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Section 1: 10-Q (10-Q)

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 March 31, 2018
or
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)
 
 
111 W. 19th Street, New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)
(516) 268-7460
(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: 66,977,104 shares outstanding as of April 26, 2018.



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, rent 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 former “Manager”) or one of its affiliates, including the termination of our management agreement and the transition services agreement and the impact of any actual, potential or predicted conflicts of interest;
the effect of the internalization of the Company's management (the “Internalization”) on our business and operations; 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
March 31, 2018
 
 
 
(Unaudited)
 
December 31, 2017
Assets
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
137,028

 
$
167,692

Restricted cash
3,162

 
5,178

Accounts receivable, net
9,046

 
8,780

Real estate assets, held-for-sale
164,040

 
2,000

Real estate securities, available-for-sale
2,362

 
2,294

Other current assets
25,815

 
21,568

Total Current Assets
341,453

 
207,512

Restricted cash, noncurrent
821

 
818

Property and equipment, net of accumulated depreciation
86,850

 
241,258

Intangibles, net of accumulated amortization
54,896

 
57,276

Other investments
21,514

 
21,135

Other assets
8,442

 
8,649

Total Assets
$
513,976

 
$
536,648

 
 
 
 
Liabilities and Equity
 
 
 
Current Liabilities
 
 
 
Obligations under capital leases
$
4,892

 
$
4,652

Membership deposit liabilities
8,715

 
8,733

Accounts payable and accrued expenses
34,513

 
36,797

Deferred revenue
13,636

 
31,207

Real estate liabilities, held-for-sale
13,487

 

Other current liabilities
16,532

 
22,596

Total Current Liabilities
91,775

 
103,985

Credit facilities and obligations under capital leases
112,156

 
112,105

Junior subordinated notes payable
51,206

 
51,208

Membership deposit liabilities, noncurrent
88,247

 
86,523

Deferred revenue, noncurrent
7,332

 
6,930

Other liabilities
4,779

 
4,846

Total Liabilities
$
355,495

 
$
365,597

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of March 31, 2018 and December 31, 2017
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 66,977,104 and 66,977,104 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
670

 
670

Additional paid-in capital
3,173,559

 
3,173,281

Accumulated deficit
(3,078,734
)
 
(3,065,853
)
Accumulated other comprehensive income
1,403

 
1,370

Total Equity
$
158,481

 
$
171,051

 
 
 
 
Total Liabilities and Equity
$
513,976

 
$
536,648

 
See notes to Consolidated Financial Statements.

1



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 

 
 

Golf course operations
$
53,554

 
$
46,296

Sales of food and beverages
13,106

 
12,845

Total revenues
66,660

 
59,141

 
 
 
 
Operating costs
 
 
 
Operating expenses
57,379

 
50,509

Cost of sales - food and beverages
4,040

 
4,032

General and administrative expense
9,192

 
7,487

Management fee to affiliate

 
2,677

Depreciation and amortization
5,548

 
5,793

Pre-opening costs
1,556

 

Impairment
1,473

 

Realized and unrealized (gain) loss on investments
(242
)
 
3,389

Total operating costs
78,946

 
73,887

Operating loss
(12,286
)
 
(14,746
)
 
 
 
 
Other income (expenses)
 
 
 
Interest and investment income
446

 
7,888

Interest expense, net
(4,049
)
 
(5,434
)
Other loss, net
(406
)
 
(123
)
Total other income (expenses)
(4,009
)
 
2,331

Loss before income tax
(16,295
)
 
(12,415
)
Income tax expense

 
539

Net Loss
(16,295
)
 
(12,954
)
Preferred dividends
(1,395
)
 
(1,395
)
Loss Applicable to Common Stockholders
$
(17,690
)
 
$
(14,349
)
 
 
 
 
Loss Applicable to Common Stock, per share
 

 
 

Basic
$
(0.26
)
 
$
(0.21
)
Diluted
$
(0.26
)
 
$
(0.21
)
 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

Basic
66,977,104

 
66,841,977

Diluted
66,977,104

 
66,841,977

Dividends Declared per Share of Common Stock
$

 
$



See notes to Consolidated Financial Statements.

2



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except share data)
 
Three Months Ended March 31,
 
2018
 
2017
Net loss
$
(16,295
)
 
$
(12,954
)
Other comprehensive income (loss):
 

 
 

Net unrealized gain on available-for-sale securities
33

 
47

Other comprehensive income
33

 
47

Total comprehensive loss
$
(16,262
)
 
$
(12,907
)
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity
$
(16,262
)
 
$
(12,907
)
  
See notes to Consolidated Financial Statements.

3



DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2018
(dollars in thousands, except share data)
 
Drive Shack Inc. Stockholders
 
 
Preferred Stock
 
Common Stock
 

 

 

 

 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-
in Capital
 
Accumulated
Deficit
 
Accumulated Other Comp.
Income
 
Total Equity
(Deficit)
Equity (deficit) - December 31, 2017
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,281

 
$
(3,065,853
)
 
$
1,370

 
$
171,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared

 

 

 

 

 
(1,395
)
 

 
(1,395
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation

 

 

 

 
278

 

 

 
278

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASC 606 (Note 3)

 

 

 

 

 
4,809

 

 
4,809

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)


 


 


 


 


 


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 

 
(16,295
)
 

 
(16,295
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income

 

 

 

 

 

 
33

 
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(16,262
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (deficit) - March 31, 2018
2,463,321

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,559

 
$
(3,078,734
)
 
$
1,403

 
$
158,481


See notes to Consolidated Financial Statements.

4




DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except share data)

 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows From Operating Activities
 
 
 
Net loss
$
(16,295
)
 
$
(12,954
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
5,548

 
5,793

Amortization of discount and premium
288

 
620

Other amortization
2,711

 
2,614

Net interest income on investments accrued to principal balance

 
(3,431
)
Amortization of revenue on golf membership deposit liabilities
(349
)
 
(305
)
Amortization of prepaid golf membership dues
(6,270
)
 
(6,283
)
Non-cash directors’ compensation

 
75

Stock-based compensation
278

 

Impairment
1,473

 

Equity in earnings from equity method investments, net of distributions
(379
)
 
(379
)
Loss on settlement of investments, net
2

 
473

Unrealized (gain) loss on investments
(242
)
 
3,060

Loss on extinguishment of debt
52

 
146

Change in:
 

 
 

Accounts receivable, net, other current assets and other assets - noncurrent
(1,983
)
 
(645
)
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
(353
)
 
1,404

Net cash used in operating activities
(15,519
)
 
(9,812
)
Cash Flows From Investing Activities
 

 
 

Principal repayments from investments

 
10,707

Proceeds from sale of securities and loans

 
286,639

Net proceeds for settlement of TBAs

 
2,474

Acquisition and additions of property and equipment and intangibles
(13,080
)
 
(3,971
)
Deposits paid on property and equipment
(2,298
)
 
(80
)
Net cash (used in) provided by investing activities
(15,378
)
 
295,769

Cash Flows From Financing Activities
 
 
 
Borrowings under debt obligations

 
1,007

Repayments of debt obligations
(1,141
)
 
(292,237
)
Margin deposits under repurchase agreements and derivatives

 
(48,406
)
Return of margin deposits under repurchase agreements and derivatives

 
50,156

Golf membership deposits received
861

 
695

Common stock dividends paid

 
(8,019
)
Preferred stock dividends paid
(1,395
)
 
(1,395
)
Payment of deferred financing costs

 
(22
)
Other financing activities
(105
)
 
(97
)
Net cash used in financing activities
(1,780
)
 
(298,318
)
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
(32,677
)
 
(12,361
)
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
173,688

 
146,544

Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
$
141,011

 
$
134,183

 
 
 
 
Supplemental Schedule of Non-Cash Investing and Financing Activities
 
 
 
Preferred stock dividends declared but not paid
$
930

 
$
930

Additions to capital lease assets and liabilities
$
1,170

 
$
254

Additions to property and equipment and accounts payable
$
6,599

 
$

See notes to Consolidated Financial Statements.


5

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 


1. ORGANIZATION
Drive Shack Inc., which is referred to, together with its subsidiaries, “Drive Shack Inc.” or the “Company” is a leading owner and operator of golf-related leisure and entertainment businesses. The Company, a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through the following segments: (i) Traditional Golf properties, (ii) Entertainment Golf venues, (iii) Debt Investments and (iv) corporate. For a further discussion of the reportable segments, see Note 4.
The Company’s Traditional Golf business is one of the largest owners and operators of golf properties in the United States. As of March 31, 2018, the Company owned, leased or managed 74 properties across 12 states.
The Company opened its first Entertainment Golf venue in Orlando, Florida on April 7, 2018. The Company expects to open a chain of next-generation Entertainment Golf venues across the United States and internationally which combine golf, competition, dining and fun.

On December 21, 2017, the Company announced the Internalization effective January 1, 2018. The Company agreed with the former Manager to terminate the existing Management Agreement and arrange for the former Manager to continue to provide certain services for a transition period. In connection with the termination of the Management Agreement, the Company made a one-time cash payment of $10.7 million to the former Manager.


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, 2017 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 13, 2018. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2017.

As of March 31, 2018, 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, 2017.

Prior Period Reclassification Certain prior period amounts have been reclassified to conform to the current period's presentation. Effective January 1, 2018, the Company internalized management (as discussed above) and records corporate overhead, including corporate payroll and related expenses, in "General and administrative expense" on the Consolidated Statements of Operations. Prior to January 1, 2018, the Company reported corporate overhead, including corporate payroll and related expenses, related to the Traditional Golf business in "Operating expenses" on the Consolidated Statements of Operations. The Company reclassified $3.9 million from "Operating expenses" to "General and administrative expense" for the three months ended March 31, 2017.

The Company adopted ASU 2015-18 Statement of Cash Flows (Topic 230), Restricted Cash effective January 1, 2018, which requires retrospective adjustment to all periods. The addition of the reconciliation of restricted cash for three months ended March 31, 2017 included an increase of $1.1 million in "Margin deposits under repurchase agreements and derivatives."


6

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

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 for private club members and The Players Club members is recognized in the month earned. Membership dues received in advance are included in deferred revenue and recognized as revenue ratably over the appropriate period, which is generally twelve months or less for private club members and the following month for The Players Club members. The membership dues are generally structured to cover the club operating costs and membership services.
Private country club members generally pay an advance initiation fee deposit upon their acceptance as a member to the respective country club. Initiation fee deposits are refundable 30 years after the date of acceptance as a member. The difference between the initiation fee deposit paid by the member and the present value of the refund obligation is deferred and recognized into revenue in the Consolidated Statements of Operations on a straight-line basis over the expected life of an active membership, which is estimated to be seven years. The determination of the estimated average expected life of an active membership is a significant judgment based on company-specific historical membership addition and attrition data. The present value of the refund obligation is recorded as a membership deposit liability in the Consolidated Balance Sheets and accretes over a 30-year nonrefundable term using the effective interest method. This accretion is recorded as interest expense in the Consolidated Statements of Operations.
Revenue from the reimbursement of certain operating costs incurred at the Company’s managed Traditional Golf properties is recognized at the time the associated operating costs are incurred as collection is reasonably assured per the terms of the management contracts and the repayment histories of the property owners.
Sales of Food and Beverages Revenue from food and beverage sales are recorded at the time of sale.
Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net These items are comprised of the following:
 
Three Months Ended March 31,
 
2018
 
2017
Loss on settlement of real estate securities
$

 
$
2,803

Unrealized loss on securities, intent-to-sell

 
558

Realized (gain) on settlement of TBAs, net

 
(2,474
)
Unrealized (gain) loss on non-hedge derivative instruments
(242
)
 
2,502

Realized and unrealized (gain) loss on investments
$
(242
)
 
$
3,389

 
 
 
 
Loss on lease modifications and terminations
$
(771
)
 
$
(158
)
Loss on extinguishment of debt, net
(52
)
 
(146
)
Collateral management fee income, net
154

 
122

Equity in earnings of equity method investments
379

 
379

(Loss) gain on disposal of long-lived assets
(206
)
 
26

Other income (loss)
90

 
(346
)
Other loss, net
$
(406
)
 
$
(123
)
EXPENSE RECOGNITION

Operating Expenses Operating expenses for Traditional Golf consist primarily of payroll directly related to golf properties, equipment and cart leases, utilities, repairs and maintenance, supplies, seed, soil and fertilizer, marketing, certain operating costs incurred at managed Traditional Golf properties 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 initially range from 10 to 20 years, and typically, the leases contain renewal options. Certain leases include scheduled

7

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

increases or decreases in minimum rental payments at various times during the term of the lease. These scheduled rent increases or decreases are recognized on a straight-line basis over the term of the lease. Increases result in an accrual, which is included in other current liabilities and other liabilities, and decreases result in a receivable, which is included in other current assets and other assets, for the amount by which the cumulative straight-line rent differs from the contractual cash rent.

Pre-Opening Costs Pre-opening costs are expensed as incurred and consist primarily of marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.

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 March 31, 2018, the Company has one interest rate cap with a fair value of $0.5 million which is not designated as a hedge.
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 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 to construction in progress 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 “Real estate assets, held-for-sale” and “Real estate liabilities, held-for-sale” 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.

The Company leases certain golf carts and other equipment that are classified as capital leases. The value of capital leases is recorded as an asset on the balance sheet, along with a liability related to the associated payments. Depreciation of capital lease 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 obligations under capital leases, 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 acquisition transaction. The value of a leasehold advantage (disadvantage) is calculated based on the differential between market and contracted rent, which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each 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

8

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

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 Investment The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. The Company accounts for this investment as an equity method investment. As of March 31, 2018 and December 31, 2017, the carrying value of this investment was $21.5 million and $21.1 million, respectively. The Company evaluates its equity method investment for other-than-temporary impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future.

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 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.


9

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

Other Current Assets

The following table summarizes the Company's other current assets:
 
 
March 31, 2018
 
December 31, 2017
Loans, held-for-sale, net (A)
 
$

 
$
147

Prepaid expenses
 
4,906

 
3,081

Deposits
 
5,337

 
3,469

Inventory
 
5,302

 
4,722

Miscellaneous current assets, net
 
10,270

 
10,149

Other current assets
 
$
25,815

 
$
21,568

(A)
During the three months ended March 31, 2018, the Company recorded an impairment of $0.2 million on a corporate loan.

Other Assets

The following table summarizes the Company's other assets:
 
 
March 31, 2018
 
December 31, 2017
Prepaid expenses
 
$
5

 
$
6

Deposits
 
2,126

 
2,213

Derivative assets
 
528

 
286

Miscellaneous assets, net
 
5,783

 
6,144

Other assets
 
$
8,442

 
$
8,649


Other Current Liabilities

The following table summarizes the Company's other current liabilities:
 
 
March 31, 2018
 
December 31, 2017
Security deposits payable
 
$
7,894

 
$
6,602

Accrued rent
 
2,548

 
2,160

Due to affiliates
 

 
1,786

Dividends payable
 
930

 
930

Miscellaneous current liabilities
 
5,160

 
11,118

Other current liabilities
 
$
16,532

 
$
22,596


Other Liabilities

The following table summarizes the Company's other liabilities:
 
 
March 31, 2018
 
December 31, 2017
Security deposits payable
 
$
302

 
$
66

Unfavorable leasehold interests
 
3,066

 
3,374

Accrued rent
 
1,057

 
1,057

Miscellaneous liabilities
 
354

 
349

Other liabilities
 
$
4,779

 
$
4,846



10

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

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 adopted the new guidance effective January 1, 2018 using the modified retrospective method. See Note 3 for additional information.

In January 2016, the FASB issued ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The standard addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with an option to use certain relief. The Company 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's operating leases include ground leases, for certain of its golf properties and leased equipment which are not recognized on the balance sheet. The Company anticipates a right-of-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

11

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Statements of Cash Flows.

In November 2016, the FASB issued ASU 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. The standard requires entities to show the changes in the total of cash, cash equivalents and restricted cash in the statement of cash flows and provide a reconciliation to the related line items in the balance sheet. The 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 adopted the new guidance effective January 1, 2018 and has included changes in restricted cash in the Consolidated Statements of Cash Flows for all periods presented.

In January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets of businesses. The 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 adopted the new guidance effective January 1, 2018 and it did not have a material impact on the Consolidated Financial Statements.


3. REVENUES

On January 1, 2018, the Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) for all contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as a decrease to the 2018 opening balance of accumulated deficit of $4.8 million. The adjustment is due to the recognition of breakage on gift cards and gift certificates offered at the Company's Traditional Golf properties that are not expected to be redeemed based on historical redemption rates. The recognition of breakage on gift cards and gift certificates on an ongoing basis is expected to have an immaterial impact to the Company’s net income (loss).

The majority of the Company’s revenue continues to be recognized at the time of sale to customers at the Company’s Traditional Golf properties, including green fees, cart rentals, and sales of food, beverages and merchandise. Under the new revenue standard, certain operating costs incurred at the Company’s managed Traditional Golf properties and the reimbursements of those operating costs will now be recognized in Operating expenses and Golf course operations, respectively. The reimbursements do not include a profit margin and therefore this change will have no net impact to the Company’s operating income (loss).

Per the modified retrospective method, comparative information has not been restated to conform to these changes and continues to be reported under the accounting standards in effect for those periods. In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Consolidated Balance Sheet and Statement of Operations was as follows:

Consolidated Balance Sheet
 
 
March 31, 2018
 
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Liabilities
 
 
 
 
 
 
Other current liabilities
 
$
16,532

 
$
21,341

 
$
(4,809
)
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
Accumulated Deficit
 
$
(3,078,734
)
 
$
(3,083,543
)
 
$
4,809



12

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

Consolidated Statement of Operations
 
 
Three Months Ended March 31, 2018
 
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of Change
Revenues
 
 
 
 
 
 
Golf course operations
 
$
53,554

 
$
48,897

 
$
4,657

 
 
 
 
 
 
 
Operating Costs
 
 
 
 
 
 
Operating expenses
 
$
57,379

 
$
52,722

 
$
4,657


The Company’s revenue is all generated within the Traditional Golf segment. The following table disaggregates revenue by category: public and private golf properties (owned and leased) and managed golf properties.
 
 
Three Months Ended March 31, 2018
 
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
Golf course operations
 
22,370

 
25,949

 
5,235

 
53,554

Sales of food and beverages
 
7,207

 
5,899

 

 
13,106

Total revenues
 
$
29,577

 
$
31,848

 
$
5,235

 
$
66,660



4. 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 March 31, 2018, the Company owned, leased or managed 74 Traditional Golf properties across 12 states.  Additionally, the Company opened its inaugural Entertainment Golf venue in Orlando, Florida on April 7, 2018 and expects to continue opening a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun. 

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 7), management fees pursuant to the Management Agreement prior to the Internalization effective January 1, 2018 (Note 12) and income tax expense (Note 14).
 

13

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(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:
 
Traditional Golf
 
Entertainment Golf
 
Debt Investments
 
Corporate
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Golf course operations
$
53,554

 
$

 
$

 
$

 
$
53,554

Sales of food and beverages
13,106

 

 

 

 
13,106

Total revenues
66,660

 

 

 

 
66,660

Operating costs
 
 
 
 
 
 
 
 
 
Operating expenses (A)
57,379

 

 

 

 
57,379

Cost of sales - food and beverages
4,040

 

 

 

 
4,040

General and administrative expense
4,153

 
1,102

 
6

 
2,074

 
7,335

General and administrative expense - acquisition and transaction expenses (B)
307

 
1,253

 

 
297

 
1,857

Depreciation and amortization
5,513

 
30

 

 
5

 
5,548

Pre-opening costs (C)

 
1,556

 

 

 
1,556

Impairment
1,326

 

 
147

 

 
1,473

Realized and unrealized loss on investments
(242
)
 

 

 

 
(242
)
Total operating costs
72,476

 
3,941

 
153

 
2,376

 
78,946

Operating loss
(5,816
)
 
(3,941
)
 
(153
)
 
(2,376
)
 
(12,286
)
Other income (expenses)
 
 
 
 
 
 
 
 
 
Interest and investment income
51

 
28

 
59

 
308

 
446

Interest expense, net (D)
(3,555
)
 

 

 
(494
)
 
(4,049
)
Other (loss) income, net
(938
)
 

 
532

 

 
(406
)
Total other income (expenses)
(4,442
)
 
28

 
591

 
(186
)
 
(4,009
)
Income tax expense

 

 

 

 

Net (loss) income
(10,258
)
 
(3,913
)
 
438

 
(2,562
)
 
(16,295
)
Preferred dividends

 

 

 
(1,395
)
 
(1,395
)
(Loss) income applicable to common stockholders
$
(10,258
)
 
$
(3,913
)
 
$
438

 
$
(3,957
)
 
$
(17,690
)


 
 
 
 
 
 
 
 
 
 

 
Traditional Golf
 
Entertainment Golf
 
Debt Investments (E)
 
Corporate
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
Total assets
320,491

 
81,575

 
24,306

 
87,604

 
513,976

Total liabilities
290,553

 
9,160

 
79

 
55,703

 
355,495

Preferred stock

 

 

 
61,583

 
61,583

Equity attributable to common stockholders
$
29,938

 
$
72,415

 
$
24,227

 
$
(29,682
)
 
$
96,898

 
 
 
 
 
 
 
 
 
 
Additions to property and equipment (including capital leases) during the three months ended March 31, 2018
$
4,040

 
$
9,498

 
$

 
$

 
$
13,538


14

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
Traditional Golf
 
Entertainment Golf
 
Debt Investments
 
Corporate
 
Total
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Golf course operations
$
46,296

 
$

 
$

 
$

 
$
46,296

Sales of food and beverages
12,845

 

 

 

 
12,845

Total revenues
59,141

 

 

 

 
59,141

Operating costs
 
 
 
 
 
 
 
 
 
Operating expenses (A)
50,509

 

 

 

 
50,509

Cost of sales - food and beverages
4,032

 

 

 

 
4,032

General and administrative expense
4,222

 
15

 
1

 
1,595

 
5,833

General and administrative expense - acquisition and transaction expenses (B)
276

 
1,261

 

 
117

 
1,654

Management fee to affiliate

 

 

 
2,677

 
2,677

Depreciation and amortization
5,793

 

 

 

 
5,793

Realized and unrealized loss on investments
120

 

 
3,269

 

 
3,389

Total operating costs
64,952

 
1,276

 
3,270

 
4,389

 
73,887

Operating loss
(5,811
)
 
(1,276
)
 
(3,270
)
 
(4,389
)
 
(14,746
)
Other income (expenses)
 
 
 
 
 
 
 
 
 
Interest and investment income
39

 

 
7,802

 
47

 
7,888

Interest expense, net (D)
(3,817
)
 

 
(1,206
)
 
(411
)
 
(5,434
)
Other (loss) income, net
(624
)
 

 
501

 

 
(123
)
Total other income (expenses)
(4,402
)
 

 
7,097

 
(364
)
 
2,331

Income tax expense

 

 

 
539

 
539

Net (loss) income
(10,213
)
 
(1,276
)
 
3,827

 
(5,292
)
 
(12,954
)
Preferred dividends

 

 

 
(1,395
)
 
(1,395
)
(Loss) income applicable to common stockholders
$
(10,213
)
 
$
(1,276
)
 
$
3,827

 
$
(6,687
)
 
$
(14,349
)
 
 
 
 
 
 
 
 
 
 


(A)
Operating expenses includes rental expenses recorded under operating leases for carts and equipment in the amount of $0.6 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively. Operating expenses also includes amortization of favorable and unfavorable lease intangibles in the amount of $1.0 million and $1.0 million for the three months ended March 31, 2018 and 2017, respectively.
(B)
Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions which may include advisory, legal, accounting, valuation and other professional or consulting fees.
(C)
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
(D)
Interest expense, net includes the accretion of membership deposit liabilities in the amount of $1.7 million and $1.6 million for the three months ended March 31, 2018 and 2017, respectively. Interest expense is net of $0.4 million related to capitalized interest for Entertainment Golf for the three months ended March 31, 2018.
(E)
Total assets in the Debt Investments segment includes an equity method investment in the amount of $21.5 million as of March 31, 2018 recorded in other investments on the Consolidated Balance Sheets. See Note 2 for additional information.


15

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(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, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
5,105

 
$

 
$
5,105

 
$
88,251

 
$

 
$
88,251

Buildings and improvements
51,164

 
(24,382
)
 
26,782

 
154,769

 
(52,636
)
 
102,133

Furniture, fixtures and equipment
21,053

 
(16,094
)
 
4,959

 
33,109

 
(23,451
)
 
9,658

Capital leases - equipment
26,027

 
(9,719
)
 
16,308

 
24,949

 
(8,649
)
 
16,300

Construction in progress
33,696

 

 
33,696

 
24,916

 

 
24,916

Total Property and Equipment
$
137,045

 
$
(50,195
)
 
$
86,850

 
$
325,994

 
$
(84,736
)
 
$
241,258


In February 2018, the lease on a golf property in Oklahoma was terminated and the Company exited the property.

On March 7, 2018, the Company announced it will actively pursue the sale of 26 owned Traditional Golf properties in order to generate capital for reinvestment in the Entertainment Golf business. The assets and associated liabilities are reported on the Consolidated Balance Sheets as “Real estate assets, held-for-sale” and “Real estate liabilities, held-for-sale,” respectively.  The real estate assets, held-for-sale are reported at a carrying value of $164.0 million and include $83.8 million of land, $74.3 million of buildings and improvements, $4.8 million of furniture, fixtures and equipment, and $1.1 million of other related assets.  The real estate liabilities, held-for-sale are reported at a carrying value of $13.5 million and include property liabilities to be assumed, primarily prepaid membership dues. 

The Company has assessed the real estate assets and determined that the carrying value of one property exceeded the fair value less anticipated costs to sell.  As a result, the Company recognized an impairment loss totaling approximately $1.3 million for the three months ended March 31, 2018. The fair value measurement was based on the pricing in a letter of intent and internal valuation models. The significant inputs used to value these real estate investments fall within Level 3 for fair value reporting.



6. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION

The following table summarizes the Company’s intangible assets:
 
March 31, 2018
 
December 31, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
Trade name
$
700

 
$
(99
)
 
$
601

 
$
700

 
$
(93
)
 
$
607

Leasehold intangibles (A)
48,107

 
(17,756
)
 
30,351

 
48,107

 
(16,716
)
 
31,391

Management contracts
35,111

 
(14,210
)
 
20,901

 
35,111

 
(13,468
)
 
21,643

Internally-developed software
800

 
(680
)
 
120

 
800

 
(640
)
 
160

Membership base
5,236

 
(3,179
)
 
2,057

 
5,236

 
(2,992
)
 
2,244

Nonamortizable liquor licenses
866

 

 
866

 
1,231

 

 
1,231

Total Intangibles
$
90,820

 
$
(35,924
)
 
$
54,896

 
$
91,185

 
$
(33,909
)
 
$
57,276

(A)
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.


16

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

7. DEBT OBLIGATIONS

The following table presents certain information regarding the Company’s debt obligations at March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Obligation/Collateral
 
Month Issued
 
Outstanding
Face
Amount
 
Carrying
Value
 
Final Stated Maturity
 
Weighted
Average
Coupon (A)
 
Weighted Average
Funding
Cost (B)
 
Weighted Average Life (Years)
 
Face Amount of
Floating Rate Debt
Credit Facilities and Capital Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Traditional Golf term loan (C)(D)
 
June 2016
 
102,000

 
100,255

 
Jul 2019
 
LIBOR+4.70%
 
7.92
%
 
1.3
 
102,000

Vineyard II
 
Dec 1993
 
200

 
200

 
Dec 2043
 
2.20%
 
2.20
%
 
25.7
 
200

Capital leases (Equipment)
 
Jun 2014 - Mar 2018
 
16,593

 
16,593

 
Sep 2018 - Oct 2023
 
3.00% to 16.16%
 
6.61
%
 
3.5
 

 
 
 
 
118,793

 
117,048

 
 
 
 
 
7.72
%
 
1.6
 
102,200

Less current portion of obligations under capital leases
 
 
 
4,892

 
4,892

 
 
 
 
 
 
 
 
 
 
Credit facilities and obligations under capital leases - noncurrent
 
 
 
113,901

 
112,156

 
 
 
 
 
 
 
 
 
 
Corporate
 
 
 
 

 
 

 
 
 
 
 
 

 
 
 
 

Junior subordinated notes payable (E)
 
Mar 2006
 
51,004

 
51,206

 
Apr 2035
 
LIBOR+2.25%
 
3.99
%
 
17.1
 
51,004

Total debt obligations
 
 
 
$
169,797

 
$
168,254

 
 
 
 
 
6.59
%
 
6.3
 
$
153,204



(A)
Weighted average, including floating and fixed rate classes.
(B)
Including the effect of deferred financing costs.
(C)
The Traditional Golf term loan is collateralized by 22 golf properties. The carrying amount of the Traditional Golf term loan is reported net of amortized deferred financing costs of $1.7 million as of March 31, 2018.
(D)
Interest rate based on 1 month LIBOR plus 4.70% with a LIBOR floor of 1.80%. At the time of closing, the Company purchased a co-terminus LIBOR interest rate cap of 1.80%.
(E)
Interest rate based on 3 month LIBOR plus 2.25%.

Traditional Golf leases certain golf carts and other equipment under capital lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from 36 to 66 months. Certain leases include bargain purchase options at lease expiration.

The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of March 31, 2018 are as follows:
April 1, 2018 - December 31, 2018
$
4,384

2019
5,709

2020
4,431

2021
2,864

2022
1,091

2023
190

Total minimum lease payments
18,669

Less: imputed interest
2,076

Present value of net minimum lease payments
$
16,593


The Company’s credit facilities contain various customary loan covenants, including certain coverage ratios. The Company was in compliance with all of these covenants as of March 31, 2018.

17

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 


8. REAL ESTATE SECURITIES
 
The following is a summary of the Company’s real estate securities at March 31, 2018, 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, 2018
 
 
 
 
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

 
$
2,480

 
$
(1,521
)
 
$
959

 
$
1,403

 
$

 
$
2,362

 
1

 
CCC
 
2.26
%
 
22.81
%
 
7.5
 
33.9
%
Total Securities, Available for Sale (E)
 
$
4,000

 
$
2,480

 
$
(1,521
)
 
$
959

 
$
1,403

 
$

 
$
2,362

 
1

 
 
 
 
 
 
 
 
 
 
  
(A)
See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities.
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third-party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
(C)
The weighted average life is based on the timing of expected cash flows on the assets.
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to the Company’s investments.
(E)
The total outstanding face amount was $4.0 million for floating rate securities. The collateral securing the ABS - Non-Agency RMBS is located in various geographical regions in the US. The Company does not have significant investments in any geographic region, thus a downturn in market conditions would not have a material negative impact on the Company.

The Company had no securities in an unrealized loss position as of March 31, 2018. The Company has no activity related to credit losses on debt securities for the three months ended March 31, 2018.

9. DERIVATIVES

The Company’s derivative instrument is an interest rate cap with a fair value of $0.5 million and $0.3 million as of March 31, 2018 and December 31, 2017, respectively, and is recorded within other assets on the Consolidated Balance Sheets. The Company had no derivative liabilities as of both March 31, 2018 and December 31, 2017.

The following table summarizes (gains) losses recorded in relation to derivatives:
 
 
 
Three Months Ended March 31,
 
Income Statement Location
 
2018
 
2017
Non-hedge derivatives
 
 
 
 
 
Unrealized (gain) loss on interest rate derivatives
Realized and unrealized (gain) loss on investments
 
$
(242
)
 
$
120

Unrealized loss recognized related to TBAs
Realized and unrealized (gain) loss on investments
 

 
2,382

Realized (gain) on settlement of TBAs
Realized and unrealized (gain) loss on investments
 

 
(2,474
)



18

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

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, 2018
 
Carrying Value
 
Estimated Fair Value
 
Fair Value Method (A)
Assets
 

 
 

 
 
Real estate securities, available-for-sale
$
2,362

 
$
2,362

 
Pricing models - Level 3
Cash and cash equivalents
137,028

 
137,028

 
 
Restricted cash, current and noncurrent
3,983

 
3,983

 
 
Non-hedge derivative assets (B)
528

 
528

 
Counterparty quotations - Level 2
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Credit facilities - Traditional Golf term loan
100,255

 
103,461

 
Pricing models - Level 3
Junior subordinated notes payable
51,206

 
29,030

 
Pricing models - Level 3
 

(A)
Pricing models are used for (i) real estate securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) debt obligations which are private and untraded.
(B)
Represents an interest rate cap (Note 9).

Fair Value Measurements

Valuation Hierarchy
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company follows this hierarchy for its financial instruments measured at fair value.

Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on observable market parameters, including
quoted prices for similar assets or liabilities in active markets,
inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads), and
market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations determined using unobservable inputs that are supported by little or no market activity, and that are significant to the overall fair value measurement.

The Company’s real estate securities and loans, and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, the Company has estimated the fair value of these illiquid instruments based on internal pricing models subject to the Company’s controls described below.

The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. With respect to broker and pricing service quotations, and in order to ensure these quotes represent a reasonable estimate of fair value, the Company’s quarterly procedures include a comparison of such quotations to quotations from different sources, outputs generated from its internal pricing models and transactions completed, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on the Company’s internal pricing models, the Company’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third-party market parameters and models, where available, for reasonableness. The Company believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real

19

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2018
(dollars in tables in thousands, except share data)
 

estate securities and loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities.
 
Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of March 31, 2018:

 
 
 
 
 
 
Weighted Average Significant Input
Asset Type
 
Amortized Cost Basis
 
Fair Value
 
Discount
Rate
 
Prepayment
Speed
 
Cumulative Default Rate
 
Loss
Severity
ABS - Non-Agency RMBS
 
$
959

 
$
2,362

 
12.0
%
 
5.4
%
 
4.1
%
 
62.8
%
Total
 
$
959

 
$
2,362

 
 
 
 
 
 
 
 

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, 2018 as follows:
 
 
ABS - Non-Agency RMBS
Balance at December 31, 2017
 
$
2,294

Total gains (losses) (A)
 
 

Included in other comprehensive income (loss)
 
33

Amortization included in interest income
 
54

Purchases, sales and repayments (A)
 
 

Proceeds
 
(19
)
Balance at March 31, 2018
 
$
2,362


(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, 2018. There were no transfers into or out of Level 3 during the three months ended March 31, 2018.

Non-Recurring Fair Value Measurements - Loans

Loans held-for-sale are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on internal pricing models. All the loans were within Level 3 of the fair value hierarchy. The most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments. 


20

DRIVE SHACK INC. AND SUBSIDIARIES