UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2014



_	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-54532

BREF HR, LLC

(Exact name of registrant as specified in its charter)



Delaware		27-4938906
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

Three World Financial Center
250 Vesey Street, 15^th Floor New York, NY		10281
(Address of principal executive office)		(Zip Code)

(Registrant’s telephone number, including area code): (212) 417-7265

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes __ No X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION	2

Item 1. Financial Statements	2

Condensed Consolidated Balance Sheets (unaudited)	2

Condensed Consolidated Statements of Operations (unaudited)	3

Condensed Consolidated Statements of Cash Flows (unaudited)	4

Notes To Condensed Consolidated Financial Statements (unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3. Quantitative and Qualitative Disclosures About Market Risk	21

Item 4. Controls and Procedures	21

PART II—OTHER INFORMATION	21

Item 1. Legal Proceedings	21

Item 1A. Risk Factors	21

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3. Defaults Upon Senior Securities	22

Item 4. Mine Safety Disclosures	22

Item 5. Other Information	22

Item 6. Exhibits	22

Signatures	23

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

BREF HR, LLC
Condensed Consolidated Balance Sheets
(Unaudited)



($ in thousands)	September 30, 2014			December 31, 2013
Assets
Current assets
Cash and cash equivalents	$	16,983		$	14,094
Accounts receivable, net	10,543			8,351
Inventories	3,248			2,947
Prepaid expenses and other current assets	4,142			3,002
Related party receivable	114			435
Restricted cash	4,006			5,069
Total current assets	39,036			33,898
Property and equipment, net	462,472			479,008
Intangible assets, net	67,514			70,542
Restricted cash	20,945			19,354
Investment in joint venture	1,252			1,425
Total assets	$	591,219		$	604,227

Liabilities and Members' Equity (Deficit)
Current liabilities
Accounts payable	$	4,827		$	7,560
Construction related payables	306			847
Related party payables	316			220
Accrued expenses	19,026			20,816
Interest payable	83,420			61,165
Current portion of long term debt	723,705			686,850
Total current liabilities	831,600			777,458
Long term accrued expenses	—			177
Long term interest payable	14,878			10,547
Long term debt - due to affiliate	18,072			16,596
Total long term liabilities	32,950			27,320
Total liabilities	864,550			804,778

Members' equity (deficit)
Paid-in capital	86,673			86,673
Accumulated deficit	(360,004		)	(287,224		)
Total members' equity (deficit)	(273,331		)	(200,551		)
Total liabilities and members equity (deficit)	$	591,219		$	604,227

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

BREF HR, LLC
Condensed Consolidated Statements of Operations

(Unaudited)



($ in thousands)	Three months ended September 30, 2014			Three months ended September 30, 2013			Nine months ended September 30, 2014			Nine months ended September 30, 2013
Revenues
Casino	$	11,500		$	9,666		$	37,632		$	32,849
Lodging	15,862			15,571			50,821			47,896
Food and beverage	19,564			18,804			60,791			60,099
Entertainment, retail and other	7,917			8,182			21,440			26,733
Gross revenues	54,843			52,223			170,684			167,577
Less: Promotional allowances	(4,665		)	(4,902		)	(14,112		)	(15,586		)
Net revenues	50,178			47,321			156,572			151,991
Costs and Expenses
Casino	8,861			8,808			25,600			27,220
Lodging	5,256			5,132			16,412			14,905
Food and beverage	12,082			11,998			36,555			34,617
Entertainment, retail and other	5,183			5,464			14,122			17,449
Marketing	2,050			2,317			6,700			6,762
Management fee and expense reimbursements - related party	587			452			3,193			1,366
General and administrative	8,675			9,720			26,024			30,468
Depreciation and amortization	7,516			7,428			22,435			23,469
Pre-opening	—			1			—			11
Total costs and expenses	50,210			51,320			151,041			156,267
Income (loss) from operations	(32		)	(3,999		)	5,531			(4,276		)
Interest income	3			4			9			20
Interest expense	(28,300		)	(25,088		)	(78,307		)	(72,367		)
Income (loss) on joint venture investment	(32		)	(16		)	(13		)	20
Loss before income tax expense	(28,361		)	(29,099		)	(72,780		)	(76,603		)
Income tax expense	—			—			—			—
Net loss	$	(28,361	)	$	(29,099	)	$	(72,780	)	$	(76,603	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

BREF HR, LLC
Condensed Consolidated Statements of Cash Flows
(Unaudited)



	Nine months ended September 30, 2014			Nine months ended September 30, 2013
($ in thousands)
Cash flows from operating activities
Net loss	$	(72,780	)	$	(76,603	)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation	19,407			18,896
Provision for doubtful accounts	563			258
Amortization of intangible assets	3,028			4,573
Amortization of debt discount	26,759			24,574
Accrued non-cash interest applied to principal	11,572			13,221
Change in value of interest rate caps net of
premium amortization	—			64
Loss (income) on joint venture investment	13			(20		)
(Increase) decrease in operating assets:
Accounts receivable	(2,755		)	(1,830		)
Inventories	(301		)	(312		)
Prepaid expenses	(1,140		)	(173		)
Related party receivable	321			696
Increase (decrease) in operating liabilities:
Accounts payable	(2,733		)	1,597
Related party payable	96			(406		)
Other accrued liabilities	(1,628		)	(1,032		)
Accrued interest payable	26,586			21,187
Net cash provided by operating activities	7,008			4,690
Cash flows from investing activities
Purchases of property and equipment	(2,871		)	(3,878		)
(Payments on) receipt of construction related payables	(541		)	5
Restricted cash contributions	(8,253		)	(7,008		)
Restricted cash withdrawals	7,725			7,107
Loan to joint venture	—			(248		)
Return of investment	160			—
Repayments of joint venture debt	—			300
Net cash used in investing activities	(3,780		)	(3,722		)
Cash flows from financing activities
Purchase of interest rate caps	—			(64		)
Capital lease payments	(339		)	(467		)
Net cash used in financing activities	(339		)	(531		)
Net increase in cash and cash equivalents	2,889			437
Cash and cash equivalents, beginning of period	14,094			13,658
Cash and cash equivalents, end of period	$	16,983		$	14,095

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest, net
of amounts capitalized	$	13,250		13,254

Supplemental Disclosure Non-cash Investing and Financing Activities
Construction related payables	$	306		$	307

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

BREF HR, LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Company Structure

Organization

BREF HR, LLC is a Delaware limited liability company that was formed on February 11, 2011. The affairs of the Company are governed by a Limited Liability Company Agreement dated as of March 1, 2011 (the “LLC Agreement”). Unless otherwise specified, the terms the “Company,” “we,” “us” or “our” refer to BREF HR, LLC and its consolidated subsidiaries, or any one or more of them, as the context may require. We own and operate the Hard Rock Hotel & Casino Las Vegas. Commencing operations in 1995, the Hard Rock Hotel & Casino Las Vegas is modeled after the highly successful Hard Rock Cafe restaurant chain and is decorated with an extensive collection of rare rock and roll memorabilia. The original Hard Rock Cafe was co-founded in 1971 by Peter Morton, and the “Hard Rock” name has grown to become widely recognized throughout the world.

The Company was formed by certain affiliates of Brookfield Financial, LLC (“Brookfield Financial”) to acquire the limited liability company interests of HRHH JV Junior Mezz, LLC (“HRHH JV Junior Mezz”) and HRHH Gaming Junior Mezz, LLC (“HRHH Gaming Junior Mezz”), which indirectly owned the Hard Rock Hotel & Casino Las Vegas and certain related assets. These assets were acquired pursuant to the assignment from Hard Rock Hotel Holdings, LLC (“HRH Holdings”) in connection with the default by HRH Holdings and its subsidiaries on the real estate financing facility (the “Facility”), and the resulting settlement agreement, as described below. Brookfield Financial is managed by Brookfield Real Estate Financial Partners LLC (together with its affiliates, “Brookfield”).

On March 1, 2011, HRH Holdings, Vegas HR Private Limited (the “Mortgage Lender”), Brookfield Financial, NRFC WA Holdings, LLC, Morgans Hotel Group Co. (“Morgans” and together with an affiliated entity, the “Morgans Parties”) and certain affiliates of DLJ Merchant Banking Partners (“DLJMBP”), as well as other interested parties entered into the Agreement to Transfer in Lieu of Foreclosure and Settlement Agreement (the “Settlement Agreement”) pursuant to which the membership interests of HRHH JV Junior Mezz and HRHH Gaming Junior Mezz were transferred and assigned to the Company. The transactions contemplated by the Settlement Agreement are referred to as the “Assignment.” The Assignment was accounted for as a business combination.

Going Concern

The Company incurred a loss of $72.8 million for the nine months ended September 30, 2014, and has a net members' deficit of $273.3 million as of September 30, 2014. The Amended Facility (as defined in Note 10, Debt) allows the Company to accrue 'payable in kind' interest ("PIK interest"), representing the difference between interest accruing under the Amended Facility and the amounts paid. The outstanding PIK interest as of September 30, 2014 and December 31, 2013 was $51.4 million and $39.8 million, respectively. The PIK interest outstanding as of March 1, 2014, in the amount of $44.3 million, became due and payable on March 1, 2014, as the operating performance of the Company did not meet a specified debt yield threshold for the twelve month period ended March 1, 2014. However, the lender entered into a Forbearance Agreement effective as of March 1, 2014, pursuant to which it agreed not to exercise any rights or remedies with respect to the PIK interest until June 2, 2014. The lender entered into a series of amendments to the Forbearance Agreement which each time extended the effective date to which the lender agreed it would not exercise any rights or remedies with respect to the PIK interest. The most recent amendment to the Forbearance Agreement, the Ninth Amendment, is effective as of October 30, 2014, pursuant to which the lender agreed not to exercise any rights or remedies with respect to the PIK interest until December 15, 2014. Currently, the Company does not have sufficient funds to satisfy a demand for the PIK interest payment on December 15, 2014. The Company is currently assessing its options to satisfy the PIK interest payment obligation, including, but not limited to, negotiating a waiver of this requirement from the lender, selling off a portion of existing collateral or attempting to obtain borrowings from other sources. The Company's ability to continue as a going concern is dependent upon its ability to restructure its indebtedness, obtain alternative financing on acceptable terms, obtain approval from the lender to use available cash reserves to satisfy a portion of this potential obligation, or a combination thereof. However, there is no assurance that the Company will be able to achieve any of these possibilities. We have placed mortgages on our hotel casino property to secure our indebtedness. In the event the PIK interest is not paid on December 15, 2014, among other lesser remedies, the lender may declare all unpaid principal and accrued interest, totaling $997.5 million, under the Amended Facility due and payable immediately, in which case, under present circumstances, the Company would not have sufficient funds or other sources of liquidity to pay all such amounts. If this occurs, our business and results of operations would be materially

adversely affected. The Company is currently in discussions with the lender but as of the date of the filing the outcome remains uncertain. These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liabilities in the ordinary course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of uncertainties, including the possibility that the Company loses some or substantially all of its assets to foreclosure as a result of these uncertainties.

2. Basis of Presentation, Principles of Consolidation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting under the rules and regulations of the Securities and Exchange Commission (“SEC”) in accordance with the instruction to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X . These condensed consolidated financial statements should be read in conjunction with the Company’s 2013 annual consolidated financial statements and notes thereto on Form 10-K for the year ended December 31, 2013.

The results for the periods indicated reflect all adjustments (consisting primarily of normal recurring adjustments) that management considers necessary for a fair presentation of financial position, results of operations, and cash flows. The results for such periods are not necessarily indicative of the results to be expected for the full year.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, and those differences could be material.

Certain amounts reported in the prior period on the condensed consolidated statement of operations have been combined to conform to the current presentation. Retail revenue and other revenue have been combined into entertainment, retail and other revenue and retail expenses and other expenses have been combined into entertainment, retail and other expenses.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued new authoritative guidance regarding the recognition of revenue from contracts with customers. The new guidance clarifies the principles for revenue recognition and provides a common standard for all entities and the existing industry guidance, including guidance specific to the gaming industry, will be eliminated. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Interim and annual disclosures will also be revised. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the impact of adopting this new standard, which will be effective for the Company January 1, 2017.

3. Accounts Receivable, Net

Components of accounts receivable, net consist of the following:



($ in thousands)	September 30, 2014			December 31, 2013
Casino	$	4,893		$	2,999
Lodging	3,726			2,679
Other	3,134			3,352
	11,753			9,030
Less: allowance for doubtful accounts	(1,210		)	(679		)
Total accounts receivable, net	$	10,543		$	8,351

4. Restricted Cash

Certain of our subsidiaries are obligated to maintain cash reserve funds for a variety of purposes as determined pursuant to the Amended Facility, discussed at Note 10, Debt, including a requirement for the subsidiaries to deposit funds into a replacements and refurbishments reserve fund at amounts equal to three percent of the Hard Rock Hotel & Casino Las Vegas’ gross revenues. Restricted cash consists of the following:



($ in thousands)	September 30, 2014	December 31, 2013
Current
Tax reserves	2,495	$	2,602
Insurance reserves	373	1,329
Other reserves	363	363
Workers' compensation reserves	775	775
Total current restricted cash	4,006	5,069

Long-term
Working capital reserves	15,046	14,399
Replacements and refurbishments reserves	5,899	4,955
Total long-term restricted cash	20,945	19,354
Total restricted cash	24,951	$	24,423

5. Inventories

Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market. Inventories consist of the following:



($ in thousands)	September 30, 2014		December 31, 2013
Restaurants and bars	$	2,019	$	1,848
Retail merchandise	1,126		975
Other inventory and operating supplies	103		124
Total inventories	$	3,248	$	2,947

6. Property and Equipment, Net

Property and equipment, net consists of the following:



($ in thousands)	September 30, 2014			December 31, 2013
Land	$	115,600		$	115,600
Buildings and land and building improvements	343,292			342,159
Furniture, fixtures and equipment	82,747			79,943
Memorabilia	6,783			6,442
Construction in progress	277			1,683
	548,699			545,827
Less: accumulated depreciation	(86,227		)	(66,819		)
Total property and equipment, net	$	462,472		$	479,008

Depreciation relating to property and equipment was $6.5 million and $6.3 million for the three months ended September 30, 2014 and 2013, respectively. Depreciation relating to property and equipment was $19.4 million and $18.9 million for the nine months ended September 30, 2014 and 2013, respectively.

7. Intangible Assets, Net

Intangible assets, net consist of the following:



	December 31, 2013										September 30, 2014
($ in thousands)	Gross Carrying Amount		Accumulated Impairment Losses			Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Impairment Losses			Accumulated Amortization			Net Carrying Amount		Remaining life (years)

Non-amortizing intangible assets
Hard Rock Licensing	$	55,000	$	(15,000	)	$	—		$	40,000	$	55,000	$	(15,000	)	$	—		$	40,000	Indefinite
Future Trademark Licensing	7,000		—			—			7,000		7,000		—			—			7,000		Indefinite
	62,000		(15,000		)	—			47,000		62,000		(15,000		)	—			47,000
Amortizing intangible assets
In-place Contracts	29,000		(6,175		)	(8,492		)	14,333		29,000		(6,175		)	(9,992		)	12,833		0 - 7
Monster TM Licensing	2,537		—			(1,875		)	662		2,537		—			(2,371		)	166		1
Customer Relationships	3,000		—			(3,000		)	—		3,000		—			(3,000		)	—		0
Sponsorship Agreements	1,300		—			(1,300		)	—		1,300		—			(1,300		)	—		0
Market Leases	1,736		—			(912		)	824		1,736		—			(1,093		)	643		0 - 7
Player Relationships	10,000		—			(3,854		)	6,146		10,000		—			(4,540		)	5,460		7
Other	2,200		—			(623		)	1,577		2,200		—			(788		)	1,412		7
	49,773		(6,175		)	(20,056		)	23,542		49,773		(6,175		)	(23,084		)	20,514
Total
intangibles, net	$	111,773	$	(21,175	)	$	(20,056	)	$	70,542	$	111,773	$	(21,175	)	$	(23,084	)	$	67,514

The Hard Rock Licensing and Future Trademark Licensing rights are not subject to amortization as they have an indefinite useful life. The in-place contracts, Monster TM Licensing, Customer Relationships, Sponsorship Agreements, Market Leases and Other amortizing intangible assets are being ratably amortized on a straight-line basis over the estimated useful life which ranges from one to nine years. Player relationships are amortized on an accelerated basis consistent with the expected timing of the Company’s realization of the economic benefits of such relationships. Due to an ongoing triggering event during the third quarter of 2014, the

Company performed an interim impairment analysis of the Hard Rock trademark. This analysis resulted in no impairment. The fair value of Hard Rock Licensing at September 30, 2014 was determined using the relief of royalty method (discounted forecasted net revenues). As of September 30, 2014, the total carrying value of Hard Rock Licensing Trademark is $40 million and is at risk of future impairment if there are adverse changes in our significant assumptions which include discount rate, long-term growth rate, royalty rate, or net revenue projections. Based on management's estimates, the fair value of the Hard Rock Licensing Trademark exceeded the carrying value by $1.0 million.

For the three months ended September 30, 2014 and 2013, the Company recorded amortization expense of $1.0 million and $1.1 million, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded amortization expense of $3.0 million and $4.6 million, respectively.

8. Accrued Expenses

Accrued expenses consist of the following:



($ in thousands)	September 30, 2014		December 31, 2013
Current
Deferred income	$	1,016	$	2,013
Capital lease obligations	261		391
Advance room, convention and customer deposits	6,753		6,631
Accrued salaries, payroll taxes and other employee benefits	2,427		1,163
Accrued miscellaneous taxes	1,794		1,479
Reserve for legal liability claims	3,384		5,187
Other accrued liabilities	3,391		3,952
Total current accrued expenses	19,026		20,816
Long term
Capital lease obligations	—		177
Total long term accrued expenses	—		177
Total accrued expenses	$	19,026	$	20,993

9. Agreements with Related Parties

WG-Harmon

During the three months ended September 30, 2014 and 2013, the Company incurred $587,000 and $452,000, respectively in management fees payable to WG-Harmon under the Management Agreement (Gaming Operations), Amended Resort Management Agreement and Liquor Management and Employee Services Agreement, collectively ("WG-Harmon Agreements"), as defined below which is included in management fee and expense reimbursement - related party on the condensed consolidated statement of operations. During the nine months ended September 30, 2014 and 2013, the Company incurred $3.2 million and $1.4 million, respectively, in management fees payable under the WG-Harmon Agreements. As of September 30, 2014 and December 31, 2013, the Company had $251,000 and $135,000, respectively, payable to WG-Harmon which is included in related party payables on the condensed consolidated balance sheets.

Gaming Operations

On March 1, 2011, LVHR entered into the Management Agreement (Gaming Operations) (the “Management Agreement”) with WG-Harmon, pursuant to which WG-Harmon agreed to manage the gaming operations at the Hard Rock Hotel & Casino Las Vegas for LVHR. The term of the Management Agreement began on March 1, 2011 and terminated on June 15, 2012. During the term of the Management Agreement, LVHR paid to WG-Harmon a base fee in the amount of $37,500 per month. LVHR also reimbursed WG-Harmon for reasonable fees and expenses incurred in connection with the performance of WG-Harmon’s duties under such agreement.

On December 22, 2011, the Company received a license from the Nevada Gaming Commission to serve as the operator of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas and we were approved to acquire and own the equity securities of LVHR, subject to the Registration Statement becoming effective. Under Section 12(g)(1) of the Exchange Act, the Registration Statement became effective on December 22, 2011. LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas on June 15, 2012. On or about the same date that LVHR became one of our subsidiaries and we assumed operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas, we restructured and converted LVHR from a Nevada corporation to a Nevada limited liability company known as LVHR Casino, LLC. Upon consummation of the restructure and conversion of LVHR: (i) LVHR Casino, LLC became a mortgage borrower under the Amended Facility and the Second Mortgage; (ii) LVHR Casino, LLC continued to own all of the assets that LVHR acquired on March 2, 2011 that are used at the Hard Rock Hotel & Casino Las Vegas gaming operations, and (iii) the revolving line of credit HRHH Gaming was obligated to make available to LVHR terminated. The Management Agreement terminated on June 15, 2012 without payment of any termination fee.

Non-Gaming Operations

On March 1, 2011, the Company and WG-Harmon entered in a Resort Management Agreement (the “Resort Management Agreement”), pursuant to which WG-Harmon managed the Hard Rock Hotel & Casino Las Vegas, other than the gaming operations and the liquor operations. The term of the Resort Management Agreement began on March 1, 2011 and continued until June 15, 2012, the date upon which LVHR became one of our subsidiaries and we assumed the operation of the gaming facilities at the Hard Rock Hotel & Casino Las Vegas. During the term of the Resort Management Agreement, the Company paid to WG-Harmon a base fee in the amount of $122,500 per month. In addition to such base fee, WG-Harmon has an incentive management fee based on performance of the adjusted EBITDA of the Hard Rock Hotel & Casino Las Vegas as set forth in the Resort Management Agreement.

On June 15, 2012, the Resort Management Agreement was replaced by the Amended and Restated Management Agreement (the “Amended Resort Management Agreement”). On June 15, 2012, the Company and WG-Harmon entered into the Amended Resort Management Agreement, pursuant to which WG-Harmon will manage the Hard Rock Hotel & Casino Las Vegas, including the gaming operations and the liquor operations. WG-Harmon is required to use commercially reasonable efforts to operate the Hard Rock Hotel & Casino Las Vegas, and has complete discretion and control in all matters related to the management and operation of the Hard Rock Hotel & Casino Las Vegas. The term of the Amended Resort Management Agreement began on June 15, 2012 and will continue until March 31, 2016. During the term of the Amended Resort Management Agreement, the Company will pay WG-Harmon a base fee in the amount of $160,000 per month, payable monthly, which base fee may be decreased to $150,000 per month if WG-Harmon is no longer providing certain construction services to the Company. In April 2013, a $10,000 reduction to the base fee was put in place. In addition to such base fee, the Company will pay WG-Harmon an incentive management fee based on the performance of the adjusted EBITDA of the Hard Rock Hotel & Casino Las Vegas, as set forth in the Amended Resort Management Agreement.

Second Mortgage Loan Agreement

On March 1, 2011, as part of the Assignment, the Company entered into a second mortgage loan agreement with Brookfield Financial (the “Second Mortgage”), a related party. See Note 10, Debt, for further discussion. During each of the three months ended September 30, 2014 and 2013, the Company accrued interest of $1.6 million under the Second Mortgage which is included in long-term accrued expenses on the condensed consolidated balance sheets. During the nine months ended September 30, 2014 and 2013, the Company accrued interest of $4.3 million and $4.5 million, respectively, under the Second Mortgage which is included in long-term accrued expenses on the condensed consolidated balance sheets.

Investment in Joint Venture

In June 2012, CDO Restaurant Associates LLC (“CDO”), a Delaware limited liability company, was formed between the Company and Fox Restaurant Concepts, LLC (“Fox”) to operate a restaurant, Culinary Dropout, using leased space at the Hard Rock Hotel and Casino Las Vegas. The Company contributed 80% of the initial construction and pre-opening budget, or $2.1 million, and also loaned CDO $100,000 to cover pre-opening costs in excess of initial budgeted amounts. During 2012, the Company loaned CDO an additional $248,000 to cover final construction costs in excess of budgeted amounts. The Company determined that the investment in CDO should be accounted for as an equity method investment. The loans bears interest at the greater of 8% or the reference rate publicly announced by Bank of America N.T. & S.A (3.25% at September 30, 2014) plus 4 percent. Loans are required to be repaid before any other distributions of net cash flow. Net cash flow is then distributed in proportion to the Members’ initial capital contributions, plus an 8% preferred return, and, once paid in full, in accordance with the 50% membership interest. The Company accounts for its investment in CDO under the equity method based on applicable accounting guidance as the Company does not hold a controlling financial interest in CDO.

For the three months ended September 30, 2014 and 2013, the Company recorded losses of $32,000 and $16,000, respectively, related to its equity in CDO. For the nine months ended September 30, 2014 and 2013, the Company recorded a loss of $13,000 and income of $20,000, respectively, related to its equity in CDO. The Company’s share of the joint venture’s income or loss is included in income (loss) on joint venture investment in the accompanying condensed consolidated statements of operations. At September 30, 2014 and December 31, 2013, the Company’s net investment in CDO was $1.3 million and $1.4 million, respectively. The balance is included in investment in joint venture in the accompanying condensed consolidated balance sheets at September 30, 2014. There were no distributions to the members for the three months ended September 30, 2014. At September 30, 2014 and December 31, 2013, the Company had no loans outstanding from CDO. As of September 30, 2014 and December 31, 2013, the Company had $65,000 and $85,000, respectively, payable to CDO which is included in related party payables on the condensed consolidated balance sheets.

CDO leases space from the Company under a ten-year operating lease expiring in August 2022. The lease has one five-year renewal option. Rent is paid monthly at 6% of sales, as defined in the agreement. CDO also pays a management fee of 6% of gross sales to Fox. Both the lease and the management agreement expire in August of 2022.

10. Debt

The following table presents debt outstanding as of September 30, 2014 and December 31, 2013:



($ in thousands)		Face value			Book value			Face value			Book value
Project name/lender	Maturity	September 30, 2014			September 30, 2014			December 31, 2013			December 31, 2013
Amended facility -Note A/Vegas HR Private Limited	March 1, 2018 (1)	$	586,785		$	524,679		$	575,213		$	504,775

Amended facility -Note B/Vegas HR Private Limited	March 1, 2018 (1)	327,290			199,026			327,290			182,075

Second Mortgage - Brookfield Financial	March 1, 2018	30,000			18,072			30,000			16,596
Total debt		944,075			741,777			932,503			703,446
Current portion of long-term debt		(914,075		)	(723,705		)	(902,503		)	(686,850		)
Total long term debt		$	30,000		$	18,072		$	30,000		$	16,596

(1) As discussed in Note 1, Company Structure, the PIK interest will become due and payable on December 15, 2014. Currently, the Company does not have sufficient funds to satisfy a demand for the PIK interest payment on December 15, 2014, and therefore, the Company could be in default upon notification by the lender. Accordingly, the Amended Facility, supplemental interest, and PIK interest is classified as current as of September 30, 2014.

The difference between the face and book value of the debt represents debt discounts that are amortized to interest expense using the effective interest method over the term of the debt.

Amended Facility – Note A and Note B

On March 1, 2011, as part of the Assignment, the Company assumed the obligations under the Facility and entered into an amendment thereof (as amended, the “Amended Facility”) pursuant to which the land, building and improvements, equipment, fixtures and all personal properties were pledged as security and collateral.

The Amended Facility has a maturity date of March 1, 2018 and provides for interest only at The London InterBank Offered Rate (LIBOR) plus 2.5% with a 1.5% LIBOR floor (total of 2.7% at September 30, 2014). In addition, under the Amended Facility supplemental interest is accrued at a rate sufficient to provide for the greater of 6.5% or LIBOR + 4.0% effective interest rate at maturity after consideration of all prior payments of principal and interest. The rates of accrual are dependent on fluctuations in the applicable LIBOR rate. The Amended Facility has a provision whereby if the cash available for debt service is less than the current interest due, the PIK Interest will be automatically added to the outstanding principal balance of the Amended Facility and shall thereafter accrue interest. In addition, excess cash in the cash management account will be applied to the outstanding PIK interest, supplemental interest and principal according to the terms of the Amended Facility.

Second Mortgage

On March 1, 2011, as part of the Assignment, the Company entered into a second mortgage loan agreement with Brookfield Financial (the “Second Mortgage”) in the amount of $30.0 million pursuant to which certain land, building and improvements, equipment, fixtures and personal properties were pledged as security and collateral. The Second Mortgage is subordinate in right of payment to the Amended Facility. The maturity date of the Second Mortgage is March 1, 2018 and provides for an effective interest rate of 15.0% payable at maturity.

The Amended Facility and Second Mortgage include customary affirmative and negative covenants for similar financings, including, among others, restrictive covenants regarding incurrence of liens, sales or assets, distributions to affiliates, changes in business, cancellation of indebtedness, dissolutions, mergers and consolidations, as well as limitations on security issuances, transfers of any of the Company’s real property and removal of any material article of furniture, fixture or equipment from the Company’s real property. As of September 30, 2014, the Company was in compliance with all covenants.

The outstanding PIK interest related to the Amended Facility as of September 30, 2014 and December 31, 2013 was $51.4 million and $39.8 million, respectively. During the three months ended September 30, 2014 and 2013, the Company recorded PIK interest in the amount of $2.8 million and $6.6 million, respectively. During the nine months ended September 30, 2014 and 2013, the Company recorded PIK interest in the amount of $11.6 million and $13.2 million, respectively. See discussion in Note 1 regarding the acceleration of PIK interest on March 1, 2014, the forbearance of such obligation until December 15, 2014, and the Company's ability to meet such obligation.

The fair value of our total debt as of September 30, 2014 and December 31, 2013 was $555.0 million and $641.3 million, respectively, which was determined utilizing a discounted cash flow model. The Company has determined that the fair value of its long-term debt is determined using Level 3 inputs. The discount rate was determined utilizing historical market-based equity returns which are adjusted, as necessary, for entity specific factors.

11. Commitments and Contingencies

Legal and Regulatory Proceedings

The Company and affiliates Brookfield Real Estate Financial Partners, LLC, Brookfield Financial, LLC - Series B, and Brookfield Asset Management (US), Inc. are currently amongst a number of defendants (“Defendants”) in an action commenced by Mace Management Group, LLC (“Mace) and Mandown, LLC (“Mandown”) on June 12, 2012 in Nevada’s Eighth Judicial District Court in Clark County, Nevada (the “Mace/Mandown Action”). The Mace/Mandown Action relates to investments made by Mace/Mandown in Wasted Space Lounge, Rare 120 restaurant, the Johnny Smalls restaurant and Vanity nightclub (collectively, the “Venues”) at the Hard Rock Hotel and Casino Las Vegas. In general, all claims assert that actions taken by Defendants allegedly

deprived Mace/Mandown of their initial investment and/or their share of profits from the Venues. The Mace/Mandown Action is in the discovery phase and management has determined that based on the proceedings to date it does not believe the outcome of this matter will have a material effect on our business, or results of operations or financial condition of the Company.

We are also subject to a variety of other claims and lawsuits that arise in the ordinary course of our business. We do not believe the outcome of these and the other matters disclosed above will have a material effect on our business, results of operations or financial condition. As of September 30, 2014, the Company accrued approximately $3.1 million for all loss contingency matters and our best estimate of reasonably possible losses in excess of the amount accrued is not material to the financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provide a safe harbor for “forward-looking statements” made by or on behalf of a company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission (“SEC”), which represent our expectations or beliefs concerning future events. Statements containing expressions such as “believes,” “anticipates,” “expects” or other similar words or expressions are intended to identify forward-looking statements. We caution that these and similar statements are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Although we believe our expectations are based upon reasonable assumptions within the bounds of our knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. Important risks and factors that could cause our actual results to differ materially from any forward-looking statements include, but are not limited to, continued adverse economic and market conditions, particularly in levels of spending in the hotel, resort and casino industry in Las Vegas, Nevada; the seasonal nature of the hotel, casino and resort industry; the use of the “Hard Rock” brand name by entities other than us; costs associated with compliance with extensive regulatory requirements; increases in interest rates and operating costs; the ability of the Company to satisfy its PIK interest payment obligations; increases in uninsured and underinsured losses; risks associated with conflicts of interest with entities which control us; the loss of key members of our senior management; the impact of any material litigation; risks related to natural disasters; changes in the competitive environment in our industry; hostilities, including future terrorist attacks, or fear of hostilities that affect travel; and other risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequently filed Quarterly Reports on Form 10-Q in the section entitled “Risk Factors” and in this report in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date hereof.

Overview

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2013 and our condensed consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of certain factors, including but not limited to, those factors set forth in the section entitled “Forward-Looking Statements” and elsewhere in this report and in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 and subsequently filed Quarterly Reports on Form 10-Q.

Within this management’s discussion and analysis of financial condition and results of operation for the three months ended and nine months ended September 30, 2014 and 2013, references to the “Company,” “we,” “us,” or “our” refer to BREF HR, LLC.

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” and “slot machine handle” are used to identify the amount wagered by patrons for a casino table game and slot machine, respectively. “Drop” and “Handle” are abbreviations for table game drop and slot machine handle. “Table game hold percentage” and “slot machine 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.

Results of Operations for the Three Months Ended September 30, 2014 Compared to the Results of Operations for the Three Months Ended September 30, 2013



							$ Change			% Change
($ in thousands)	Three months ended September 30, 2014			Three months ended September 30, 2013			2014 vs 2013
Statement of Operations Data:
Revenues
Casino	$	11,500		$	9,666		$	1,834		19.0	%
Lodging	15,862			15,571			291			1.9
Food and beverage	19,564			18,804			760			4.0
Entertainment, retail and other	7,917			8,182			(265		)	(3.2	)
Gross revenues	54,843			52,223			2,620			5.0
Less: Promotional allowances	(4,665		)	(4,902		)	237			4.8
Net revenues	50,178			47,321			2,857			6.0

Costs and Expenses
Casino	8,861			8,808			53			0.6
Lodging	5,256			5,132			124			2.4
Food and beverage	12,082			11,998			84			0.7
Entertainment, retail and other	5,183			5,464			(281		)	(5.1	)
Marketing	2,050			2,317			(267		)	(11.5	)
Management fee and expense reimbursements - related party	587			452			135			29.9
General and administrative	8,675			9,720			(1,045		)	(10.8	)
Depreciation and amortization	7,516			7,428			88			1.2
Pre-opening	—			1			(1		)	(100.0	)
Total costs and expenses	50,210			51,320			(1,110		)	(2.2	)
Income (loss) from operations	(32		)	(3,999		)	3,967			99.2
Interest income	3			4			(1		)	(25.0	)
Interest expense	(28,300		)	(25,088		)	(3,212		)	(12.8	)
Income (loss) on joint venture investment	(32		)	(16		)	(16		)	(100.0	)
Net loss	$	(28,361	)	$	(29,099	)	$	738		2.5	%

Casino Revenues. The increase in casino revenues for the three months ended September 30, 2014 are primarily due as follows:

Table Games. Table games revenues for the three months ended September 30, 2014 increased $1.5 million or 33.3% to $6.2 million when compared to the same period in 2013. Table game hold percentage increased to 10.4% from 9.1% due to an enhanced focus in baccarat games.

Slot. An $11.0 million increase in slot machine handle more than offset a 0.4% decrease in slot machine hold percentage resulting in an increase of $263,000 or 5.3% in revenue to $5.2 million for the three months ended September 30, 2014 when compared to the same period in 2013. The increased slot machine revenue was due to an increase in programmed casino events.

Lodging Revenues. For the three months ended September 30, 2014, lodging revenues increased $291,000 or 1.9% to $15.9 million when compared to the same period in 2013. Occupancy decreased in transient and casino segments, but the outside travel agent ("OTA"), wholesale and groups segments were up significantly translating to an overall increase of 8,367 occupied rooms to 131,506, and produced a decrease in average daily rate ("ADR") of $5.44.

Food and Beverage Revenues. Food and beverage revenues for the three months ended September 30, 2014 increased $760,000 when compared to the same period in 2013 primarily due to a $926,000 increase in banquet revenues partially offset by a $443,000 decrease in nightlife revenue.

Entertainment, Retail and Other Revenues. Overall, entertainment, retail and other revenues for the three months ended September 30, 2014 decreased $265,000 or 3.2% to $7.9 million when compared to the same period in 2013. With fewer Joint concerts, entertainment revenues and sponsorship revenues decreased significantly. These decreases were partially offset by a $496,000 increase in licensing revenues.

Casino Expenses. Casino expenses increased slightly by $53,000 to $8.9 million for the three months ended September 30, 2014 when compared to the period in 2013. An increase in returned markers was offset by reductions in payroll and Backstage Pass Rewards Club expenses.

Lodging Expenses. Lodging expenses increased $124,000 to $5.3 million for the three months ended September 30, 2014 when compared to the same period in 2013 mostly due to increased travel agency commissions.

Food and Beverage Expenses. Food and beverage expenses for the three months ended September 30, 2014 increased $84,000 mainly due to an increase in cost of sales.

Entertainment, Retail and Other Expenses. The decrease of $281,000 in entertainment, retail and other expenses for the three months ended September 30, 2014 when compared to the same period in 2013 was primarily due to three fewer Joint concerts when compared to the same period in 2013.

General and Administrative. A $1.2 million decrease in non-recurring legal liability claims expenses were slightly offset by increases in various other expenses resulting in an overall reduction of $1.0 million in general and administrative expenses for the three months ended September 30, 2014 when compared to the same period in 2013.

Depreciation and Amortization. The increase of $88,000 in depreciation and amortization expenses for the three months ended September 30, 2014 was primarily due to increased purchases of furniture, fixtures and equipment.

Interest Expense. The $3.2 million increase in interest expense for the three months ended September 30, 2014 was the result of an increase in the amount of debt as a result of interest being paid in kind during 2013 and the first nine months of 2014.

Results of Operations for the Nine Months Ended September 30, 2014 Compared to the Results of Operations for the Nine Months Ended September 30, 2013



							$ Change			% Change
($ in thousands)	Nine Months Ended September 30, 2014			Nine Months Ended September 30, 2013			2014 vs 2013
Statement of Operations Data:
Revenues
Casino	$	37,632		$	32,849		$	4,783		14.6	%
Lodging	50,821			47,896			2,925			6.1
Food and beverage	60,791			60,099			692			1.2
Entertainment, retail and other	21,440			26,733			(5,293		)	(19.8	)
Gross revenues	170,684			167,577			3,107			1.9
Less: Promotional allowances	(14,112		)	(15,586		)	1,474			9.5
Net revenues	156,572			151,991			4,581			3.0

Costs and Expenses
Casino	25,600			27,220			(1,620		)	(6.0	)
Lodging	16,412			14,905			1,507			10.1
Food and beverage	36,555			34,617			1,938			5.6
Entertainment, retail and other	14,122			17,449			(3,327		)	(19.1	)
Marketing	6,700			6,762			(62		)	(0.9	)
Management fee and expense reimbursements - related party	3,193			1,366			1,827			133.7
General and administrative	26,024			30,468			(4,444		)	(14.6	)
Depreciation and amortization	22,435			23,469			(1,034		)	(4.4	)
Pre-opening	—			11			(11		)	(100.0	)
Total costs and expenses	151,041			156,267			(5,226		)	(3.3	)
Income (loss) from operations	5,531			(4,276		)	9,807			229.3
Interest income	9			20			(11		)	(55.0	)
Interest expense	(78,307		)	(72,367		)	(5,940		)	(8.2	)
Income (loss) on joint venture investment	(13		)	20			(33		)	(165.0	)
Net loss	$	(72,780	)	$	(76,603	)	$	3,823		5.0	%

Casino Revenues. The increase in casino revenues for the nine months ended September 30, 2014 are primarily due as follows:

Table Games. Table games revenues for the nine months ended September 30, 2014 increased $3.1 million or 17.4% to $21 million when compared to the same period in 2013 despite a $2.2 million decrease in table game drop because the table game hold percentage increased to 11.8% from 10%, mainly due to an increased focus on baccarat.

Slot. Slot machine revenues for the nine months ended September 30, 2014 increased $1.6 million or 10.6% to $16.1 million when compared to the same period in 2013. Slot machine hold percentage increased to 5.8% from 5.7%. The increase in slot revenues was primarily the result of a 9.6% increase in slot machine handle due to an increase in programmed casino events.

Lodging Revenues. The $2.9 million increase in lodging revenues for the nine months ended September 30, 2014 was primarily due to increased occupancy and a $0.97 increase in ADR. Despite a decrease in the transient room segment, total occupied rooms increased 19,675 to 391,190 mainly because group and wholesale segments were up when compared to the same period in 2013.

Food and Beverage Revenues. Banquet revenue was up $3.3 million for the nine months ended September 30, 2014 when compared to the same period in 2013 and was offset by a decrease of $3.2 million in nightlife revenue resulting in an overall increase in food and beverage revenues of $692,000 over prior year to $60.8 million.

Entertainment, Retail and Other Revenues. For the nine months ended September 30, 2014 entertainment, retail and other revenues decreased $5.3 million to $21.4 million due to 6 fewer events when compared to the same period in 2013.

Promotional Allowances. The $1.5 million decrease to $14.1 million in promotional allowances for the nine months ended September 30, 2014 was primarily due to a change in promotional marketing strategy to casino customers.

Casino Expenses. Total casino expenses decreased $1.6 million to $25.6 million for the nine months ended September 30, 2014 when compared to the period in 2013 primarily due to a decline in costs incurred by the Company to provide complementaries to casino customers.

Lodging Expenses. Total lodging expenses for the nine months ended September 30, 2014 were up $1.5 million when compared to the period in 2013, primarily driven by increases in payroll and related expenses of $441,000, travel agency commissions of $307,000 and laundry expenses of $218,000.

Food and Beverage Expenses. Total food and beverage expenses increased $1.9 million to $36.6 million for the nine months ended September 30, 2014. The largest increases were in professional services, contract services and equipment rental.

Entertainment, Retail and Other Expenses. The decrease in entertainment, retail and other expenses of $3.3 million to $14.1 million for the nine months ended September 30, 2014 was due to a decrease in artist fees and related production costs from fewer Joint concerts in 2014.

Management Fee and Expense Reimbursements - Related Party. The $1.8 million increase to $3.2 million in management fee and expense reimbursements — related party for the nine months ended September 30, 2014 was primarily the result of incentive fees incurred under the WG-Harmon Agreements.

General and Administrative. The decrease in non-recurring expenses associated with the timing of certain legal matters led to an overall decrease in general and administrative expenses for the nine months ended September 30, 2014 of $4.4 million to $26.0 million when compared to the same period in 2013.

Depreciation and Amortization. The $1.0 million decrease in depreciation and amortization expenses for the nine months ended September 30, 2014 was primarily the result of intangible assets becoming fully amortized.

Interest Expense. The $5.9 million increase in interest expense to $78.3 million for the nine months ended September 30, 2014 was the result of an increase in the amount of debt and interest being paid in kind during 2013 and the first nine months of 2014.

CRITICAL ACCOUNTING POLICIES

A description of the Company’s critical accounting policies can be found in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2013.

LIQUIDITY AND CAPITAL RESOURCES

Our ability to service our contractual obligations and commitments will be dependent on availability of operating cash and on our future performance, which will be affected by, among other things, the status of any potential payments related to our Amended Facility as described below, prevailing economic conditions and financial, business and other factors, certain of which are beyond our control.

The Amended Facility has a maturity date of March 1, 2018 and provides for interest only at LIBOR plus 2.5% with a 1.5% LIBOR floor (total of 2.7% at September 30, 2014). In addition, under the Amended Facility supplemental interest is accrued at a rate sufficient to provide for the greater of 6.5% or LIBOR + 4.0% effective interest rate at maturity after consideration of all prior payments of principal and interest. The rates of accrual are dependent on fluctuations in the applicable LIBOR rate. The Amended Facility has a provision whereby if the cash available for debt service is less than the current interest due, the interest shortfall will be automatically added to the outstanding principal balance of the Amended Facility and shall thereafter accrue interest, as PIK interest. In addition, excess cash in the cash management account will be applied to the outstanding PIK interest, supplemental interest and principal according to the terms of the Amended Facility.

The outstanding PIK interest as of September 30, 2014 and December 31, 2013 was $51.4 million and $39.8 million, respectively. The PIK interest outstanding as of March 1, 2014, in the amount of $44.3 million, became due and payable on March 1, 2014, as the operating performance of the Company did not meet a specified debt yield threshold for the twelve month period ended March 1, 2014. However, the lender entered into a Forbearance Agreement effective as of March 1, 2014, pursuant to which it agreed not to exercise any rights or remedies with respect to the PIK interest until June 2, 2014. The lender entered into a series of amendments to the Forbearance Agreement which each time extended the effective date to which the lender agreed it would not exercise any rights or remedies with respect to the PIK interest. The most recent amendment to the Forbearance Agreement, the Ninth Amendment, is effective as of October 30, 2014, pursuant to which the lender agreed not to exercise any rights or remedies with respect to the PIK interest until December 15, 2014. Currently, the Company does not have sufficient funds to satisfy a demand for the PIK interest payment on December 15, 2014. The Company is currently assessing its options to satisfy the PIK interest payment obligation, including, but not limited to, negotiating a waiver of this requirement from the lender, selling off a portion of existing collateral or attempting to obtain borrowings from other sources. If the Company is unable to restructure its indebtedness, obtain alternative financing on acceptable terms, obtain approval from the lender to use available cash reserves to satisfy a portion of this potential obligation, or a combination thereof, among other lesser remedies, the lender may declare all unpaid principal and accrued interest, totaling $997.5 million, under the Amended Facility due and payable immediately, in which case, under present circumstances, the Company would not have sufficient funds or other sources of liquidity to pay all such amounts. If this occurs, our business and results of operations would be materially adversely affected. The Company is currently in discussions with the lender but as of the date of the filing the outcome remains uncertain.

The maturity date of the Second Mortgage is March 1, 2018 and provides for an effective interest rate of 15% payable at maturity.

Liquidity Requirements

Short-Term Liquidity Requirements. Currently, the Company does not have sufficient funds to satisfy a demand for the PIK interest payment on December 15, 2014 and therefore, the Company could be in default and its debt could be accelerated upon notification by the lender. The Amended Facility, supplemental interest, and PIK interest are classified as current as of September 30, 2014. If prevailing interest rates or other factors at the time of any restructuring of our indebtedness or at the time we obtain borrowings from other sources result in higher interest rates, our interest expense could increase, which would harm our business and results of operations.

Except for the implications described above related to the Amended Facility, we expect our liquidity requirements to consist primarily of funds necessary to pay operating expenses associated with our subsidiaries’ hotel and casino operations, interest, payment of principal, fees and expenses under certain of our subsidiaries’ loan agreements (including required deposits into reserve accounts) and capital expenditures associated with the Hard Rock Hotel & Casino Las Vegas. Anticipated sources of our liquidity needs include our subsidiaries’ existing working capital, cash provided by our subsidiaries’ operations and our subsidiaries’ non-restricted cash reserves. Excluding the potential implications of the item described above, we expect to be able to meet our short-term liquidity needs through existing working capital and cash provided by our operations. For the nine months ended September 30, 2014, the Company incurred cash interest payments of $13.3 million.

Long-Term Liquidity Requirements. Our long-term liquidity requirements include funds necessary to pay debt under the Amended Facility and Second Mortgage.

Cash Flows for the Nine Months Ended September 30, 2014

Operating Activities. Our operating cash flows primarily consist of our operating income (excluding non-cash charges), interest paid and changes in working capital accounts such as receivables, inventories, prepaid expenses and payables. Net cash provided by operating activities amounted to $7.0 million for the nine months ended September 30, 2014, compared to $4.7 million net cash used in operating activities for the nine months ended September 30, 2013. The increase in net cash provided by operating activities primarily relates to the change in working capital for the nine months ended September 30, 2014.

Investing Activities. Net cash used in investing activities amounted to $3.8 million for the nine months ended September 30, 2014, compared to $3.7 million net cash used in investing activities for the nine months ended September 30, 2013. The increase primarily relates to increased restricted cash contribution during the nine months ended September 30, 2014.

Financing Activities. Net cash used in financing activities amounted to $339,000 for the nine months ended September 30, 2014, compared to $531,000 net cash used in financing activities for nine months ended September 30, 2013.

Capital Expenditures, Interest Expense and Reserve Funds

The Company is obligated to maintain reserve funds for capital expenditures at the Hard Rock Hotel & Casino Las Vegas as determined pursuant to the Amended Facility. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. The Amended Facility requires the subsidiaries to deposit funds into a replacements and refurbishments reserve fund at amounts equal to three percent of the Hard Rock Hotel & Casino Las Vegas’ gross revenues and requires that the funds be set aside in restricted cash. As of September 30, 2014, the Company had restricted cash in a working capital reserve account of $15 million, and an additional $5.9 million was available in restricted cash reserves for future capital expenditures in the replacements and refurbishments reserve fund.

Pursuant to gaming requirements certain of our subsidiaries maintain up to $8 million in reserve for their gaming operations, which in accordance with the Amended Facility is not deposited into the cash management account described above.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The outstanding debt under the Amended Facility has a variable interest rate. We use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. As of September 30, 2014, our total outstanding variable rate debt was $914.1 million.

At September 30, 2014, the LIBOR rate was 0.157% on the total outstanding debt. Due to a LIBOR floor of 1.5% currently in place under the Amended Facility, the LIBOR rate would have to exceed the LIBOR floor for our interest expense to be affected and any decrease in interest rates would not decrease interest expense. As of September 30, 2014, a hypothetical 1% increase in market rates above the LIBOR floor of 1.5% to 2.5% would increase interest expense for the next twelve months by $9.5 million and a hypothetical 2% increase in market rates above the LIBOR floor of 1.5% to 3.5% would increase interest expense for the next twelve months by $18.9 million. Due to the LIBOR floor, a decrease in market interest rates would not decrease our annual interest expense.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of our principal executive and financial officers, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) of September 30, 2014. Based on that evaluation, management has concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting during the Quarter Ended September 30, 2014

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For discussions of legal proceedings, refer to Note 11, Commitments and Contingencies, to our condensed consolidated financial statements, included elsewhere in this Quarter Report on Form 10-Q.

Item 1A. Risk Factors

You should carefully consider the risks discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects. We do not believe that there have been any material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit 31(a), (b) Rule 13a-14(a)/15d-14(a) Certifications

Exhibit 32(a), (b) 18 U.S.C. Section 1350 Certifications

Exhibit 101 Interactive data files pursuant to Rule 405 of Regulation S-T

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	BREF HR, LLC, by its manager, BREF HR Management, LLC
November 12, 2014	By:	/s/ Andrea Balkan
		Andrea Balkan
		Authorized Representative

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Signature	Title	Date
/s/ William Warner	Principal Executive Officer	November 12, 2014
William Warner

/s/ Chad Konrad	Principal Financial Officer	November 12, 2014
Chad Konrad

Large accelerated filer __

Accelerated filer __

Non-accelerated filer X

Smaller reporting company __

(Do not check if a smaller
reporting company)

BREF HR, LLC 10-Q