Penn National Gaming Reports Second Quarter Revenue of $761.4 Million and Adjusted EBITDA of $211.4

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Penn National Gaming Reports Second Quarter Revenue of $761.4 Million and Adjusted EBITDA of $211.4 Million

- Second Quarter Results Reflect $76.0 Million of Non-Cash Charges related to Argosy Casino Sioux City -


- Establishes 2013 Third Quarter Guidance and Updates 2013 Full Year Guidance -

WYOMISSING, Pa.--(BUSINESS WIRE)-- Penn National Gaming, Inc. (PENN: Nasdaq):

    

Conference Call:

  

Today, July 23, 2013 at 10:00 a.m. ET

Dial-in number:

212/231-2932

Webcast:

www.pngaming.com

 

Replay information provided below

 

Penn National Gaming, Inc. (PENN: Nasdaq) today reported second quarter operating results for the three months ended June 30, 2013, as summarized below:

Summary of Second Quarter Results

   
(in millions, except per share data) Three Months Ended

June 30,

  2013 Actual 2013 Guidance (2) 2012 Actual
Net revenues $761.4  $793.2  $712.6 
Adjusted EBITDA (1)  211.4   225.2   189.8 
Less: Impact of stock compensation, impairment losses, insurance recoveries and deductible charges, depreciation and amortization, gain/loss on disposal of assets, interest expense - net, income taxes, and other expenses  (223.6)  (155.6)  (123.1)
Net (loss) income $(12.2) $69.6  $66.7 
       
Diluted (loss) earnings per common share (3) $(0.16) $0.68  $0.63 
   
(1)  Adjusted EBITDA is income (loss) from operations, excluding the impact of stock compensation, impairment losses, insurance recoveries and deductible charges, depreciation and amortization, and gain or loss on disposal of assets, and is inclusive of gain or loss from unconsolidated affiliates. A reconciliation of net income (loss) per accounting principles generally accepted in the United States of America ("GAAP") to adjusted EBITDA, as well as income (loss) from operations per GAAP to adjusted EBITDA, is included in the accompanying financial schedules.
(2)The figures in this column present the guidance Penn National provided on April 18, 2013 for the three months ended June 30, 2013.
(3)Since the Company reported a loss from operations for the three months ended June 30, 2013, it was required by GAAP to use basic weighted-average common shares outstanding, rather than diluted weighted-average common shares outstanding, when calculating diluted loss per common share.
 

Review of Second Quarter 2013 Results vs. Guidance

        
   Three Months
Ended
June 30, 2013
    Pre-tax  After-tax
    (in thousands)
Income, per guidance (1)   $114,086   $69,592 
Midwest segment variance    (10,629)   (6,321)
Sioux City goodwill and intangible asset write-downs    (76,036)   (73,102)
Tornado insurance deductible charge at Hollywood St. Louis    (2,500)   (1,497)
Spin-off transaction costs    (3,437)   (2,057)
Gain on redemption of corporate debt securities and foreign currency    2,579    1,544 
Tax rate differential    -    (1,722)
Other    2,324    1,383 
        
Income (loss), as reported   $26,387   $(12,180)
(1)  The guidance figures in the tables above present the guidance Penn National provided on April 18, 2013 for the three months ended June 30, 2013.
 

Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming, commented, "Second quarter operating results fell short of our guidance due to several factors: In addition to soft industry-wide regional gaming revenue trends, several properties in the Midwest and Southern Plains segments endured extreme weather, including tornados, flooding and construction disruption, which led to closures as well as insurance deductible charges. Other facilities were negatively impacted by competitive pressures, including marketing promotions that due to economic return considerations we elected not to match. Partially offsetting these challenges, our second quarter adjusted EBITDA includes $4.3 million of favorable tax settlements in various jurisdictions.

"In Ohio, while first year gaming revenues for the Columbus market are in line with other similarly sized markets, our facility has not yet achieved the market share or margins we expected. At this juncture, we continue to grow our player database and remain disciplined with respect to marketing and promotional activities. With a population base of approximately 1.8 million adults within a one hour drive of the Columbus facility, a reasonable tax rate and anticipated upcoming relief from illegal internet café operations, we remain confident that over time the property can improve its adjusted EBITDA contribution to our consolidated results. Additionally, Hollywood Casino Toledo's top line results have met our expectations at this stage of the property's development, though its operating margin has also been lower than we anticipated.

"Given the trends from the first two quarters, results thus far in July, and a lack of visibility on factors that would improve national regional gaming revenue trends, we are guarded in our outlook for the remainder of the year. As such, we have adjusted our guidance and now expect full year 2013 adjusted EBITDA of $805.1 million compared to our prior expectation of $875.8 million. Reflecting the updated guidance, we now forecast that upon the proposed separation of Penn National's operating assets and real property assets, the initial annual dividend of the planned Gaming and Leisure Properties ('GLPI') real estate investment trust ('REIT') will be $2.32 per Penn National Gaming common share versus our previous forecast of $2.44 per Penn National Gaming common share. The change in the anticipated annual dividend payment reflects a downward revision of approximately $16.6 million in our forecast of Penn National Gaming's initial annual rent payments to GLPI. We currently expect that Penn National will pay approximately $420 million to GLPI in annual rent, which would result in a rent coverage ratio of approximately 2.07 times earnings before interest, taxes, depreciation, amortization, rent and corporate overheard compared to 2.15 times coverage based on the prior guidance.

"The calculation of the coverage ratio has been changed to exclude corporate overhead and if calculated as we did previously, the rent coverage ratio based on the new guidance would be 1.8 times compared to 1.9 times previously. In any case, we believe that the structure and terms of the master lease agreement provides attractive economics for GLPI at inception while leaving Penn National with significant free cash flow and financial flexibility after rent payments to pursue growth and expansion opportunities. Recognizing the reduced 2013 guidance, we believe it is prudent to maintain the expected leverage ratios for both Penn National and GLPI and as such we now expect the cash portion of the one-time dividend for accumulated earnings and profits to be paid by GLPI to be 28%, down from 40% previously.

"With respect to Penn National's long-term post-split expansion, we are actively pursuing a wide range of opportunities that can generate meaningful growth relative to the Company's after rent free cash flow. We have continued to make progress on our Jamul Indian Village Project to develop a Hollywood Casino branded casino and resort on the Tribe's land in trust which is approximately 20 miles east of downtown San Diego. During the second quarter Penn National received approval from the Ohio Racing Commission for the relocation of Beulah Park in Columbus to Austintown in Mahoning Valley and for Raceway Park in Toledo to move to Dayton. Shortly thereafter, we broke ground on both facilities, which are expected to open in the second half of 2014. We also submitted a proposal, subject to selection processes and other conditions, to the Maryland Video Lottery Facility Location Commission for a casino resort project at the Company's Rosecroft Raceway in Prince George's County, Maryland. In addition, we entered into a joint venture that submitted a proposal to the Pennsylvania Gaming Control Board for the development of an integrated racing and gaming facility in Mahoning Township, Pennsylvania. Both of these proposed projects would leverage the Company's excellent long-term record of supporting the pari-mutuel industry with thoughtful developments that drive strong economic and employment benefits while expanding our scale, diversification and returns. In Philadelphia, where we have proposed a $480 million project in the Stadium District, we expect the selection process to become more active this fall and anticipate a decision by the Pennsylvania Gaming Control Board in early 2014.

"Elsewhere, we remain on schedule and on budget with the re-branding and facility upgrade of Hollywood Casino St. Louis, which despite the tornado disruption is expected to be completed late this year. In addition, the construction of a 154 room hotel at Zia Park Casino is on schedule and is expected to open in the second half of 2014. More recently, in Massachusetts we are working with the Township of Tewksbury, approximately 25 miles northwest of Boston, on an approximately $200 million proposed Category 2 slots machine facility project. Late last week, the Town Selectmen in Tewksbury voted unanimously to support a Host Community Agreement with Penn National and we have requested a September 21 town election for a ballot question regarding our proposal. Finally, and notwithstanding the second quarter impairment charge, we have instituted several legal actions in Iowa following the decision in April from the Iowa Racing & Gaming Commission ('IRGC') to award the Sioux City casino license to another operator. We firmly believe that state law, the Company's right to due process and other procedural matters were violated, and that the non-profit organization that holds the license for riverboat gaming in Woodbury County acted in a highly improper and unethical manner prior to and at the time the IRGC awarded the license. We intend to continue to vigorously defend our position on these matters.

"As we look to the second half of 2013, we remain focused on completing the separation of the Company's operating assets from its real property assets and the creation of GLPI, which will be a newly formed, publicly-traded REIT. During the second quarter, we continued to make progress towards completing the spin-off of GLPI to Penn National shareholders."

GLPI has filed a preliminary registration statement (File No. 333-188608) for the proposed transaction. Investors are encouraged to read the registration statement because it contains more complete information about GLPI and its separation from the Company including financial information and disclosures regarding GLPI's capital structure, senior management and relationship with Penn National as well as a detailed description of the conditions that must be satisfied in order to proceed with the proposed transaction, including, without limitation, the continuing validity of the factual representations underlying the private letter ruling, the completion of the financings needed to fund each of the public companies and the successful completion of the gaming and racing regulatory approval process.

Mr. Carlino continued, "Subject to satisfaction of the applicable conditions, the Company is planning to consummate the separation in the fourth quarter of 2013 and expects that GLPI will pay the one-time taxable cash and stock dividend, expected to total $11.92 per share, to its shareholders in January 2014, concurrent with the REIT election.

"The Company has notified each of the 27 regulatory agencies that have jurisdiction over the Company's gaming and racing operations of the proposed separation and has made, and is continuing to make, all documentary filings required or requested by the various agencies. The Company believes that no further regulatory approvals will be required by 12 of the 27 agencies prior to the consummation of the separation and distribution of shares of GLPI common stock, and that further prior approvals will be required from the other 15 agencies. Both the Nevada Gaming Commission and the West Virginia Lottery Commission are scheduled to consider certain matters relating to the proposed separation on July 25, 2013, and the Company expects most of the remaining agencies to consider these matters at their July or August meetings. However, the Company does not expect all agencies to consider the matters related to the proposed separation in August, and, in any event, no assurance can be given on the timing of the remaining regulatory approvals or whether any of the 27 regulatory agencies may require the Company or GLPI to provide additional information or obtain additional approvals.

"In conclusion, Penn National remains on course with its strategies to build shareholder value by optimizing the efficiencies of our existing operations to generate appropriate property level margins, pursuing new development opportunities, and completing the planned REIT conversion which is expected to bring near- and long-term opportunities to return capital to shareholders."

Development and Expansion Projects

The table below summarizes Penn National Gaming's current facility development projects:

    
Project/Scope New

Gaming

Positions

 Planned

Total

Budget

 Amount

Expended

through

June 30,


2013

 Expected

Opening

Date

  

 

 

(in millions)

  
         
Hollywood Casino St. Louis (MO) - Rebranding of former Harrah's property to our Hollywood theme. Integration of new casino, hotel, financial and operating systems and upgrades of slot machine product.   $61 $32.8 Ongoing through Fourth Quarter 2013
         
Zia Park Casino (NM) - Addition of 154 room, five story hotel which will include six suites, a breakfast room, a business center, meeting and exercise rooms, as well as additional surface parking,   $26 $0.1 Late 2014
         
Mahoning Valley Race Track (OH) - Construction began in May 2013 at Austintown's Centrepointe Business Park, with our new Hollywood themed facility featuring a new racetrack and the ability to hold up to 1,000 video lottery terminals, as well as various restaurants, bars and other amenities. 850 $261 (1) $13.0 Second Half 2014
         
Dayton Raceway (OH) - Construction began in May 2013 at the site of an abandoned Delphi Automotive plant, with our new Hollywood themed facility featuring a new racetrack and the ability to hold up to 1,500 video lottery terminals, as well as various restaurants, bars and other amenities. 1,000 $254 (1) $11.2 Second Half 2014
         
(1) Includes a $75 million relocation fee in addition to a $50 million VLT license fee.
 

Financial Guidance - Penn National Gaming, Inc. ("PENN")

The table below sets forth current guidance targets for financial results for the 2013 third quarter and full year, based on the following assumptions:

  • Due to general softness in the majority of the regional gaming markets where the Company has operations, particularly in the Midwest segment, and the slower than expected ramp-up at Hollywood Casino Columbus and to lesser extents Hollywood Casino Toledo and Hollywood Casino St. Louis, a reduction of $70.7 million in adjusted EBITDA for the full year;
    • The reduction is inclusive of previously unanticipated charges associated with severance accruals and legal fees for the Company's Argosy Casino Sioux City facility;
  • Excludes cash and non-cash charges associated with the proposed tax-free spin-off transaction for the remainder of 2013 (including tender costs, consulting fees, professional fees, debt issuance costs write-offs and impairments of goodwill and other intangible assets). Transaction costs related to the planned separation of the Company's real estate and operating assets totaled $5.8 million for the first half of 2013;
  • Corporate overhead expenses exclude the impact of future stock price changes on our cash settled stock based compensation awards;
  • A continuation of the Casino Rama management contract at least through the remainder of calendar 2013;
  • Depreciation and amortization charges in 2013 of $317.6 million, with $80.2 million projected to be incurred in the third quarter of 2013 which includes an increase associated with the amortization of the Argosy Casino Sioux City gaming license intangible asset;
  • Full year and third quarter guidance includes a loss on sale of $5 million relating to the sale of our Bullwhackers facility;
  • Estimated non-cash stock compensation expenses of $23.6 million for 2013, with $6.2 million of the cost incurred in the third quarter of 2013;
  • LIBOR is based on the forward yield curve;
  • An income tax rate of approximately 39% for the remainder of 2013;
  • A diluted share count of approximately 102.9 million shares for the full year 2013. This excludes the impact of any stock price changes on the diluted weighted average shares per the terms of the Preferred Stock or as a result of the exchange transaction with Fortress Investment Group and our anticipated repurchase of the remaining preferred shares; and,
  • There will be no material changes in applicable legislation, regulatory environment, world events, weather, recent consumer trends, economic conditions, or other circumstances beyond our control that may adversely affect the Company's results of operations.
     
(in millions, except per share data) Three Months Ending September 30, Full Year Ending December 31,
Penn National Gaming, Inc. 2013 Guidance 2012 Actual 2013 Revised Guidance 2013 Prior Guidance (2) 2012 Actual
Net revenues $714.1  $707.0  $2,982.8  $3,137.8  $2,899.5 
Adjusted EBITDA (1)  189.7   168.6   805.1   875.8   711.4 
Less: Impact of stock compensation, impairment losses, insurance recoveries and deductible charges, depreciation and amortization, gain/loss on disposal of assets, interest expense - net, income taxes, and other expenses  (145.6)  (122.2)  (663.8)  (612.0)  (499.4)
Net income $44.1  $46.4  $141.3  $263.8  $212.0 
           
Diluted earnings per common share $0.43  $0.44  $1.37  $2.56  $2.04 
     
(1)  Adjusted EBITDA is income (loss) from operations, excluding the impact of stock compensation, impairment losses, insurance recoveries and deductible charges, depreciation and amortization, and gain or loss on disposal of assets, and is inclusive of gain or loss from unconsolidated affiliates.
(2)These figures present the guidance Penn National provided on April 18, 2013 for the full year ending December 31, 2013.
 

Pro Forma 2013 Financial Guidance for GLPI, Penn National's Proposed REIT Entity

Reflecting the assumptions below and the cash flow projected in the 2013 financial guidance for Penn National Gaming, Inc. above, and if the spin-off were to have occurred on January 1, 2013, GLPI would be expected to generate adjusted EBITDA of $439.8 million and Adjusted Funds From Operations ("AFFO") of $271.5 million.

Significant changes in assumptions from the previous guidance issued on April 18, 2013 are as follows:

  • A reduction in adjusted EBITDA resulting from lower projected rent payments due to slower than anticipated initial results from Hollywood Casino Columbus as well as reduced expectations at other properties partially offset by higher taxable REIT subsidiary (TRS) adjusted EBITDA levels driven by the addition of table games at Hollywood Casino Perryville;
  • A decrease in the assumed employee option holder dividends that will be incurred by GLPI related to equity awards due to reduced dividend estimates and a decline in options outstanding;
  • A fully diluted share count of 92.6 million common shares for 2013 (which excludes the impact of the pro rata share distribution associated with the one-time dividend to shareholders of accumulated earnings and profits);
  • An assumed total leverage ratio at the time of the spin-off of GLPI to Penn National shareholders of 5.6x EBITDA;
  • Conversion of some of Peter M. Carlino's stock options and stock holdings to GLPI stock options and common stock to implement the non pro-rata distribution for the Carlino Family;
  • The cash component of the E&P distribution (accumulated earnings and profits attributable to any pre-REIT years to comply with certain REIT qualification requirements) has been reduced to $294 million or approximately $3.33 per current Penn National Gaming common share;
  • A decrease in the overall E&P dividend, from $1.1 billion to $1.05 billion due to refined estimates of asset values and accumulated earnings and profits. The impact of the decrease in the cash component of the E&P distribution noted above has resulted in an increase of the share component of the E&P distribution to 0.35 additional GLPI shares, from the previously assumed 0.29 additional GLPI shares, per Penn National Gaming common share;
  • The ordinary dividend amount to GLPI shareholders is calculated as 80 percent of AFFO less the PNG option holder dividends. It is anticipated that proceeds from option exercises will be applied to reduce GLPI debt. Additionally, the share count utilized in the per share dividend calculation excludes the dilutive impact of employee stock options; and,
  • A decrease in the annual dividend to $2.32 per Penn National Gaming common share from $2.44 due to the factors described above.
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GLPI, Penn National's Proposed REIT Entity

(in millions, except per share data)   Full Year Ending December 31,
   2013 Revised 2013 Prior
GLPI, Penn National's Proposed REIT Entity   Guidance Guidance (3)
Net revenues