LEASES

3 Months Ended

Dec. 31, 2019

LEASES:

The Company determines if a contract is, or contains, a lease at its inception or at the time of any modification. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset requires that the lessee has both: (i) the right to obtain substantially all of the economic benefits from the use of the asset and (ii) the right to direct the use of the asset.

ROU operating and finance lease assets and liabilities are recognized on the respective lease commencement date based on the present value of future lease payments over the expected lease term. An expected lease term includes any option to extend or terminate the lease if it is reasonably certain that the Company will exercise such option. The Company utilizes the incremental borrowing rate (“IBR”) applicable to the lease as determined at the lease commencement date to calculate the present value of future lease payments. The applicable IBR is determined based on the treasury group to which the leasing entity belongs and that group’s estimated interest rate for collateralized borrowings over a similar term as the future lease payments. Upon adoption of ASU 2016-02, the Company utilized IBRs as of October 1, 2019 to determine the present value of the remaining lease payments for operating leases that commenced prior to that date. Operating lease expense for fixed lease payments is recognized on a straight-line basis over the expected lease term. ROU finance lease assets are recorded within property and equipment, net and are amortized on a straight-line basis over the related lease term. As of December 31, 2019, ROU finance lease assets totaled $31.4 million.

Lessee

The Company leases real estate and equipment under various operating and finance lease agreements. Lease terms range from approximately one month to 50 years and do not contain any material residual value guarantees or restrictive covenants. Rental payments under these lease agreements are fixed and/or variable based on periodic adjustments for inflation, performance, usage or appraised land values. Variable components of lease payments are not included in the calculation of ROU assets and liabilities.

The Company’s lease arrangements contain both lease and non-lease components. For instances in which the Company is a lessee, the Company accounts for both lease and non-lease components as a single lease component for substantially all classes of underlying assets (primarily real estate and equipment). Leases with an expected or initial term of 12 months or less are not recorded on the Company’s balance sheet and the related lease expenses are recognized on a straight-line basis over the expected lease term.

Information related to weighted average lease terms and discount rates is as follows:



	December 31, 2019
Weighted average remaining lease terms (years):
Operating leases	23
Finance leases	18
Weighted average discount rates:
Operating leases (1)	7.98	%
Finance leases	5.01	%

_________


(1)	The weighted average discount rates for existing operating leases were established upon the adoption of ASU 2016-02 on October 1, 2019.

The components of lease expense are as follows (in thousands):



	For the
	Three Months Ended
	December 31, 2019
Operating lease expense	$	9,601
Short-term lease expense	9,956
Variable lease expense	3,609
Finance lease expense:
Amortization of ROU assets	607
Interest on lease liabilities	397
Less: sublease income (1)	(9,604		)
Total	$	14,566

_________


(1)	Represents income earned by the Company from the rental of hotel, convention or retail space at the MGE Niagara Resorts and the Earth Hotel Tower at Mohegan Sun, both of which are leased properties.

Supplemental cash flow information related to lease liabilities is as follows (in thousands):



	For the
	Three Months Ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Payments on operating lease obligations	$	8,385
Payments for interest on finance lease obligations	397
Payments on finance lease obligations	404
Total	$	9,186

Maturities of ROU operating lease obligations are as follows (in thousands):



	Operating Leases			Finance Leases
Fiscal years:
2020 (1)	$	24,415		$	2,502
2021	30,922			3,131
2022	31,282			3,130
2023	31,047			2,934
2024	31,115			2,568
Thereafter	734,067			33,442
Total future lease payments	882,848			47,707
Less: amounts representing interest	(513,106		)	(16,197		)
Plus: residual values	—			327
Present value of future lease payments	369,742			31,837
Less: current portion of lease obligations	(9,894		)	(1,794		)
Lease obligations, net of current portion	$	359,848		$	30,043

_________


(1)	Represents payment obligations from January 1, 2020 to September 30, 2020.

In connection with the acquisition of the MGE Niagara Resorts, the Company committed to enter into a lease agreement with a third-party to lease the Niagara Falls Entertainment Centre following the completion of its construction. Prior to the adoption of ASU 2016-02, the Company was deemed, for accounting purposes only, to be the owner of this construction project, despite not being the legal owner. Accordingly, the Company capitalized $90.3 million as of September 30, 2019 for amounts paid as a build-to-suit asset within property and equipment, net and recorded a corresponding build-to-suit liability. In connection with the adoption of ASU 2016-02, the Company derecognized the build-to-suit asset and liability in their entirety.

Lessor

The Company leases space at its facilities to third parties. Lease terms for these non-cancelable operating leases range from approximately one month to 17 years. Rental income under these lease agreements are fixed and/or variable based on percentage of tenant sales or periodic adjustments for inflation. Rental income is recorded within hotel and retail, entertainment and other revenues. For instances in which the Company is the lessor, and the class of underlying asset represents retail space, the Company accounts for both the lease and non-lease components, such as common area maintenance and tenant services, as a single lease component. In all other instances, non-lease components are accounted for separately in accordance with applicable guidance, most commonly ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.

Lease income consists of the following (in thousands):



	For the Three Months Ended December 31, 2019
	Hotel		Retail, Entertainment and Other
Fixed rent	$	15,743	$	3,075
Variable rent	—		1,388
Total	$	15,743	$	4,463

Future fixed rental income that the Company expects to earn under non-cancelable operating leases, exclusive of amounts under contingent escalated rent clauses, are as follows (in thousands):



Fiscal years:
2020 (1)	$	7,120
2021	8,211
2022	5,375
2023	4,748
2024	4,180
Thereafter	9,440
Total	$	39,074

_________


(1)	Represents future fixed rental income from January 1, 2020 to September 30, 2020.

The portions of Mohegan Sun, including the Sky Hotel Tower and the Earth Expo & Convention Center, and Mohegan Sun Pocono that are leased to third parties under operating leases are recorded within property and equipment, net as follows (in thousands):



	December 31, 2019
Property and equipment, at cost	$	492,612
Less: accumulated depreciation	(197,212		)
Property and equipment, net	$	295,400

As of September 30, 2019, information pertaining to the Company’s leases, as accounted for under prior accounting standards, was as follows:

Capital Leases

Minimum future capital lease payments were as follows (in thousands):



Fiscal years:
2020	$	2,571
2021	2,598
2022	2,598
2023	2,548
2024	2,251
Thereafter	32,832
Total minimum future capital lease payments	45,398
Less: amounts representing interest	(16,031		)
Plus: residual values	327
Present value of capital lease obligations	29,694
Less: current portion of capital lease obligations	(1,133		)
Capital lease obligations, net of current portion	$	28,561

Operating Leases

Minimum future rental income that the Company expected to earn under non-cancelable leases was as follows (in thousands):



Fiscal years:
2020	$	4,808
2021	4,038
2022	2,485
2023	2,092
2024	2,011
Thereafter	5,734
Total	$	21,168

Minimum future rental payments that the Company expected to incur under non-cancelable leases and subleases was as follows (in thousands):



Fiscal years:	Minimum Future Rental Payments		Minimum Future Sublease Income			Total
2020	$	32,504	$	(1,709	)	$	30,795
2021	30,376		(1,428		)	28,948
2022	30,651		(1,114		)	29,537
2023	30,473		(987		)	29,486
2024	30,602		(1,025		)	29,577
Thereafter	715,910		(843		)	715,067
Total	$	870,516	$	(7,106	)	$	863,410

Leases

LEASES:

Lessee

Information related to weighted average lease terms and discount rates is as follows:



	December 31, 2019
Weighted average remaining lease terms (years):
Operating leases	23
Finance leases	18
Weighted average discount rates:
Operating leases (1)	7.98	%
Finance leases	5.01	%

_________


(1)	The weighted average discount rates for existing operating leases were established upon the adoption of ASU 2016-02 on October 1, 2019.

The components of lease expense are as follows (in thousands):



	For the
	Three Months Ended
	December 31, 2019
Operating lease expense	$	9,601
Short-term lease expense	9,956
Variable lease expense	3,609
Finance lease expense:
Amortization of ROU assets	607
Interest on lease liabilities	397
Less: sublease income (1)	(9,604		)
Total	$	14,566

_________


(1)	Represents income earned by the Company from the rental of hotel, convention or retail space at the MGE Niagara Resorts and the Earth Hotel Tower at Mohegan Sun, both of which are leased properties.

Supplemental cash flow information related to lease liabilities is as follows (in thousands):



	For the
	Three Months Ended
	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Payments on operating lease obligations	$	8,385
Payments for interest on finance lease obligations	397
Payments on finance lease obligations	404
Total	$	9,186

Maturities of ROU operating lease obligations are as follows (in thousands):



	Operating Leases			Finance Leases
Fiscal years:
2020 (1)	$	24,415		$	2,502
2021	30,922			3,131
2022	31,282			3,130
2023	31,047			2,934
2024	31,115			2,568
Thereafter	734,067			33,442
Total future lease payments	882,848			47,707
Less: amounts representing interest	(513,106		)	(16,197		)
Plus: residual values	—			327
Present value of future lease payments	369,742			31,837
Less: current portion of lease obligations	(9,894		)	(1,794		)
Lease obligations, net of current portion	$	359,848		$	30,043

_________


(1)	Represents payment obligations from January 1, 2020 to September 30, 2020.

Lessor

Lease income consists of the following (in thousands):



	For the Three Months Ended December 31, 2019
	Hotel		Retail, Entertainment and Other
Fixed rent	$	15,743	$	3,075
Variable rent	—		1,388
Total	$	15,743	$	4,463

Future fixed rental income that the Company expects to earn under non-cancelable operating leases, exclusive of amounts under contingent escalated rent clauses, are as follows (in thousands):



Fiscal years:
2020 (1)	$	7,120
2021	8,211
2022	5,375
2023	4,748
2024	4,180
Thereafter	9,440
Total	$	39,074

_________


(1)	Represents future fixed rental income from January 1, 2020 to September 30, 2020.



	December 31, 2019
Property and equipment, at cost	$	492,612
Less: accumulated depreciation	(197,212		)
Property and equipment, net	$	295,400

As of September 30, 2019, information pertaining to the Company’s leases, as accounted for under prior accounting standards, was as follows:

Capital Leases

Minimum future capital lease payments were as follows (in thousands):



Fiscal years:
2020	$	2,571
2021	2,598
2022	2,598
2023	2,548
2024	2,251
Thereafter	32,832
Total minimum future capital lease payments	45,398
Less: amounts representing interest	(16,031		)
Plus: residual values	327
Present value of capital lease obligations	29,694
Less: current portion of capital lease obligations	(1,133		)
Capital lease obligations, net of current portion	$	28,561

Operating Leases

Minimum future rental income that the Company expected to earn under non-cancelable leases was as follows (in thousands):



Fiscal years:
2020	$	4,808
2021	4,038
2022	2,485
2023	2,092
2024	2,011
Thereafter	5,734
Total	$	21,168

Minimum future rental payments that the Company expected to incur under non-cancelable leases and subleases was as follows (in thousands):



Fiscal years:	Minimum Future Rental Payments		Minimum Future Sublease Income			Total
2020	$	32,504	$	(1,709	)	$	30,795
2021	30,376		(1,428		)	28,948
2022	30,651		(1,114		)	29,537
2023	30,473		(987		)	29,486
2024	30,602		(1,025		)	29,577
Thereafter	715,910		(843		)	715,067
Total	$	870,516	$	(7,106	)	$	863,410