Toggle SGML Header (+)


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, 2019
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)
 
 
218 W. 18th Street, 3rd Floor, New York, NY
 
10011
(Address of principal executive offices)
 
(Zip Code)
(646) 585-5591
(Registrant’s telephone number, including area code)

111 W. 19th Street, 8th Floor, New York, NY 10011
(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 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




Securities registered pursuant to Section 12(b) of the Act:
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 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: 67,027,104 shares outstanding as of May 1, 2019.



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, our operating performance, the 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,” “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:

the ability to retain and attract members and guests to our 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 any failure 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; and
other risks detailed from time to time below, particularly in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and in our other reports filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC in this Quarterly Report on Form 10-Q.

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:
 
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)
 
(Unaudited)
 
 
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
49,599

 
$
79,235

Restricted cash
3,365

 
3,326

Accounts receivable, net
5,635

 
7,518

Real estate assets, held-for-sale, net
51,931

 
75,862

Real estate securities, available-for-sale
3,007

 
2,953

Other current assets
20,331

 
20,505

Total current assets
133,868

 
189,399

Restricted cash, noncurrent
258

 
258

Property and equipment, net of accumulated depreciation
157,636

 
132,605

Operating lease right-of-use assets
223,278

 

Intangibles, net of accumulated amortization
20,952

 
48,388

Other investments
22,956

 
22,613

Other assets
5,043

 
8,684

Total assets
$
563,991

 
$
401,947

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Obligations under finance leases
$
6,790

 
$
5,489

Membership deposit liabilities
8,834

 
8,861

Accounts payable and accrued expenses
37,740

 
45,284

Deferred revenue
14,738

 
18,793

Real estate liabilities, held-for-sale
813

 
2,947

Other current liabilities
29,277

 
22,285

Total current liabilities
98,192

 
103,659

Credit facilities and obligations under finance leases - noncurrent
13,185

 
10,489

Operating lease liabilities - noncurrent
190,229

 

Junior subordinated notes payable
51,198

 
51,200

Membership deposit liabilities, noncurrent
92,603

 
90,684

Deferred revenue, noncurrent
5,445

 
6,016

Other liabilities
3,076

 
5,232

Total liabilities
$
453,928

 
$
267,280

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Equity
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, 1,347,321 shares of 9.75% Series B Cumulative Redeemable Preferred Stock, 496,000 shares of 8.05% Series C Cumulative Redeemable Preferred Stock, and 620,000 shares of 8.375% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, issued and outstanding as of March 31, 2019 and December 31, 2018
$
61,583

 
$
61,583

Common stock, $0.01 par value, 1,000,000,000 shares authorized, 67,027,104 and 67,027,104 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
670

 
670

Additional paid-in capital
3,177,065

 
3,175,843

Accumulated deficit
(3,131,133
)
 
(3,105,307
)
Accumulated other comprehensive income
1,878

 
1,878

Total equity
$
110,063

 
$
134,667

 
 
 
 
Total liabilities and equity
$
563,991

 
$
401,947


See notes to Consolidated Financial Statements.

1



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except share data)

 
Three Months Ended March 31,
 
2019
 
2018
Revenues
 

 
 

Golf operations
$
44,706

 
$
53,554

Sales of food and beverages
9,246

 
13,106

Total revenues
53,952

 
66,660

 
 
 
 
Operating costs
 
 
 
Operating expenses
47,723

 
57,379

Cost of sales - food and beverages
2,698

 
4,040

General and administrative expense
11,619

 
9,192

Depreciation and amortization
4,924

 
5,548

Pre-opening costs
1,179

 
1,556

Impairment
4,088

 
1,473

Realized and unrealized (gain) on investments

 
(242
)
Total operating costs
72,231

 
78,946

Operating loss
(18,279
)
 
(12,286
)
 
 
 
 
Other income (expenses)
 
 
 
Interest and investment income
344

 
446

Interest expense, net
(2,153
)
 
(4,049
)
Other income (loss), net
5,488

 
(406
)
Total other income (expenses)
3,679

 
(4,009
)
Loss before income tax
(14,600
)
 
(16,295
)
Income tax expense

 

Net Loss
(14,600
)
 
(16,295
)
Preferred dividends
(1,395
)
 
(1,395
)
Loss Applicable to Common Stockholders
$
(15,995
)
 
$
(17,690
)
 
 
 
 
Loss Applicable to Common Stock, per share
 

 
 

Basic
$
(0.24
)
 
$
(0.26
)
Diluted
$
(0.24
)
 
$
(0.26
)
 
 
 
 
Weighted Average Number of Shares of Common Stock Outstanding
 

 
 

Basic
67,027,104

 
66,977,104

Diluted
67,027,104

 
66,977,104


See notes to Consolidated Financial Statements.

2



DRIVE SHACK INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(dollars in thousands, except share data)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Net loss
 
$
(14,600
)
 
$
(16,295
)
Other comprehensive income (loss):
 
 

 
 

Net unrealized gain on available-for-sale securities
 

 
33

Other comprehensive income (loss)
 

 
33

Total comprehensive loss
 
$
(14,600
)
 
$
(16,262
)
Comprehensive loss attributable to Drive Shack Inc. stockholders’ equity
 
$
(14,600
)
 
$
(16,262
)
  
See notes to Consolidated Financial Statements.

3



DRIVE SHACK INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018
(dollars in thousands, except share data)
 
Drive Shack Inc. Stockholders
 
Preferred Stock
 
Common Stock
 

 

 

 

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

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,281

 
$
(3,065,853
)
 
$
1,370

 
$
171,051

Dividends declared

 

 

 

 

 
(1,395
)
 

 
(1,395
)
Stock-based compensation

 

 

 

 
278

 

 

 
278

Adoption of ASC 606

 

 

 

 

 
4,809

 

 
4,809

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 

 
(16,295
)
 

 
(16,295
)
Other comprehensive income

 

 

 

 

 

 
33

 
33

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

 
$
61,583

 
66,977,104

 
$
670

 
$
3,173,559

 
$
(3,078,734
)
 
$
1,403

 
$
158,481

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity (deficit) - December 31, 2018
2,463,321

 
$
61,583

 
67,027,104

 
$
670

 
$
3,175,843

 
$
(3,105,307
)
 
$
1,878

 
$
134,667

Dividends declared

 

 

 

 

 
(1,395
)
 

 
(1,395
)
Stock-based compensation

 

 

 

 
1,222

 

 

 
1,222

Adoption of ASC 842

 

 

 

 

 
(9,831
)
 
 
 
(9,831
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss

 

 

 

 

 
(14,600
)
 

 
(14,600
)
Other comprehensive income

 

 

 

 

 

 

 

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(14,600
)
Equity (deficit) - March 31, 2019
2,463,321

 
$
61,583

 
67,027,104

 
$
670

 
$
3,177,065

 
$
(3,131,133
)
 
$
1,878

 
$
110,063


See notes to Consolidated Financial Statements.

4




DRIVE SHACK INC. AND SUBSIDIARIES

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

 
Three Months Ended March 31,
 
2019
 
2018
Cash Flows From Operating Activities
 
 
 
Net loss
$
(14,600
)
 
$
(16,295
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
4,924

 
5,548

Amortization of discount and premium
(56
)
 
288

Other amortization
3,566

 
2,711

Amortization of revenue on golf membership deposit liabilities
(379
)
 
(349
)
Amortization of prepaid golf membership dues
(3,323
)
 
(6,270
)
Stock-based compensation
1,222

 
278

Impairment
4,088

 
1,473

Equity in earnings from equity method investments, net of distributions
(341
)
 
(379
)
Other (gains) losses, net
(5,022
)
 
2

Unrealized (gain) on investments

 
(242
)
Loss on extinguishment of debt
16

 
52

Change in:
 

 
 

Accounts receivable, net, other current assets and other assets - noncurrent
(1,052
)
 
(1,983
)
Accounts payable and accrued expenses, deferred revenue, other current liabilities and other liabilities - noncurrent
(11,234
)
 
(353
)
Net cash used in operating activities
(22,191
)
 
(15,519
)
Cash Flows From Investing Activities
 

 
 

Proceeds from sale of property and equipment
17,749

 

Acquisition and additions of property and equipment and intangibles
(22,717
)
 
(15,378
)
Net cash used in investing activities
(4,968
)
 
(15,378
)
Cash Flows From Financing Activities
 
 
 
Repayments of debt obligations
(1,397
)
 
(1,141
)
Golf membership deposits received
357

 
861

Preferred stock dividends paid
(1,395
)
 
(1,395
)
Other financing activities
(3
)
 
(105
)
Net cash used in financing activities
(2,438
)
 
(1,780
)
Net Decrease in Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent
(29,597
)
 
(32,677
)
Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, Beginning of Period
82,819

 
173,688

Cash and Cash Equivalents, Restricted Cash and Restricted Cash, noncurrent, End of Period
$
53,222

 
$
141,011

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

 
$
930

Additions to finance lease assets and liabilities
$
6,352

 
$
1,170

Additions to property and equipment and accounts payable
$
2,258

 
$
6,599

Additions for operating lease right-of-use assets and operating lease liabilities
$
200,368

 
$


See notes to Consolidated Financial Statements.


5

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 


1. ORGANIZATION
Drive Shack Inc., which is referred to, together with its subsidiaries, as “Drive Shack Inc.” or the “Company” is a leading owner and operator of golf-related leisure and entertainment businesses. The Company, a Maryland corporation, was formed in 2002, and its common stock is traded on the NYSE under the symbol “DS.”
The Company conducts its business through the following segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. For a further discussion of the reportable segments, see Note 4.
The Company opened its first Entertainment Golf venue in Orlando, Florida on April 7, 2018. The Company expects to open a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun.
The Company’s Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2019, the Company owned, leased or managed 64 properties across 11 states.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation The accompanying Consolidated Financial Statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2018 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2019. Capitalized terms used herein, and not otherwise defined, are defined in the Company’s Consolidated Financial Statements for the year ended December 31, 2018.

As of March 31, 2019, the Company’s significant accounting policies for these financial statements are summarized below and should be read in conjunction with the Summary of Significant Accounting Policies detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.




6

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

Realized and Unrealized (Gain) Loss on Investments and Other Income (Loss), Net These items are comprised of the following:
 
Three Months Ended March 31,
 
2019
 
2018
Unrealized (gain) on non-hedge derivative instruments

 
(242
)
Realized and unrealized (gain) loss on investments
$

 
$
(242
)
 
 
 
 
Loss on lease modifications and terminations
$

 
$
(771
)
Loss on extinguishment of debt, net
(16
)
 
(52
)
Collateral management fee income, net
128

 
154

Equity in earnings of equity method investments
341

 
379

Gain (loss) on sale of long-lived assets and intangibles
5,029

 
(206
)
Other income
6

 
90

Other income (loss), net
$
5,488

 
$
(406
)

Property and Equipment, Net Long-lived assets to be disposed of by sale, which meet certain criteria, are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale. The Company suspends depreciation and amortization for assets held-for-sale. Subsequent changes to the estimated fair value less costs to sell could impact the measurement of assets held-for-sale. Decreases are recognized as an impairment loss and recorded in "Impairment" on the Consolidated Statements of Operations. To the extent the fair value increases, any previously reported impairment is reversed. Real estate held-for-sale is recorded in “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale” on the Consolidated Balance Sheets.

Leasing Arrangements The Company evaluates at lease inception whether an arrangement is or contains a lease by providing the Company with the right to control an asset. Operating leases are accounted for on balance sheet with the Right of Use (“ROU”) assets and lease liabilities recognized in "Operating lease right-of-use assets," "Other current liabilities" and "Operating lease liabilities - noncurrent" in the Consolidated Balance Sheets. Finance lease ROU assets, current lease liabilities and noncurrent lease liabilities are recognized in "Property and equipment, net of accumulated depreciation", and "Obligations under finance leases" and "Credit facilities and obligations under finance leases - noncurrent" in the Consolidated Balance Sheets, respectively.

All lease liabilities are measured at the present value of the associated payments, discounted using the Company’s incremental borrowing rate determined using a portfolio approach based on the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for similar term and in a similar economic environment on a collateralized basis. ROU assets, for both operating and finance leases, are initially measured based on the lease liability, adjusted for initial direct costs, prepaid rent, and lease incentives received. The operating lease ROU assets are subsequently measured at the carrying amount of the lease liability adjusted for initial direct costs, prepaid or accrued lease payments, and lease incentives. Depreciation of the finance lease ROU assets are subsequently calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms and recorded in "Depreciation and amortization" on the Consolidated Statements of Operations.

In addition to the fixed minimum payments required under the lease arrangements, certain leases require variable lease payments, which are payment of the excess of various percentages of gross revenue or net operating income over the minimum rental payments as well as payment of taxes assessed against the leased property. The leases generally also require the payment for the cost of insurance and maintenance. Variable lease payments are recognized when the associated activity occurs and contingency is resolved.

The Company has elected to combine lease and non-lease components for all lease contracts. Additionally, the Company does not recognize ROU assets and lease liabilities for arrangements with lease terms of 12 months or less and lease payments are recognized on a straight-line basis over the lease term with variable lease payments recognized in the period in which the obligation is incurred.

Other Investment The Company owns an approximately 22% economic interest in a limited liability company which owns preferred equity secured by a commercial real estate project. The Company accounts for this investment as an equity method investment. As of March 31, 2019 and December 31, 2018, the carrying value of this investment was $23.0 million and $22.6

7

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

million, respectively. The Company evaluates its equity method investment for other-than-temporary impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. The evaluation of recoverability is based on management’s assessment of the financial condition and near-term prospects of the commercial real estate project, the length of time and the extent to which the market value of the investment has been less than cost, availability and cost of financing, demand for space, competition for tenants, changes in market rental rates, and operating costs.  As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its recoverability analyses may not be realized, and actual losses or impairment may be realized in the future.

Impairment of Real Estate and Finite-lived Intangible Assets The Company periodically reviews the carrying amounts of its long-lived assets, including real estate held-for-use and held-for-sale, as well as finite-lived intangible assets, to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. Assets to be disposed of by sale are recorded at the lower of carrying amount or fair value less costs to sell.

Other Current Assets

The following table summarizes the Company's other current assets:
 
 
March 31, 2019
 
December 31, 2018
Prepaid expenses
 
$
2,310

 
$
2,651

Deposits
 
2,606

 
2,494

Inventory
 
3,025

 
2,855

Miscellaneous current assets, net
 
12,390

 
12,505

Other current assets
 
$
20,331

 
$
20,505

 
Other Assets

The following table summarizes the Company's other assets:
 
 
March 31, 2019
 
December 31, 2018
Prepaid expenses
 
$
334

 
$
277

Deposits
 
2,127

 
2,140

Miscellaneous assets, net
 
2,582

 
6,267

Other assets
 
$
5,043

 
$
8,684


Other Current Liabilities

The following table summarizes the Company's other current liabilities:
 
 
March 31, 2019
 
December 31, 2018
Security deposits payable
 
$
6,435

 
$
14,188

Operating lease liabilities
 
16,924

 

Accrued rent
 
1,707

 
2,885

Dividends payable
 
930

 
930

Miscellaneous current liabilities
 
3,281

 
4,282

Other current liabilities
 
$
29,277

 
$
22,285


8

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 


Other Liabilities

The following table summarized the Company's other liabilities:

 
 
March 31, 2019
 
December 31, 2018
Security deposits payable
 
$
271

 
$
91

Service obligation intangible
 
2,043

 
2,759

Accrued rent
 

 
1,617

Miscellaneous liabilities
 
762

 
765

Other liabilities
 
$
3,076

 
$
5,232


Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02 Leases (Topic 842). The standard requires lessees to recognize most leases on the balance sheet and addresses certain aspects of lessor accounting. On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective approach. The Company has utilized the effective date transition method and accordingly is not required to adjust its comparative period financial information for effects of ASU 2016-02. The Company has elected to adopt practical expedients which permits it to not reassess its prior conclusions about lease identification, lease classification and initial direct costs under the new standard. The Company elected to combine lease and non-lease components for all lease contracts and also elected not to recognize ROU assets and lease liabilities for leases with terms of 12 months or less. The Company has also elected to adopt the practical expedient for land easements which permits it not to evaluate existing and expired land easements under the new standard. The adoption of ASU 2016-02 had a material impact on the Company’s Consolidated Balance Sheets, resulting in the recognition of operating lease right-of-use assets and operating lease liabilities of $225.6 million and $205.9 million, respectively, with the difference primarily due to reclassifications of leasehold intangibles and an adjustment to accumulated deficit. There was no material impact on the Consolidated Statements of Operations.

In June 2016, the FASB issued ASU 2016-13 Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount under the other-than-temporary impairment model. In November 2018, the FASB issued ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarifies that operating lease receivables accounted for under ASC 842 are not in the scope of this guidance. The effective date of the standard will be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 and early adoption is permitted for annual periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the new guidance to determine the impact it may have on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15 Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The standard requires a customer in a cloud computing arrangement (i.e., a hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. That guidance requires certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use.  The effective date of the standard will be for annual periods beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. Entities can either apply the guidance prospectively to all implementation costs incurred after the date of adoption or retrospectively. The Company is currently evaluating the timing for adoption and the impact it may have on its Consolidated Financial Statements.


9

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 


3. REVENUES

The majority of the Company’s revenue is recognized at a point in time which is at the time of sale to customers at the Company’s Entertainment Golf venues and Traditional Golf properties, including green fees, cart rentals, bay play, events and sales of food, beverages and merchandise.

The Company’s revenue is all generated within the Entertainment and Traditional Golf segments. The following table disaggregates revenue by category: Entertainment golf venues, public and private golf properties (owned and leased) and managed golf properties.
 
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
 
Ent. golf venues
 
Public golf properties
 
Private golf properties
 
Managed golf properties
 
Total
Golf operations
 
$
681

 
$
17,464

 
$
15,454

 
$
11,107

 
$
44,706

 
$

 
$
22,370

 
$
25,949

 
$
5,235

 
$
53,554

Sales of food and beverages
 
1,040

 
5,476

 
2,730

 

 
9,246

 

 
7,207

 
5,899

 

 
13,106

Total revenues
 
$
1,721

 
$
22,940

 
$
18,184

 
$
11,107

 
$
53,952

 
$

 
$
29,577

 
$
31,848

 
$
5,235

 
$
66,660


4. SEGMENT REPORTING
 
The Company currently has three reportable segments: (i) Entertainment Golf venues, (ii) Traditional Golf properties and (iii) corporate. The chief operating decision maker (“CODM”) for each segment is our Chief Executive Officer, who reviews discrete financial information for each reportable segment to manage the Company, including resource allocation and performance assessment.

The Company opened its inaugural Entertainment Golf venue in Orlando, Florida on April 7, 2018 and expects to continue opening a chain of next-generation Entertainment Golf venues across the United States and internationally, which combine golf, competition, dining and fun. 

Additionally, the Company's Traditional Golf business is one of the largest operators of golf properties in the United States. As of March 31, 2019, the Company owned, leased or managed 64 Traditional Golf properties across 11 states. 

The corporate segment consists primarily of investments in loans and securities, interest income on short-term investments, general and administrative expenses as a public company, interest expense on the junior subordinated notes payable (Note 8) and income tax expense (Note 14).

Beginning as of the Company’s second fiscal quarter in 2018, the Company changed its reportable segments to reflect the manner in which our CODM manages our businesses, including resource allocation and performance assessment. As a result, the former Debt Investments segment was combined with the corporate segment, to reflect the ongoing reduction in size of the Debt Investments segment.

 

10

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

Summary financial data on the Company’s segments is given below, together with a reconciliation to the same data for the Company as a whole:
 
 
Entertainment Golf
 
Traditional Golf
 
Corporate
 
Total
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$
681

 
$
44,025

 
$

 
$
44,706

Sales of food and beverages
 
1,040

 
8,206

 

 
9,246

Total revenues
 
1,721

 
52,231

 

 
53,952

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 
1,747

 
45,976

 

 
47,723

Cost of sales - food and beverages
 
251

 
2,447

 

 
2,698

General and administrative expense
 
3,379

 
3,897

 
3,944

 
11,220

General and administrative expense - acquisition and transaction expenses (B)
 
157

 
153

 
89

 
399

Depreciation and amortization
 
709

 
4,217

 
(2
)
 
4,924

Pre-opening costs (C)
 
1,179

 

 

 
1,179

Impairment
 

 
4,088

 

 
4,088

Realized and unrealized (gain) on investments
 

 

 

 

Total operating costs
 
7,422

 
60,778

 
4,031

 
72,231

Operating loss
 
(5,701
)
 
(8,547
)
 
(4,031
)
 
(18,279
)
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
132

 
38

 
174

 
344

Interest expense (D)
 
(3
)
 
(2,190
)
 
(626
)
 
(2,819
)
Capitalized interest (D)
 

 
188

 
478

 
666

Other (loss) income, net
 
(7
)
 
5,030

 
465

 
5,488

Total other income (expenses)
 
122

 
3,066

 
491

 
3,679

Income tax expense
 

 

 

 

Net loss
 
(5,579
)
 
(5,481
)
 
(3,540
)
 
(14,600
)
Preferred dividends
 

 

 
(1,395
)
 
(1,395
)
Loss applicable to common stockholders
 
$
(5,579
)
 
$
(5,481
)
 
$
(4,935
)
 
$
(15,995
)

 
 
 
 
 
 
 
 
 

 
 
Entertainment Golf
 
Traditional Golf
 
Corporate (E)
 
Total
March 31, 2019
 
 
 
 
 
 
 
 
Total assets
 
164,907

 
351,877

 
47,207

 
563,991

Total liabilities
 
42,054

 
349,987

 
61,887

 
453,928

Preferred stock
 

 

 
61,583

 
61,583

Noncontrolling interest
 

 

 

 

Equity attributable to common stockholders
 
$
122,853

 
$
1,890

 
$
(76,263
)
 
$
48,480

 
 
 
 
 
 
 
 
 
Additions to property and equipment (including finance leases) during the three months ended March 31, 2019
 
$
28,037

 
$
2,106

 
$
800

 
$
30,943



11

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

Summary segment financial data (continued).
 
 
Entertainment Golf
 
Traditional Golf
 
Corporate (F)
 
Total
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Golf operations
 
$

 
$
53,554

 
$

 
$
53,554

Sales of food and beverages
 

 
13,106

 

 
13,106

Total revenues
 

 
66,660

 

 
66,660

Operating costs
 
 
 
 
 
 
 
 
Operating expenses (A)
 

 
57,379

 

 
57,379

Cost of sales - food and beverages
 

 
4,040

 

 
4,040

General and administrative expense
 
1,102

 
4,153

 
2,080

 
7,335

General and administrative expense - acquisition and transaction expenses (B)
 
1,253

 
307

 
297

 
1,857

Depreciation and amortization
 
30

 
5,513

 
5

 
5,548

Pre-opening costs (C)
 
1,556

 

 

 
1,556

Impairment
 

 
1,326

 
147

 
1,473

Realized and unrealized (gain) on investments
 

 
(242
)
 

 
(242
)
Total operating costs
 
3,941

 
72,476

 
2,529

 
78,946

Operating loss
 
(3,941
)
 
(5,816
)
 
(2,529
)
 
(12,286
)
Other income (expenses)
 
 
 
 
 
 
 
 
Interest and investment income
 
28

 
51

 
367

 
446

Interest expense (D)
 

 
(3,938
)
 
(494
)
 
(4,432
)
Capitalized interest (D)
 

 
383

 

 
383

Other (loss) income, net
 

 
(938
)
 
532

 
(406
)
Total other income (expenses)
 
28

 
(4,442
)
 
405

 
(4,009
)
Income tax expense
 

 

 

 

Net loss
 
(3,913
)
 
(10,258
)
 
(2,124
)
 
(16,295
)
Preferred dividends
 

 

 
(1,395
)
 
(1,395
)
Loss applicable to common stockholders
 
$
(3,913
)
 
$
(10,258
)
 
$
(3,519
)
 
$
(17,690
)
 
 
 
 
 
 
 
 
 


(A)
Operating expenses include rental expenses recorded under operating leases for carts and equipment in the amount of $0.3 million and $0.6 million for the three months ended March 31, 2019 and 2018, respectively.
(B)
Acquisition and transaction expenses include costs related to completed and potential acquisitions and transactions, which may include advisory, legal, accounting and other professional or consulting fees.
(C)
Pre-opening costs are expensed as incurred and consist primarily of site-related marketing expenses, pre-opening rent, employee payroll, travel and related expenses, training costs, food, beverage and other restaurant operating expenses incurred prior to opening an Entertainment Golf venue.
(D)
Interest expense includes the accretion of membership deposit liabilities in the amount of $1.9 million and $1.7 million for the three months ended March 31, 2019 and 2018, respectively. Interest expense and capitalized interest total to interest expense, net on the Consolidated Statements of Operations.
(E)
Total assets in the corporate segment include an equity method investment in the amount of $23.0 million as of March 31, 2019 recorded in other investments on the Consolidated Balance Sheets.
(F)
The Debt Investments segment and corporate segment as reported previously are combined to conform to the current period's presentation.


12

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

5. PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION

The following table summarizes the Company’s property and equipment:
 
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Depreciation
 
Net Carrying Value
Land
$
6,747

 
$

 
$
6,747

 
$
6,747

 
$

 
$
6,747

Buildings and improvements
77,055

 
(30,315
)
 
46,740

 
78,833

 
(30,540
)
 
48,293

Furniture, fixtures and equipment
27,179

 
(17,396
)
 
9,783

 
26,726

 
(16,729
)
 
9,997

Finance leases - equipment
33,359

 
(13,566
)
 
19,793

 
28,745

 
(12,843
)
 
15,902

Construction in progress
74,573

 

 
74,573

 
51,666

 

 
51,666

Total Property and Equipment
$
218,913

 
$
(61,277
)
 
$
157,636

 
$
192,717

 
$
(60,112
)
 
$
132,605


On March 7, 2018, the Company announced it was actively pursuing the sale of 26 owned Traditional Golf properties in order to generate capital for reinvestment in the Entertainment Golf business. As of March 31, 2019, the Company continues to present nine golf properties as held-for-sale. The assets and associated liabilities are reported on the Consolidated Balance Sheets as “Real estate assets, held-for-sale, net” and “Real estate liabilities, held-for-sale,” respectively.
 
The real estate assets, held-for-sale, net are reported at a carrying value of $51.9 million and include $34.8 million of land, $17.3 million of buildings and improvements, $1.1 million of furniture, fixtures and equipment, and $0.5 million of other related assets, partially offset by accumulated impairment. The real estate liabilities, held-for-sale, are reported at a carrying value of $0.8 million and include property liabilities to be assumed, primarily prepaid membership dues. In March 2019, the Company reassessed the real estate assets, held-for-sale, net and determined that the carrying value of two properties exceeded the fair value less anticipated costs to sell. As a result, the Company recognized an impairment loss and recorded accumulated impairment totaling approximately $1.0 million. The fair value measurements were based on expected selling prices, less costs to sell. The significant inputs used to value these real estate investments fall within Level 3 for fair value reporting.

During the three months ended March 31, 2019, the Company sold two public golf properties in Georgia and a private golf property in California for an aggregate sale price of $28.7 million, resulting in net proceeds of $25.5 million, inclusive of transaction costs of $0.5 million. The Company received sale proceeds of $17.7 million during the three months ended March 31, 2019, consisting of $18.2 million for the golf properties sold during the three months ended March 31, 2019, and $2.2 million for golf properties that were sold during December 2018, less $2.7 million that was remitted to buyers for golf properties that were sold during December 2018. The Company previously received a $9.4 million cash deposit in 2018 related to a golf property that was sold in 2019. The difference between the sales price and the net proceeds was primarily due to prepaid membership dues that we are obligated to remit to the buyer, including $2.1 million payable to the buyer of a golf property sold during the three months ended March 31, 2019. The golf properties had a carrying value of $20.3 million and resulted in a gain on sale of $5.2 million. The gain on sale is recorded in other income (loss), net on the Consolidated Statement of Operations. The Company entered into a management agreement on the California golf property.

In March 2019, the Company evaluated the recoverability of the carrying value of a Traditional Golf leased golf property in California, using the income approach based on future assumptions of cash flows. Based on the analysis, the Company recorded an impairment charge of $3.1 million. As the fair value inputs utilized are unobservable, the Company determined that the significant inputs used to value this property falls within Level 3 for fair value reporting.

 


13

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

6. LEASES
The Company's commitments under lease arrangements are primarily ground leases for Entertainment Golf venues and Traditional Golf properties and related facilities, office leases and leases for equipment and golf carts. The majority of lease terms for our Entertainment Golf venues and Traditional Golf properties and related facilities initially range from 10 to 20 years, and include up to eight 5-year renewal options (see Note 13 for additional detail). Equipment and golf cart leases initially range between 2 to 6 years and typically contain renewal options which may be on a month-to-month basis. An option to renew a lease is included in the determination of the ROU asset and lease liability when it is reasonably certain that the renewal option will be exercised.
Lease related costs recognized in the Consolidated Statements of Operations for the three months ended March 31, 2019 are as follows:
Finance lease cost
 
 
Amortization of right-of-use assets
 
$
1,517

Interest on lease liabilities
 
246

Total finance lease cost
 
1,763

 
 
 
Operating lease cost
 
 
Operating lease cost
 
8,890

Short-term lease cost
 
751

Variable lease cost
 
2,750

Total operating lease cost
 
12,391

 
 
 
Total lease cost
 
$
14,154


Other information related to leases included on the Consolidated Balance Sheet as of and the three months ended March 31, 2019 are as follows:

 
 
Operating Leases
 
Financing Leases
Right-of-use assets
 
223,278

 
19,793

Lease liabilities
 
207,153

 
19,775

 
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
Operating cash flows
 
7,484

 
189

Financing cash flows
 
N/A

 
1,355

 
 
 
 
 
Right-of-use assets obtained in exchange for lease liabilities
 
4,305

 
6,352

 
 
 
 
 
Weighted average remaining lease term
 
13.1 years

 
3.5 years

Weighted average discount rate
 
8.7
%
 
5.1
%

Future minimum lease payments under non-cancellable leases as of March 31, 2019 are as follows:


14

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

 
 
Operating Leases
 
Financing Leases
April 1, 2019 - December 31, 2019
 
22,899

 
6,009

2020
 
33,680

 
6,013

2021
 
30,739

 
4,509

2022
 
29,034

 
2,874

2023
 
28,862

 
1,803

Thereafter
 
225,126

 
258

Total minimum lease payments
 
370,340

 
21,466

Less: imputed interest
 
163,187

 
1,691

Total lease liabilities
 
$
207,153

 
$
19,775




7. INTANGIBLES, NET OF ACCUMULATED AMORTIZATION

The following table summarizes the Company’s intangible assets:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Value
Trade name
$
700

 
$
(122
)
 
$
578

 
$
700

 
$
(117
)
 
$
583

Leasehold intangibles (A) (B)

 

 

 
46,581

 
(20,270
)
 
26,311

Management contracts
32,331

 
(15,582
)
 
16,749

 
32,932

 
(15,174
)
 
17,758

Internally-developed software
2,327

 
(1,048
)
 
1,279

 
2,314

 
(967
)
 
1,347

Membership base
5,236

 
(3,927
)
 
1,309

 
5,236

 
(3,740
)
 
1,496

Nonamortizable liquor licenses
1,037

 

 
1,037

 
893

 

 
893

Total Intangibles
$
41,631

 
$
(20,679
)
 
$
20,952

 
$
88,656

 
$
(40,268
)
 
$
48,388

(A)
The amortization expense for leasehold intangibles is reported in operating expenses in the Consolidated Statements of Operations.
(B)
As of January 1, 2019, leasehold intangibles were reclassified from "Intangibles, net of accumulated amortization" to "Operating lease right-of-use assets" in the Consolidated Balance Sheet as part of the adoption of ASU 2016-02.


15

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

8. DEBT OBLIGATIONS

The following table presents certain information regarding the Company’s debt obligations at March 31, 2019 and December 31, 2018:
 
 
 
 
March 31, 2019
 
December 31, 2018
Debt Obligation/Collateral
 
Month Issued
 
Outstanding
Face
Amount
 
Carrying
Value
 
Final Stated Maturity
 
Weighted
Average
Coupon (A)
 
Weighted Average
Funding
Cost (B)
 
Weighted Average Life (Years)
 
Face Amount of
Floating Rate Debt
 
Outstanding Face Amount
 
Carrying Value
Credit Facilities and Finance Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vineyard II
 
Dec 1993
 
$
200

 
$
200

 
Dec 2043
 
2.80%
 
2.80
%
 
24.7
 
$
200

 
$
200

 
$
200

Finance leases (Equipment)
 
Jun 2014 - Mar 2019
 
19,775

 
19,775

 
May 2019 - Oct 2024
 
3.00% to 15.00%
 
5.13
%
 
3.5
 

 
15,778

 
15,778

 
 
 
 
19,975

 
19,975

 
 
 
 
 
5.11
%
 
3.7
 
200

 
15,978

 
15,978

Less current portion of obligations under finance leases
 
 
 
6,790

 
6,790

 
 
 
 
 
 
 
 
 
 
 
5,489

 
5,489

Credit facilities and obligations under finance leases - noncurrent
 
 
 
13,185

 
13,185

 
 
 
 
 
 
 
 
 
 
 
10,489

 
10,489

Corporate
 
 
 
 

 
 

 
 
 
 
 
 

 
 
 
 

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

 
51,198

 
Apr 2035
 
LIBOR+2.25%
 
4.74
%
 
16.1
 
51,004

 
51,004

 
51,200

Total debt obligations
 
 
 
$
70,979

 
$
71,173

 
 
 
 
 
4.84
%
 
12.6
 
$
51,204

 
$
66,982

 
$
67,178



(A)
Weighted average, including floating and fixed rate classes.
(B)
Including the effect of deferred financing costs.
(C)
Interest rate based on 3 month LIBOR plus 2.25%.

The Company leases certain golf carts and other equipment under finance lease agreements. The agreements typically provide for minimum rentals plus executory costs. Lease terms range from 24 to 66 months. Certain leases include bargain purchase options at lease expiration.

9. REAL ESTATE SECURITIES
 
The following is a summary of the Company’s real estate securities at March 31, 2019, which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.
 
 
March 31, 2019
 
 
 
 
Amortized Cost Basis
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Before Impairment
 
Other-Than- Temporary Impairment
 
After Impairment
 
Gains
 
Losses
 
Carrying
 Value (A)
 
Number of Securities
 
Rating (B)
 
Coupon
 
Yield
 
Life
(Years) (C)
 
Principal Subordination (D)
ABS - Non-Agency RMBS
 
$
4,000

 
$
2,650

 
$
(1,521
)
 
$
1,129

 
$
1,878

 
$

 
$
3,007

 
1

 
CCC
 
2.88
%
 
32.00
%
 
4.7
 
38.7
%
Total Securities, Available for Sale (E)
 
$
4,000

 
$
2,650

 
$
(1,521
)
 
$
1,129

 
$
1,878

 
$

 
$
3,007

 
1

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


16

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 


The Company had no securities in an unrealized loss position as of March 31, 2019. The Company has no activity related to credit losses on debt securities for the three months ended March 31, 2019.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Summary Table

The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2019
 
Carrying Value
 
Estimated Fair Value
 
Fair Value Method (A)
Assets
 

 
 

 
 
Real estate securities, available-for-sale
$
3,007

 
$
3,007

 
Pricing models - Level 3
Cash and cash equivalents
49,599

 
49,599

 
 
Restricted cash, current and noncurrent
3,623

 
3,623

 
 
Liabilities
 
 
 
 
 
Junior subordinated notes payable
51,198

 
29,383

 
Pricing models - Level 3
 

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

Fair Value Measurements

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

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

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

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

17

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 

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

Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of March 31, 2019:

 
 
 
 
 
 
Weighted Average Significant Input
Asset Type
 
Amortized Cost Basis
 
Fair Value
 
Discount
Rate
 
Prepayment
Speed
 
Cumulative Default Rate
 
Loss
Severity
ABS - Non-Agency RMBS
 
$
1,129

 
$
3,007

 
10.0
%
 
8.0
%
 
2.9
%
 
43.3
%

All of the inputs used have some degree of market observability, based on the Company’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class but conform to industry conventions. The Company uses assumptions that generate its best estimate of future cash flows of each respective security.

Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed during the three months ended March 31, 2019 as follows:
 
 
ABS - Non-Agency RMBS
Balance at December 31, 2018
 
$
2,953

Total gains (losses) (A)
 
 

Included in other comprehensive income (loss)
 

Amortization included in interest income
 
82

Purchases, sales and repayments (A)
 
 

Proceeds
 
(28
)
Balance at March 31, 2019
 
$
3,007


(A)
None of the gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. There were no purchases or sales during the three months ended March 31, 2019. There were no transfers into or out of Level 3 during the three months ended March 31, 2019.

Liabilities for Which Fair Value is Only Disclosed
 
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed
 
Fair Value Hierarchy
 
 
Valuation Techniques and Significant Inputs
Junior subordinated notes payable
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields and the credit spread of the Company

18

DRIVE SHACK INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2019
(dollars in tables in thousands, except share data)
 


11. EQUITY AND EARNINGS PER SHARE
 
A. Stock Options

The following is a summary of the changes in the Company’s outstanding options for the three months ended March 31, 2019:
 
Number of Options
 
Weighted Average Strike Price
 
Weighted Average Life Remaining (in years)
Balance at December 31, 2018
8,436,931

 
$
3.72

 
 
Balance at March 31, 2019
8,436,931

 
$
3.72

 
7.47
 
 
 
 
 
 
Exercisable at March 31, 2019
2,705,586