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Form 10-K for BREF HR, LLC


3-Jun-2013

Annual Report


Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, AND THE OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K.

Within this management's discussion and analysis of financial condition and results of operation for the period from March 1, 2011 to December 31, 2011, references to the "Company," "we," "us," or "our" refer to BREF HR, LLC, and references to "HRH Holdings" for the period from January 1, 2009 to February 28, 2011 refer to Hard Rock Hotel Holdings, LLC.

Substantially all of our current business is comprised of the operation of the Hard Rock Hotel & Casino Las Vegas. For the year ended December 31, 2011, Hard Rock Hotel & Casino Las Vegas' gross revenues were derived 19.1% from gaming operations, 38.7% from food and beverage, 27.3% from lodging and 14.9% from retail and other sales. Our business strategy is to provide our guests with an energetic and exciting gaming and entertainment environment with the services and amenities of a luxury boutique hotel. Because of the substantial costs incurred during the expansion project, our financial condition, results of operation and liquidity for periods during the project (which was substantially completed in 2009) are not expected to be comparable to our financial condition, results of operation and liquidity for periods before or after completion of the project.

The historical consolidated financial statements of HRH Holdings included herein represent the financial condition, results of operation and liquidity of the Hard Rock Hotel & Casino during the period prior to March 1, 2011. For comparative purposes, a comparison of the results of operations of HRH Holdings for the years ended December 31, 2010 and 2009 is included.

In January 2011, HRH Holdings received a notice of acceleration from its lenders under the Facility, and also from NRFC, the second mezzanine lender pursuant to the Second Mezzanine Loan Agreement, and declaring all unpaid principal and accrued interest immediately due and payable. On February 1, 2011 NRFC commenced an action in the Supreme Court of New York and on February 2, 2011 Brookfield Financial and Mortgage Lender commenced an action in the Supreme Court of New York. Following filing of such actions, subsidiaries of HRH Holdings, the Mortgage Lender, Brookfield Financial, NRFC, Morgans, certain affiliates of DLJMBP, and certain other related parties entered into a Standstill and Forbearance Agreement, dated as of February 6, 2011. Pursuant to such agreement, among other things, until February 28, 2011, the Mortgage Lender, Brookfield Financial and NRFC agreed not to take any action or assert any right or remedy arising with respect to any of the applicable loan documents or the collateral pledged under such loan documents. In addition, pursuant to the Forbearance Agreement, NRFC agreed to withdraw its foreclosure notice, and the parties agreed to jointly request a stay of all action on the pending motions that had been filed by various parties to enjoin such foreclosure proceedings.

The Assignment closed on March 1, 2011. The Assignment provided for, among other things:

the transfer by HRH Holdings to an affiliate of Brookfield Financial of 100% of the indirect equity interests in the Hard Rock Hotel & Casino Las Vegas and other related assets, namely HHRH JV Junior Mezz and HRHH Gaming Junior Mezz;

release of the non-recourse carve-out guaranties provided by HRH Holdings with respect to the loans made by the Mortgage Lender, Brookfield Financial and NRFC to the direct and indirect owners of the Hard Rock Hotel & Casino Las Vegas; and

termination of the Morgans management agreement.

The following discussion and analysis covers periods both prior and subsequent to the Assignment. HRH Holdings' historical consolidated financial statements included herein for the periods prior to March 1, 2011 represent the financial condition, results of operations and liquidity of HRH Holdings prior to the closing of the Assignment. Our historical consolidated financial statements included herein for the period following the closing of the Assignment


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represent our financial condition, results of operation and liquidity after the Assignment. As a result of various factors, the financial condition, results of operations and liquidity for the periods beginning on or after March 1, 2011 may not be comparable to the information prior to that date. For comparative purposes, below we have included a comparison of HRH Holdings' audited results of operations for the year ended December 31, 2010 to the combined audited results of operations for the year ended December 31, 2011, which include periods of operation by HRH Holdings and the Company. While the Company believes that a comparison of the results of operations for this period provides useful information regarding the changes in operating data between the periods, not all of the data is comparable due to the impact that the Assignment has had on the amount of interest expense and depreciation and amortization we incur.

Due to a number of factors affecting consumers, including the continued recovery in global economies, credit markets, and consumer spending, the outlook for the gaming, travel, and entertainment industries both domestically and abroad is optimistic. Based on these circumstances, we believe that we may experience slightly higher hotel occupancy rates as compared to that of prior periods.

Prior to obtaining the necessary gaming approvals, we were prohibited from receiving any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, we entered into the Casino Lease with LVHR, a licensed third party casino operator, and the Resort Management Agreement with WG-Harmon under which WG-Harmon conducts the gaming and other operations at the casino. The Casino Lease provides for base rent equal to $1.25 million per month. In addition to the base rent, LVHR must pay for certain rent-related costs. See "Business-Agreements Governing the Operation of the Hard Rock Hotel & Casino Las Vegas-Resort Management Agreement."

The Assignment was accounted for as a business combination in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations.

HRH Holdings and the Company each evaluate our variable interests in accordance with FASB ASC 810-10, ("FASB ASC 810-10 (FIN 46R)"), to determine if they are variable interests in variable interest entities. FASB ASC 810-10 (FIN 46R) previously required certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Prior to early 2008, the gaming operations of HRH Holdings at the Hard Rock casino were operated pursuant to a Casino Sublease entered into by HRH Holdings with Golden HRC, LLC (the "Holdings Casino Operator"), a third party lessee, (as amended on January 9, 2007, the "Holdings Casino Sublease") which purchased the gaming assets located at the premises with a Gaming Asset Note in an amount equal to approximately $6.8 million (the "Gaming Asset Note"). In addition, where and to the extent that the monthly Casino EBITDAR (as was defined in Holdings Casino Sublease) for the previous month fell below the base rent under Holdings Casino Sublease, the Casino Operator would provide HRH Holdings with the difference between the base rent and the Casino EBITDAR in monthly shortfall notes ("Shortfall Notes"). In contrast, where and to the extent that monthly Casino EBITDAR exceeded the base rent, the Casino Operator would establish a reserve account for excess cash flow, which would be applied toward satisfying certain amounts due under the Shortfall Notes. Once the Casino Operator paid out such amounts as became due under the Shortfall Notes, 75.0% of any surplus fund reserves remaining would be earmarked for repayment of the Gaming Asset Note and a Working Capital Note, according to the terms contained in Holdings Casino Sublease should be similar to the terms in the resort management agreement. In early 2008, HRH Holdings received a license from the Nevada Commission to serve as the operator of the gaming facilities at the Hard Rock, HRH Holdings assumed operation of the gaming facilities and Holdings Casino Sublease was terminated. Upon termination of Holdings Casino Sublease on February 29, 2008, the Casino Operator relinquished all of the gaming assets to HRH Holdings and, in return, HRH Holdings forgave any remaining balance on the Gaming Asset Note. At that time, there were no excess funds remaining in the surplus fund reserve. The Company believes that HRH Holdings determined that it was the primary beneficiary of the gaming operations because HRH Holdings was ultimately responsible for a majority of the operations' losses and was entitled to a majority of the operations' residual returns. Therefore, the gaming operations conducted by Holdings Casino Operator were consolidated in HRH Holdings' financial statements. Similarly, during the period from March 1, 2011 through June 15, 2012, LVHR was the third party operator of all gaming operations at the Hard Rock Hotel & Casino Las Vegas. LVHR became one of our indirect subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas on June 15, 2012.


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During the period from March 1, 2011 through June 15, 2012, the Company did not own any interest in LVHR or its affiliated entities, WG-Harmon and Warner Gaming. However, since the Company believes that it is the primary beneficiary of the gaming operations because under current accounting standard ASC 810-10 the Company both has the power to direct the activities of the variable interest entity that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entities that could potentially be significant to the variable interest entity.

As is customary for companies in the gaming industry, we present average occupancy rate and average daily rate for the Hard Rock Hotel & Casino Las Vegas including rooms provided on a complimentary basis. Operators of hotels in the lodging industry generally may not follow this practice, as they may present average occupancy rate and average daily rate net of rooms provided on a complimentary basis. We calculate (a) average daily rate by dividing total daily lodging revenue by total daily rooms rented and (b) average occupancy rate by dividing total rooms occupied by total number of rooms available. We account for lodging revenue on a daily basis. Rooms provided on a complimentary basis include rooms provided free of charge or at a discount to the rate normally charged to customers as an incentive to use the casino. Complimentary rooms reduce average daily rate for a given period to the extent the provision of such rooms reduces the amount of revenue we would otherwise receive. We do not separately account for the number of occupied rooms that are provided on a complimentary basis, and obtaining such information would require unreasonable effort and expense within the meaning of Rule 12b-21 under the Exchange Act.

The following are key gaming industry-specific measurements we use to evaluate casino revenues. "Table game drop," "slot machine handle" and "race and sports book write" are used to identify the amount wagered by patrons for a casino table game, slot machine or racing events and sports games, respectively. "Drop" and "Handle" are abbreviations for table game drop and slot machine handle. "Table game hold percentage," "slot machine hold percentage" and "race and sports book hold percentage" represent the percentage of the total amount wagered by patrons that the casino has won. Such hold percentages are derived by dividing the amount won by the casino by the amount wagered by patrons. Based on historical experience, in the normal course of business we expect table games hold percentage for any period to be within the range of 12% to 16%, slot machine hold percentage for any period to be within the range of 4% to 7% and race and sports book hold percentage to be within the range of 4% to 8%. For the period beginning on March 1, 2011 the Company is beneficiary of rental payments under the Casino Lease, which includes results relating to the sports book and other operations at the Hard Rock Hotel & Casino Las Vegas for which LVHR receives certain rental payments.


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Results of Operations

The following table presents consolidated statement of operations data for each of the periods indicated as a percentage of net revenues.

                                                       Period from                              Year Ended
                                          Company(1)                              HRH Holdings(1)
                                        Mar 1, 2011 to              Jan 1, 2011 to        Dec 31,        Dec 31,
                                         Dec 31, 2011                Feb 28, 2011           2010           2009
                                                                         (in thousands)
STATEMENT OF OPERATIONS DATA:
REVENUES:
Casino                                             21.0 %                      20.4 %         26.7 %         26.9 %
Lodging                                            29.6                        31.5           24.7           21.7
Food and beverage                                  42.5                        42.3           43.2           46.1
Retail                                              1.6                         1.5            2.0            3.1
Other                                              14.6                        15.7           13.9           17.0

Gross revenues                                    109.3                       111.4          110.5          114.9
Less: promotional allowances                       (9.3 )                     (11.4 )        (10.5 )        (14.9 )

Net revenues                                      100.0                       100.0          100.0          100.0

COSTS AND EXPENSES:
Casino                                             18.0                        19.4           21.5           26.3
Lodging                                             9.9                        10.7            8.3            4.5
Food and beverage                                  22.5                        19.6           23.0           23.4
Retail                                              1.0                         0.9            1.3            1.9
Other                                               8.5                         9.8           10.0           13.4
Marketing                                           3.6                         2.9            3.9            3.0
Fee and expense
reimbursements-related party                        1.0                         3.2            4.2            4.4
General and administrative                         19.4                        21.8           21.3           17.5
Depreciation and amortization                      15.1                        37.1           24.8           14.3
Loss on disposal of assets                           -                           -             1.4            0.1
Pre-opening                                         0.1                          -             0.3            6.1
Impairment of land, goodwill and
license rights                                       -                           -             7.2           67.3

Total costs and expenses                           99.1                       125.5          127.2          182.1

(LOSS) INCOME FROM OPERATIONS                       0.9                       (25.5 )        (27.2 )        (82.1 )
Interest income                                      -                           -              -             0.2
Interest expense, net of
capitalized interest                              (41.1 )                     (50.8 )        (30.5 )        (49.3 )
Gain on forgiveness of debt                          -                        110.9             -              -


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                                                        Period from                             Year Ended
                                             Company(1)                           HRH Holdings(1)
                                           Mar 1, 2011 to          Jan 1, 2011 to        Dec 31,         Dec 31,
                                            Dec 31, 2011            Feb 28, 2011           2010            2009
                                                                      (in thousands)
(Loss) income before income tax
(benefit) expense                                    (40.1 )                  34.7          (57.7 )        (131.1 )
Income tax (benefit) expense                            -                      0.5            0.2              -

Net (loss) income                                    (40.1 )                  34.2          (57.9 )        (131.2 )

Interest rate cap fair market value
adjustment, net of tax                                (0.1 )                   1.1            0.9             9.2

Comprehensive loss (40.2 %) 35.3 % (57.0 %) (122.0 %)

Minor differences may exist due to rounding.

(1) The Company was formed by Brookfield Financial to acquire the Hard Rock Hotel & Casino Las Vegas and certain related assets. HRH Holdings was formed by DLJMBP and Morgans to acquire the Hard Rock Hotel & Casino Las Vegas and certain related assets. The Hard Rock Hotel & Casino Las Vegas was owned by HRH Holdings during the period from February 2, 2007 to February 28, 2011. The Company acquired the assets comprising the Hard Rock Hotel & Casino Las Vegas business from HRH Holdings pursuant to the Assignment. As a result of the Assignment, the Company, through a subsidiary, obtained the assets comprising the Hard Rock Hotel & Casino Las Vegas business. Commencing on March 1, 2011 and continuing through June 15, 2012 the gaming operations at the Hard Rock Hotel & Casino Las Vegas were operated by WG-Harmon pursuant to the Management Agreement.


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The following table presents results of operations data as reported in HRH Holdings' and Company's consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). GAAP requires that we separately present HRH Holdings and Company periods' results. Management believes reviewing the operating results for the twelve months ended December 31, 2011 by combining the results of the HRH Holdings and Company periods is more useful in identifying any trends in, or reaching conclusions regarding, our overall operating performance. Accordingly, the table below presents the non-GAAP combined results for the twelve months ended December 31, 2011, which is also the period we compare when computing percentage change from prior year, as we believe this presentation provides the most meaningful basis for comparison of our results and it is how management reviews operating performance. The combined operating results may not reflect the actual results we would have achieved had the Assignment closed prior to March 1, 2011 and may not be predictive of future results of operations.

                                                                                                                                    Change from Year  Ended
                                                                                                                                        Dec 31, 2010 to
                                                    Year Ended                  Period From                  Year Ended             Year Ended Dec 31, 2011
                                                            HRH Holdings(1)                Company(1)         Combined
                                                                                          Period From
                                                                       Period From          Mar 1 to
                                                                         Jan 1 to           Dec 31,
                                                   Dec 31, 2010        Feb 28, 2011           2011          Dec 31, 2011        Change ($)           Change (%)
                                                                               (in thousands)
STATEMENT OF OPERATIONS DATA:
REVENUES:
Casino                                             $      59,703      $        5,973      $     34,641      $      40,614            (19,089 )             (32.0 %)
Lodging                                                   55,405               9,222            48,725             57,947              2,542                 4.6
Food and beverage                                         96,669              12,390            69,908             82,298            (14,371 )             (14.9 )
Retail                                                     4,452                 426             2,588              3,014             (1,438 )             (32.3 )
Other                                                     31,242               4,591            24,011             28,602             (2,640 )              (8.5 )

Gross revenues                                           247,471              32,602           179,873            212,475            (34,996 )             (14.1 )
Less: promotional allowances                             (23,500 )            (3,345 )         (15,220 )          (18,565 )            4,935               (21.0 )

Net revenues                                             223,971              29,257           164,653            193,910            (30,061 )             (13.4 )

COSTS AND EXPENSES:
Casino                                                    48,067               5,666            29,717             35,383             12,684                26.4
Lodging                                                   18,617               3,122            16,321             19,443               (826 )              (4.4 )
Food and beverage                                         51,612               5,748            37,005             42,753              8,859                17.2
Retail                                                     2,872                 273             1,696              1,969                903                31.4
Other                                                     22,320               2,877            13,930             16,807              5,513                24.7
Marketing                                                  8,656                 843             5,867              6,710              1,946                22.5
Fee and expense reimbursements-related party               9,444                 932             1,673              2,605              6,839                72.4
General and administrative                                47,701               6,389            31,906             38,295              9,406                19.7
Depreciation and amortization                             55,575              10,858            24,815             35,673             19,902                35.8
Loss on disposal of assets                                 3,138                  -                 50                 50              3,088                98.4
Pre-opening                                                  726                  -                146                146                580                79.9
Impairment of land                                        16,180                  -                 -                  -              16,180               100.0

Total costs and expenses                                 284,908              36,708           163,126            199,834             85,074                29.9

(LOSS) INCOME FROM OPERATIONS                            (60,937 )            (7,451 )           1,527             (5,924 )           55,013                90.3

Interest income                                               38                   8                66                 74                 36                94.7
Interest expense, net of capitalized interest            (68,251 )           (14,870 )         (67,674 )          (82,544 )          (14,293 )             (20.9 )


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                                                                                                                          Change from Year Ended
                                                                                                                              Dec 31, 2010 to
                                       Year Ended                   Period From                   Year Ended              Year Ended Dec 31, 2011
                                              HRH  Holdings(1)                 Company(1)          Combined
                                                                              Period From
                                                           Period From          Mar 1 to
                                                             Jan 1 to           Dec 31,
                                      Dec 31, 2010         Feb 28, 2011           2011           Dec 31, 2011         Change ($)           Change (%)
                                                                  (in thousands)
Gain on forgiveness of debt                      -                32,460                -               32,460              32,460               100.0

Loss before income tax benefit             (129,150 )             10,147           (66,081 )           (55,934 )           (73,216 )              56.7
Income tax expense                              467                  141                -                  141                 326                69.8

Net income (loss)                          (129,617 )             10,006           (66,081 )           (56,075 )           (72,890 )              56.2
Other Comprehensive Loss:
Interest rate cap market value
adjustment, net of tax                        1,976                  335              (203 )               132              (1,844 )             (93.3 )

Comprehensive loss                   $     (127,641 )     $       10,341      $    (66,284 )     $     (55,943 )     $     (74,734 )             (58.6 %)

(1) The Company was formed by Brookfield Financial to acquire the Hard Rock Hotel & Casino Las Vegas and certain related assets. HRH Holdings was formed by DLJMBP and Morgans to acquire the Hard Rock Hotel & Casino Las Vegas and certain related assets. The Hard Rock Hotel & Casino Las Vegas was owned by HRH Holdings during the period from February 2, 2007 to February 28, 2011. The Company acquired the assets comprising the Hard Rock Hotel & Casino Las Vegas business from HRH Holdings pursuant to the Assignment. As a result of the Assignment, the Company, through a subsidiary, obtained the assets comprising the Hard Rock Hotel & Casino Las Vegas business. Commencing on . . .

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