Penn National Gaming reports record Q2 income

Last week, Penn National Gaming, Inc. announced financial results for the three and six months ended June 30, 2018, and initiated 2018 third quarter guidance.

Timothy J. Wilmott, Chief Executive Officer, commented: “Penn National delivered another strong quarter in which we exceeded our guidance for income from operations and adjusted EBITDA. Our solid second quarter results are largely attributable to same-store revenue growth at nearly two-thirds of our gaming operations and the continued success of our ongoing margin enhancement initiatives. As a result, all three of the Company’s operating segments generated year-over-year adjusted EBITDA growth. Our margin enhancement initiatives, which began last October, continue to yield results, with an ongoing focus on procurement, marketing and labor.”

2018 Second Quarter Financial Highlights

Net revenues of $826.9 million;
Income from operations of $181.8 million, up 34.6%;
Adjusted EBITDA of $247.1 million, up 8.7%;
Adjusted EBITDA after Master Lease payments of $131.2 million, up 15.7%;
Adjusted EBITDA margins increased by 133 basis points to 29.88%, with 18 of 23 gaming operations delivering improved margins; and
Reduced traditional debt by over $120 million. Traditional net debt ratio declined to 1.94x from 2.25x and gross and net leverage inclusive of master lease obligations declined to 5.21x and 4.99x, respectively, from 5.45x and 5.20x at March 31, 2018.

Pinnacle Acquisition Update

Mr. Wilmott continued: “Last week we secured approvals from the Ohio Casino Control Commission and the Louisiana Gaming Control Board, subject to customary conditions, in connection with our pending acquisition of Pinnacle Entertainment, Inc.

“Penn National had previously received approvals from six other gaming regulatory bodies, subject to customary conditions, including the Pennsylvania Gaming Control Board and the Pennsylvania Racing Commission; the West Virginia Lottery Commission; the Illinois Gaming Control Board, the Mississippi Gaming Commission; and the Indiana Gaming Commission. In addition, on March 29, shareholders of both Penn National and Pinnacle approved the proposed merger, with over 99% of all votes cast in favor of the transaction.

“Over the last several months, we have worked diligently with Pinnacle’s leadership to better understand the company’s culture and processes and engaged with leaders and team members from all corporate functions. With that knowledge, we have developed a new corporate organizational structure that blends proven leaders from both Penn National and Pinnacle, while maintaining our corporate headquarters in Wyomissing, Pennsylvania, and retaining a significant corporate presence at Pinnacle’s Las Vegas-based Service Center.

“Based on our progress to date in terms of regulatory approvals and transition planning, we anticipate closing the transaction in early fourth quarter. In addition, we remain confident our $100 million of cost synergy objectives are well within reach,” said Mr. Wilmott.

Recent Development Activity

“During the quarter, we entered into a definitive agreement to acquire the operations of Margaritaville Resort Casino in Bossier City, Louisiana for approximately $115 million in a transaction that is expected to be immediately accretive to operating results upon closing,” said Mr. Wilmott.

“Simultaneous with the closing of the transaction, which we anticipate will occur late in the fourth quarter, Penn National will enter into a triple-net lease agreement with VICI Properties Inc. for Margaritaville. We are pleased to partner with VICI to structure this tuck-in acquisition of Bossier City’s newest casino resort. With a purchase multiple of 5.5x trailing twelve months adjusted EBITDA, which we believe will decline to below 5.0x after synergies, this acquisition is consistent with our criteria for transactions that are accretive to free cash flow and present well-defined paths to the realization of significant synergies,” said Mr. Wilmott.

“During the second quarter the U.S. Supreme Court overturned the Federal ban on sports betting. We anticipate accepting wagers on sporting events at our casinos in Mississippi, West Virginia, and potentially Pennsylvania, prior to the start of the National Football League’s season opener in September,” said Mr. Wilmott. Meanwhile, we are continuing to engage with state lawmakers in our other jurisdictions to advocate for passage of sports betting laws with reasonable tax rates and license fees, similar to legislation enacted in the West Virginia, Mississippi and Nevada models.

“In Pennsylvania, as previously reported, Penn National was the winning bidder for two of Pennsylvania’s new Category 4 ‘satellite casino’ licenses, which were created through the gaming expansion law approved last October. The licenses allow us to operate up to 750 slot machines and initially up to 30 table games at each facility. We are currently preparing our applications for these proposed facilities and will be submitting our first application to the PGCB by September 12 [th] for a site in southern York County followed shortly thereafter for our location in Berks/Lancaster counties.

“In addition, earlier this month we applied to the Pennsylvania Gaming Control Board for the approval to operate online casino games. Despite the state’s high tax rate, we chose to proceed with the hope that we can continue to work to bring the tax rate in line with that of other gaming jurisdictions around the world, and if successful, we plan to market the games to our robust database of casino and social gaming customers in Pennsylvania.

Continued Debt Reduction

“Our strong second quarter operating performance enabled us to further deliver our balance sheet with the repayment of over $120 million of indebtedness. Pro forma for the completion of all announced transactions, we continue to target a net adjusted leverage ratio of 5.0x to 5.5x.

“Our solid second quarter results reflect our continued focus on driving operating efficiencies and generating further margin expansion at our properties. We look forward to the closing and integration of the Pinnacle and Margaritaville transactions,” concluded Mr. Wilmott.