Churchill Downs Inc (CHDN) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Churchill Downs Inc. 2022 Third Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Nick Zangari, Vice President, Treasury and Investor Relations.

Thank you, Andrew. Good morning, and welcome to our third quarter 2022 earnings conference call. After the company's prepared remarks, we will open the call for your questions. The company's 2022 third quarter business results were released yesterday afternoon. A copy of this release announcing results and other financial and statistical information about the period to be presented in this conference call, including information required by Regulation G, is available at the section of the company's website titled News, located at churchilldownsincorporated.com as well as in the website's Investors section.

Before we get started, I would like to remind you that some of the statements that we make today may include forward-looking statements. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our filings with the SEC, specifically the most recent reports on Form 10-Q and Form 10-K. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events.

During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and Form 10-Q are available on our website at churchilldownsincorporated.com.

And now I'll turn the call over to our Chief Executive Officer, Mr. Bill Carstanjen.

Thanks, Nick. Good morning, everyone. With me today are several members of our team, including Bill Mudd, our President and Chief Operating Officer; Marcia Dall, our Chief Financial Officer; and Brad Blackwell, our General Counsel. I will provide some high-level thoughts on our third quarter results and then share some updates on a number of strategic topics, including the P2E acquisition and our major capital projects. Marcia will then walk through our results in more detail and provide an update on our capital management strategy. After she finishes, we will open up the call for questions.

First, some thoughts on our third quarter results. We delivered record third quarter adjusted EBITDA. We also opened a new gaming property and completed a couple of strategic acquisitions. Finally, we positioned ourselves to close the P2E acquisition in the fourth quarter.

Let's talk about each of our segments, starting with live and historical racing. This segment delivered strong double-digit growth in adjusted EBITDA for the third quarter. All of our HRM properties performed well. We were especially pleased with the double-digit adjusted EBITDA growth from our Oak Grove and Newport properties.

Derby City Gaming performed solidly despite disruptions from the ongoing gaming floor expansion and build-out of the new hotel. We opened our fourth HRM facility at Turfway Park on September 1. This entertainment venue serves Northern Kentucky and the entire tristate area around Cincinnati. It has 850 HRMs and the ability to expand to 1,200 as demand ramps up. It's a competitive market, and we expect a steady ramp up over the coming quarters.

We completed, on September 2, the acquisition of Chasers Poker Room in Salem, New Hampshire, just off of Interstate 93. Over recent years, the property has generated the highest level of revenue of all of the charitable gaming licenses in New Hampshire. That's a great backdrop from which to now expand into HRMs. More on that later.

We also completed, on September 26, the acquisition of Ellis Park Racing and Gaming in Henderson, Kentucky. This property currently features a thoroughbred racetrack with 300 HRMs in the grand stand. With this acquisition, we have the opportunity to construct another HRM venue in Owensboro, the fourth largest city in Kentucky. We expect to invest approximately $75 million into the existing Ellis Park facility and the new Owensboro HRM project over the next year. We will talk more about this in a few minutes.

Turning to our TwinSpires business. While handle was up almost 8% over 2021, adjusted EBITDA for the TwinSpires horse racing business was down slightly for the third quarter compared to the prior year quarter. This doesn't concern or surprise us. Despite a slight decline in adjusted EBITDA, we are pleased with the strong margins that this business delivered when we compare it to 2019, with third quarter adjusted EBITDA up nearly 50% and margins up nearly 3 points over the third quarter of 2019.

Our TwinSpires sports and casino business generated positive adjusted EBITDA in the third quarter. Our team has done a nice job of carefully yet quickly exiting the online sports and casino business while maintaining the retail sports operations and our gaming facilities. While we continue to like retail sports wagering, our interest in online sports has shifted to the B2B model, focused on providing technology and horseracing content to facilitate para-mutual wagering on third-party sports wagering platforms. More on this in a few moments.

Turning to our business. We have a diversified portfolio of regional gaming properties that continue to perform well during the third quarter. Our consumers behave differently in each of our markets, so it is difficult to generalize across all of our properties with respect to clear trends by customer segment. Our Florida, Maryland and Louisiana facilities delivered adjusted EBITDA growth in the quarter, as I will discuss in a moment, Illinois and Ohio were also strong. In contrast, we continue to see softness in our Mississippi and Pennsylvania gaming properties, although not as significantly as we saw in the second quarter. Most likely, this relates in part to the stimulus money that was burning off in 2021 as we progress through the year.

Regarding our equity investments, Rivers Des Plaines delivered record revenue and record adjusted EBITDA in the third quarter, reflecting the benefit of the property's gaming floor expansion during the first half of this year. We are optimistic about this facility's future performance with the new amenities and improvements.

Miami Valley Gaming also delivered record third quarter revenue and adjusted EBITDA. This property benefited from the expansion of its outdoor gaming patio in June and the expansion of the indoor gaming space into a portion of the area that was previously a buffet. Across the company over the third quarter, our segments performed well, and we expect the trends in each of our segments to continue into the fourth quarter. Marcia will provide more color on our financials in a few minutes.

Now I will provide updates on the 5 areas of strategic focus for our team that will transform our company over the coming years. First, our major organic investments; second, the P2E acquisition; third, our next steps regarding New Hampshire and Ellis Park; fourth, our Arlington land sale; and finally, our TwinSpires business to business strategy.

First, let's talk about our major organic growth projects. We have a very experienced team leading the execution of our capital projects. Our team has done a good job in responding to materials and labor cost pressure as well as delays in equipment delivery over the past couple of years. We plan for contingencies in our projects and value engineer to further help mitigate cost pressures. Our team works proactively with other -- with our vendors to anticipate any delays in critical equipment and develops alternatives if a critical item is delayed. The majority of our capital projects are delivered on time and on budget. Some projects such as the home stretch club, which was completed in May of this year at Churchill Downs Racetrack and the Turfway Park HRM facility were delivered under budget. That said, there are a couple of projects in our pipeline that we anticipate spending modestly more on than we originally projected. I will identify these as we discuss all of our projects over the next few minutes. Again, most remain on time and on budget.

Beyond this, I want to give you a sense of the strength of our growth pipeline and our excitement to execute on it. Let's start with Churchill Downs Racetrack. We held the topping off ceremony for the first term project on October 21 when we placed the final steel beam on the top of the new structure. Our $90 million investment will be ready for the 149th Derby in May of 2023 when we will introduce more than 7,300 permanent seats in this new and unique location. We are currently projecting that this project will be delivered on time and on budget. We've also made significant progress on the Paddock project, our $185 million to $200 million investment in the reimagination of the area surrounding the TwinSpires remains on time and on budget for completion by the 150th Kentucky Derby in May of 2024.

While the first term project will be transformational in its own right, the paddock project will enhance the experience of everyone who enters the front gate or views the facility on television. It's a once in a century project for our iconic flagship.

Next, our investments in new high-growth historical racing and gaming properties, beginning with Derby City Gaming. The expansion of the gaming floor with an additional 200 machines and new dining and entertainment options remains on track to be completed by the end of 2022. The construction of the hotel also remains on time to be completed in the second quarter of 2023, but after the Derby, as we previously explained. The budget is still approximately $76 million. Regarding our Derby City Gaming downtown project in Louisville, we are now making excellent progress renovating the building that we purchased on the corner of West Market Street and South Fort Street.

This construction has been more challenging than expected as we encountered a number of issues related to the age and condition of the building, resulting in incremental costs and delays. We still anticipate opening this project in the second half of 2023. However, we are now projecting around $10 million more than the original budgeted cost of $80 million. We believe that even with this additional investment the economic return on this project is well within our target and is a good use of our capital.

Regarding the rollout of HRMs and our OTBs in Louisiana, as of today, we have installed 295 HRMs and 11 OTBs and they have performed well to date. We are on track to have 600 machines across 14 of our OTBs by the end of the first quarter of 2023. The final organic project is our Terre Haute Casino in Indiana. We are building an entertainment venue with approximately 1,000 slots, 34 table games and a sports book, along with several food and beverage offerings and a 122-room hotels. Our 50-acre site is immediately adjacent to Interstate 70 in Terre Haute, less than an hour from the western suburbs in Indianapolis.

We have begun the construction of the foundation walls for the casino and hotel. The completion date has been affected by delays in the initial permitting and approval process and long lead times for equipment. We originally projected that this project would be opened in late 2023 and would cost $260 million. We are now projecting it will be completed in the first quarter of 2024 and will cost up to $290 million. We remain confident that this is a very good use of our capital, based on the expected returns.

Now I'd like to provide an update on our acquisition of Peninsula Pacific Gaming or P2E. This acquisition of a very unique set of assets will provide our company significant growth through both existing and to be constructed facilities. After we close the transaction, we will have added meaningful scale and organic growth opportunities to our company at a very attractive multiple. We've obtained approval from the Virginia Racing Commission to acquire the Virginia properties and the Iowa Racing and Gaming Commission to acquire the Hard Rock Hotel and Casino in Sioux City. The New York State Gaming Commission is meeting this morning to consider for approval our application to acquire Del Lago Resort Casino in Upstate New York. Assuming all goes according to plan this morning in New York, we anticipate closing the P2E transaction next Tuesday, November 1.

As you likely saw, we announced in early September that we will be purchasing all of the Iowa assets as part of the acquisition instead of purchasing just the operating company in connection with the underlying real estate being sold to a REIT. As a result of this change, the purchase prices increased $265 million to $2.75 billion.

The P2E acquisition includes the opportunity to construct a large HRM facility in Dumfries. This is an approximately $400 million investment in Northern Virginia, around 30 miles south of Washington, D.C., directly off of Interstate 95. Phase 1 of the project will include 1,150 HRMs and is scheduled to open in fourth quarter of 2023. It also includes a 102-room hotel that is expected to open in the first quarter of 2024. This is an extremely exciting project. We have worked very closely with the seller to ensure a smooth transition to us at closing of the P2E acquisition. The project has been fully built out and construction is well underway. It remains on time and on budget.

We are also acquiring the Rosie's Emporia project in Southern Virginia, near Norfolk and Virginia Beach, immediately adjacent to and Interstate 95 interchange. This project will offer 150 HRMs. This is a $30 million effort that is currently planned to be completed in the third quarter of 2023. As part of the P2E acquisition, we also acquired the rights to partner with Urban One on the potential to build a casino in Richmond, Virginia, if a referendum is held and passed there in 2023. We believe that the city of Richmond and the Commonwealth of Virginia will benefit significantly from having a state-of-the-art casino in Richmond. We will work hard with Urban One in the coming year to build support for the referendum next year.

Turning to our expansion in New Hampshire. As I mentioned earlier, we completed our acquisition of Chasers Poker Room in Salem on September 2. We are excited about the opportunity to build an HRM venue with table games just 30 miles from Boston. New Hampshire has a unique structure for HRMs, where a significant portion of the excise taxes are contributed directly to charities. We look forward to developing a successful property in Salem that will create great jobs and will also provide critical support to many local charities serving the surrounding communities. We've leased a location that is near the current Chasers Poker Room and are working with the various local stakeholders to obtain building permits and other approvals necessary for our proposed facility. We will provide more details on our development plans on future calls.

With respect to our acquisition of Ellis Park, our initial focus is on our development plans for an HRM facility in Owensboro because that is the larger unrealized economic opportunity. We will have approximately 600 HRMs with room to expand as demand grows. We are also determining our capital plans for the Thoroughbred racetrack and gaming facility at Ellis Park in addition to a gaming refresh Ellis Park itself will need capital improvements, the racing infrastructure and customer facility, and that is something we anticipated and planned for in our modeling supporting our purchase price.

Across Ellis Park and the new Owensboro HRM facility, we expect to spend approximately an additional $75 million. We will have much more to share on our next call, including more specific budget and timing estimates.

Let's spend a moment on our process to sell the Arlington Park property. We are still on track to sell the 326-acre parcel to the Chicago Bears for $197 million in the first quarter of 2023 pending completion of remaining conditions. We expect to then execute on our plans to defer the tax from the gain on this sale by utilizing qualifying 1031 exchange transactions.

And last, I will share some thoughts on our TwinSpires B2B strategy related to wagering on horseracing. First, we are still very committed to our B2C TwinSpires horseracing online wagering business. Our online offering has delivered very high customer retention metrics over a long period of time, and our connection to the Kentucky Derby should continue to help attract new and casual players. As we exited the online sports and casino business, we sought to build relationships with some of the major online sports betting companies who want to introduce their significant customer base to horseracing, which is actually an important part of the content offering in many European markets, like those in the United Kingdom.

We were thrilled to announce our partnership with FanDuel in early September. We expect FanDuel will go live with us in January 2023. With our support, FanDuel is creating a fully integrated, seamless wagering experience for their customers to bet on horseracing while on the FanDuel sports wagering platform where they can bet on a variety of other sports. Our partnership with FanDuel demonstrates our strategic commitment to a B2B offering. As we discussed on our last earnings call, we believe that horseracing content should be available in sports wagering platforms across the U.S., and we intend to use the expertise and technology of our TwinSpires and United Tote teams to deliver it. Our TwinSpires team is in the process of negotiating other sports betting partnerships. If successfully completed, each of these partnerships will enable the sports wagering platform to distribute online horseracing content to their U.S. sports betting customers.

As we look towards the end of the year and into 2023, we are very excited about the many growth opportunities in front of us. With the imminent closing of the P2E acquisition, we will see a material increase in adjusted EBITDA and free cash flow. In 2023 and 2024, we will deliver on the other investments I discussed today, and we will keep pursuing what we are good at. developing greenfield and organic opportunities as well as pursuing acquisitions to grow our company significantly while not overtaxing our balance sheet.

With that, I will turn the call over to Marcia, and when she is finished, we will take your questions. Marcia?

Thanks, Bill, and good morning, everyone. I'll start with a few thoughts on our third quarter results and then provide an update on capital management. First, if you exclude the 2 businesses that we have exited, Arlington and our online sports and casino business, our net revenue would have been up $15 million or 4% higher for the third quarter compared to the prior year quarter. We had strong growth in net revenue in third quarter from our Oak Grove and Newport HRM facilities, our Churchill Downs Racetrack and our Calder Fair Grounds and Ocean Downs Gaming properties as well as for our TwinSpires horseracing business. We did have softness in our Mississippi and Pennsylvania properties in the third quarter compared to the prior year quarter.

Second, as you look at our adjusted EBITDA for the third quarter, we are very pleased with the performance of Churchill Downs Racetrack and there is so much growth yet to be realized from the psychotic asset in the coming years. The team is very focused on the preparations for the 149th and 150th Kentucky Derby. We will generate step function growth in adjusted EBITDA as a result of the increased number of reserved seats once we complete the first turn and the Paddock projects and as we grow sponsorships and wagering in the coming years.

Third, we were also very pleased with the continued strong performance of our HRM properties in the third quarter and we expect strong growth from this segment of our business going forward. Our 3 existing HRM properties in Kentucky, excluding Turfway Park, delivered another strong quarter with combined revenue up 14% and adjusted EBITDA up 15% compared to the prior year quarter. Oak Grove had net revenue up 23% and adjusted EBITDA up 31% compared to the prior year quarter. Our team enjoyed celebrating Oak Grove's second anniversary in September. It has been great to see the growth from this property, and there is still much more to come in the years ahead as we build our customer base for the surrounding area and draw customers from Nashville, Tennessee.

Newport Gaming continues to benefit from the expansion and redesign of the gaming floor, delivering over a 60% increase in net revenue and more than doubling its adjusted EBITDA for the quarter compared to the prior year quarter. Our existing HRM properties along with our new HRM properties at Turfway Park, Chasers in New Hampshire and Ellis Park and the Annex in Owensboro, Kentucky, coupled with the acquisition of Peninsula Pacific gaming assets, will fuel the growth of our high-margin and uniquely attractive HRM assets.

Fourth, our team continued to make good progress in exiting the TwinSpires Online sports and casino business, and we now expect to have a combined net loss for retail and online of less than $5 million for the total year.

And last, regarding our third quarter results for our wholly owned gaming properties, our gaming margin of 36% for our wholly owned properties, excluding our racetracks, was up 30 basis points compared to the prior year quarter and up 7.8 points compared to the third quarter of 2019. Third quarter of 2021 is relevant but saw a challenging comparison given the lingering impact from stimulus payments last year and the inflationary impact on consumers this year. Our teams that are wholly owned gaming properties have managed to execute very efficiently when compared to pre-pandemic levels despite these challenges.

Turning to our capital management update. We have generated $387 million of free cash flow on a year-to-date basis, up $19 million over the prior year. Regarding maintenance capital, we have spent $37 million through September, and we now expect to spend $50 million to $60 million on maintenance capital for the total year. This is $10 million lower than our previous range for the year. We would expect our maintenance capital to grow approximately $10 million to $15 million in 2023 based on the assumption of the P2E assets and with the growth of our existing businesses.

Regarding project capital, we have spent $227 million through September, and we now expect to spend $325 million to $350 million on project capital in 2022. Many of you have asked -- have also asked how to think about our project capital projections for 2023. We currently would anticipate our project capital spend growing by $200 million to $250 million in 2023. This reflects the anticipated cash spend for all of the projects listed on our capital project exhibit in our press release as well as for the remaining portion of Phase 1 of P2E Dumfries project and the P2E Emporia project.

Regarding share repurchases, we repurchased approximately 289,000 shares in the third quarter at an average share price of approximately $204 per share, reflecting our belief in the long-term value of our shares. Regarding our dividend, our Board of Directors did approve a dividend of $0.714 per share, which is 7% higher than last year's dividend. The dividend has a record date of December 2, 2022, and a dividend payment date of January 6, 2023. This dividend represents the 12th consecutive year of increased dividends for our company.

At the end of September 2022, our bank covenant net leverage was 2.5x, and our external net leverage was 2.6x. Our leverage has remained low because of our strong operating results again in the third quarter. We look forward to closing the P2E acquisition as soon as we can after we obtain the approval of the New York State Gaming Commission. As we've discussed in the past, we fortunately raised all of the funds that we need for this acquisition earlier this year. We do expect our bank covenant net leverage to increase to 4.4x at the end of this year as a result of the P2E acquisition.

We then expect to see our bank covenant net leverage to begin to decline as we benefit from the sale of the Arlington land in the first quarter of 2023 and as our businesses generate strong cash flow from both our existing and new operations.

In closing, we have a very strong balance sheet with extended and well-laddered maturities on our debt with a relatively low average cost of capital. We have a unique portfolio of assets that is unparalleled in the gaming and entertainment space that will generate a significant amount of revenue, adjusted EBITDA and free cash flow in the coming years based on the disciplined capital investments that our team has made and will be making over the next few years. We remain committed to creating long-term shareholder value with increasing dividends and by strategically repurchasing shares of our stock.

With that, I'll turn the call back over to Bill so that he can open the call for questions. Bill?

Okay. Thank you very much, Marcia. We're now ready to take your questions, so please fire away.

(Operator Instructions) And our first question comes from the line of Dan Politzer with Wells Fargo.

So I wanted to touch on the B2B racing content strategy that seems to be unfolding real time. As we think about the FanDuel deal and the 4 pieces there, broadcast rights, Derby sponsorship, United Tote and the technology component and then I guess the variable piece relates to content fees, can you walk us through the a la carte offering as it relates to the future conversations that you're having? What are the biggest pieces as we kind of try to estimate what the opportunity here could be?

Sure. Happy to do that, Dan. So first, FanDuel is a company that -- whose roots are born out of Europe, and they have a strong appreciation and interest in horseracing because of their activities there and the ADW that they own here in the United States [GVG] so they were very, very focused even militant on an integrated product from the beginning into their sports plan. So the first distinction I want to draw between them and others in the immediate term, I don't think there'll be a distinction on this point in the long term, but in the immediate term is FanDuel wanted an immediate integration.

So they want to have para-mutual wagering on horseracing sort of as a tab or an option on their broad sports wagering platform where you can get all sorts of other sports. Others will not be ready quite as quickly with that middleware and that integration so that the wagering can happen immediately on their sports plan, and there will be an interim step where they are essentially being provided by us with a white label accounts deposit wagering platform. From there, they will then transition their customers ultimately to a fully integrated product on their sports plan. So we're prepared to move as fast or as slow as people are wanting us to move, but I do think you'll see in the immediate term one differentiating point with that piece.

Others will want -- most of them will want content. They will want us to source the content from them. That's something that we are good at. Others may want us to do settlements for them. Some will be interested in sponsorships. There is a variety of commercial and operational tools and options that we will offer. And I bet no 2 sports wagering companies has a deal that looks exactly the same with us.

Got it. And then I think on the variable component that relates to the content fees for wagers on races at your tracks -- what are, I guess, the key variables that we should look at as we try to size this opportunity? Is it the planned rate days. Call it, your half a dozen or so tracks? Is it the estimated handle from these tracks and maybe the additive component from additional deals? Or what are the data points that we should be looking out there to try to size this?

I could take that in a couple of different directions. So if you don't mind, just clarify if you could, just a little more precisely what you're asking.

Well, I mean, of those 4 kind of buckets for the FanDuel deal, for example, the big variable piece is I guess we think about it and understand it is that the fees for wagers run at your track. So a bet place on -- a later placed on the FanDuel app that runs through the Derby or Turfway Park for race there. So as we try to size that opportunity, what are, I guess, kind of the parameters or data points that you could point us to, to kind of give us some clues there?

Got it. I understand, Dan. So first, we, of course, have our own tracks, and we have our own -- we own the Kentucky Derby. So we own the most important piece of content and the streams of payment with that are more than one. So this business of creating content, running a racetrack, the way it works in the United States is that track always gets paid. That's pursuant to the interstate horseracing act. You need to have contracts with tracks in order to take wagers on their track, and that's different than other sports. So the first revenue stream for us always is the fact that if you want to bet on the Derby or Churchill Downs Racetrack, the most famous racetrack America, you have to have a contractual relationship directly with our track, and you have to pay our track on a perjuring basis for every wager that is taken through your platform. So that will continue here. That will continue everywhere, anywhere, anyone in the United States takes a bet on the Kentucky Derby.

Separately, we will be paid on all the content that is provided to our sports wagering platforms. That is how our deals are structured generally with respect to content. So we will get a piece -- a marginal piece of every single track that goes through the platform regardless of whether we own that track or not. When we do own that track, of course, another additional piece flows through to the track. So the margins, of course, are really good. We're providing a technology solution, and we're also delivering content for those that need us to and the economic structure for that is always a piece of the wagering transaction. So I'm going to stop there, Dan. I think that answers your question. The larger point is, yes, we get paid more when it's our content, but we get paid on all content.

And our next question comes from the line of Shaun Kelley from Bank of America.

Bill, maybe sticking with the FanDuel deal with the B2B strategy. Just can you help us think about how you thought about or analyzed cannibalization so just the risk to wagers placed on TwinSpires as a sort of direct channel that you own relative to? Obviously, a huge opportunity to grow the TAM. You mentioned Europe a couple of times. So I assume -- that's a big piece of it, but sort of growing the Derby's presence relative to the risk around your own channels? Just how you thought about that dimensionally?

Yes. Happy to do that, Shaun. So first, this is a great opportunity for our company. There are millions of customers out there on the sports wagering platforms and a chance to reach those customers who sign up for an online account because of their interest in any variety of sports is a really attractive market. Right now, we can only reach online those customers who have demonstrated such a strong interest in horseracing. They're willing to download an app and go through the registration process, specifically for the horseracing product. We know there are a lot more casual fans out there than there are more serious fans.

So the chance to reach those more casual fans is a much, much bigger sandbox to plan than the world we've been used to, where it's just those that care enough to actually sign up for an account. That being said, our best margin would always be on a player that plays through TwinSpires. However, the fact is TwinSpires is now and will probably continue to morph over time. It is a product that is primarily driven by more serious customers. So it is driven by more serious players who are involved and focused and spending a lot of time building data models, utilizing data, utilizing information for their handicapping activities. So we still think that, that product that we offer with TwinSpires is still really, really, really attractive for serious players and will remain so.

For the more casual players, we're pretty good at finding them and recruiting them because of our connection to the Kentucky Derby, our utilization of the NBC telecast. So I suspect we'll always find new customers who are enthused enough to download the product, and that provides us with newer customers. But increasingly, I hope we also find customers that become more serious horseplayers over time and maybe want a more immersive experience. And that's what TwinSpires is and will continue to morph to. A lot of Internet businesses, I think, are driven by a small piece of economic activity from a huge group of people. That's really never been the TwinSpires model, TwinSpires is driven by a relatively modest number of people who are significantly engaged in the product and participating in a significant way, both monetarily and in terms of time on device.

So I think cannibalization will absolutely happen. It will happen at the margins. However, I do think this also is a much bigger opportunity and better overall for the company. And I also think and don't want to lose track of the idea that creating serious horseplayers is always -- creating both casual horse players and creating serious horseplayers is always in the best interest of Churchill Downs.

So any time and through any way that a serious player is created, that's a chance for TwinSpires in the long run. So I think cannibalization can happen. I expect it to happen in some level. I think overall, this is still way better for our company than to worry about that risk. How exactly it will happen quarter-to-quarter, I don't have an economic -- or I don't have a mathematical formula that can show you that. We'll just have to see how it plays out. But I'm entirely sort of -- I'm entirely optimistic on it and not looking behind my shoulder.

Really clear. And then maybe to switch gears on you. But Marcia, I think it was in your prepared remarks where you mentioned that the wholly owned margins. If I caught it correctly, we're actually up 30 basis points year-over-year in the gaming segment. Could you just elaborate on that a little bit? First of all, tell me if I was correct. And then second of all, if you could elaborate that a little bit, it's a pretty stunning or excellent performance. You talked about efficiency. What are the teams doing? And just in your mind, as you look out at some of the inflationary pressures, labor costs, et cetera, into '23, kind of how sustainable is the range of outcomes that you're seeing kind of right now as we've increasingly lapped the stimulus and some of the onetime effects from last year.

So, I think the more important thing. Yes, it was up slightly to 30 basis points on a quarter-over-quarter basis. Part of that was driven by the insurance recovery that we had in Fair Grounds regarding business interruption insurance related to Hurricane Ida. I think the more important point that I was trying to make there is that we were up 7.8 points compared to the third quarter of 2019, really compared to the pre-pandemic levels. The team has really been able to offset really the fact that given all the inflationary pressures that we've had, some of the labor challenges over the last 12 months, the team has really continued to just keep their head down. And even with the increased competition that we've seen at the Mississippi properties, the team has really done a great job of addressing all of the challenges that they can and continue to attract customers to come into the properties and growing the properties as well as they can through these challenging times.

And our next question comes from the line of David Katz with Jefferies.

Bill, we've talked about this a bunch of times off-line, and I just think it'd be to go back to it. Since it's come up this morning, just talking about the budgets that are out there for the many compelling projects that you have and how comfortable you are and how comfortable you can get us that the budgets will stay -- aren't going to move a whole lot, right?

David, good to talk to you. Well, some of the budgets are now being built in the current environment. So that makes it easier because we're in the middle of the environment where there's been the disruption, the inflation and the time delay. But I have to say that even for the budgets that have been compiled previously, Bill Mudd and his team, they've done a really fantastic job. We're on these issues every single day. It's not like these things should surprise anybody. We know we're in an environment like this. So we have to be working on these things every single day and the communication with vendors and suppliers has to be excellent.

So I think the first place to look is just look at the projects we're delivering, look at Turfway Park, look at the home stretch club, look at the projects we've been doing in this environment. We have been on time, and we have been on budget. There have been a couple where we're slipping a little as a percentage of the project. They're not big. But I called those out very specifically and talked about those very specifically in my comments, we're on it. And sometimes, there can be different reasons for different ones. I would say the Derby City downtown, it's an old building. When we got behind the covers on that building and saw what we have that cost is a little bit more.

So that's part of it. It's not just the inflationary environment and the cost of materials. That building was in worse shape than we realized. And when we when we peel back the layers and could really look at it, we saw that. So again, not particularly material, but there's another reason for it besides just inflationary pressures.

So project by project, that's how we do this. It's not some kind of philosophy. It's project by project, and it's elbow grease. We have built a team over the last few years, led by Bill Mudd, and this is what they do for us every day. This is their job. So I think the first place to look at is our performance in this environment, which is there. And then hopefully, we can impart some comfort, as you hear us talk about these projects that we're focused on these sorts of risks, and we have our hands around them pretty well.

Understood. And for Marcia, I know that this has been discussed in the past as well, but I think it's instructive because it's come up so much with investors of late. Can you just talk about the debt stack that you have, the potential that you may need to go out and raise more capital if there is any, and the degree to which you're your interest rates are fixed versus variable today? And I just think that would be sort of helpful in a broad context.

Thanks, David. I think if you look at our debt maturities, you will see that we have a very -- as I mentioned in my comments, very well-laddered maturity of our debt structure. We have no debt due until 2024, which is a very small piece, which is a Term Loan B that's less than $400 million. After that, there's really no debt due until 2027. If you look at our debt once we're done with P2E, we estimate that we'll have about 45% of floating, 55% that will be fixed after we're done. We really, I think, have a very low average cost of capital when we're done with this. So our interest rate exposure is, I think, very well managed at this point in time. And as I mentioned, we -- I think we are very fortunate, some might call it lucky, but I think it's just a discipline of our team is that we went out and raised some money for the P2E deal earlier this year, we did not do committed financing and we raised some money.

And so we're able to execute the P2E acquisition now. We have a large enough revolver, $1.2 billion that we can handle execution of things like the Ellis Park acquisition very seamlessly within 3 weeks, being able to close that. And even once we're done with the P2E acquisition and everything that we've done, we'll still have a very significant amount of capacity remaining on a revolver for things that may come up in the coming months. We're always, though, looking for strategic things that we might do to reposition things off of the revolver and finding those open windows that even free up more capacity because as Bill said, we like to acquire things, we like to continue to fuel the growth of our company. And Nick and I will always be looking for those opportunities to continue to make sure we find those windows of opportunity to tap into the debt markets where it makes sense.

And our next question comes from the line of Joe Stauff with Susquehanna.

Wanted to ask about Derby City Gaming. Bill, you had mentioned that some of the construction disruption on the expansion obviously very likely affected sort of the core facility. What's the right way to think about maybe when there is a more notable step down in terms of the construction disruption? Will it be when you kind of launch the 200 new units, I guess, later this quarter or will it be more towards like the first quarter of '23 with the second dining option? And then as we think about again, within HRMs, as we think about sort of Oak Grove and the right margin profile for that property, what's the right way to think about it? Naturally, Derby City gaming is so high in the low to mid-50s currently. Just wondering how to think about sort of the Oak Grove margin profile going forward?

Joe, this is Bill Mudd. I'm going to take this one for the team. So first of all, there's definitely been construction disruption because we have 2 entrances to Derby City Gaming. We have one at each end of the building. And one end of the building, which is where over half the parking is, customers can't go there. So we've been buzzing customers from that end of the building. Over to the other entrants, we've been providing a nominal amount of free play for the aggravation for the customers to keep them coming back. So the team has done a very good job of keeping those customers engaged and keeping them coming. So there's definitely been to be able to quantify and tell you what percentage it is. It's really almost impossible to be able to tell you, but there's clearly been a disruption.

We've handled it very well. In terms of when that disruption goes away, it will -- we'll have disruption until the hotel is done just because your going to have construction workers there and you're going to have people going in and out of the building. But most of the construction will be happening on the inside as we build out the hotel rooms after the end of this quarter. So at the end of this quarter, a good portion of the disruption will go away. We'll continue to have that until the hotel is completely done toward the end of May of next year. So overall, we're happy with it. Hard to quantify exactly how much there is, but there's definitely disruption.

Now going to your other question about Oak Grove and the margin profile of Oak Grove, yes, I mean if you compare Oak Grove to Derby City Gaming, you're kind of comparing apples and oranges right now. If you think about Oak Grove, it has a hotel, it has more food and beverage offerings because you do have a hotel which tend to be low margin, it also has a racing product which Obviously, as low margin, Derby City Gaming racing product is excluded and sent over with Churchill Downs in that profile. So you're kind of comparing apples and oranges. So it will be a better fair comparison once we finish the capital expansion projects we're working at DCG.

But I would also say Derby City Gaming, it's a bigger facility. And as you have a bigger facility, you can cover overhead cost. And the nominal revenue dollar falling through those assets come through at a higher rate. So what I would say is Oak Grove has lots of capacity to continue to grow. We love that Greater Nashville market. We're continuing to see that property ramp. And as that property ramps, even with the hotel, you should see the margin rate within that facility continue to grow. So all things being equal, all of the assets in Kentucky are at the same tax rate, but obviously, each one are going to have different volumes and that's clearly what's going to be the primary driver of any margin differentials between, say, a downtown Newport versus a Derby City gaming.

And our next question comes from the line of Chad Beynon with Macquarie.

Continuing on some detailed questions around HRM facilities, it sounds like things are humming along pretty well at the -- at Oak Grove and Newport. With respect to Turfway and the Louisiana HRM and OTBs, can you just kind of help us think about how long it takes for these properties to ramp up? I know it's pretty new to the customers, and we're obviously the customer is going through a lot right now, but it sounds like the returns on the other assets were very strong after, let's call it, 18 to 24 months. How long should it take for some of those numbers for Turfway and Louisiana to start picking up?

Thanks, Chad. So first, with respect to Turfway, that's a competitive market. There are properties on the Ohio side of the Ohio River and on the Indiana side of the Ohio River in the Tri-State area. So we have some experience there. We have recent experience with our Newport asset that we have there. And Marcia went through some of the ramping we're seeing there in her comments. Also, a number of years ago, we opened up Miami Valley, which is not -- it's still largely part of the same market. It's a little more distant, but we saw a similar experience there. So when it comes to Turfway, this is what you're going to find in a competitive market. You just get in there, you start building your database, you try to recruit customers the right way, you try to get them in your database and you take your time and it takes some time.

And in the meantime, competitors will run their models to try to keep competitors -- or keep customers from visiting. So I think you'll see it ramp up over an extended period of time. Newport is in no sense done with its ramping process, and we're a couple of years in, and I think you'll find something similar for Turfway Park. So we opened at September 1. We immediately had some technical problems with a particular manufacturer, so some of the games were down. So we've sorted out those kinks, and we're really just getting started now with building our program.

You also asked about New Orleans and HRMs and whether they cannibalize the product and our OTBs? There will probably be a little of that. But any time you have a chance to introduce a great product, a better product, a competitive product, you do it. And it will be a rising tide, and it will improve the overall performance. So I'm not going to give you a formula for the percentage of cannibalization that you might find in an OTB in Louisiana. We're not actually sure, but we know and we're confident the more HRMs we can add to the mix, the more attractive broader product offering we have and that will attract more customers who stay longer. So we'll see it sort out over the near term, but we wouldn't have put these things in if we thought we were just going to spend capital to cannibalize our existing product. We're very confident that this product brings us more customers who stay longer.

Great. Appreciate that. And then separately, on the capital allocation strategy, nice to see how balanced it is for you guys with the share repo, the increase in the dividend and obviously, all the projects that you're working on. As we get deeper into the projects in 2023, how should we think about what you guys will be able to do on the share repurchase side, given how consistent and strong that's been in your company approach for years?

We still have the authorization in place. I think it's $300 million or so of authorization we have. So it's one of the tools in our arsenal. It's something we thought all things considered it was attractive to do and we have the ability to keep doing it. I can't tell you today exactly what we're going to do in the future, except you do have the benefit of a long history with this management team to see how we behave. And you also understand the broader parameters of our leverage, even with all the projects that we're currently executing on, we pop up around 4.4, 4.5x levered, which isn't excessively levered. So we continue to have this tool in our arsenal, and it's something we'll continue to consider based on market conditions and other forces, but it's certainly not off the table just because we have a lot of good capital projects going on at the same time.

I'll now turn the call back over to CEO, Bill Carstanjen, for any closing remarks.

Thank you, and thanks to all of our investors out there who join these calls and to the analysts. We always appreciate your interest in our company and your feedback to us. We're always looking to get better and to improve. So we appreciate the feedback. We appreciate the support, and we appreciate the interest. I would just remind you that even though it's only late October, start thinking about getting your Derby purchases in. Derby 149 comes on in a hurry, and we're starting to sell the tickets, and they're moving pretty well. So you want to sample that first term for yourself, I encourage you to do it. I encourage you not to wait too long or you'll find that you may not just have the opportunity to do it. So don't yell at us as we get towards the next Derby and you can't find tickets. We're warning you now that (inaudible) Again, thanks very much. Have a nice holiday season. We'll talk to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.