MGM GROWTH PROPERTIES LLC This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see "Forward-Looking Statements" for a discussion of the uncertainties, risks, and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. The following discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and the related notes thereto, of MGP and theOperating Partnership for the years endedDecember 31, 2019 , 2018 and 2017. Executive Overview
MGP is one of the leading publicly traded REITs engaged in the acquisition, ownership and leasing of large-scale destination entertainment and leisure resorts, whose tenants generally offer diverse amenities including casino gaming, hotel, convention, dining, entertainment and retail offerings.
MGP is a limited liability company that was formed inDelaware inOctober 2015 . MGP conducts its operations through theOperating Partnership , aDelaware limited partnership formed byMGM inJanuary 2016 that became a subsidiary of MGP on the IPO Date. The Company has elected to be treated as a REIT commencing with its taxable year endedDecember 31, 2016 . As ofDecember 31, 2019 , we generated all of our revenues by leasing our real estate properties pursuant to the MGM-MGP Master Lease which requires the tenant to pay substantially all costs associated with each property, including real estate taxes, ground lease rent, insurance, utilities and routine maintenance, in addition to the base rent and the percentage rent, each as described below. The lease has an initial lease term of ten years (other than with respect toMGM National Harbor , whose initial lease term ends onAugust 31, 2024 ) with the potential to extend the term for four additional five-year terms thereafter at the option of the tenant. Base rent and percentage rent that are known at the lease commencement date will be recorded on a straight-line basis over 30 years, which represents the initial ten-year non-cancelable lease term and all four five-year renewal terms under the lease, as we have determined such renewal terms to be reasonably assured. Additionally, we expect to grow our portfolio through acquisitions with third parties and withMGM . In pursuing external growth initiatives, we will generally seek to acquire properties that can generate stable rental revenue through long-term, triple-net leases with tenants with established operating histories, and we will consider various factors when evaluating acquisitions. As ofDecember 31, 2019 , our portfolio consisted of eleven premier destination resorts inLas Vegas and elsewhere acrossthe United States ,MGM Northfield Park inNorthfield, Ohio ,Empire Resorts Casino , inYonkers, New York , as well as a retail and entertainment district, The Park inLas Vegas . OnJanuary 29, 2019 , we completed the Empire City Transaction. Empire City was added to the MGM-MGP Master Lease. As a result, the annual rent payment to MGP increased by$50 million . Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2% per year until 2022 with escalators thereafter subject to the tenant meeting an adjusted net revenue to rent ratio as described below. In addition, pursuant to the lease, MGP has a right of first offer with respect to certain undeveloped land adjacent to the property to the extentMGM develops additional gaming facilities and chooses to sell or transfer the property in the future. OnMarch 7, 2019 , we completed the ParkMGM Transaction for total consideration of$637.5 million . We funded the transaction with$605.6 million in cash and the issuance of approximately 1.0 million ofOperating Partnership units to a subsidiary ofMGM . 33 -------------------------------------------------------------------------------- As a result of the transaction, we recorded a lease incentive asset and the MGM-MGP Master Lease annual rent payment to us increased by$50 million , prorated for the remainder of the lease year. Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2% per year until 2022 with escalators thereafter subject to the tenant meeting an adjusted net revenue to rent ratio as described below. OnApril 1, 2019 , we transferred the membership interests ofNorthfield to a subsidiary ofMGM and the Company retained the real estate assets. Our TRS that ownedNorthfield liquidated immediately prior to the transfer. Subsequently,MGM rebranded Northfield OpCo toMGM Northfield Park , which was then added to the MGM-MGP Master Lease. As a result, the annual rent payment to MGP increased by$60 million . Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2% per year until 2022 with escalators thereafter subject to the tenant meeting an adjusted net revenue to rent ratio as described below. Northfield OpCo is presented as discontinued operations in our consolidated statements of operations for all periods presented in which we ownedNorthfield OpCo and the related operating assets and liabilities are presented as assets held for sale and liabilities related to assets held for sale in our consolidated balance sheet as ofDecember 31, 2018 . Refer to Note 3 of the accompanying financial statements for additional discussion. OnFebruary 14, 2020 , theOperating Partnership completed a series of transactions (collectively the "MGP BREIT Venture Transaction") pursuant to which the real estate assets ofMGM Grand Las Vegas andMandalay Bay (includingMandalay Place ) were contributed to a newly formed entity ("MGP BREIT Venture"), which, following the transactions, is owned 50.1% by theOperating Partnership and 49.9% by a subsidiary ofBlackstone Real Estate Income Trust, Inc. ("BREIT"). In exchange for the contribution of theMandalay Bay real estate assets, theOperating Partnership received consideration of$2.1 billion , which was comprised of$1.3 billion of theOperating Partnership's secured indebtedness assumed byMGM BREIT Venture , theOperating Partnership's 50.1% equity interest in the MGP BREIT Venture, and the remainder in cash. In addition,MGM received$2.4 billion of cash distributed from the MGP BREIT Venture as consideration for its contribution of theMGM Grand Las Vegas real estate assets, and, additionally, theOperating Partnership issued 2.6 millionOperating Partnership units toMGM representing 5% of the equity value of MGP BREIT Venture. In connection with the transactions,MGM provided a shortfall guaranty of the principal amount of indebtedness of the MGP BREIT Venture (and any interest accrued and unpaid thereto). On the closing date, BREIT also purchased 4.9 million Class A common shares of MGP for$150 million . In connection with the transactions, MGP BREIT Venture entered into a lease with a subsidiary ofMGM for the real estate assets ofMandalay Bay andMGM Grand Las Vegas . The lease provides for a term of thirty years with two ten-year renewal options and has an initial annual base rent of$292 million , escalating annually at a rate of 2% per annum for the first fifteen years and thereafter equal to the greater of 2% and the CPI increase during the prior year subject to a cap of 3%. In addition, the lease will require the tenant to spend 3.5% of net revenues over a rolling five-year period at the properties on capital expenditures and for the tenant andMGM to comply with certain financial covenants, which, if not met, will require the tenant to maintain cash security or provide one or more letters of credit in favor of the landlord in an amount equal to the rent for the succeeding one-year period.MGM provided a guarantee of tenant's obligations under the lease. In connection with the MGP BREIT Venture Transaction, the MGM-MGP Master Lease was modified to remove theMandalay Bay property and the rent under the MGM-MGPMaster Lease was reduced by$133 million . Also, onJanuary 14, 2020 , theOperating Partnership , MGP, andMGM entered into an agreement for theOperating Partnership to waive its right to issue MGP Class A shares, in lieu of cash, toMGM in connection withMGM exercising its right to require theOperating Partnership to redeem theOperating Partnership units it holds. The waiver provides that the units will be purchased at a price per unit equal to a 3% discount to the applicable cash amount as calculated in accordance with the operating agreement. The waiver terminates on the earlier of 24 months following the closing of the MGP BREIT Venture Transaction andMGM receiving cash proceeds of$1.4 billion as consideration for the redemption of itsOperating Partnership units.
Combined Results of Operations for MGP and the
The following is a comparative discussion of results of operations for the years endedDecember 31, 2019 and 2018. Refer to the audited consolidated financial statements and notes for the fiscal year endedDecember 31, 2018 , which were included in our annual report on Form 10-K, filed with theSEC onFebruary 27, 2019 , and the audited and consolidated financial statements and notes for the fiscal year endedDecember 31, 2018 , as retrospectively recasted for discontinued operations, which were filed on current report on Form 8-K filed with theSEC onAugust 16, 2019 , for the comparative discussion of the results of operations for the years endedDecember 31, 2018 and 2017. 34 --------------------------------------------------------------------------------
Overview
The following table summarizes our financial results for the years ended
Year ended December 31,
2019 2018 2017
(in thousands)
Total Revenues $ 881,078 $ 869,495 $ 765,695
Total Expenses 355,911 429,355 412,910Income from continuing operations, net of tax 259,349 214,139 165,990 Income from discontinued operations, net of tax 16,216 30,563
-
Net income 275,565 244,702
165,990
Net income attributable to Class A shareholders 90,260 67,065
41,775 Revenues Rental revenue. Rental revenues, including tenant reimbursements and other, for the years endedDecember 31, 2019 and 2018 were$881.1 million and$869.5 million , respectively. The$11.6 million , or 1%, increase for 2019 compared to 2018 was primarily due to an increase in rental revenues, excluding the lease incentive amortization, of$126.5 million as a result of the Empire City Transaction inJanuary 2019 , the ParkMGM Transaction inMarch 2019 , and the addition ofMGM Northfield Park to the MGM-MGP Master Lease inApril 2019 . The increase was offset by a$93.7 million decrease in reimbursed revenues as we no longer recognize reimbursed revenue for property taxes in accordance with the adoption of ASC 842 onJanuary 1, 2019 and a$16.4 million decrease in revenues for the amortization of the lease incentive asset recorded as part of the ParkMGM Transaction . Expenses Depreciation. Depreciation expense was$294.7 million and$266.6 million for the years endedDecember 31, 2019 and 2018, respectively. The$28.1 million , or 11%, increase for 2019 as compared to 2018 was primarily due to the full year of depreciation recorded in 2019 for the acquisitions ofMGM Northfield Park inJuly 2018 and Empire City inJanuary 2019 . Property transactions, net. Property transactions, net were$10.8 million in 2019 compared to$20.3 million in 2018. Property transactions, net in all years relate to normal losses on the disposition of assets recognized during the year and fluctuate year over year based on the timing of our disposition of assets. Ground lease and other reimbursable expenses. Ground lease and other reimbursable expenses were$23.7 million and$119.5 million for the years endedDecember 31, 2019 and 2018, respectively. The$95.9 million , or 80%, decrease for 2019 as compared to 2018 was primarily due to a$93.7 million decrease reflecting the adoption of ASC 842 effectiveJanuary 1, 2019 , under which we no longer recognize the property taxes paid by the tenant under the MGM-MGP Master Lease. Acquisition-related expenses. Acquisition-related expenses were$10.2 million and$6.1 million for the years endedDecember 31, 2019 and 2018, respectively. The$4.0 million , or 65%, increase for 2019 as compared to 2018 primarily relates to expenses related to the Empire City Transaction and the MGP BREIT Venture Transaction offset by expenses incurred in the prior year relating to theNorthfield acquisition. General and administrative expenses. General and administrative expenses for the years endedDecember 31, 2019 and 2018 were$16.5 million and$16.0 million , respectively. The$0.5 million , or 3%, increase for 2019 as compared to 2018 was primarily due to increased financial, administrative and operational support costs. Other Expenses Other expenses for the years endedDecember 31, 2019 and 2018 were$258.2 million and$220.2 million , respectively. The$38.0 million , or 17%, increase for 2019 as compared to 2018 was primarily related to an increase of interest expense on the senior notes, which primarily related to the$750 million 5.75% senior notes issued inJanuary 2019 , the loss on extinguishment of debt of$6.2 million and the$3.9 million loss on unhedged interest rate swaps, net. 35 -------------------------------------------------------------------------------- Discontinued Operations Income from discontinued operations, net of tax for the years endedDecember 31, 2019 and 2018 were$16.2 million and$30.6 million , respectively, and were entirely attributable to Northfield OpCo in both years. See Note 3 of the accompanying financial statements for additional discussion. Provision for Income Taxes Our effective tax rate was 2.8% and 2.6% for the years endedDecember 31, 2019 and 2018, respectively. Variations of the effective tax rate among these periods is primarily the result of activities of the TRS, which was liquidated inApril 2019 . Refer to Note 2 and Note 8 of the accompanying financial statements for additional discussion. Non-GAAP Measures Funds From Operations ("FFO") is net income (computed in accordance withU.S. GAAP), excluding gains and losses from sales or disposals of property (presented as property transactions, net), plus depreciation, as defined by theNational Association of Real Estate Investment Trusts . Adjusted Funds From Operations ("AFFO") is FFO as adjusted for amortization of financing costs and cash flow hedges; non-cash compensation expense; straight-line rent (which is defined as the difference between contractual rent and cash rent payments, excluding lease incentive asset amortization); amortization of lease incentive asset and deferred revenue relating to non-normal tenant improvements; acquisition-related expenses; non-cash ground lease rent, net; other expenses; loss on unhedged interest rate swaps, net; provision for income taxes related to the REIT and other, net - discontinued operations. Adjusted EBITDA is net income (computed in accordance withU.S. GAAP) as adjusted for gains and losses from sales or disposals of property (presented as property transactions, net); real estate depreciation; amortization of financing costs and cash flow hedges; non-cash compensation expense; straight-line rent; amortization of lease incentive asset and deferred revenue relating to non-normal tenant improvements; acquisition-related expenses; non-cash ground lease rent, net; other expenses; loss on unhedged interest rate swaps, net; other, net - discontinued operations; interest income; interest expense (including amortization of financing costs and cash flow hedges) and provision for income taxes. FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA are supplemental performance measures that have not been prepared in conformity withU.S. GAAP that management believes are useful to investors in comparing operating and financial results between periods. Management believes that this is especially true since these measures exclude real estate depreciation and amortization expense and management believes that real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. The Company believes such a presentation also provides investors with a meaningful measure of the Company's operating results in comparison to the operating results of other REITs. Adjusted EBITDA is useful to investors to further supplement AFFO and FFO and to provide investors a performance metric which excludes interest expense. In addition to non-cash items, the Company adjusts AFFO and Adjusted EBITDA for acquisition-related expenses. While we do not label these expenses as non-recurring, infrequent or unusual, management believes that it is helpful to adjust for these expenses when they do occur to allow for comparability of results between periods because each acquisition is (and will be) of varying size and complexity and may involve different types of expenses depending on the type of property being acquired and from whom. FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA do not represent cash flow from operations as defined byU.S. GAAP, should not be considered as an alternative to net income as defined byU.S. GAAP and are not indicative of cash available to fund all cash flow needs. Investors are also cautioned that FFO, FFO per unit, AFFO, AFFO per unit and Adjusted EBITDA as presented, may not be comparable to similarly titled measures reported by other REITs due to the fact that not all real estate companies use the same definitions. 36 -------------------------------------------------------------------------------- The following table provides a reconciliation of our net income to FFO, AFFO and Adjusted EBITDA: Year ended December 31, 2019 2018 2017 (in thousands) Net income(1)$ 275,565 $ 244,702 $ 165,990 Real estate depreciation (2) 294,705 266,622 260,455 Property transactions, net 10,844 20,319 34,022 Funds From Operations 581,114 531,643 460,467 Amortization of financing costs and cash flow hedges 12,520 12,572
11,713
Non-cash compensation expense 2,277 2,093
1,336
Straight-line rental revenues, excluding lease incentive asset 41,447 20,680
6,415
Amortization of lease incentive asset and deferred revenue on non-normal tenant improvements 14,347 (3,711 ) (2,352 ) Acquisition-related expenses 10,165 6,149
17,304
Non-cash ground lease rent, net 1,038 686 686 Other expenses 7,615 7,191
1,621
Loss on unhedged interest rate swaps, net 3,880 - - Provision for income taxes - REIT 7,598 5,779
4,906
Other, net - discontinued operations 3,707 9,147 - Adjusted Funds From Operations 685,708 592,229 502,096 Interest income(1) (3,219 ) (2,501 ) (3,907 ) Interest expense(1) 249,944 215,532 184,175 Amortization of financing costs and cash flow hedges (12,520 ) (12,572 ) (11,713 ) Provision for income taxes - discontinued operations 2,890 5,056 - Adjusted EBITDA$ 922,803 $ 797,744 $ 670,651 (1) Net income, interest income and interest expense are net of intercompany interest eliminations of$5.6 million for the year endedDecember 31, 2019 . (2) Includes depreciation onMGM Northfield real estate assets for the period ofJuly 6, 2018 throughDecember 31, 2018 . The following table presents FFO and AFFO per dilutedOperating Partnership unit: Year Ended December 31, 2019 2018 2017 Weighted averageOperating Partnership units outstanding Basic 293,884,939 266,131,712 249,451,258 Diluted 294,137,313 266,319,797 249,634,668 Net income perOperating Partnership units outstanding Basic$ 0.94 $ 0.92 $ 0.67 Diluted$ 0.94 $ 0.92 $ 0.66 FFO perOperating Partnership unit Diluted$ 1.98 $ 2.00 $ 1.84 AFFO perOperating Partnership unit Diluted$ 2.33 $ 2.22 $ 2.01 37
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Liquidity and Capital Resources
Rental revenues and, subsequent to the close of the MGP BREIT Venture Transaction inFebruary 2020 , distributions from the MGP BREIT Venture are our primary sources of cash from operations and are dependent on the tenant's ability to pay rent and the MGP BREIT Venture's ability to pay distributions. All of our indebtedness is held by theOperating Partnership and MGP does not guarantee any of theOperating Partnership's indebtedness. MGP's principal funding requirement is the payment of dividends and distributions on its Class A shares, and its principal source of funding for these dividends and distributions is the distributions it receives from theOperating Partnership . MGP's liquidity is therefore dependent upon theOperating Partnership's ability to make sufficient distributions to it.The Operating Partnership's primary uses of cash include payment of operating expenses, debt service and distributions to MGP andMGM . We believe that theOperating Partnership currently has sufficient liquidity to satisfy all of its commitments, including its distributions to MGP, and in turn, that we currently have sufficient liquidity to satisfy all our commitments in the form of$202.1 million in cash and cash equivalents held by theOperating Partnership as ofDecember 31, 2019 , expected cash flows from operations, and$1.4 billion of borrowing capacity under theOperating Partnership's revolving credit facility as ofDecember 31, 2019 . See Note 6 to the accompanying financial statements for a description of our principal debt arrangements as ofDecember 31, 2019 . In connection with the MGP BREIT Venture Transaction, onFebruary 14, 2020 , theOperating Partnership amended its senior secured credit facility to, among other things, allow for the transaction to occur, permit the incurrence by theOperating Partnership of a nonrecourse guarantee for debt of the MGP BREIT Venture, and permit the incurrence of a bridge loan facility. As a result of the transaction and the amendment, theOperating Partnership repaid its$1.3 billion outstanding term loan B facility in full with the proceeds of a bridge facility, which was then assumed by the MGP BREIT Venture as partial consideration for theOperating Partnership's contribution. Additionally, theOperating Partnership used the proceeds from the settlement of theNovember 2019 forward equity issuance of 12.0 million Class A shares for net proceeds of$355.9 million and of the ATM program forward equity issuance of 0.6 million Class A shares for net proceeds of$18.7 million to pay off the balance of its term loan A facility in full. Also, in connection with the waiver agreement entered into inFebruary 2020 ,MGM may redeem itsOperating Partnership units for cash. MGP and theOperating Partnership have sufficient liquidity to satisfy such commitment, including the$1.4 billion of borrowing capacity under theOperating Partnership's revolving credit facility as ofDecember 31, 2019 .
In addition, we expect to incur additional indebtedness in the future to finance acquisitions or for general corporate or other purposes.
Summary of Cash Flows
Net cash provided by operating activities for the years endedDecember 31, 2019 and 2018 was$100.7 million and$556.8 million , respectively. The$456.1 million decrease in cash generated from operating activities was primarily due to the ParkMGM Transaction , for which we paid a cash lease incentive of$605.6 million to a subsidiary ofMGM and amended the MGM-MGP Master Lease, as further described in Note 5 within our accompanying financial statements, and an increase in cash paid for interest under our principal debt agreements due to the issuance of the$750 million in aggregate principal amount of 5.75% senior notes due 2027. This was partially offset with an increase in cash rental payments of$147.4 million as a result of the Empire City Transaction, the ParkMGM Transaction , theNorthfield real estate assets being added to the MGM-MGPMaster Lease , and the impact of the 2.0% fixed annual rent escalator that went into effect onApril 1, 2019 . Net cash provided by investing activities for the year endedDecember 31, 2019 was$3.8 million related to cash proceeds from the Northfield OpCo Transaction. Net cash used in investing activities for the year endedDecember 31, 2018 was$1.1 billion , primarily relating to the acquisition ofNorthfield inJuly 2018 . Net cash provided by financing activities for the year endedDecember 31, 2019 was$93.6 million , which was primarily attributable to our issuance of$750 million in aggregate principal amount of 5.75% senior notes due 2027, our offering of 19.6 million Class A shares in a registered public offering inJanuary 2019 for net proceeds of$548.4 million , our offering of 18.0 million Class A shares in a registered public offering inNovember 2019 for net proceeds of$540.6 million , and our offering of 5.3 million Class A shares under our "at-the-market" ("ATM") equity distribution program throughout 2019 for net proceeds of$161.0 million , partially offset by repayments of our bank credit facility of approximately$1.1 billion , net, our repayment of approximately$246.0 million of assumed indebtedness from the Empire City Transaction, and$533.7 million of dividends paid. Net cash provided by financing activities for the year endedDecember 31, 2018 was$256.0 million , which was primarily attributable to net borrowings of$727.8 million from our bank credit facility and$454.3 million in dividends paid. Net cash used in operating, financing and investing activities for our discontinued operations for the year endedDecember 31, 2019 was$22.3 million and net cash provided by operating, financing and investing activities for our discontinued operations for the 38 --------------------------------------------------------------------------------
year ended
Dividends and Distributions
The following table presents the distributions declared and paid by theOperating Partnership and the distributions declared and paid by MGP. MGP pays its dividends with the receipt of its share of theOperating Partnership's distributions. Distribution/ Dividend Per Unit/ Declaration Date Record Date Share Payment Date (in thousands, except per unit and per share amount) 2019 March 15, 2019 March 29, 2019 $ 0.4650 April 15, 2019 June 14, 2019 June 28, 2019 $ 0.4675 July 15, 2019 September 13, 2019 September 30, 2019 $ 0.4700 October 15, 2019 December 13, 2019 December 31, 2019 $ 0.4700 January 15, 2020 2018 March 15, 2018 March 30, 2018 $ 0.4200 April 13, 2018 June 15, 2018 June 29, 2018 $ 0.4300 July 16, 2018 September 17, 2018 September 28, 2018 $ 0.4375 October 15, 2018 December 14, 2018 December 31, 2018 $ 0.4475 January 15, 2019 2017 March 15, 2017 March 31, 2017 $ 0.3875 April 13, 2017 June 15, 2017 June 30, 2017 $ 0.3950 July 14, 2017 September 15, 2017 September 29, 2017 $ 0.3950 October 13, 2017 December 15, 2017 December 29, 2017 $ 0.4200 January 16, 2018 Principal Debt Arrangements
See Note 6 to the accompanying consolidated financial statements for information
regarding our debt agreements as of
Capital Expenditures
The MGM-MGP Master Lease has a triple-net structure, which requires the tenant to pay substantially all costs associated with each property, including real estate taxes, insurance, utilities and routine maintenance, in addition to the rent, ensuring that the cash flows associated with our lease will remain relatively predictable for the duration of its term.
Inflation
The MGM-MGP Master Lease provides for certain increases in rent as a result of the fixed annual rent escalator or changes in the variable percentage rent as further described above under "- MGM-MGP Master Lease." We expect that inflation will cause the variable percentage rent provisions to result in rent increases over time. However, we could be negatively affected if increases in rent are not sufficient to cover increases in our operating expenses due to inflation. In addition, inflation and increased cost may have an adverse impact on our tenant if increases in its operating expenses exceed increases in revenue due to inflation thereby impacting its ability to pay rent. This may also impact the MGP BREIT Venture's ability to pay distributions to us if its tenant's ability to pay rent is similarly impacted by inflation.
Off-Balance Sheet Arrangements
As of
39
--------------------------------------------------------------------------------Commitments and Contractual Obligations
The following table summarizes our scheduled contractual obligations as ofDecember 31, 2019 : Payments due by Period 2020 2021 2022 2023 2024 Thereafter Total (In millions) Debt $ - $ - $ -$ 399.1 $ 1,050.0 $ 2,904.6 $ 4,353.7
Estimated interest payments on debt(1) 211.5 211.5 211.5 199.6 160.1 219.3 1,213.5 Operating leases(2) 21.1 25.0 25.0 24.9 24.8 1,332.8 1,453.6 Total$ 232.6 $ 236.5 $ 236.5 $ 623.6 $ 1,234.9 $ 4,456.7 $ 7,020.8
(1) Estimated interest payments are based on principal amounts and expected
maturities of debt outstanding at
our interest rate swap agreements.
(2) Reflects our lessee leases for the land underlying certain of our properties
as further discussed in Note 12 to the accompanying financial statements.
Application of Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance withU.S. GAAP. We have identified certain accounting policies that we believe are the most critical to the presentation of our financial information over a period of time. These accounting policies may require our management to make decisions on subjective and/or complex matters relating to reported amounts of assets, liabilities, revenue, costs, expenses and related disclosures. These would further lead us to estimate the effect of matters that may inherently be uncertain. Estimates are required in order to prepare the financial statements in conformity withU.S. GAAP. Significant estimates, judgments, and assumptions are required in a number of areas, including, but not limited to, REIT qualification, lease accounting, determining the useful lives of real estate investments and property and equipment used in operations and evaluating the impairment of such assets, and purchase price allocations. The judgment on such estimates and underlying assumptions is based on our experience and various other factors that we believe are reasonable under the circumstances. These form the basis of our judgment on matters that may not be apparent from other available sources of information. In many instances changes in the accounting estimates are likely to occur from period to period. Actual results may differ from the estimates. The future financial statement presentation, financial condition, results of operations and cash flows may be affected to the extent that the actual results differ materially from our estimates.
Income Taxes - REIT Qualification
We have elected to be taxed as a REIT forU.S. federal income tax purposes commencing with our taxable year endedDecember 31, 2016 , and intend to continue to be organized and to operate in a manner that will permit us to continue to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to shareholders, determined without regard to the dividends paid deduction and excluding any net capital gains. As a REIT, we generally will not be subject to federal income tax on income that we pay as distributions to our shareholders. If we fail to qualify as a REIT in any taxable year, we will for that year and subsequent years be subject toU.S. federal and state income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate income tax rates, and distributions paid to our shareholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. Leases The lease accounting guidance under ASC 842 is complex and requires the use of judgments and assumptions by management to determine the proper accounting treatment of a lease. Upon entry into a lease agreement or amendment, we assess whether such agreements are accounted for as a separate or combined contract and/or a lease modification or a new lease. This further determines whether the extent to which we need to perform lease classification testing to determine if the agreement is a finance or operating lease. The lease classification test may require judgments which may include, among other things, the fair value of the assets, the residual value of the assets at the end of the lease term, the estimated remaining economic life of the assets, and the likelihood of the tenant exercising renewal options. 40 --------------------------------------------------------------------------------
Real Estate Investments, Property and Equipment used in operations, and Depreciation
Real estate costs related to the acquisition and improvement of our properties are capitalized and include expenditures that materially extend the useful lives of existing assets. Property and equipment used in operations represents the assets acquired in theNorthfield acquisition and was therefore recognized at fair value at the acquisition date. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. We consider the period of future benefit of an asset to determine its appropriate useful life. Depreciation on our buildings, improvements and integral equipment is computed using the straight-line method over an estimated useful life of 3 to 40 years. If we use a shorter or longer estimated useful life, it could have a material impact on our results of operations. We believe that 3 to 40 years is an appropriate estimate of useful life. Property and Equipment used in operations that related to the operations ofNorthfield are classified as assets held for sale. Refer to Note 3 for further information.
Impairment of Real Estate Investments
We continually monitor events and changes in circumstances that could indicate that the carrying amount of our real estate investments may not be recoverable or realized. In accordance with accounting standards governing the impairment or disposal of long-lived assets, the carrying value of long-lived assets, including land, buildings and improvements, land improvements, and equipment is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Factors that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses, current cash flows that may be insufficient to recover the investment in a property over its remaining useful life, a projection that demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of use of the assets, or significant changes in business strategies. If such circumstances arise, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows plus net proceeds expected from disposition of the asset (if any) are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows, appraisals or other valuation techniques.
Business Combinations (Acquisition of
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows (primarily from the racing and gaming license) and discount rates. Management's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Other estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed, as more fully discussed in Note 3 of the accompanying consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
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