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Leases

3 Months Ended

Mar. 31, 2019

The Company determines if a contract is or contains a leasing element at the inception of the contract or the date in which a modification of an existing contract occurs. In order for a contract to be considered a lease, the contract must transfer the right to control the use of an identified asset for a period of time in exchange for consideration. Control is determined to have occurred if the lessee has (i) the right to obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (ii) the right to direct the use of the identified asset.

The Company has leasing arrangements that contain both (i) lease and (ii) non-lease components. The Company accounts for both the lease component and the non-lease component as a single component for all classes of underlying assets.

For leases where the rate implicit in the lease is not readily determinable, the Company utilizes its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Upon adoption of the new lease standard, the Company utilized its incremental borrowing rate on January 1, 2019, for operating and finance leases that commenced prior to that date.

Lessee

Master Leases - General

As described in Note 3, “New Accounting Pronouncements,” components associated with the Master Leases were determined to be operating leases or finance leases or continued to be financing obligations.

Penn Master Lease

Pursuant to a triple net master lease with GLPI, which became effective November 1, 2013 (the “Penn Master Lease”), the Company leases real estate assets associated with 20 of the gaming facilities used in its operations. The Penn Master Lease has an initial term of 15 years with four subsequent, five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 35 years.

The payment structure under the Penn Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the Penn Master Lease) of 1.8:1, and a component that is based on the performance of the facilities, which is prospectively adjusted (i) every five years by an amount equal to 4% of the average change in net revenues of all facilities under the Penn Master Lease compared to a contractual baseline (other than Hollywood Casino Columbus and Hollywood Casino Toledo (“Columbus and Toledo”)) during the preceding five years (“Penn Percentage Rent”) and (ii) monthly by an amount equal to 20% of the revenues of Hollywood Casino Columbus and Hollywood Casino Toledo in excess of a contractual baseline. The next annual escalator test date is scheduled to occur effective November 1, 2019 and the next Penn Percentage Rent reset is scheduled to occur on November 1, 2023.

Monthly variable expenses associated with contingent payments for Columbus and Toledo totaled $13.1 million and $12.4 million for the three months ended March 31, 2019 and 2018, respectively. For the three months ended March 31, 2019, the Company recorded an expense of $6.8 million related to the operating lease components (land components), which is included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations; and recorded an expense of $6.3 million related to the finance lease components (building components), which is included in “Interest expense” within our unaudited Condensed Consolidated Statements of Operations. The $12.4 million expense related to the three months ended March 31, 2018 was included in “Interest expense” within our unaudited Condensed Consolidated Statements of

Operations pursuant to previous GAAP under which all contingent rentals were recorded as interest expense due to the failed sale-leaseback accounting treatment.

Changes to future lease payments (i.e., when future escalators become known or future variable rent resets occur) require the Company to (i) increase both the operating lease ROU assets and corresponding operating lease liabilities with respect to operating leases; and (ii) record the incremental variable payment associated with the financing obligation to interest expense.

Pinnacle Master Lease

In connection with the Pinnacle Acquisition (as defined in Note 5, “Acquisitions,”), the Company assumed a triple net master lease with GLPI, originally effective April 28, 2016 (the “Pinnacle Master Lease”), pursuant to which the Company leases real estate assets associated with 12 of the gaming facilities used in its operations. Upon assumption of the Pinnacle Master Lease, as amended, there were 7.5 years remaining of the initial 10-year term, with five subsequent, five-year renewal periods, on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 32.5 years.

The payment structure under the Pinnacle Master Lease includes a fixed component, which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the Pinnacle Master Lease) of 1.8:1, and a component that is based on the performance of the facilities, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of all facilities under the Pinnacle Master Lease (with the exception of Plainridge Park Casino) compared to a contractual baseline during the preceding two years (“Pinnacle Percentage Rent”). The next annual escalator test date is scheduled to occur effective May 1, 2019 and the next Pinnacle Percentage Rent reset is scheduled to occur on May 1, 2020.

Operating Leases

The Company’s operating leases consist mainly of (i) the Meadows Lease with GLPI; (ii) a triple net lease with VICI Properties Inc. (“VICI”) for the real estate assets used in the operation of Margaritaville Resort Casino (the “Margaritaville Lease”); (iii) ground and levee leases to landlords which were not assumed by our REIT landlords and remain an obligation of the Company; and (iv) building and equipment not associated with our Master Leases. Certain of our lease agreements include rental payments based on a percentage of sales over specified contractual amounts, rental payments adjusted periodically for inflation and rental payments based on usage. The Company’s leases include options to extend the lease term. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Other information related to lease term and discount rate was as follows:



	March 31, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	29.8 years
Finance leases ⁽²⁾	29.5 years
Financing obligations ⁽³⁾	31.1 years

Weighted Average Discount Rate
Operating leases ⁽¹⁾	6.9	%
Finance leases ⁽²⁾	6.8	%
Financing obligations ⁽³⁾	8.1	%

(1)

Amounts consist of (i) land components associated with our Master Leases that were concluded to be operating leases at the adoption date of the new lease standard; (ii) our Meadows Lease; (iii) our Margaritaville Lease; (iv) ground and levee leases with landlords which were not assumed by our REIT landlords and remain an obligation of the Company; and (v) building and equipment not contained within leases with our REIT landlords. For leases where the rate implicit in the lease is not readily determinable, we use our incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments.

(2)

Amounts primarily represent finance leases associated with our Dayton and Mahoning Valley properties (which are included in the Penn Master Lease) that under previous GAAP utilized specific build-to-suit guidance. The adoption of the new lease standard required the Company to evaluate the components utilizing the guidance contained within the new lease standard, which resulted in all components being classified as finance leases.

For leases where the rate implicit in the lease is not readily determinable, we use our incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments.


(3)	Amounts consist of components contained within each of the Master Leases determined to continue to be financing obligations (which consist primarily of building components) at the adoption date of the new lease standard.

The components of lease expense were as follows:



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the three months ended March 31, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	84,730	$	—	$	—	$	84,730
Operating lease cost	137		156		4,097		—		—		4,390
Short-term lease cost	12,936		160		568		—		—		13,664
Variable lease cost	1,259		2		315		—		—		1,576
Total	$	14,332	$	318	$	89,710	$	—	$	—	$	104,360

Finance Lease Costs
Interest expense associated with finance leases ⁽²⁾	$	—	$	—	$	—	$	3,827	$	—	$	3,827
Amortization expense associated with finance leases ⁽²⁾	—		—		—		—		1,959		1,959
Total	$	—	$	—	$	—	$	3,827	$	1,959	$	5,786

Financing Obligation Costs
Interest expense associated with financing obligations ⁽³⁾	$	—	$	—	$	—	$	97,672	$	—	$	97,672


(1)	Pertains to the components contained within the Master Leases (primarily land components) determined to be operating leases, the Meadows Lease, and the Margaritaville Lease.


(2)	Primarily pertains to the Dayton and Mahoning Valley finance leases.


(3)	Pertains to the components contained within the Master Leases (primarily building components) determined to continue to be financing obligations, inclusive of contingent variable interest expense associated with Columbus and Toledo.

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of March 31, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the three months ended March 31, 2019)	$	275,761		$	15,701		$	292,189
2020	352,916			21,028			374,715
2021	336,908			21,021			367,278
2022	336,660			20,909			367,278
2023	333,540			20,083			367,278
Thereafter	7,665,371			398,727			9,637,956
Total lease payments	9,301,156			497,469			11,406,694
Less: Amounts representing interest	(5,336,870		)	(274,647		)	(7,224,861		)
Present value of future lease payments	3,964,286			222,822			4,181,833
Less: Current portion of lease obligations	(95,894		)	(5,874		)	(52,600		)
Long-term portion of lease obligations	$	3,868,392		$	216,948		$	4,129,233

For the three months ended March 31, 2019 and 2018, total payments made to GLPI under the Penn Master Lease were $114.4 million and $115.9 million, respectively. For the three months ended March 31, 2019, total payments made to GLPI under the Pinnacle Master Lease were $81.3 million.

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	3,827
Operating cash flows from operating leases	$	90,629
Financing cash flows from finance leases	$	1,640

Lessor

The Company leases its hotel rooms to patrons and records the corresponding lessor revenue within “Food, beverage, hotel and other revenues” within our unaudited Condensed Consolidated Statements of Operations. For the three months ended March 31, 2019, the Company recognized $71.4 million of lessor revenues related to the rental of hotel rooms. Hotel leasing arrangements vary in duration, but are short-term in nature. The cost and accumulated depreciation of property and equipment associated with hotel rooms is included in “Property and equipment, net” within our unaudited Condensed Consolidated Balance Sheets.

Leases

Lessee

Master Leases - General

Penn Master Lease

Operations pursuant to previous GAAP under which all contingent rentals were recorded as interest expense due to the failed sale-leaseback accounting treatment.

Pinnacle Master Lease

Operating Leases

Other information related to lease term and discount rate was as follows:



	March 31, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	29.8 years
Finance leases ⁽²⁾	29.5 years
Financing obligations ⁽³⁾	31.1 years

Weighted Average Discount Rate
Operating leases ⁽¹⁾	6.9	%
Finance leases ⁽²⁾	6.8	%
Financing obligations ⁽³⁾	8.1	%

(1)

(2)


(3)	Amounts consist of components contained within each of the Master Leases determined to continue to be financing obligations (which consist primarily of building components) at the adoption date of the new lease standard.

The components of lease expense were as follows:



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the three months ended March 31, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	84,730	$	—	$	—	$	84,730
Operating lease cost	137		156		4,097		—		—		4,390
Short-term lease cost	12,936		160		568		—		—		13,664
Variable lease cost	1,259		2		315		—		—		1,576
Total	$	14,332	$	318	$	89,710	$	—	$	—	$	104,360

Finance Lease Costs
Interest expense associated with finance leases ⁽²⁾	$	—	$	—	$	—	$	3,827	$	—	$	3,827
Amortization expense associated with finance leases ⁽²⁾	—		—		—		—		1,959		1,959
Total	$	—	$	—	$	—	$	3,827	$	1,959	$	5,786

Financing Obligation Costs
Interest expense associated with financing obligations ⁽³⁾	$	—	$	—	$	—	$	97,672	$	—	$	97,672


(1)	Pertains to the components contained within the Master Leases (primarily land components) determined to be operating leases, the Meadows Lease, and the Margaritaville Lease.


(2)	Primarily pertains to the Dayton and Mahoning Valley finance leases.


(3)	Pertains to the components contained within the Master Leases (primarily building components) determined to continue to be financing obligations, inclusive of contingent variable interest expense associated with Columbus and Toledo.

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of March 31, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the three months ended March 31, 2019)	$	275,761		$	15,701		$	292,189
2020	352,916			21,028			374,715
2021	336,908			21,021			367,278
2022	336,660			20,909			367,278
2023	333,540			20,083			367,278
Thereafter	7,665,371			398,727			9,637,956
Total lease payments	9,301,156			497,469			11,406,694
Less: Amounts representing interest	(5,336,870		)	(274,647		)	(7,224,861		)
Present value of future lease payments	3,964,286			222,822			4,181,833
Less: Current portion of lease obligations	(95,894		)	(5,874		)	(52,600		)
Long-term portion of lease obligations	$	3,868,392		$	216,948		$	4,129,233

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	3,827
Operating cash flows from operating leases	$	90,629
Financing cash flows from finance leases	$	1,640

Lessor

Leases

Lessee

Master Leases - General

Penn Master Lease

Operations pursuant to previous GAAP under which all contingent rentals were recorded as interest expense due to the failed sale-leaseback accounting treatment.

Pinnacle Master Lease

Operating Leases

Other information related to lease term and discount rate was as follows:



	March 31, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	29.8 years
Finance leases ⁽²⁾	29.5 years
Financing obligations ⁽³⁾	31.1 years

Weighted Average Discount Rate
Operating leases ⁽¹⁾	6.9	%
Finance leases ⁽²⁾	6.8	%
Financing obligations ⁽³⁾	8.1	%

(1)

(2)


(3)	Amounts consist of components contained within each of the Master Leases determined to continue to be financing obligations (which consist primarily of building components) at the adoption date of the new lease standard.

The components of lease expense were as follows:



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the three months ended March 31, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	84,730	$	—	$	—	$	84,730
Operating lease cost	137		156		4,097		—		—		4,390
Short-term lease cost	12,936		160		568		—		—		13,664
Variable lease cost	1,259		2		315		—		—		1,576
Total	$	14,332	$	318	$	89,710	$	—	$	—	$	104,360

Finance Lease Costs
Interest expense associated with finance leases ⁽²⁾	$	—	$	—	$	—	$	3,827	$	—	$	3,827
Amortization expense associated with finance leases ⁽²⁾	—		—		—		—		1,959		1,959
Total	$	—	$	—	$	—	$	3,827	$	1,959	$	5,786

Financing Obligation Costs
Interest expense associated with financing obligations ⁽³⁾	$	—	$	—	$	—	$	97,672	$	—	$	97,672


(1)	Pertains to the components contained within the Master Leases (primarily land components) determined to be operating leases, the Meadows Lease, and the Margaritaville Lease.


(2)	Primarily pertains to the Dayton and Mahoning Valley finance leases.


(3)	Pertains to the components contained within the Master Leases (primarily building components) determined to continue to be financing obligations, inclusive of contingent variable interest expense associated with Columbus and Toledo.

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of March 31, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the three months ended March 31, 2019)	$	275,761		$	15,701		$	292,189
2020	352,916			21,028			374,715
2021	336,908			21,021			367,278
2022	336,660			20,909			367,278
2023	333,540			20,083			367,278
Thereafter	7,665,371			398,727			9,637,956
Total lease payments	9,301,156			497,469			11,406,694
Less: Amounts representing interest	(5,336,870		)	(274,647		)	(7,224,861		)
Present value of future lease payments	3,964,286			222,822			4,181,833
Less: Current portion of lease obligations	(95,894		)	(5,874		)	(52,600		)
Long-term portion of lease obligations	$	3,868,392		$	216,948		$	4,129,233

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	3,827
Operating cash flows from operating leases	$	90,629
Financing cash flows from finance leases	$	1,640

Lessor