VARIABLE INTEREST ENTITIES

12 Months Ended

Feb. 01, 2025

VARIABLE INTEREST ENTITIES

VARIABLE INTEREST ENTITIES

NOTE 7—VARIABLE INTEREST ENTITIES

Consolidated Variable Interest Entities and Noncontrolling Interests

In fiscal 2022, we formed eight privately-held limited liability companies (each, a “Member LLC” and collectively, the “Member LLCs” or the “consolidated variable interest entities”) with a third-party real estate development partner affiliated with the managing member of the Aspen LLCs (as defined in “Equity Method Investments” below) for real estate development activities related to our Gallery transformation and global expansion strategies.

In December 2024, we acquired 50 percent of the membership interests of one of the Member LLCs from the same development partner for no consideration. As a result, we own 100 percent of the membership interests and this Member LLC is no longer a variable interest entity as of February 1, 2025. No distribution to the former member of this entity was required as a result of the transaction.

As of February 1, 2025, of the remaining seven Member LLCs, we hold a 50 percent membership interest in six of the Member LLCs, and the remaining noncontrolling interest of 50 percent in each Member LLC is held by the same development partner. In one Member LLC, we hold approximately 75 percent membership interest with the remaining noncontrolling interest of approximately 25 percent held by the same development partner as of February 1, 2025.

The Member LLCs are qualitatively determined to be VIEs due to their having insufficient equity investment at risk to finance their activities without additional subordinated financial support. Upon the formation of each Member LLC we determined that the power to direct the most significant activities of each Member LLC is either controlled by us or shared between the members of the Member LLCs. In the instances where there is shared power among related parties as defined in the consolidation accounting guidance, we evaluated the related-party tiebreaker guidance and determined that we are most closely associated with each Member LLC. Accordingly, we are the primary beneficiary of the Member LLCs and we consolidate the results of operations, financial condition and cash flows of the Member LLCs in our consolidated financial statements. Six locations represent current or future RH locations and are included in the RH Segment, three of which are operational as of February 1, 2025. One location represents property, the purpose of which is use by RH or others related to developing, operating and selling such property, and is part of the Real Estate segment.

In fiscal 2022, we recognized compensation expense of $4.5 million related to the equity interests given to the noncontrolling interest holders of the consolidated VIEs, of which $3.6 million was recorded to additional paid-in capital and $0.9 million was recorded to other non-current obligations on the consolidated balance sheets. The additional paid-in capital portion relates to equity-classified compensation arrangements and represents the fair-value-based measure of the equity interests upon the noncontrolling interest holders being admitted as a member of the VIEs. The other non-current obligations portion relates to liability-classified compensation arrangements and represents the fair-value-based measure of the equity interests at the end of the reporting period, which was $0.9 million as of both February 1, 2025 and February 3, 2024. There are no explicit or implicit vesting conditions associated with these compensation arrangements.

We measure the noncontrolling interests in the consolidated variable interest entities using the distribution provisions set out in the operating agreements of each Member LLC. As of February 1, 2025 and February 3, 2024, the noncontrolling interest holders had no claim to the net assets of each Member LLC based upon such distribution provisions. Accordingly, we did not recognize any noncontrolling interests in fiscal 2024, fiscal 2023 and fiscal 2022.

The carrying amounts and classification of the VIEs’ assets and liabilities included in the consolidated balance sheets were as follows:

	FEBRUARY 1,		FEBRUARY 3,
	2025		2024
	(in thousands)
ASSETS
Cash and cash equivalents	$	2,177	$	8,918
Prepaid expense and other current assets		980		1,876
Total current assets		3,157		10,794
Property and equipment—net(1)		259,057		256,523
Other non-current assets		6		6
Total assets	$	262,220	$	267,323
LIABILITIES
Accounts payable and accrued expenses	$	4,867	$	8,735
Other current liabilities		333		1,041
Total current liabilities		5,200		9,776
Real estate loans—net(2)		15,524		17,766
Other non-current obligations		929		947
Total liabilities	$	21,653	$	28,489

(1) Includes $54 million and $77 million of construction in progress as of February 1, 2025 and February 3, 2024, respectively, which is included in “building and building improvements” within property and equipment—net.

(2) Real estate loans are secured by the assets of each respective Member LLC and the associated creditors do not have recourse against RH’s general assets.

On August 3, 2022, a Member LLC as the borrower executed a Secured Promissory Note (the “Secured Promissory Note”) with a third-party in an aggregate principal amount equal to $2.0 million with a maturity date of August 1, 2032. On December 1, 2024, the maturity date of the Secured Promissory Note was amended to December 1, 2025. The Secured Promissory Note bears interest at a fixed rate per annum equal to 6.00%. In December 2024, we acquired the remaining 50% membership interest of this Member LLC from our development partner, with the result of this entity becoming a wholly-owned subsidiary and not a VIE as of February 1, 2025. Therefore, as of February 1, 2025, the real estate loan is no longer presented as a VIE liability in the table above. The outstanding balance under this debt agreement is included in other current liabilities on the consolidated balance sheets as of February 1, 2025.

On September 9, 2022, a Member LLC as the borrower executed a Promissory Note (the “Promissory Note”) with a third-party bank in an aggregate principal amount equal to $16 million with a maturity date of September 9, 2032. The Promissory Note bears interest at a fixed rate per annum equal to 5.37% until September 15, 2027, on which date the interest rate will reset based on the five-year treasury rate plus 2.00%, subject to a total interest rate floor of 3.00%.

The current obligations of the real estate loans—net of $0.3 million and $0.1 million as of February 1, 2025 and February 3, 2024, respectively, are included in other current liabilities on the consolidated balance sheets.

Equity Method Investments

Equity method investments primarily represent our membership interests in three privately-held limited liability companies in Aspen, Colorado (each, an “Aspen LLC” and collectively, the “Aspen LLCs” or the “equity method investments”) that were formed for the purpose of acquiring, developing, operating and selling certain real estate projects in Aspen, Colorado. We hold a 50 percent membership interest in two of the Aspen LLCs and a 70 percent membership interest in the third Aspen LLC. The Aspen LLCs are VIEs, however, we are not the primary beneficiary of these VIEs because we do not have the power to direct the activities of each VIE that most significantly impact the VIE’s economic performance. Accordingly, we account for these investments using the equity method of accounting. As of February 1, 2025 and February 3, 2024, the aggregate balance of the investment in the Aspen LLCs was $124 million and $125 million, respectively.

As of February 1, 2025 and February 3, 2024, $3.7 million and $3.3 million, respectively, of a promissory notes receivable, inclusive of accrued interest, was outstanding with the managing member or entities affiliated with the managing member for the Aspen LLCs, which promissory notes were included in prepaid expense and other current assets on the consolidated balance sheets. The promissory note related specifically to the Aspen LLCs is expected to be settled in cash and not converted into additional equity investment in the Aspen LLCs.

During fiscal 2024, fiscal 2023 and fiscal 2022, we recorded our proportionate share of equity method investments loss of $11 million, $11 million and $2.1 million, respectively, which is included on the consolidated statements of income with a corresponding decrease to the carrying value of equity method investments on the consolidated balance sheets as of February 1, 2025 and February 3, 2024. We did not receive any distributions or have any undistributed earnings of equity method investments in any fiscal year.

We have previously made contractually required contributions to the Aspen LLCs in an aggregate amount of $135 million in prior periods. As of February 1, 2025, we have made capital contributions of approximately $146 million to the Aspen LLCs. Additionally, Waterworks has membership interests in two European entities that are equity method investments. Our maximum exposure to loss with respect to these equity method investments is the carrying value of the equity method investments as of February 1, 2025.

In March 2025, the Aspen LLC in which we hold a 70 percent interest sold its sole real estate property. Subsequent to the property sale, we received $15 million from the Aspen LLC, which consisted of $2.9 million for the repayment of its outstanding promissory note to us, including accrued interest (refer to Note 4—Prepaid expenses and other assets), and a capital distribution of $13 million. The capital distribution of $13 million represented a return of our contributed capital of $7.9 million and a return on investment of $4.6 million.