Long-Term Financing Obligation

6 Months Ended

Jun. 30, 2020

. Long-Term Financing Obligation

Under the prior lease accounting standard, the GLPI Master Lease was accounted for as a failed sale-leaseback financing obligation equal to the fair value of the leased real estate assets and liabilities acquired in purchase accounting in conjunction with the acquisition of Tropicana in 2018. Upon adoption of ASC 842, the Company re-evaluated the GLPI Master Lease and determined this existing failed sale-leaseback transaction would continue to be accounted for as a financing obligation.

The fair value of the real estate assets and the related failed sale-leaseback financing obligations were estimated based on the present value of the estimated future lease payments over the lease term of 35 years, including renewal options, using an imputed discount rate of approximately 10.2%. The value of the failed sale-leaseback financing obligations is dependent upon assumptions regarding the amount of the lease payments and the estimated discount rate of the lease payments required by a market participant.

The GLPI Master Lease provides for the lease of land, buildings, structures and other improvements on the land (including barges and riverboats), easements and similar appurtenances to the land and improvements relating to the operation of the leased properties. The GLPI Master Lease provides for an initial term of 15 years with no purchase option. At the Company’s option, the GLPI Master Lease may be extended for up to four five-year renewal terms beyond the initial 15-year term. If the Company elects to renew the term of the GLPI Master Lease, the renewal will be effective as to all, but not less than all, of the leased property then subject to the GLPI Master Lease. The Company does not have the ability to terminate its obligations under the GLPI Master Lease prior to its expiration without GLPI’s consent.

On June 15, 2020, the Company entered into an Amended and Restated Master Lease with GLPI, which, among other things, (i) extended the initial term from 15 to 20 years (through September 2038), with four five-year renewals at the Company’s option, (ii) commencing October 1, 2020, removed the percentage rent payable in exchange for an increase to the non-escalating portion of land base rent to $23.5 million, (iii) amended the dates on which, and the amounts by which, the escalating portion of base rent escalates, and (iv) provided certain relief under the operating, capital expenditure and financial covenants in the event of facility closures due to public health emergencies, governmental restrictions and certain other instances of unavoidable delay. The GLPI Master Lease provides that the effectiveness is subject to the receipt of applicable gaming regulatory approvals, the provision of applicable gaming regulatory notices and the expiration of applicable gaming regulatory advance notice periods. Subsequent to June 30, 2020, the amendment to the GLPI Master Lease became effective as the Company obtained all necessary approvals and the applicable waiting period expired.

The rent payable under the GLPI Master Lease is comprised of “Base Rent” and “Percentage Rent.” Base rent is the sum of:

•Building Base Rent: a fixed component equal to $60.9 million during the first year of the GLPI Master Lease, and thereafter escalated annually by 2%, subject to a cap that would cause the preceding year’s adjusted revenue to rent ratio for the properties in the aggregate not to fall below 1.20:1.00 for the first five years of the GLPI Master Lease and 1.80:1:00 thereafter; plus

•Land Base Rent: an additional fixed component equal to $13.4 million, subject to adjustment in the event of the termination of the GLPI Master Lease with respect to any of the leased properties.

The percentage rent payable under the GLPI Master Lease is adjusted every two years based on the actual net revenues of the leased properties during the two-year period then ended. The initial percentage rent, which is fixed for the first two years, is $13.4 million per year. The actual percentage increase is based on actual performance and is subject to change.

The initial annual rent under the terms of the lease was approximately $87.7 million and subject to annual escalations as referenced in the table below.

Under the GLPI Master Lease, the Company is required to pay the following, among other things: lease payments to the underlying ground lessor for properties that are subject to ground leases, facility maintenance costs, all insurance premiums for insurance with respect to the leased properties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties).

The estimated future lease payments include the minimum lease payments and were adjusted to reflect estimated lease payments as described in the agreements, including an annual escalator of up to 2%.

The future minimum payments related to the GLPI Master Lease financing obligation at June 30, 2020 were as follows (in thousands):


2020 (excluding the six months ended June 30, 2020)	$	44,736
2021	90,417
2022	91,691
2023	92,990
2024	94,315
Thereafter	3,412,359
Total future payments	3,826,508
Less: Amounts representing interest at 10.2%	(3,270,816)
Plus: Residual values	420,100
Financing obligation to GLPI	$	975,792

Total cash payments and interest expense related to the GLPI Master Lease totaled $22.2 million and $24.9 million, respectively, for the three months ended June 30, 2020, and $44.4 million and $49.7 million, respectively, for the six months ended June 30, 2020. Total cash payments and interest expense related to the GLPI Master Lease totaled $21.9 million and $24.6 million, respectively, for the three months ended June 30, 2019, and $43.8 million and $49.2 million, respectively, for the six months ended June 30, 2019. For the initial periods of the GLPI Master Lease, cash payments are less than the interest expense recognized, which causes the failed sale-leaseback obligation to increase during the initial years of the lease term.

The GLPI Master Lease, as amended, contains certain covenants, including minimum capital improvement expenditures and a rent coverage ratio for which certain relief is provided in the event of facility closures due to public health emergencies, governmental restrictions and certain other instances of unavoidable delay.