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In preparation for PENN’s Q2 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PENN’s Q1 earnings release/call and subsequent conferences/articles.

Columbus water/sewer annexation deal misses deadline (7/20/2011)

  • "The pending settlement expired at the deadline because the two contingencies were not satisfied. Penn National continues to be in discussion with all parties.”
    • 2 contingencies
      • PENN had to have an agreement to sell its original casino site in the Arena District for at least $11MM. Nationwide Realty Investors had acknowledged it was in talks with PENN to purchase the land.
      • PENN had to settle separate lawsuits with The Dispatch Printing Company, which publishes The Dispatch and Dispatch.com.
  • "We are prepared to go to trial and are confident in a fair hearing from Judge (Gregory L.) Frost."

$2.15BN Senior notes refinancing (7/19/2011)

  • $700MM RC facility—matures July 2016, L+175bps
  • $700MM Term Loan A—matures July 2016, L+175bps
  • $750MM Term Loan B—matures July 2018, L+275bps (LIBOR floor of 100 bps)
  • $250MM 6.75% Senior Sub Notes—matures August 2015
  • $325MM 8.75% Senior Sub Notes—matures March 2019s
  • Refi replaces the existing $640.6MM RC facility maturing July 2012 and the $1.52BN secured TL B loan maturing Oct 2012

Ohio Governor Kasich signs the racetrack relocation bill—HB 277 (7/15/2011)

  • Permits PENN to move Beulah Park from Columbus to Dayton, and Raceway Park from Toledo to Youngstown.  The Ohio Racing Commission will have the final say on the matter.

Highlights of the Ohio casino agreement (6/17/2011)

  • Penn would pay Ohio $110 million over 10 years–$10 million per year for the first five years and $12 million per year for the next five year
  • Tax certainty for gaming companies: Ohio’s Commercial Activity Tax (CAT) would be applied to casinos’ total dollars wagered minus winnings and prizes paid out to customers
  • Capital Expenditures: Gaming companies would make a combined capital expenditure in their casino facilities of at least $700 million (ROC: Cleveland and Cincinnati, PENN: Columbus and Toledo)
  • VLT Licenses: The Lottery Commission intends to allow each of Ohio’s seven horse racing permit holders to apply for a 10-year sales agent license to operate a VLT facility. Licenses would cost $50 million and be paid over time: $10 million upon application, $15 million at the onset of VLT sales, and $25 million one year later
  • The state tax on racetrack gaming machines would be set at 33.5%

PENN divests Maryland Jockey Club (6/16/2011)

  • “While we are divesting our interest in the Maryland Jockey Club, Penn National Gaming remains committed to racing and gaming in Maryland. With our acquisition earlier this year of Rosecroft Raceway in Oxon Hill and our successful opening last fall of the state’s first VLT facility, we will focus our resources on further strengthening the racing and operations at Rosecroft and building on the initial success of Hollywood Casino Perryville. We believe that the Maryland Jockey Club, Pimlico and Laurel Park will be well served under the single ownership of The Stronach Group and we wish them success with these historic racing venues.”
  • Transaction expected to be completed in the next few months and is subject to approvals from the Maryland Racing Commission.

Post Earnings Conference Commentary (Jefferies & Co. Global Consumer Conference/ Wells Fargo Securities Consumer Gaming and Lodging Conference/ UBS Leveraged Finance Conference)

  • [Perryville Capex budget/ROI] “I think we’ve budgeted $98. We’re probably going to come in around $94. And I think you’ll see here we’ve generated $8.8 million since opening -- six months -- plus $17 million over a year’s timeframe and that’s still ramping. So you can see that’s at least a 17% to 20% of return on invested capital regardless of how small it is we still only think about returns on invested capital.”
  • [M Resorts] “Net of cash, we’re in for about $210 million on this $1 billion facility. So, the property is running less than 10% margin and we think that there is a big opportunity for us here to get margins up to a level that commensurate with our overall company operating margin.”
  • [Leverage] “So from a leverage perspective, our leverage should not go up in 2011, should not go up in ‘12. And once we bring these facilities on in 2013 and the CapEx goes away, we should be able to de-lever very, very quickly even though we already have very low leverage.”
  • [April/May] “April was a good month.  April was one of our better months and we’re very encouraged by that. May has been okay; it hasn’t been as strong as April, but [we’re] still very happy with the month of May.”
  • [Business interruption insurance] “Our policy is we have a $5 million deductible and a two-day business interruption and we’ve got a flood insurance coverage from the federal government for like a million bucks, which will help. So basically net deductible should be like $4 million. I’m not sure we’re really going to go very deep into that claim because candidly we’ll see.”
  • Q: If gaming got passed in Texas or any other jurisdiction in general, how long do you think is usually between the time it gets passed and time you can have something running?
    • “It depends to the extent that they preordain or they preselect sites and that will indicate who is eligible for site, it can be probably two years from the actual authorization to the extent that they’re going to have a process and what we affectionately refer to is a beauty contest, then that usually generally takes three years.”
  • [$1.25 BN interest-free loan in 2015] “There is another issue in 2015, which is the Fortress and Centerbridge, what we call the preferred equity slug, comes to a maturity in 2015 and if we haven’t been able to find a good mechanism for deploying our capital in terms of expansion opportunities by then, obviously we would look to eliminate that delusion at that point we would go out, raise the debt and pay it off….So really through 2015 that speaks to roughly $1.2 billion of commitment of where we would spend the money.”
  • [EBITDA] “I think one of the best things that happened ironically for the gaming industry was this financial crisis or economic crisis. Pretty much across the boards, people have stopped worrying about market share and that’s a good thing, because they’ve started to worry about EBITDA. And EBITDA is basically where we’ve always been focused.”
  • [Joliet] “When we look at all of our properties, and we do a monthly review, which is at a very high level review at each of the properties, we’ve been incredibly pleased with really the operations for all of our properties and if there is one that’s been a little bit of a disappointment, it’s probably Joliet. Joliet, we’ve clearly not really executing – and I don’t mean this in any way to be discouraging to the team in Joliet, but clearly the property, when you look at it, we’re struggling with the margins, we’ve put some significant CapEx in, not astronomical amounts, but $50 million or so, put a new parking garage on – it’s just been a really tough environment there.  Other than there, I think we’re pretty pleased across the boards.”
  • [Slot Capex] “So this year, we had a very small reduction in our slot machine maintenance CapEx. So we’re probably replacing just slightly less.”
  • [Thoughts on slot purchases] “Most of our other competitors have almost like stopped ordering slot machines, I think we’re probably more inclined to follow – not follow to the extent and the degree to which they followed, but if it’s not making a difference and the customer’s don’t care, then why would you want to run around buy a bunch of new slot machines other than to make the slot manufacturers happy with you. There’s really not a whole lot of benefit there….And the other issue that’s out there, which is candidly starting to get addressed, is the slot manufacturers were year-over-year having significant increases in their pricing, but the production of their slot machines in the way we measure production is win per unit was not matching the increases in the price. So that’s a bit of a concern because obviously that’s a relationship that just says that the slot manufacturers are taking more and more money out of our investors pockets for their benefit of their investor’s pockets and they’re not delivering.”

Youtube from Q1 Conference Call

  • [Margin guidance] “I think as we look out, certainly we are incorporating operations from Rosecroft well as the Sam Houston Raceway Park into our EBITDA guidance. But some of the other components that are out there is that we are also moving up the date of which we expect the 10th license in Illinois to open up. And candidly, we are looking at it going forward and recognizing that our margin improvement has been a gradual process. I think certainly on a year-over-year basis, we are ecstatic with how we’ve done this year, but as we went along last year, our margins were continually developing and improving throughout the year. So I don’t know that we certainly can’t take this year’s or this quarter’s margin improvement and extrapolate that out for the rest of the year, certainly not the rate of improvement. We’re certainly reflecting I think margin improvement in the next quarter and the combination of all of those events together is kind of where we look at.”
  • [Flat revenue guidance] “We’re not including a rebound in revenues going forward or some kind of improvement. We are assuming revenues are basically flat on a year-over-year basis other than the properties that have table games obviously in the second quarter at Charles Town and Penn National will continue to see robust growth. And then going forward from that we’ll start to anniversary to the table games. So we would expect our year-over-year revenue improvement to basically come back in line. Not to say that we don’t expect some growth in Charles Town, but once we get the year-over-year comparisons our revenue growth will not be quite as strong as what you’ve seen here in the first quarter.”
  • [M Resorts] "I think that that property will trend like all the other Las Vegas local properties trend."
  • [JV properties] “I mean on an overall basis for the year, I think we’ll find that we should at least for the properties that are continuing in a year-over-year basis that we should see some progress in terms of reducing those levels of losses. Clearly, within Maryland Jockey Club right now, which is a number that’s included, it’s a pretty decent number in the first quarter, that does not take into account any kind of rebates and other issues that are in front of the Maryland legislature in terms of reimbursing operating losses. When in fact those monies are authorized and finalized and start getting paid, that would obviously reduce the operating losses significantly from the Maryland Jockey Club.”
  • [MJC] “Well, clearly in the second quarter, Maryland Jockey Club will swing from a negative to a positive because of the Preakness. So, clearly in the second quarter, you are going to see a dramatic improvement. First quarter results are probably some of the weakest results, the winter months in the racing business is probably the worst quarter. So I would expect that as you go out throughout the year, the seasonality combined with the concept of the fact that we are doing some stuff to try to reduce our operating losses should see better results going forward than what you’ve seen in the first quarter.”
  • [Charles Town table games] “We are going to be adding 20 more table games come the end of the second quarter to the operations to take advantage of that growth. We’ll have over 100 games heading in to the summer. [They currently have 104 tables, ex poker.] And we also will be completing our $40 million capital program opening up our entertainment lounge and sports bar come June, July, to complete the transformation of Charles Town.”
  • [MS promotional spending] “Down there on the Gulf Coast, promotional spending has been fairly rational.”
  • [Impact of 10th IL gaming license] “We think the property that’s going to be most affected will be Elgin, followed by Aurora, followed by the properties down in Joliet…. And there also will probably some effect in the Northwest Indiana as well with customers from within the loop.”
  • [Why 2H EBITDA margin guidance much lower than 1H?] “You certainly cannot expect us to continue to have the same margins in 3Q/4Q as you see us having in 1Q/2Q, so there is a seasonality effect. There is the impact of the M. There is the impact of these additional racing operations, which do generate revenues and generate losses. So those are clearly counterproductive to overall margins…. We also have for five months the removal of the Rama management fee, which is extremely high margin that we have concluded at the end of July. However, we are in negotiations with the Ontario government and we do believe we’re going to get a short-term extension on that that will carry us through the first quarter of 2012, but that’s not in our numbers as well.”