Full House Resorts, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

6 Months Ended

Jun. 30, 2021

3. LEASES

The Company has no 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 37 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.

Operating Leases

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.

The Company executed a fourth amendment to the original lease with the landlord, effective March 2020, which granted a waiver of base rent for April and May of 2020. Such abatement totaled $155,000 and the value of such abatement will be amortized over the remaining term of the lease. From April 1, 2022 through October 1, 2027, the Company may buy out the lease 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.

Bronco Billy’s / Chamonix 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. In May 2019, Bronco Billy’s exercised its second renewal option to extend the lease term through January 31, 2023 and currently pays $32,500 per month in rent. 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.

In June 2021, the Company remeasured this lease’s related ROU asset and liability balances by factoring in an additional renewal term through January 2026, with monthly rent increases to $35,000 starting in February 2023. Since part of Chamonix will be built on this leased land, management believes this remeasurement fairly accounts for such easement, until the Company becomes reasonably certain of exercising the purchase option.

Third Street Corner Building through August 2023 and Option to Purchase. The Company leased a nearby closed casino in August 2018 and reopened it in November 2018. The reopened casino did not produce enough incremental revenue to offset the incremental costs, and it was closed in September 2020. The Company has the right to purchase the casino at any time during the lease term, as extended. Currently, the purchase price is $2.7 million if exercised by October 31, 2021 and increases to $2.8 million for purchase dates thereafter.

As part of the Chamonix development project, this building is currently used as office space for construction personnel, obviating the need for construction trailers. The lease includes a minimum three-year term with annual lease payments of $0.2 million, and was subsequently extended in June 2021 for an additional two years with annual lease payments of $0.3 million. Beginning in March 2021, such rent expenses have been capitalized as construction costs for Chamonix.

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 2028 Notes (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.

In July 2020, the Company executed a fifth amendment to the Hyatt lease that retroactively reduced rent amounts due during the closure period, specifically a 25% reduction in rent for March 2020 and a 50% reduction in rent for each of April and May of 2020. Such reductions totaled $208,000 and such benefit is being amortized over the remaining life of the lease.

Corporate Office Lease through January 2025. The Company leases 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.

Finance Lease

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 hotel’s original cost of $7.7 million, reduced by the cumulative principal payments made by the Company during the lease term. At June 30, 2021, such potential purchase price was $3.5 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.

The components of lease expense are as follows:


(In thousands)		Three Months Ended				Six Months Ended
		June 30,				June 30,
Lease Costs	Statement of Operations Classification	2021		2020		2021		2020
Operating leases:
Fixed/base rent⁽¹⁾	Selling, General and Administrative Expenses	$	1,086	$	1,199	$	2,245	$	2,399
Variable payments	Selling, General and Administrative Expenses		418		4		820		158
Finance lease:
Amortization of leased assets	Depreciation and Amortization		39		39		78		79
Interest on lease liabilities	Interest Expense, Net		41		62		84		94
Total lease costs		$	1,584	$	1,304	$	3,227	$	2,730

__________

(1)	Starting in March 2021, rent expenses of approximately $60,000 and $79,000 were subsequently capitalized as construction costs for Chamonix for the respective three- and six-months ended June 30, 2021.

Leases recorded on the balance sheet consist of the following:


(In thousands)

Leases	Balance Sheet Classification	June 30, 2021		December 31, 2020
Assets
Operating lease assets	Operating Lease Right-of-Use Assets, Net	$	17,443	$	17,361
Finance lease assets	Property and Equipment, Net⁽¹⁾		4,801		4,879
Total lease assets		$	22,244	$	22,240

Liabilities
Current
Operating	Current Portion of Operating Lease Obligations	$	3,454	$	3,283
Finance	Current Portion of Finance Lease Obligation		458		491
Noncurrent
Operating	Operating Lease Obligations, Net of Current Portion		14,710		14,914
Finance	Finance Lease Obligation, Net of Current Portion		3,090		3,298
Total lease liabilities		$	21,712	$	21,986

__________

(1)	Finance lease assets are recorded net of accumulated amortization of $2.9 million and $2.8 million as of June 30, 2021 and December 31, 2020, respectively.

Maturities of lease liabilities as of June 30, 2021 are summarized as follows:


(In thousands)
	Operating		Financing
Years Ending December 31,	Leases		Lease⁽¹⁾
2021 (excluding the six months ended June 30, 2021)	$	2,447	$	274
2022		4,852		652
2023		3,539		652
2024		1,663		652
2025		1,466		652
Thereafter		30,105		1,195
Total future minimum lease payments		44,072		4,077
Less: Amount representing interest		(25,908)		(529)
Present value of lease liabilities		18,164		3,548
Less: Current lease obligations		(3,454)		(458)
Long-term lease obligations	$	14,710	$	3,090

__________

(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:


Lease Term and Discount Rate	June 30, 2021		December 31, 2020
Weighted-average remaining lease term
Operating leases	20.15	years	20.4	years
Finance lease	6.3	years	6.8	years
Weighted-average discount rate
Operating leases	9.20	%	9.41	%
Finance lease	4.50	%	4.50	%

Supplemental cash flow information related to leases is as follows:


(In thousands)	Six Months Ended
	June 30,
Cash paid for amounts included in the measurement of lease liabilities:	2021		2020
Operating cash flows for operating leases⁽¹⁾	$	2,439	$	1,659
Operating cash flows for finance lease	$	84	$	94
Financing cash flows for finance lease	$	242	$	251

__________

(1)	Starting in March 2021, cash paid for base rents of approximately $57,000 and $76,000 were subsequently capitalized as construction costs for Chamonix for the respective three- and six-months ended June 30, 2021.