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Show all filings for BREF HR, LLC

Form 10-K for BREF HR, LLC


23-Dec-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, 2012, 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.


The following discussion and analysis covers periods both prior and subsequent to the Assignment as discussed in Item 1. HRH Holdings' historical consolidated financial statements included herein represent the financial condition, results of operations and liquidity the Hard Rock Hotel & Casino during the period prior to March 1, 2011. Our historical consolidated financial statements included herein for the period following the closing of the Assignment 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 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.
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, 2012, Hard Rock Hotel & Casino Las Vegas' gross revenues were derived 19.9% from gaming operations, 36.3% from food and beverage, 28.1% from lodging and 15.7% 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.
Prior to obtaining the necessary gaming approvals on June 15, 2012, 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 provided for base rent equal to $1.25 million per month. In addition to the base rent, LVHR paid for certain rent-related costs. See Item 1, Business-Agreements Governing the Operation of the Hard Rock Hotel & Casino Las Vegas-Resort Management Agreement.
HRH Holdings and the Company each evaluate our variable interests to determine if they are variable interests in variable interest entities. Certain variable interest entities must 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. 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.
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. The Company consolidated LVHR since it was the primary beneficiary of the gaming operations and had 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.
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 net hold percentage for any period to be within the range of 12% to 16% and slot machine hold percentage for any period to be within the range of 4% to 7%.

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

                                   Company                            Company                  HRH Holdings
                                                                    Period from
                                                                    Mar 1, 2011     Period from
                                                                        to          Jan 1, 2011
                              For the year ended        2011         December       to Feb 28,     For the year ended
                              December 31, 2012       Combined       31, 2011          2011        December 31, 2010
Statement of Operations
Data:
Revenue
Casino                                  22  %             21  %           21  %           20  %            27  %
Lodging                                 31  %             30  %           30  %           32  %            25  %
Food and beverage                       40  %             42  %           42  %           42  %            43  %
Retail                                   1  %              2  %            2  %            1  %             2  %
Other                                   16  %             15  %           15  %           16  %            14  %
Gross revenues                         110  %            110  %          109  %          111  %           110  %
Less: Promotional allowances           (10 )%            (10 )%           (9 )%          (11 )%           (10 )%
Net revenues                           100  %            100  %          100  %          100  %           100  %

Costs and Expenses:
Casino                                  18  %             18  %           18  %           19  %            21  %
Lodging                                 10  %             10  %           10  %           11  %             8  %
Food and beverage                       23  %             22  %           22  %           20  %            23  %
Retail                                   1  %              1  %            1  %            1  %             1  %
Other                                   10  %              9  %            8  %           10  %            10  %
Marketing                                4  %              3  %            4  %            3  %             4  %
Fee and expense
reimbursements - related
party                                    1  %              1  %            1  %            3  %             4  %
General and administrative              19  %             20  %           19  %           22  %            21  %
Depreciation and
amortization                            16  %             18  %           15  %           37  %            25  %
Loss on disposal of assets               -  %              -  %            -  %            -  %             1  %
Pre-opening                              -  %              -  %            -  %            -  %             -  %
Impairment of land                       -  %              -  %            -  %            -  %             7  %
Impairment of licenses and              11  %              -  %            -  %            -  %             -  %
trademarks
Total costs and expenses               113  %            103  %           99  %          125  %           127  %
(Loss) income from
operations                             (13 )%             (3 )%            1  %          (25 )%           (27 )%
Interest income                          -  %              -  %            -  %            -  %             -  %
Interest expense                       (45 )%            (43 )%          (41 )%          (51 )%           (30 )%
Gain on forgiveness of debt              -  %             17  %            -  %          111  %             -  %
Loss on joint venture
investment                               -  %              -  %            -  %            -  %             -  %
(Loss) income before income
tax expense                            (58 )%            (29 )%          (40 )%           35  %           (58 )%
Income tax expense                       -  %              -  %            -  %            -  %             -  %
Net (Loss) income                      (58 )%            (29 )%          (40 )%           35  %           (58 )%

Minor differences may exist due to rounding.
The following table presents results of operations data as reported in the Company's and HRH Holdings' consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). GAAP requires that we separately present the Company and HRH Holdings results. As noted above, management believes reviewing the operating results for the year 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.


                          Company                             Company                    HRH Holdings                 Percent Change
                       For the year                       Period from Mar                          For the year
                           ended                            1, 2011 to        Period from Jan 1,       ended
                       December 31,                        December 31,        2011 to Feb 28,     December 31,     2012 vs     2011 vs
($ in thousands)           2012         2011 Combined          2011                  2011              2010          2011        2010
Statement of
Operations Data:
Revenue
Casino                 $    43,572     $       40,614     $    34,641         $      5,973         $    59,703        7.3  %      (32 )%
Lodging                     61,356             57,947          48,725                9,222              55,405        5.9  %      4.6  %
Food and beverage           79,348             82,298          69,908               12,390              96,669       (3.6 )%    (14.9 )%
Retail                       2,789              3,014           2,588                  426               4,452       (7.5 )%    (32.3 )%
Other                       31,469             28,602          24,011                4,591              31,242       10.0  %     (8.5 )%
Gross revenues             218,534            212,475         179,873               32,602             247,471        2.9  %    (14.1 )%
Less: Promotional
allowances                 (19,993 )          (18,565 )       (15,220 )             (3,345 )           (23,500 )      7.7  %       21  %
Net revenues               198,541            193,910         164,653               29,257             223,971        2.4  %    (13.4 )%

Costs and Expenses:
Casino                      35,444             35,383          29,717                5,666              48,067        0.2  %    (26.4 )%
Lodging                     20,472             19,443          16,321                3,122              18,617        5.3  %      4.4  %
Food and beverage           44,747             42,753          37,005                5,748              51,612        4.7  %    (17.2 )%
Retail                       1,682              1,969           1,696                  273               2,872      (14.6 )%    (31.4 )%
Other                       20,495             16,807          13,930                2,877              22,320       21.9  %    (24.7 )%
Marketing                    8,650              6,710           5,867                  843               8,656       28.9  %    (22.5 )%
Fee and expense
reimbursements               2,206              2,605           1,673                  932               9,444      (15.3 )%    (72.4 )%
General and
administrative              36,832             38,295          31,906                6,389              47,701       (3.8 )%    (19.7 )%
Depreciation and
amortization                31,360             35,673          24,815               10,858              55,575      (12.1 )%    (35.8 )%
Loss on disposal of
assets                         501                 50              50                    -               3,138      902.0  %    (98.4 )%
Pre-opening                    433                146             146                    -                 726      196.6  %    (79.9 )%
Impairment of land               -                  -               -                    -              16,180          -  %     (100 )%
Impairment of licenses      21,175                  -               -                    -                   -      100.0  %        -  %
and trademarks
Total costs and
expenses                   223,997            199,834         163,126               36,708             284,908       12.1  %    (29.9 )%
(Loss) income from
operations                 (25,456 )           (5,924 )         1,527               (7,451 )           (60,937 )    329.7  %     90.3  %
Interest income                 36                 74              66                    8                  38      (51.4 )%     94.7  %
Interest expense           (89,554 )          (82,544 )       (67,674 )            (14,870 )           (68,251 )      8.5  %    (20.9 )%
Gain on forgiveness of
debt                             -             32,460               -               32,460                   -     (100.0 )%      100  %
Loss on joint venture
investment                    (630 )                -               -                    -                   -      100.0  %        -  %
(Loss) income before
income tax expense        (115,604 )          (55,934 )       (66,081 )             10,147            (129,150 )    106.7  %     56.7  %
Income tax expense               -                141               -                  141                 467     (100.0 )%    (69.8 )%
Net (loss) income      $  (115,604 )   $      (56,075 )   $   (66,081 )       $     10,006         $  (129,617 )    106.2  %     56.7  %

Results of Operations of the Company for the Year Ended December 31, 2012 Compared to the Combined Results of Operations of the Company and HRH Holdings for the Year Ended December 31, 2011
In the following discussion references to the year ended December 31, 2011 refer to combining the results of HRH Holdings for the period from January 1, 2011 to February 28, 2011 with the results of the Company for the period from March 1, 2011 to December 31, 2011.
Casino Revenues. Until June 15, 2012, we did not receive any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, the Company did not directly earn any casino revenues, for the period from March 1, 2011 to June 14, 2012. However, the Company has included revenues earned by LVHR during such period in its consolidated financial statements in accordance with applicable guidance relating to variable interest entities.


Casino revenues increased $3.0 million to $43.6 million for the year ended December 31, 2012 from $40.6 million for the year ended December 31, 2011. Slot. Slot machine revenues increased $1.6 million to $17.2 million for the year ended December 31, 2012 from $15.5 million for the year ended December 31, 2011. Slot machine handle decreased $9.5 million from $328.2 million to $318.7 million. Slot machine hold percentage increased to 5.4% from 4.7%. The number of slot machines in operation decreased to 628 from 631. The net result of these changes in handle, hold percentage and average number of slot machines in operation was an increase in net win per slot machine per day to $74.72 from $67.40, an increase of $7.32 or 10.9%. Management believes the decrease in slot handle was due to the construction projects under way in 2012 and also increased competition from other hotel/casinos on the Las Vegas strip.
Table Games. Table games revenues increased $1.4 million to $25.9 million for the year ended December 31, 2012 from $24.5 million for the year ended December 31, 2011. Table games drop decreased $24.1 million or 10% to $218.3 million. Table games hold percentage increased 1.7% to 11.9% from 10.1%. The average number of table games in operations decreased to 75 from 86 tables. The net result of these changes in drop and hold percentage was an increase in win per table game per day to $943 from $778, an increase of $165 or 21.2%. We have historically reported table games hold percentage using the gross method, while casinos on the Las Vegas Strip report hold percentage using the net method (which reduces the table game drop by marker repayments made in the gaming pit area). For the purpose of comparison to properties on the Las Vegas Strip, our net hold percentage for the year ended December 31, 2012 was 14.3% compared to 13.0% for the year ended December 31, 2011. The increase in table games revenues was due to an increase in the table games hold percentage. Management believes the decrease in table games drop was due to increased competition from other hotel/casinos on the Las Vegas strip.
Lodging Revenues. Lodging revenues increased $3.4 million to $61.4 million for the year ended December 31, 2012 from $57.9 million for the year ended December 31, 2011. The increase in lodging revenues was primarily due to a 3.9% increase in total occupied rooms to 454,044 from 436,976 and an increase in the average daily rate of $1.51 to $133.08 or 1.1%. Revenue per available room increased $5.94 to $112.35 from $106.42 or 5.6%.
Food and Beverage Revenues. Food and beverage revenues decreased $3.0 million to $79.3 million for the year ended December 31, 2012 from $82.3 million for the year ended December 31, 2011. The $3.0 million decrease in food and beverage revenues was primarily due to the closure of venues during construction of four new food and beverage outlets, including, Culinary Dropout, Ainsworth, Fú and Fuel Express, and a decline in nightclub revenue from Vanity due to the competitive nightclub market in Las Vegas during 2012. Due to the significant decline in revenue at Vanity, Body English was reopened on December 28, 2012 after being closed since January 1, 2010. Vanity has limited its operations exclusively to special events since January 1, 2013.
Retail Revenues. Retail revenues decrease $0.2 million to $2.8 million for the year ended December 31, 2012 from $3.0 million for the year ended December 31, 2011. The decrease in retail revenues was due to the relocation of the Hard Rock retail store into a smaller footprint and a decline in the number of transactions during 2012.
Other Revenues. Other revenues increased $2.9 million to $31.5 million for the year ended December 31, 2012 from $28.6 million for the year ended December 31, 2011. The increase in other revenues was primarily the result of having 23 more events in 2012 compared to 2011.
Promotional Allowances. Promotional allowances increased $1.4 million or 7.7% to $20.0 million for the year ended December 31, 2012. As a percentage of gross revenues, promotional allowances increased to 9.1% from 8.7%. The increase in promotional allowances was primarily attributable to increased marketing efforts to attract casino customers by providing rooms on a complimentary basis. Casino Expenses. Casino expenses remained flat at $35.4 million for the year ended December 31, 2012.
Lodging Expenses. Lodging expenses increased $1.0 million or 5.3% to $20.5 million for the year ended December 31, 2012 from $19.4 million for the year ended December 31, 2011. Lodging expenses in relation to lodging revenues decreased to 33.4% from 33.6% in the prior period. The increase in lodging expenses was primarily due to operating costs associated with the increase in occupancy.
Food and Beverage Expenses. Food and beverage expenses increased $2.0 million or 4.7% to $44.7 million for the year ended December 31, 2012 from $42.8 million for the year ended December 31, 2011. Food and beverage expenses in relation to food and beverage revenues increased to 56.4% from 51.9% in the prior period. The increase in food and beverage expense was primarily


the result of an increase in the number of pool and nightclub events and an increase in advertising in order to promote the respective venues.
Retail Expenses. Retail expenses decreased $0.3 million or 14.6% to $1.7 million for the year ended December 31, 2012 from $2.0 million for the year ended December 31, 2011. Retail expenses in relation to retail revenues decreased to 60.3% from 65.3% in the prior period. The decrease in retail expenses was primarily the result of a decrease in cost of goods sold included in retail costs and expenses..
Other Expenses. Other expenses increased $3.7 million or 21.9% to $20.5 million for the year ended December 31, 2012 from $16.8 million for the year ended December 31, 2011. This increase was primarily due to a $2.8 million increase in concert expense (artist fees) as a result of having 23 more concerts. Marketing. Marketing expenses increased $1.9 million or 28.9% to $8.7 million for the year ended December 31, 2012 from $6.7 million for the year ended December 31, 2011. Marketing expenses in relation to gross revenues increased to 3.9% from 3.1% in the prior period. The increase in marketing expenses was primarily due to an increase in advertising and personnel in an effort to drive brand awareness in our competitive market.
General and Administrative. General and administrative expenses decreased $1.5 million or 3.8% to $36.8 million for the year ended December 31, 2012 from $38.3 million for the year ended December 31, 2011. General and administrative expenses in relation to gross revenues decreased to 16.9% from 18.0%. The decrease in these expenses was primarily due to a decrease in property taxes due to a decline in assessed property values and a decline in professional fees related to the Assignment.
Depreciation and Amortization. Depreciation and amortization expense decreased by $4.3 million or 12.1% to $31.4 million for the year ended December 31, 2012 from $35.7 million for the year ended December 31, 2011. The decrease in depreciation and amortization expense is a result of the decreased values at the time of the Assignment coupled with an intangible asset that became fully depreciated during the first quarter of 2012.
Interest Expense. Interest expense increased $6.9 million or 8.5% to $89.6 million for the year ended December 31, 2012 from $82.5 million for the year ended December 31, 2011. The increase in interest expense is primarily due to debt discount amortization as part of the Assignment. A total of $28.9 million of interest expense is a result of debt discount amortization under the Amended Facility and Second Mortgage in 2012 compared to $17.9 million in 2011. The increase in debt discount amortization is partially offset by a decrease in the interest rate of debt after the Assignment.
Combined Results of Operations of the Company and HRH Holdings for the Year Ended December 31, 2011 Compared to the Results of Operations for the Year Ended December 31, 2010 of HRH Holdings
In the following discussion, references to the year ended December 31, 2011 refer to combining the results of HRH Holdings for the period from January 1, 2011 to February 28, 2011 with the results of the Company for the period from March 1, 2011 to December 31, 2011.
Since March 1, 2011 the Hard Rock Hotel & Casino Las Vegas and related assets have been owned by the Company pursuant to the Assignment thereof from HRH Holdings. The Hard Rock Hotel & Casino Las Vegas was owned by HRH Holdings during the period from February 2, 2007 to February 28, 2011. The following management's discussion and analysis of financial condition and results of operation includes a summary of the combined periods of ownership of the Hard Rock Hotel & Casino Las Vegas by HRH Holdings and the Company, respectively, during the year ended December 31, 2011.
Casino Revenues. Until June 15, 2012, we did not receive any revenues of the casino at the Hard Rock Hotel & Casino Las Vegas. As such, the Company did not directly earn any casino revenues, for the period from March 1, 2011 to June 14, 2012. However, the Company has included revenues earned by LVHR during such period in its consolidated financial statements in accordance with applicable guidance relating to variable interest entities.
For the year ended December 31, 2011, the $19.1 million decrease in casino revenues was primarily due to a $13.6 million or 35.6% decrease in table games revenue and a $1.6 million or 9.5% decrease in slot revenue.
Table Games. The decrease in table games revenues was due to a decrease in table games drop. Management believes the decrease in table games drop was due to increased competition from other hotel/casinos on the Las Vegas strip. Table games drop decreased


$66.1 million or 21.4% to $242.4 million. Table games hold percentage decreased 2.2% to 10.1% from 12.3%. The average number of table games in operations decreased to 86 from 110 tables. The net result of these changes in drop and hold percentage was a decrease in win per table game per day to $778 from $950, a decrease of $172 or 18.1%. We have historically reported table games hold percentage using the gross method, while casinos on the Las Vegas Strip report hold percentage using the net method (which reduces the table game drop by marker repayments made in the gaming pit area). For the purpose of comparison to properties on the Las Vegas Strip, our net hold percentage for the year ended December 31, 2011 was 13.0% compared to 15.8% for the year ended December 31, 2010. . . .

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