10/21/09 11:42AM EDT

Penn missed the quarter and lowered guidance, but the market doesn't seem to care. Taking into account the lobbying costs, the miss, and the guide-down isn't enough to spook investors. All eyes are on the Fontainebleau deal update, particularly now that PENN isn't planning on going it alone and that prudence hasn't gone out the window

“The challenging economic environment, which has resulted in lower consumer spending at gaming facilities, continued to impact operating results for both the overall industry and Penn National in the third quarter, particularly during the month of August. Penn National’s reported third quarter results were below guidance..."

"We recognize that the issues in Las Vegas are extremely challenging, and are focused on attempting to develop a creative and strategic solution that would include bringing in an equity partner."


  • Continue to feel challenged with the softening of the consumer - increased saving levels and deleveraging
  • Visitation continues to be flat, but spend per visitor and time on device continues to be down year-over-year and quarter-over-quarter
  • Being appropriately aggressive at reducing costs to adjust to this new environment
  • More of the same of what they saw in 2Q.  August was the weakest month of 3Q, due to lower spend per visit


  • Are they satisfied with the performance of Lawrenceburg (post expansion) thus far?
    • No they are not. Gaming revenues only grew 12%, turnstile count grew over 20% though.  Not getting growth in the VIP segment that they hoped for.  They are working on improving the non-gaming amenities, like adding more meeting space and replacing a "tired" restaurant with a new dining option. Hopefully those additional amenities will be ready in 6 to 9 months
  • Any change in the consumer in October, trend-wise?
    • No change to what they saw in 3Q
  • Fontainebleau, how are they thinking about the capex there, how much would they spend?
    • Very complicated bankruptcy, are carefully evaluating the opportunity.  Ultimately, the courts will decide what the best course is.  They think that there will be a fast resolution since the building needs to be secured and maintained. Those things are a cash drain now but the alternative is a rapidly depreciating asset

    • Value of the building (sunk cost) is almost nothing, given the cost left to complete it. They will not pay a lot for the current site

    • Would only approach this project with a strategic partner that can bring more to the table than just money

    • Capital markets have gotten better, but not good enough for a greenfield project in Vegas.  Maximum available financing for this project would $500 - $600MM

    • If they do the project they would put it in a separate entity

    • Need a positive outlook on future of Vegas to do this project, and think that "in time Vegas will be fine"
  • 4Q09 lobbing spend in Ohio?
    • Can't disclose for obvious reasons. They will disclose what they spend in 4Q09 on Nov 4th.
    • Obviously there is a decent # in their guidance for the lobbying effort, but we don't think that the entire lowering of guidance can be attributed to lobbying (I assume they knew they would be spending money on this last time they gave guidance, or not?)
  • $764.4MM of cash (roughly $60MM was restricted) at 3Q09, 1.695BN of bank debt, total debt of $2.282BN
  • Ohio outcomes?
    • Not sure when and if slots at racetracks will get on the ballot for a referendum vote
  • Not sure why the state of Indiana would give Indiana Downs table games, and if they did, it would negatively impact Lawrenceburg
  • Acqueduct?
    • Not sure on the timing, originally decision was supposed to be made by Labor Day
    • They have the most aggressive proposal in terms of up-front payment to the state and think they can open the quickest
  • They don't think that Maine is getting another casino, if they did it'll be in the western part of the state and should not impact them
  • Hurdle rate at Fontainebleau? Structure of a partner?
    • "We wouldn't go there if we didn't think the investment makes senses"
    • Partner would likely be 50/50
    • Would take them 6 months or so to redesign / finish the design of the property and lock down pricing to build out the property
    • Would "take our good old time" in deciding how to proceed
  • Change in 4Q09 guidance?
    • Fundamentals - trends in September/ October
    • Ohio referendum costs
  • Capex was $88.5MM
    • $63MM of project capex ($58 for Lawrenceburg & Empress)
    • $49MM project capex for 4Q09, $26MM for maintenance
  • Texas and bid for Lonestar?
    • Think that at some point TX will allow for expansion, who knows when... (big shot at PNK given their concentration there... you can write off Lake Charles then...and the Baton Rouge issue)
    • Lonestar's purchase can't really be justified on its standalone economics - it's really a bet on eventual gaming legalization
  • What happens if they win all of their bids in various jurisdictions? Which balls would they drop?
    • There are some obvious winners on their list
    • Las Vegas is the only "risk to capital project", "no downside" in the other projects
    • Partnerships are some of their answer in terms of being able to compete in so many jurisdictions
    • Very focused on where cost of capital is
    • Some opportunities are so good that they would issue equity but they are very far away from that scenario
    • They would definitely build both Ohio free standing casinos if they win on Nov 3rd
    • Would definitely expand in PA if they pass table games, unless its the House version that passes
    • Maryland will open and they are optimistic on Kansas
    • Wouldn't do a project that wasn't cash flow positive out of the box
    • Expect to earn a mid-high teens returns on their project and their thinking hasn't changed
  • Still two other pieces challenging VLT legislation in Ohio that would need to be resolved. However, there are legislative ways to get around the referendum. There is no indication that that is the way that they are headed
  • Timeline in Ohio?
    • Earliest that something can open is late 2012 (for the free standing casinos)... a la - PA
    • For the slots at racetracks, timing is less clear
  • Last year's corporate expense also included lobbying efforts
  • They feel good about their efforts in Jefferson county, WV regarding the benefit of table games .  Campaign is Dec 5th. Spend is modest
  • Bullwackers?
    • So insignificant that they don't think that it's worth committing capital suicide (a la ASCA?) to grow there
  • How much of their cost saves are sustainable in a recovery?
    • Think that 2/3rds is sustainable even when volumes come back
    • Most of it is labor - salary and staffing (not volume dependent)
  • Thoughts / interest in Las Vegas locals market
    • Will probably continue to be tough as construction jobs grind to a halt when City Center is completed, so employment market should continue to be tough
    • Too much capacity for the next few years
    • Longer term, as the Strip recovers, they think that things will get a lot better
    • No imminent opportunities there for PENN
  • Again... not seeing any improvement in consumer trends
  • Tables in WV & PA can be easily accommodated in the existing space 
    • Shell in WV is already built out so they would just need to fit out the interior
    • Can accommodate about 35 tables in PA but can expand if the legislation is favorable, hope to know late this year/early next year. The lower the tax the higher their investment

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