|3 Months Ended|
Mar. 31, 2020
The Company has no material leases in which it is the lessor. As lessee, the Company has one finance lease for a hotel and various operating leases for land, casino and office space, equipment, buildings, and signage. The Company’s lease terms, including extensions, range from one month to approximately 38 years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants, but the land lease at Silver Slipper does include contingent rent as further discussed below.
As a result of COVID-19, the Financial Accounting Standards Board (“FASB”), which governs U.S. GAAP, has offered companies the accounting election to apply guidance relief relating to lease concessions for business interruptions brought on by government-mandated closures. Normally, such rent deferments or forgiveness of certain payments that have been granted outside the original contract terms would trigger lease remeasurements. However, without relief in applying the lease accounting guidance, these modifications in terms would require evaluations that would be considered both costly and complex for certain companies. Rather than analyzing each lease contract individually, companies can choose on a reasonable basis to either: (1) apply the modification framework for these concessions in accordance with the applicable codification (see Note 2) to calculate lease remeasurements, or (2) forgo such remeasurements and account for the concessions as if they were made under the enforceable rights included in the original agreement.
In its efforts to preserve cash, the Company obtained rent concessions as a direct result of business disruptions from COVID-19 for certain material leases, as further discussed below and in Note 12. In summary, the Company has elected to apply guidance relief as granted by FASB for rent deferments as these deferrals of payments only affect the timing of payments; the total rent amounts paid over the course of the original contract remain the same. As such, the Company will continue to accrue for related lease expenses during the deferral period and forgo remeasurement of those leases. In contrast, the Company did not apply the aforementioned election for the rent forgiveness that was granted for the land lease at Silver Slipper, since the amounts paid over the remaining term of the contract reflect an actual reduction from its original lease measurement.
Silver Slipper Casino Land Lease through April 2058 and Options to Purchase. In 2004, the Company’s subsidiary, Silver Slipper Casino Venture, LLC, entered into a land lease with Cure Land Company, LLC for approximately 31 acres of marshlands and a seven-acre parcel on which the Silver Slipper Casino and Hotel is situated. The agreement includes fixed, base monthly payments of $77,500 plus contingent rents of 3% of monthly gross gaming revenue (as defined in the lease) in excess of $3.65 million, with no scheduled base rent increases through the remaining lease term ending in 2058.
Effective March 2020, the Company later executed a fourth amendment to the original lease with the landlord, which granted a waiver of base rent for April and May of 2020. With such abatement totaling $155,000 of undiscounted cash, the Company chose to remeasure this lease in order to more fairly represent the reduction in payments, as this was the only material lease in which the Company was able to obtain rent forgiveness to date. This amendment also delays the beginning of the Company’s purchase option period for the leased land. The Company may exercise its purchase option from April 1, 2022 (as amended) through October 1, 2027, for $15.5 million plus a seller-retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined) for 10 years following the purchase date.
In the event that the Company sells or transfers either (i) substantially all of the assets of Silver Slipper Casino Venture, LLC, or (ii) its membership interests in Silver Slipper Casino Venture, LLC in its entirety, the purchase price will increase to $17.1 million, plus the retained interest mentioned above. In either case, the Company also has an option to purchase a four-acre portion from the total 38 acres of leased land for $2.0 million in connection with the development of an owned hotel, which may be exercised at any time and would accordingly reduce the purchase price of the remaining land by $2.0 million. Following a buy-out of the lease, the property would have to purchase or otherwise provide for its drinking water, which is currently provided by the landlord as part of the lease.
Bronco Billy’s Lease through January 2035 and Option to Purchase. Bronco Billy’s leases certain parking lots and buildings, including a portion of the hotel and casino, under a long-term lease. The lease term includes six renewal options in three-year increments to 2035. Bronco Billy’s exercised its first renewal option through January 2020, and currently pays $30,000 per month in rent. In May 2019, Bronco Billy’s also exercised its second renewal option to extend the lease term through January 31, 2023, which will increase the monthly rent to $32,500 beginning in February 2021. The lease also contains a $7.6 million purchase option exercisable at any time during the lease term, or as extended, and a right of first refusal on any sale of the property. See Note 12 regarding concessions granted for this lease, which are effective in the second quarter of 2020.
Christmas Casino at Bronco Billy’s through August 2021 and Option to Purchase. As part of the Bronco Billy’s expansion, the Company leased a closed casino in August 2018 and opened it as the rebranded Christmas Casino in November 2018. The lease includes a minimum three-year term with annual lease payments of $0.2 million, and can be extended an additional two years with annual lease payments of $0.3 million. The Company can also purchase the casino at any time during the lease term, or as extended. The purchase price is $2.6 million if bought by October 31, 2020, increasing by $0.1 million on each anniversary thereafter up to $2.8 million. No concession was granted for this lease to date.
Grand Lodge Casino Lease through August 2023. The Company’s subsidiary, Gaming Entertainment (Nevada), LLC, has a lease with Hyatt Equities, L.L.C. (“Hyatt”) to operate the Grand Lodge Casino. The lease is collateralized by the Company’s interests under the lease and property (as defined in the lease) and is subordinate to the liens of the senior secured notes due 2024 (see Note 5). Hyatt currently has an option to purchase the Company’s leasehold interest and related operating assets of the Grand Lodge Casino, subject to assumption of applicable liabilities. The option price is an amount equal to the Grand Lodge Casino’s positive working capital, plus Grand Lodge Casino’s earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the twelve-month period preceding the acquisition (or pro-rated if less than twelve months remain on the lease), plus the fair market value of the Grand Lodge Casino’s personal property. The current monthly rent of $166,667 is applicable through the remaining lease term ending in August 2023. No concession was granted for this lease to date.
Corporate Office Lease through January 2025. In June 2017, the Company leased 4,479 square feet of office space in Las Vegas, Nevada. Annual rent is approximately $0.2 million and the term of the office lease expires in January 2025. No concession was granted for this lease to date.
Rising Star Casino Hotel Lease through October 2027 and Option to Purchase. The Company’s Indiana subsidiary, Gaming Entertainment (Indiana) LLC, leases a 104‑room hotel at Rising Star Casino Resort. At any time during the lease term, the Company has the option to purchase the hotel at a price based upon the project’s actual cost of $7.7 million (see Note 4), reduced by the cumulative principal payments made by the Company during the lease term. At March 31, 2020, such net amount was $4.2 million. Upon expiration of the lease term in October 2027, (i) the landlord has the right to sell the hotel to the Company, and (ii) the Company has the option to purchase the hotel. In either case, the purchase price is $1 plus closing costs. See Note 12 regarding concessions granted for this lease, which are effective in the second quarter of 2020.
Leases recorded on the balance sheet consist of the following:
(1)Finance lease assets are recorded net of accumulated amortization of $2.7 million as of March 31, 2020.
The components of lease expense are as follows:
Maturities of lease liabilities as of March 31, 2020 are summarized as follows:
(1)The Company’s only material finance lease is at Rising Star Casino Resort for a 104‑room hotel.
Other information related to lease term and discount rate is as follows:
(1)Upon adoption of the new lease standard, discount rates used for existing operating leases were established on January 1, 2019.
Supplemental cash flow information related to leases is as follows: