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Leases

6 Months Ended

Jun. 30, 2019

The Company determines if a contract is or contains a leasing element at contract inception 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 the right to (i) obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (ii) direct the use of the identified asset.

The Company has leasing arrangements that contain both (i) lease and (ii) non-lease components. We account for both the lease and non-lease components as a single component for all classes of underlying assets. In determining the present value of lease payments at lease commencement date, the Company utilizes its incremental borrowing rate based on the information available, unless the rate implicit in the lease is readily determinable. Upon adoption of the new lease standard, which is discussed in Note 3, “New Accounting Pronouncements,” 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

Upon adoption of the new lease standard, components associated with the Master Leases were determined to be either (i) operating leases, (ii) finance leases, or (iii) financing obligations. Changes to future lease payments under both our Penn Master Lease and Pinnacle Master Lease (i.e., when future escalators become known or future variable rent resets occur), which are discussed below, require the Company to (i) increase both the ROU assets and corresponding lease liabilities with respect to operating and finance leases and (ii) record the incremental variable payment associated with the financing obligation to interest expense.

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 19 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 (other than Hollywood Casino Columbus and Hollywood Casino Toledo (“Columbus and Toledo”)) compared to a contractual baseline during the preceding five years (“Penn Percentage Rent”) and (ii) monthly by an amount equal to 20% of the net 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.

As discussed above, the monthly rent associated with Columbus and Toledo is variable and considered contingent rent. The variable expense related to the operating lease components (the land) is included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations and the variable expense related to the finance lease components (the buildings) is included in “Interest expense” within our unaudited Condensed Consolidated Statements of Operations. The

entire variable expense related to prior year periods was included in “Interest expense” pursuant to the failed sale-leaseback accounting treatment under ASC 840. Total monthly variable expenses were as follows:



	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2019		2018		2019		2018
Variable expenses included in “General and administrative”	$	6,238	$	—	$	13,042	$	—
Variable expenses included in “Interest expense”	5,725		12,543		11,969		24,984
Total variable expenses	$	11,963	$	12,543	$	25,011	$	24,984

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, 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 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 compared to a contractual baseline during the preceding two years (“Pinnacle Percentage Rent”). The next annual escalator test date and the next Pinnacle Percentage Rent reset are scheduled to occur on May 1, 2020.

Operating Leases

The Company’s operating leases consist mainly of (i) the Meadows Lease, (ii) a triple net lease with VICI Properties Inc. (VICI:NYSE) (“VICI”) for the real estate assets used in the operation of Margaritaville Resort Casino (the “Margaritaville Lease”), (iii) a triple net lease for the real estate assets used in the operation of Greektown Casino-Hotel (the “Greektown Lease”), (iv) ground and levee leases to landlords which were not assumed by our REIT landlords and remain an obligation of the Company, and (v) 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 terms. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Information related to lease term and discount rate was as follows:



	June 30, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	27.8 years
Finance leases ⁽²⁾	28.8 years
Financing obligations ⁽³⁾	30.9 years

Weighted Average Discount Rate⁽⁴⁾
Operating leases	6.7	%
Finance leases	6.8	%
Financing obligations	8.1	%


(1)	Amount consists principally of (i) land components associated with our Master Leases; (ii) our Meadows Lease; (iii) our Margaritaville Lease; (iv) our Greektown Lease; (v) ground and levee leases with landlords which were not assumed by our REIT landlords; and (vi) building and equipment not associated with our Master Leases.


(2)	Amount consists primarily of the Dayton and Mahoning Valley finance leases.


(3)	Amount consists of the components contained within each of the Master Leases determined to continue to be financing obligations (primarily buildings) at the adoption date of the new lease standard.


(4)	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.

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 June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	90,025	$	—	$	—	$	90,025
Operating lease cost⁽²⁾	146		113		4,346		—		—		4,605
Short-term lease cost	14,226		375		212		—		—		14,813
Variable lease cost⁽²⁾	—		—		260		—		—		260
Total	$	14,372	$	488	$	94,843	$	—	$	—	$	109,703

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	3,830	$	—	$	3,830
Amortization expense ⁽³⁾	—		—		—		—		1,956		1,956
Total	$	—	$	—	$	—	$	3,830	$	1,956	$	5,786

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	98,369	$	—	$	98,369



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the six months ended June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	174,755	$	—	$	—	$	174,755
Operating lease cost⁽²⁾	283		269		8,443		—		—		8,995
Short-term lease cost	27,162		535		780		—		—		28,477
Variable lease cost⁽²⁾	1,201		2		575		—		—		1,778
Total	$	28,646	$	806	$	184,553	$	—	$	—	$	214,005

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	7,657	$	—	$	7,657
Amortization expense ⁽³⁾	—		—		—		—		3,915		3,915
Total	$	—	$	—	$	—	$	7,657	$	3,915	$	11,572

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	196,041	$	—	$	196,041


(1)	Pertains to the components contained within the Master Leases (primarily land) determined to be operating leases, the Meadows Lease, the Margaritaville Lease, and the Greektown Lease, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components (the land) (see table above).


(2)	Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.


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


(4)	Pertains to the components contained within the Master Leases (primarily buildings) determined to continue to be financing obligations, inclusive of the variable expense associated with Columbus and Toledo for the finance lease components (the buildings) (see table above).

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of June 30, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the six months ended June 30, 2019)	$	209,805		$	10,749		$	194,793
2020	408,009			21,481			374,715
2021	387,771			21,474			367,278
2022	384,825			21,362			367,278
2023	381,689			20,497			367,278
Thereafter	8,159,497			403,820			9,637,956
Total lease payments	9,931,596			499,383			11,309,298
Less: Amounts representing interest	(5,490,450		)	(273,694		)	(7,140,249		)
Present value of future lease payments	4,441,146			225,689			4,169,049
Less: Current portion of lease obligations	(123,797		)	(6,214		)	(49,890		)
Long-term portion of lease obligations	$	4,317,349		$	219,475		$	4,119,159

During the three and six months ended June 30, 2019, total payments made under our Master Leases, the Meadows Lease, the Margaritaville Lease, and the Greektown Lease, were $214.9 million and $422.8 million, respectively. During the three and six months ended June 30, 2018, total payments made under our Penn Master Lease were $115.9 million and $231.8 million, respectively.

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	7,657
Operating cash flows from operating leases	$	186,868
Financing cash flows from finance leases	$	2,941

Lessor

The Company leases its hotel rooms to patrons and records the corresponding lessor revenue in “Food, beverage, hotel and other revenues” within our unaudited Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2019, the Company recognized $80.2 million and $151.7 million of lessor revenues related to the rental of hotel rooms, respectively. 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

Penn Master Lease



	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2019		2018		2019		2018
Variable expenses included in “General and administrative”	$	6,238	$	—	$	13,042	$	—
Variable expenses included in “Interest expense”	5,725		12,543		11,969		24,984
Total variable expenses	$	11,963	$	12,543	$	25,011	$	24,984

Pinnacle Master Lease

Operating Leases

Information related to lease term and discount rate was as follows:



	June 30, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	27.8 years
Finance leases ⁽²⁾	28.8 years
Financing obligations ⁽³⁾	30.9 years

Weighted Average Discount Rate⁽⁴⁾
Operating leases	6.7	%
Finance leases	6.8	%
Financing obligations	8.1	%


(1)	Amount consists principally of (i) land components associated with our Master Leases; (ii) our Meadows Lease; (iii) our Margaritaville Lease; (iv) our Greektown Lease; (v) ground and levee leases with landlords which were not assumed by our REIT landlords; and (vi) building and equipment not associated with our Master Leases.


(2)	Amount consists primarily of the Dayton and Mahoning Valley finance leases.


(3)	Amount consists of the components contained within each of the Master Leases determined to continue to be financing obligations (primarily buildings) at the adoption date of the new lease standard.


(4)	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.

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 June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	90,025	$	—	$	—	$	90,025
Operating lease cost⁽²⁾	146		113		4,346		—		—		4,605
Short-term lease cost	14,226		375		212		—		—		14,813
Variable lease cost⁽²⁾	—		—		260		—		—		260
Total	$	14,372	$	488	$	94,843	$	—	$	—	$	109,703

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	3,830	$	—	$	3,830
Amortization expense ⁽³⁾	—		—		—		—		1,956		1,956
Total	$	—	$	—	$	—	$	3,830	$	1,956	$	5,786

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	98,369	$	—	$	98,369



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the six months ended June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	174,755	$	—	$	—	$	174,755
Operating lease cost⁽²⁾	283		269		8,443		—		—		8,995
Short-term lease cost	27,162		535		780		—		—		28,477
Variable lease cost⁽²⁾	1,201		2		575		—		—		1,778
Total	$	28,646	$	806	$	184,553	$	—	$	—	$	214,005

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	7,657	$	—	$	7,657
Amortization expense ⁽³⁾	—		—		—		—		3,915		3,915
Total	$	—	$	—	$	—	$	7,657	$	3,915	$	11,572

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	196,041	$	—	$	196,041


(1)	Pertains to the components contained within the Master Leases (primarily land) determined to be operating leases, the Meadows Lease, the Margaritaville Lease, and the Greektown Lease, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components (the land) (see table above).


(2)	Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.


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


(4)	Pertains to the components contained within the Master Leases (primarily buildings) determined to continue to be financing obligations, inclusive of the variable expense associated with Columbus and Toledo for the finance lease components (the buildings) (see table above).

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of June 30, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the six months ended June 30, 2019)	$	209,805		$	10,749		$	194,793
2020	408,009			21,481			374,715
2021	387,771			21,474			367,278
2022	384,825			21,362			367,278
2023	381,689			20,497			367,278
Thereafter	8,159,497			403,820			9,637,956
Total lease payments	9,931,596			499,383			11,309,298
Less: Amounts representing interest	(5,490,450		)	(273,694		)	(7,140,249		)
Present value of future lease payments	4,441,146			225,689			4,169,049
Less: Current portion of lease obligations	(123,797		)	(6,214		)	(49,890		)
Long-term portion of lease obligations	$	4,317,349		$	219,475		$	4,119,159

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	7,657
Operating cash flows from operating leases	$	186,868
Financing cash flows from finance leases	$	2,941

Lessor

Leases

Lessee

Master Leases

Penn Master Lease



	For the three months ended June 30,				For the six months ended June 30,
(in thousands)	2019		2018		2019		2018
Variable expenses included in “General and administrative”	$	6,238	$	—	$	13,042	$	—
Variable expenses included in “Interest expense”	5,725		12,543		11,969		24,984
Total variable expenses	$	11,963	$	12,543	$	25,011	$	24,984

Pinnacle Master Lease

Operating Leases

Information related to lease term and discount rate was as follows:



	June 30, 2019
Weighted Average Remaining Lease Term
Operating leases ⁽¹⁾	27.8 years
Finance leases ⁽²⁾	28.8 years
Financing obligations ⁽³⁾	30.9 years

Weighted Average Discount Rate⁽⁴⁾
Operating leases	6.7	%
Finance leases	6.8	%
Financing obligations	8.1	%


(1)	Amount consists principally of (i) land components associated with our Master Leases; (ii) our Meadows Lease; (iii) our Margaritaville Lease; (iv) our Greektown Lease; (v) ground and levee leases with landlords which were not assumed by our REIT landlords; and (vi) building and equipment not associated with our Master Leases.


(2)	Amount consists primarily of the Dayton and Mahoning Valley finance leases.


(3)	Amount consists of the components contained within each of the Master Leases determined to continue to be financing obligations (primarily buildings) at the adoption date of the new lease standard.


(4)	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.

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 June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	90,025	$	—	$	—	$	90,025
Operating lease cost⁽²⁾	146		113		4,346		—		—		4,605
Short-term lease cost	14,226		375		212		—		—		14,813
Variable lease cost⁽²⁾	—		—		260		—		—		260
Total	$	14,372	$	488	$	94,843	$	—	$	—	$	109,703

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	3,830	$	—	$	3,830
Amortization expense ⁽³⁾	—		—		—		—		1,956		1,956
Total	$	—	$	—	$	—	$	3,830	$	1,956	$	5,786

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	98,369	$	—	$	98,369



	Classification
(in thousands)	Gaming Expense		Food, Beverage, Hotel and Other Expense		General and Administrative		Interest Expense		Depreciation and Amortization		Total for the six months ended June 30, 2019
Operating Lease Costs
Rent expense associated with triple net leases classified as operating leases ⁽¹⁾	$	—	$	—	$	174,755	$	—	$	—	$	174,755
Operating lease cost⁽²⁾	283		269		8,443		—		—		8,995
Short-term lease cost	27,162		535		780		—		—		28,477
Variable lease cost⁽²⁾	1,201		2		575		—		—		1,778
Total	$	28,646	$	806	$	184,553	$	—	$	—	$	214,005

Finance Lease Costs
Interest expense ⁽³⁾	$	—	$	—	$	—	$	7,657	$	—	$	7,657
Amortization expense ⁽³⁾	—		—		—		—		3,915		3,915
Total	$	—	$	—	$	—	$	7,657	$	3,915	$	11,572

Financing Obligation Costs
Interest expense ⁽⁴⁾	$	—	$	—	$	—	$	196,041	$	—	$	196,041


(1)	Pertains to the components contained within the Master Leases (primarily land) determined to be operating leases, the Meadows Lease, the Margaritaville Lease, and the Greektown Lease, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components (the land) (see table above).


(2)	Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.


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


(4)	Pertains to the components contained within the Master Leases (primarily buildings) determined to continue to be financing obligations, inclusive of the variable expense associated with Columbus and Toledo for the finance lease components (the buildings) (see table above).

The following is a maturity analysis of our operating leases, finance leases, and financing obligations as of June 30, 2019:



(in thousands)	Operating Leases			Finance Leases			Financing Obligations
Years ending December 31,
2019 (excluding the six months ended June 30, 2019)	$	209,805		$	10,749		$	194,793
2020	408,009			21,481			374,715
2021	387,771			21,474			367,278
2022	384,825			21,362			367,278
2023	381,689			20,497			367,278
Thereafter	8,159,497			403,820			9,637,956
Total lease payments	9,931,596			499,383			11,309,298
Less: Amounts representing interest	(5,490,450		)	(273,694		)	(7,140,249		)
Present value of future lease payments	4,441,146			225,689			4,169,049
Less: Current portion of lease obligations	(123,797		)	(6,214		)	(49,890		)
Long-term portion of lease obligations	$	4,317,349		$	219,475		$	4,119,159

Supplemental cash flow information related to leases was as follows:



(in thousands)	For the six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	7,657
Operating cash flows from operating leases	$	186,868
Financing cash flows from finance leases	$	2,941

Lessor