Penn National Gaming reports third quarter income of $155.8 M

Penn National Gaming, Inc. has announced financial results for the three and nine months ended September 30, 2018, and provided 2018 fourth quarter and updated full year guidance.

Timothy J. Wilmott, Chief Executive Officer, commented: “Penn National generated record third-quarter income from operations, led by our Las Vegas properties and the West region overall, despite facing increased competitive pressures in Illinois and Mississippi. Our operating teams continued to execute against our margin improvement initiatives as the company drove further adjusted EBITDA margin improvements across all three operating segments by an average of 115 basis points, to 29%, with 17 of 23 gaming properties delivering improved margins,” said Mr. Wilmott.

2018 Third Quarter Financial Highlights:

• Net revenues of $789.7 million;
• Income from operations of $155.8 million, up 8.4%;
• Adjusted EBITDA of $229.7 million, up 2.0%;
• Adjusted EBITDA after master lease payments of $114.5 million, up 3.4%;
• Adjusted EBITDA margins increased by 115 basis points, to 29.1%, with 17 of 23 gaming operations delivering improved margins; and
• Traditional debt decreased by $25.5 million during the quarter. As of September 30, 2018, traditional net debt ratio declined to 1.77x and gross and net leverage inclusive of master lease obligations declined to 5.17x and 4.90x, respectively.

Pinnacle Acquisition

Mr. Wilmott continued, “On October 15, we completed our acquisition of Pinnacle Entertainment. This transformational merger further enhances Penn National’s position as North America’s leading regional gaming operator, and expands our diverse portfolio to 40 gaming, entertainment and racing properties in 18 jurisdictions, with more than five million active customers in our player rewards database. The acquisition is expected to be substantially accretive to Penn National’s free cash flow per share in the first year after closing, and we are expecting to achieve a run rate of more than $30 million of our two-year, $100 million cost synergy target by the end of the fourth quarter. We remain highly confident in our ability to realize all of our identified cost synergies, and we expect to generate new revenue synergies through leveraging one of the industry’s largest active player databases to take advantage of the continued expansion of sports wagering, iGaming, and our social gaming platform,” said Mr. Wilmott.

“With the expected significant free cash flow to be generated from our expanded base of operations, we are well-positioned to embark on an active leverage reduction program while pursuing accretive strategic growth investments, as well as evaluating opportunistic returns of capital to shareholders through our current share repurchase authorization, which has approximately $75 million remaining through next February.”

Recent Development Activity

“In Louisiana, we anticipate that our previously announced acquisition of the operations of Margaritaville Resort Casino in Bossier City (“Margaritaville”) will close by the end of the year, subject to final regulatory approvals,” continued Mr. Wilmott.

“Simultaneous with the closing of this $115 million transaction, we will be entering into a triple net lease agreement with VICI Properties Inc. (“VICI”) for certain real property assets of Margaritaville. We are pleased to partner with VICI to structure this tuck-in acquisition of the market’s newest casino resort. With a purchase multiple of 5.5x trailing twelve months adjusted EBITDA, which we expect to drive below 4.5x after synergies, this acquisition is consistent with our criteria for transactions that are accretive to free cash flow through synergy realization and strategically expand Penn National’s presence in key markets.

“In Pennsylvania, we filed our application with the Pennsylvania Gaming Control Board (“PGCB”) in mid-September for Hollywood Casino York, the Company’s first Category 4 satellite gaming facility, to be located at the York Galleria Mall in Springettsbury Township.

“The development of Hollywood Casino York will represent a total investment of nearly $120 million, including the slots and table games license fees. Hollywood Casino York will initially open with approximately 500 slot machines and 20 tables games, and has the capacity to accommodate up to 750 slot machines and 40 table games. The facility will feature a casual dining restaurant; a sports and race book for sports betting and simulcast wagering; a small entertainment lounge; and a ‘grab-and-go’ eatery. Construction is anticipated to be completed 12-18 months following receipt of all requisite approvals, including final licensing by the PGCB.

“Yesterday, we announced that we filed our application with the PGCB for Hollywood Casino Morgantown, our second Category 4 satellite gaming facility. The 80,000 square foot facility will be built on a vacant 36-acre site in Caernarvon Township, Berks County, near the intersections of I-76 and I-176. Hollywood Casino Morgantown will feature 750 slot machines and 30 table games, with the ability to accommodate an additional 10 table games. The facility will offer a sports and race book, a signature restaurant, an entertainment lounge, and a food court. Our total investment in Hollywood Casino Morgantown will be approximately $111 million, including the slots and table games license fees. With easy access to multiple major arteries, Hollywood Casino Morgantown is ideally situated to generate new revenues from the more densely populated suburbs to the west of Philadelphia, while further protecting our existing market share at Hollywood Casino at Penn National Race Course. We anticipate that the proposed development could take approximately 18 months from the receipt of all permits, approvals and entitlements.

“On the sports betting front, we began taking live wagers at our Mississippi properties in August, and at Hollywood Casino at Charles Town Races in West Virginia in September. We look forward to implementing sports betting in Pennsylvania later this year, as well as real money iGaming in the first quarter on 2019. Meanwhile, as the nation’s largest regional gaming operator, we’re actively exploring strategic relationships with several sports wagering and iGaming operators as well as leading media companies and content providers,” said Mr. Wilmott.

Continued Debt Reduction and Fixed Rate Capital Structure

“We reduced traditional net debt by approximately $70 million in the third quarter and by $164 million year to date from cash flows from operations, and ended the third quarter with net leverage inclusive of master lease obligations of 4.90x. Following the completion of all announced transactions, the Company will continue to target a net adjusted leverage ratio of 5.0x to 5.5x,” said Mr. Wilmott.

“The Company’s lease obligations, which continue to be fully tax deductible and not subject to exposure to rising interest rates, are subject to variable rent resets based on the trailing five year and two year average net revenues of the facilities in the Penn National master lease and the Pinnacle amended master lease, respectively. November 1st will be the first reset for the Penn National master lease and we anticipate a net annual rent reduction of approximately $6 million after annual escalator calculations.

“With significant near- and long-term economic benefits to be derived from the recently completed Pinnacle transaction, our focus on leverage and prudent management of our capital structure and our expanding presence in key new markets, we remain confident in our future prospects as we successfully execute a well-balanced strategic plan to create value for our shareholders,” concluded Mr. Wilmott.

Financial Guidance for the Fourth Quarter and Full Year 2018

Reflecting the current operating and competitive environment, the table below sets forth full year and fourth quarter 2018 guidance targets for the Company inclusive of projected results from the Pinnacle properties acquired on October 15, 2018. The financial results are based on the following assumptions:

Corporate overhead expenses, net of allocations, of $81.1 million, with $24.9 million to be incurred in the fourth quarter;
Transaction related costs of approximately $97.2 million (including non-cash debt issuance write-offs of $4.6 million), which is comprised of employee termination benefits, investment banking fees, debt financing costs and other costs;
Depreciation and amortization charges of $242.3 million, with $66.5 million in the fourth quarter;
Rent payments (which continue to be fully tax deductible) to GLPI of $536.7 million, with $189.7 million in the fourth quarter;
Maintenance capital expenditures of $107.0 million, with $52.1 million in the fourth quarter;
Cash interest on traditional debt of $70.0 million, with $19.1 million in the fourth quarter;
Interest expense of $548.0 million, with $201.5 million in the fourth quarter, inclusive of interest expense related to the Master Lease financing obligations with GLPI;
Interest expense includes the impact of the five-year variable rent reset related to the Master Lease effective November 1, 2018, which reduces 2018 annual rent by $1.9 million;
Interest expense also includes $0.9 million related to the maximum escalation that is projected to be incurred at the conclusion of year five of the Master Lease on October 31, 2018;
Cash taxes of $27.2 million, with $3.5 million in the fourth quarter;
Our share of non-operating items (such as depreciation and amortization expense) associated with our Kansas JV will total $5.1 million, with $1.3 million to be incurred in the fourth quarter;
Estimated non-cash stock compensation expenses of $11.7 million, with $2.8 million to be incurred in the fourth quarter;
LIBOR is based on the forward yield curve;
A diluted share count of approximately 121.6 million, 117.4 million and 101.5 million at December 31, 2018 and for the fourth quarter and full year, respectively; and,
There will be no material changes in applicable legislation, regulatory environment, world events, weather, recent consumer trends, economic conditions, oil prices, competitive landscape (other than listed above) or other circumstances beyond our control that may adversely affect the Company’s results of operations.