Penn National Gaming Reports Record First Quarter Operating Income of $182.4 Million, Net Income of $41.0 Million, and Adjusted EBITDA, After Lease Payments of $183.5 Million

– Anticipated Cost Synergies Associated with Pinnacle Transaction
Increased to $115 Million –

WYOMISSING, Pa.–(BUSINESS WIRE)–Penn National Gaming, Inc. (PENN: Nasdaq) (“Penn National” or the
“Company”) today reported record financial results for the three months
ended March 31, 2019, initiated 2019 second quarter guidance, updated
full year 2019 guidance, and increased its expectations for cost
synergies associated with its October 2018 acquisition of Pinnacle
Entertainment, Inc.

Timothy J. Wilmott, Chief Executive Officer, commented: “Despite
weather-related impacts to several properties during the first quarter,
we’re pleased to have met our Adjusted EBITDAR guidance after a one-time
adjustment of $3.1 million for expenses related to a customer loyalty
point liability true-up related to prior periods. This accomplishment
highlights our property-level management team’s consistent ability to
maintain or increase margins, even in a challenging revenue environment.
In addition, we closed our accretive acquisition of Margaritaville in
Bossier City, Louisiana in early January, and we now expect to close our
accretive acquisition of Greektown Casino-Hotel (“Greektown”) in
Detroit, Michigan, by the end of May,” said Mr. Wilmott.

2019 First Quarter Financial Highlights:

  • Revenues of $1.28 billion, an increase of $466.5 million
    year over year;
  • Operating income of $182.4 million, an increase of $10.3
    million year over year, with net income of $41.0 million;
  • Adjusted EBITDAR of $391.4 million, an increase of
    $148.9 million year over year;
  • Adjusted EBITDAR margins of 30.5% marking an
    80-basis points year over year increase;
  • Adjusted EBITDA, after Lease Payments of $183.5 million,
    an increase of $56.8 million year over year; and
  • Traditional debt decreased by $38.3 million during the
    quarter. As of March 31, 2019, our GAAP traditional net debt ratio was
    2.60x and gross and net leverage on a lease-adjusted basis were 6.09x
    and 5.79x, respectively.

Pinnacle Synergies Update

“We continue to make great strides with the integration of the Pinnacle
properties, having achieved $40 million of run rate cost synergies as of
March 31, 2019, which contributed to our ability to meet Adjusted
EBITDAR guidance,” continued Mr. Wilmott. “As we continue to apply best
practices across the enterprise we now anticipate at least $115 million
of cost synergies, with a run rate of $55 million in 2019 and an
additional $60 million expected by the end of 2020,” said Mr. Wilmott.
“In addition, we remain highly focused on driving revenue synergies,
which will start with our combined player loyalty program, mychoice.
We expect to have all of our properties on the single platform by the
end of July and are well-positioned to achieve incremental Adjusted
EBITDAR associated with revenue synergies related to Pinnacle in the
range of $15-$20 million. The majority of these revenue synergies should
be realized in 2020 and 2021,” said Mr. Wilmott.

M&A and Development Update

“Our $300 million acquisition of the operations of Greektown provides us
entree into an industry-leading 19th jurisdiction and adds
another stable regional gaming market to Penn National’s already diverse
property portfolio,” continued Mr. Wilmott. “Notably, Greektown will
have the largest single property database in our loyalty program. The
transaction will be funded with a combination of cash on hand and debt
and we expect to close the transaction before the end of this month.”

“Our development projects in Pennsylvania, including the $120 million
Hollywood Casino York and the $111 million Hollywood Casino Morgantown,
remain on track. The construction timetable for both facilities is
anticipated to be 12-18 months following all requisite approvals,
including final licensing by the Pennsylvania Gaming Control Board,”
said Mr. Wilmott.

Free Cash Flow Allocation

“Despite the weather challenges we faced this quarter, our strong
operating performance allowed us to reduce debt by approximately $40
million in the first quarter,” continued Mr. Wilmott. “We remain focused
on de-levering and following the closing of the Greektown transaction we
continue to expect a lease-adjusted net leverage level of 5.0x to 5.5x
by the end of 2020.”

Summary of First Quarter Results

     
For the three months ended March 31,

(in millions, except per share data,
unaudited)

2019 Actual   2019 Guidance (1)   2018 Actual
Revenues $ 1,282.6 $ 1,301.4 $ 816.1
Net income $ 41.0 $ 47.5 $ 45.4
 
Adjusted EBITDAR (2) $ 391.4 $ 394.5 $ 242.6
Less: Lease Payments (2) (207.9 ) (209.8 ) (115.9 )
Adjusted EBITDA, after Lease Payments (2) $ 183.5   $ 184.7   $ 126.7  
 
Diluted earnings per common share $ 0.35 $ 0.40 $ 0.48
   
(1) As provided by Penn National on February 7, 2019.
(2) See the “Non-GAAP Financial Measures” section below for more
information as well as the definitions of Adjusted EBITDAR; Lease
Payments; and Adjusted EBITDA, after Lease Payments. Additionally,
see below for reconciliations of these Non-GAAP financial measures
to their GAAP equivalent financial measure.
 

Review of 2019 First Quarter Results vs. Guidance

     
For the three months ended March 31, 2019

(in millions, unaudited)

Pre-tax   Post-tax
Income, per guidance (1) $ 64.6 $ 47.5
 
Adjusted EBITDAR favorable (unfavorable) variances:
Adjustment to customer loyalty program liability (2) (3.1 ) (2.4 )
Performance of properties and corporate overhead, net    
Total Adjusted EBITDAR variances (3.1 ) (2.4 )
 
Other favorable (unfavorable) variances:
Interest expense (3) 79.7 61.4
Rent expense associated with triple net operating leases (3) (4) (75.6 ) (58.3 )
Depreciation and amortization (1.2 ) (0.9 )
Cash-settled stock-based awards (0.5 ) (0.4 )
Pre-opening and acquisition costs (4.4 ) (3.4 )
Other (3.7 ) (2.9 )
Income taxes   0.4  
Income, as reported $ 55.8   $ 41.0  
   
(1) As provided by Penn National on February 7, 2019.
(2) During the three months ended March 31, 2019, the Company trued-up
its liabilities related to its customer loyalty program. As a
result, the Company recorded a $3.1 million adjustment during the
first quarter 2019 as an out-of-period expense.
(3) As previously disclosed, the guidance provided by the Company on
February 7, 2019 did not include the impact of the new accounting
standard related to leases, Accounting Standards Codification Topic
842, Leases, which was adopted by the Company on January 1, 2019 and
impacted the classification of expenses between interest and rent
associated with our triple net operating leases. The combined
variance between actual results and guidance of interest expense and
rent expense associated with triple net operating leases was $4.1
million on a pre-tax basis and $3.1 million on a post-tax basis.
(4) During the three months ended March 31, 2019, the Company’s triple
net operating leases included components of the Master Leases (which
principally pertains to the land), the Meadows Lease, and the
Margaritaville Lease.
 

Financial Guidance for the 2019 Second Quarter and Full Year 2019

The Company’s second quarter and full year guidance targets reflect the
anticipated impacts of several items, including ongoing bridge work in
Lake Charles, Louisiana and the hotel and casino expansion at Monarch
Casino in Black Hawk, Colorado. Also, full year 2019 guidance assumes
Resorts Casino Tunica closes on June 30, 2019. However, the table below
does not yet include the Greektown operations which are expected to
contribute to the Company’s results beginning later this month. In
addition to these factors, the guidance is based on the following
assumptions:

  • Corporate overhead expenses, which is net of allocations to our
    properties, of $97.9 million, with $24.7 million to be incurred in the
    second quarter;
  • Depreciation and amortization charges of $403.4 million, with $101.8
    million in the second quarter;
  • Lease payments (which continue to be fully tax deductible) to our REIT
    landlords under our triple net leases of $835.9 million, with $209.1
    million in the second quarter. This includes projected escalator
    payments of $0.9 million under the Penn triple net master lease with
    GLPI, no escalator under the Pinnacle triple net master lease with
    GLPI, and no escalator under the Meadows lease;
  • Maintenance capital expenditures of $188.4 million, with $70.1 million
    in the second quarter;
  • Project capital expenditures for Hollywood York of $15.0 million, with
    $2.4 million in the second quarter;
  • Project capital expenditures for Hollywood Morgantown of $21.5
    million, with $9.8 million in the second quarter;
  • Cash interest on traditional debt of $123.2 million, with $23.3
    million in the second quarter;
  • Interest expense of $534.3 million, with $133.7 million in the second
    quarter, inclusive of interest expense related to the finance lease
    components associated with our Master Leases;
  • Rent expense associated with our triple net operating leases with our
    REIT landlords of $337.9 million, with $84.5 million in the second
    quarter (1);
  • Cash taxes of $16.8 million, with $10.1 million in the second quarter;
  • Our share of non-operating items (such as depreciation and
    amortization expense) associated with our Kansas JV of $3.7 million,
    with $0.8 million to be incurred in the second quarter;
  • Estimated non-cash stock compensation expense of $13.9 million, with
    $3.5 million in the second quarter;
  • LIBOR is based on the forward yield curve;
  • A diluted share count of approximately 119.0 million; 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.

The guidance table below includes comparative prior period actual
results.

________________________

(1) On January 1, 2019, the Company adopted Accounting
Standards Codification Topic 842 – Leases (the “new lease standard”). As
a result of the adoption of the new lease standard, the Company
concluded (i) certain land components contained within the Penn Master
lease and the Pinnacle Master lease, (ii) the Meadows lease; and (iii)
the Margaritaville lease to be operating leases.

The new lease standard requires operating leases to be recognized on the
balance sheet as an asset and liability based on the net present value
of future minimum lease payments. Subsequent to the recognition on the
balance sheet, the Company records rent expense on a straight-line basis
over the expected term of the lease, which is recorded as a reduction to
operating income within the unaudited Condensed Consolidated Statements
of Operations.

         

For the three months
ending/ended June 30,

For the full year
ending/ended December 31,

(in millions, except per share data,
unaudited)

2019
Guidance

 

2018
Actual

2019
Guidance

 

2018
Actual

Revenues $ 1,314.3 $ 826.9 $ 5,173.1 $ 3,587.9
 
Net income $ 41.2 $ 54.0 $ 162.0 $ 93.5
Income tax expense (benefit) 16.5 15.2 61.8 (3.6 )
Loss on early extinguishment of debt 2.6 21.0
Income from unconsolidated affiliates (6.3 ) (5.7 ) (24.4 ) (22.3 )
Interest income (0.2 ) (0.2 ) (1.1 ) (1.0 )
Interest expense 133.7 115.9 534.3 539.4
Other expense 10.0     11.0   7.1  
Operating income 194.9 181.8 743.6 634.1
Rent expense associated with triple net operating leases (1) 84.5 337.9 3.8
Stock-based compensation 3.5 3.0 13.9 12.0
Cash-settled stock award variance (2) 7.8 0.5 (19.6 )
Loss (gain) on disposal of assets (0.1 ) 0.5 3.2
Contingent purchase price 0.4 0.2 5.7 0.5
Pre-opening and acquisition costs 5.9 4.4 95.0
Depreciation and amortization 101.8 58.6 403.4 269.0
Provision (recovery) for loan loss and unfunded loan commitments to
the JIVDC and impairment losses
(17.0 ) 17.9
Insurance recoveries, net of deductible charges (0.1 ) (0.1 )
Income from unconsolidated affiliates 6.3 5.7 24.4 22.3
Non-operating items for Kansas JV (2) 0.8   1.3   3.7   5.1  
Adjusted EBITDAR $ 392.2 $ 247.1 $ 1,538.0 $ 1,043.2
Less: Lease Payments (3) (209.1 ) (115.9 ) (835.9 ) (537.4 )
Adjusted EBITDA, after Lease Payments $ 183.1 $ 131.2 $ 702.1 $ 505.8
 
Diluted earnings per common share $ 0.35 $ 0.57 $ 1.36 $ 0.93
 
   
(1) The three months ending June 30, 2019 and the year ending December
31, 2019, include rent expense associated with the Company’s Master
Leases (which principally pertains to the land), the Meadows Lease,
and the Margaritaville Lease.
(2) For a description of these items, see “Non-GAAP Financial Measures”
section below.
(3) The three months ending June 30, 2019 and the year ending December
31, 2019, include payments made to GLPI associated with the
Company’s Master Leases and the Meadows Lease, as well as payments
made to VICI Properties Inc. (“VICI”) associated with the
Margaritaville Lease.
 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
Segment
Information

During the fourth quarter 2018, the Company made revisions to its
reportable segments upon the consummation of the Pinnacle acquisition in
order to maintain alignment with its internal organizational structure.
Apart from the addition of the new properties, the most significant
change was dividing the South/West segment into two separate reportable
segments. The three months ended March 31, 2018 has been restated to
provide comparability, but does not reflect the pre-acquisition
operating results of Pinnacle.

      Revenues     Operating Income (Loss)     Adjusted EBITDAR

For the three months ended
March 31,

For the three months ended
March 31,

For the three months ended
March 31,

(in thousands, unaudited)

2019   2018 2019   2018 2019   2018
Northeast segment (1) $ 550,578 $ 458,719 $ 142,177 $ 127,420 $ 164,754 $ 144,977
South segment (2) 291,942 63,330 78,123 18,157 97,844 21,118
West segment (3) 158,654 97,966 41,818 17,729 49,923 23,931
Midwest segment (4) 271,262 185,534 80,970 53,788 99,219 68,185
Other (5) 10,135   10,536   (160,702 ) (44,960 ) (20,303 ) (15,665 )
Total $ 1,282,571   $ 816,085   $ 182,386   $ 172,134   $ 391,437   $ 242,546  
 
   
(1) The Northeast segment consists of the following properties:
Ameristar East Chicago, Hollywood Casino Bangor, Hollywood Casino at
Charles Town Races, Hollywood Casino Columbus, Hollywood Casino
Lawrenceburg, Hollywood Casino at Penn National Race Course,
Hollywood Casino Toledo, Hollywood Gaming at Dayton Raceway,
Hollywood Gaming at Mahoning Valley Race Course, Meadows Racetrack
and Casino, and Plainridge Park Casino. The financial information
for the three months ended March 31, 2018 also includes the
Company’s Casino Rama management service contract, which terminated
in July 2018.
(2) The South segment consists of the following properties: 1st
Jackpot Casino, Ameristar Vicksburg, Boomtown Biloxi, Boomtown
Bossier City, Boomtown New Orleans, Hollywood Casino Gulf Coast,
Hollywood Casino Tunica, L’Auberge Baton Rouge, L’Auberge Lake
Charles, Margaritaville Resort Casino, and Resorts Casino Tunica. We
acquired Margaritaville Resort Casino on January 1, 2019.
(3) The West segment consists of the following properties: Ameristar
Black Hawk, Cactus Petes and Horseshu, M Resort, Tropicana Las
Vegas, and Zia Park Casino. The financial information for the three
months ended March 31, 2018 also includes the Company’s investments
in and the management contract of Hollywood Casino Jamul-San Diego,
which terminated in July 2018.
(4) The Midwest segment consists of the following properties: Ameristar
Council Bluffs; Argosy Casino Alton; Argosy Casino Riverside;
Hollywood Casino Aurora; Hollywood Casino Joliet; our 50% investment
in Kansas Entertainment, which owns Hollywood Casino at Kansas
Speedway; Hollywood Casino St. Louis; Prairie State Gaming; and
River City Casino.
(5) The Other category consists of the Company’s standalone racing
operations, namely Sanford-Orlando Kennel Club, and the Company’s
joint venture interests in Sam Houston Race Park, Valley Race Park,
and Freehold Raceway. The Other category also includes Penn
Interactive Ventures, the Company’s interactive division which
represents Penn National’s social gaming initiatives, our management
contract for Retama Park Racetrack, and our live and televised poker
tournament series that operates under the trade name, Heartland
Poker Tour. Expenses incurred for corporate and shared services
activities that are directly attributable to a property or are
otherwise incurred to support a property are allocated to each
property. The Other category also includes corporate overhead costs,
which consists of certain expenses, such as: payroll, professional
fees, travel expenses and other general and administrative expenses
that do not directly relate to or have otherwise been allocated to a
property. For the three months ended March 31, 2019, corporate
overhead costs were $23.1 million, compared to $18.8 million for the
corresponding prior year period.
 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
Supplemental
Segment Information – Combined for

the Acquisitions of
Pinnacle and Margaritaville

Although Penn National did not own Pinnacle or Margaritaville during the
period presented below, the Company believes the following financial
information is useful to investors to assess the value these
transactions bring to the Company and its stakeholders.

The following financial information for the three months ended March 31,
2018, shows (i) the Company’s reported operating results, (ii) the
acquired Pinnacle properties and Margaritaville property for the
pre-acquisition period, and (iii) the combined Company operating results
for the pre-acquisition period as if the acquisitions of Pinnacle and
Margaritaville were completed on January 1, 2018. Combined Revenues and
Combined Adjusted EBITDAR are non-GAAP financial measures. Further, the
financial information below depicts the historical results of Penn
National, Pinnacle, and Margaritaville, and do not reflect any cost
savings or revenue synergies from potential operating efficiencies or
associated costs to achieve such savings or synergies that are expected
to result from these transactions. See the “Non-GAAP Financial Measures”
section below for more information as well as the definitions of
Combined Revenues and Combined Adjusted EBITDAR. Additionally, see below
for reconciliations of these Non-GAAP financial measures to their GAAP
equivalent financial measure.

     
Revenues

Penn National, as
Reported

   

Pinnacle and
Margaritaville, Pre-
Acquisition
(1)

    Combined
 

(in thousands, unaudited)

For the three months ended March 31, 2018
Northeast $ 458,719 $ 119,726 $ 578,445
South 63,330 229,201 292,531
West 97,966 59,646 157,612
Midwest 185,534 97,479 283,013
Other 10,536   1,110   11,646  
Total $ 816,085     $ 507,162     $ 1,323,247  
 
 

Adjusted EBITDAR

Penn National, as
Reported

Pinnacle and
Margaritaville, Pre-
Acquisition
(1)

Combined

 
(in thousands, unaudited) For the three months ended March 31, 2018
Northeast $ 144,977 $ 23,925 $ 168,902
South 21,118 73,407 94,525
West 23,931 22,565 46,496
Midwest 68,185 37,163 105,348
Other (15,665 ) (14,298 ) (29,963 )
Total $ 242,546   $ 142,762   $ 385,308  
 
   
(1) The operating results of Pinnacle were derived from historical
financial information of Pinnacle, adjusted to exclude the operating
results of the four divested properties, and the operating results
of Margaritaville were derived from historical financial
information. In addition, the operating results were adjusted to
conform to Penn National’s methodology of allocating certain
corporate expenses to properties.
 
     

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
Reconciliation
of Comparable GAAP Financial Measure

to Adjusted
EBITDAR and Adjusted EBITDA, after Lease Payments

 
For the three months ended March 31,

(in thousands, unaudited)

2019   2018
Net income $ 40,987 $ 45,437
Income tax expense 14,818 15,689
Loss on early extinguishment of debt 882
Income from unconsolidated affiliates (5,687 ) (5,361 )
Interest income (319 ) (249 )
Interest expense 132,587 115,740
Other expense   (4 )
Operating income 182,386 172,134
Rent expense associated with triple net operating leases (1) 84,730
Stock-based compensation 3,417 2,929
Cash-settled stock award variance 472 (7,462 )
Loss on disposal of assets 522 55
Contingent purchase price 4,717 1,134
Pre-opening and acquisition costs 4,380 6,093
Depreciation and amortization 104,053 60,390
Impairment losses 618
Income from unconsolidated affiliates 5,687 5,361
Non-operating items for Kansas JV 1,073   1,294  
Adjusted EBITDAR $ 391,437 $ 242,546
Less: Lease Payments (207,966 ) (115,874 )
Adjusted EBITDA, after Lease Payments $ 183,471   $ 126,672  
 
 
(1) During the three months ended March 31, 2019, the Company’s triple
net operating leases, included components of the Master Leases
(which principally pertains to the land), the Meadows Lease, and the
Margaritaville Lease.
 
     

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
Reconciliation
of Comparable GAAP Financial Measure

to Combined
Adjusted EBITDAR

 

(in thousands, unaudited)

For the three
months ended
March 31,
2018

Net income $ 45,437
Income tax expense 15,689
Loss on early extinguishment of debt 882
Income from unconsolidated affiliates (5,361 )
Interest income (249 )
Interest expense 115,740
Other income (4 )
Operating income 172,134
Pinnacle and Margaritaville Adjusted EBITDAR, pre-acquisition 142,762
Stock-based compensation 2,929
Cash-settled stock award variance (7,462 )
Loss on disposal of assets 55
Contingent purchase price 1,134
Pre-opening and acquisition costs 6,093
Depreciation and amortization 60,390
Impairment losses 618
Income from unconsolidated affiliates 5,361
Non-operating items for Kansas JV 1,294  
Combined Adjusted EBITDAR (1) $ 385,308  
 
   
(1) See the “Non-GAAP Financial Measures” section below for more
information, including the definition of Combined Adjusted EBITDAR.
 
     

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations

 
For the three months ended March 31,

(in thousands, except per share data,
unaudited)

2019   2018
Revenues:
Gaming $ 1,034,511 $ 654,494
Food, beverage, hotel, and other 248,060 130,969
Management service and license fees 2,438
Reimbursable management costs   28,184  
Total revenues 1,282,571   816,085  
Operating expenses
Gaming 547,445 340,516
Food, beverage, hotel and other 161,759 92,980
General and administrative 286,928 121,263
Reimbursable management costs 28,184
Depreciation and amortization 104,053 60,390
Impairment losses   618  
Total operating expenses 1,100,185   643,951  
Operating income 182,386   172,134  
Other income (expenses)
Interest expense (132,587 ) (115,740 )
Interest income 319 249
Income from unconsolidated affiliates 5,687 5,361
Loss on early extinguishment of debt (882 )
Other   4  
Total other expenses (126,581 ) (111,008 )
Income before income taxes 55,805 61,126
Income tax expense (14,818 ) (15,689 )
Net income 40,987 45,437
Less: Net loss attributable to non-controlling interest 5    
Net income attributable to Penn National Gaming, Inc. $ 40,992   $ 45,437  
 
Earnings per common share:
Basic earnings per common share $ 0.35 $ 0.50
Diluted earnings per common share $ 0.35 $ 0.48
 
Weighted average basic shares outstanding 116,293 91,191
Weighted average diluted shares outstanding 118,595 94,650
 

Selected Financial Information

Balance Sheet Data

       

(in thousands)

March 31,
2019

December 31,
2018

Cash and cash equivalents (1) $ 400,280 $ 479,598
 
Bank debt (1) $ 1,877,885 $ 1,907,932
Notes 399,353 399,332
Other long-term obligations (2) 96,646   104,964
Total traditional debt (3) $ 2,373,884 $ 2,412,228
 
Traditional net debt $ 1,973,604 $ 1,932,630
 

Contacts

William J. Fair
Chief Financial Officer
610/373-2400

Joseph N. Jaffoni, Richard Land
JCIR
212/835-8500 or [email protected]

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