Hedgeye - PENN 1Q CONF CALL NOTES

PENN’s quarter wasn’t too bad. The underperformance of the Southern Plains segment could have negative implications for PNK.

“Our first quarter adjusted EBITDA results were approximately $4 million below our guidance. Despite the first quarter challenges, operating results at Penn National’s East/West and Southern Plains segments exceeded the results contemplated in our guidance while the Midwest segment results met our expectations."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming

CONF CALL NOTES

2012 was an especially good winter weather season. While 2013 was "normal," there were 2x as many snow days.
Happy with the way that they have managed costs in markets impacted by new supply
Iowa gaming commission just awarded a license to Hard Rock to build a casino in Sioux City despite them being the licensee in the city. They are mystified by the announcement. This is not the last word on this subject.

Q&A

Racing commission in Ohio discussions? Their current debate is down to seating. They have a disagreement over what the state of racing is in 2013. They are trying to create an environment from day one that is not obsolete. Basically, the state of Ohio wants them to have more seats than Penn thinks is appropriate for market demand. They are hoping that the Ohio Racing Commission comes around to their point of view. Nothing more that they can do right now.
No changes on the proposed debt structure or interest expense
Expect incremental $9MM of corp overhead for 2Q-4Q--$3.5-4MM (development costs) and $5.5MM for stock price-related liability
Cash: $247.7MM,
Total debt: $2.614BN - $2.276 BN was bank debt; capital leases of 2MM, 325MM bonds, 10MM of other.
Capex: $62.7MM in 1Q13, $28.1MM was maintenance, 50% of the project capex was wrap up spending at Ohio and Toledo, $12.3MM Hollywood St Louis
2013 capex: $94.3MM of maintenance, $277MM of project capex including Columbus/ Toledo ($36MM) wrapping costs, $173MM of Ohio track expenses. $13MM for the hotel at Zia and $47.8MM in St Louis.
Hope that they will a few REIT approvals in the 2Q and a lot more in the 3rd quarter
Slight reduction in revenue guidance?

Took property level guidance up but offsetting with stock employee expenses of $9.1MM and higher development expenses

Think that the ramp in Ohio will resume this summer
Gambling at internet cafes in Ohio are having a material impact on their operations at Toledo and Columbus. Have seen estimates that these cafes are can generate up to $500k of revenues. They want to see the cafes closed.
There has been a proliferation of illegal/ grey gaming in many states. It's happened in Florida as well as Texas. Ohio is the only jurisdiction where this is impacting their operations.
Tables at Maryland Live has only been up and running for 7 days. Too early to know what the impact will be.
Most of their data suggests that weather had an impact on visitation but they haven't seen a change in spend per visit at their properties.
Won't say that properties hit by competition have maintained steady margins but they haven't been hit that badly
Removal of 500 slot machines in Columbus Ohio and reallocated them to other PENN properties. Feel that the 2,500 units are appropriate for current business volumes. Do think that once the internet cafes are shut down, they will see better productivity on the slot side.
Shifts in OPCO/PROPCO guidance are just due to refining their view on the 2 entities. Still not 100% done there. There may be continued refinement in the estimates.
Expect the S-11 to be filed in the 2nd Q
Will be looking on an asset by asset basis for acquisitions for PROPCO
Have indications that there are other REITs looking at acquiring gaming assets. It's killing them that they cannot enter into conversations today with potential acquisition candidates. They are getting incoming calls that they can not entertain.
PROPCO rents changes for 2014: Ohio base rent will be set based on 2013 performance, new Ohio tracks coming online, 2% escalator on buildings if rent coverage is there
Continue to monitor online gaming as it unfolds state by state. Are keen to watch NJ unfold. Feel like it will negatively impact casino visitation but grow overall State revenues.
They were the first property to open up tables games in March. Too early to predict the table run rate at Perryville and impact from Maryland Live
The philosophy of being rational marketers is an enterprise discipline applied on a market by market basis. Their competitors have been rational marketers too.

HIGHLIGHTS FROM THE RELEASE

“The overall adjusted EBITDA shortfall for the first quarter is primarily attributable to the following higher expenses, specifically, $2.3 million of REIT transaction costs, $1.9 million of development costs for potential opportunities in Massachusetts, Philadelphia and Sioux City and higher expenses of $3.4 million associated with our cash settled employee stock appreciation rights and restricted stock units due to the increase in our stock price"
"We believe we remain on schedule to complete the tax-free spin-off of the REIT to Penn National shareholders later this year and to make the one-time taxable cash and stock dividend to Penn National shareholders in January 2014, concurrent with the REIT election"
[Agreement with the Jamul Indian Village to jointly develop a Hollywood Casino branded casino] "Based on the pace of approvals and construction progress, the facility could open by early 2016 and upon opening will generate management and licensing fees for Penn National."
"We remain on schedule and on budget with the re-branding and facility upgrade of Hollywood Casino St. Louis, which is expected to be completed later this year, as well as the commencement of construction of a 150 room hotel at Zia Park Casino which is expected to open in the second half of 2014"
“In Ohio, we are in active dialog with the Ohio State Racing Commission regarding seating capacity at the two VLT facilities planned for Mahoning Valley and Dayton. As the nation’s leading operator of pari-mutuel racing facilities, we share the commission’s deep commitment to supporting horse racing, but believe our proposed seating plan more accurately reflects current market demand. We are hopeful that a resolution to this matter can be reached soon which will allow the facilities to open as planned in 2014"
"We are currently engaged in discussions with the City around the statutorily required Host Community Agreement and expect those negotiations to conclude by early May. Meanwhile, at the State level, we’re anticipating the Massachusetts Gaming Commission will complete its suitability findings by mid- to late summer."
“In Iowa, we await today’s decision from the Iowa Racing & Gaming Commission, related to our two proposed Hollywood branded gaming and entertainment development projects in Woodbury County"