PENN Entertainment Inc (PENN) 2011 Q2 法說會逐字稿

Welcome to the Penn National Gaming second quarter earnings conference call. During the presentation all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions) As a reminder this conference is being recorded Thursday, July 21, 2011. I would now like turn the conference over to Mr Joe Jaffoni of Investor Relations. Please go ahead, sir.

Thanks, Frank. Good morning and thank you for joining Penn National Gaming's 2011 second quarter conference call. We will get to managements presentation and comments momentarily, as well as your questions and answers, but first I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements reflect the Company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results could vary materially from expectations.

The risks and uncertainties associated with the forward looking statements are described in today's news announcement and the Company's filings with the Securities and Exchange Commission, including the Company's reports on both Form 10-K and 10-Q. Penn National Gaming assumes no obligations to publicly update or revise any forward looking statements. Today's call and webcast may include non-GAAP financial measures within the meaning of SEC regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP will be found in today's news announcement as well as on the Company's website. And with that, I will turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thanks, Joe, and good morning, everyone. Happy to be here to talk about our second quarter results. Obviously, it's a whole lot more fun to talk about good quarters than less than good quarters. So, we're pleased to be here today.

This is a quarter when a lot of good things or things that we were working on have sort of came together and as we get into the Q&A, I suspect we'll cover a lot of the issues. Some of the state challenges that we've been facing and have been working with, we'll talk about that. And as usual, my comments are going to be very limited upfront and we'll get to the things that you folks care about.

But first, I'll just tell you parenthetically that as we were sitting here killing time, waiting for the start of this call, we're talking a little bit about Charles Town. I was there just the other day to look at the latest of the late, that is, the expansion of our table games and the new entertainment area that we have constructed there, landscaping, a whole host of things that we have been doing over the last months, and I've got to tell you, and you don't hear me do this very often, it was spectacular. I marvel myself that Charles Town is one of the great gaming properties in America. We'd be in a very, very short list of among the most -- certainly among the largest, but also one of the most exciting and dramatic. It surprises me sometimes that many out there, if not most folks in the world, don't really know about it. Anyway, I'm very pleased with what we've done down there. It is just terrific.

Also, I thought it be helpful because I know you're going to get there anyway, to ask Tim to give you kind of his sense, his sense of the pulse of what's going on in the industry and what are the trends that we're seeing? Tim, why don't we start off with that?

Thanks, Peter. Just wanted to cover we're seeing across the regional markets in the second quarter. If you look at our results and you look at and extract the table games impact in Pennsylvania and West Virginia, and you also remove the flood closure that we had in Tunica, generally we're seeing very stable but very slight growth in revenues, coupled with a very, very rational promotional environment out there across all these regional markets. That has given us the ability to continue to be more intelligent about our marketing spend and continue to look at our overall cost structure that produced the second quarter results.

When you get into the details of what segments of business are doing what, the only strength we're seeing is in the VIP segment, the customers that spend in excess of $400 a day with us on our casino floors, that is showing some modest growth. Below that, it's still struggling. It's not getting, as we've seen over the past five or six quarters, not getting any worse. But there's really no strength in the lower level segments of our business, the retail segment, but the better quality customers are showing some modest signs of life as we look at the second quarter results. Hope that helps.

Okay. Then, operator, let's open the floor to questions please.

Thank you. (Operator Instructions) Our first question comes from David Katz, Jefferies and Company. Please proceed.

Hi, good morning, all. Nice quarter.

Thanks, David.

I wanted to ask about 2 things. One, in Pennsylvania, I was struck by the profitability level there, and I wondered if you could just talk about what drove that, and perhaps revisit the notion of where you think profitability can max out. We obviously consider the tax rate environment, et cetera, and then I had 1 other quick question.

Let me cover the Pennsylvania results. We certainly have continued to look at the evolution of table games now in its fourth quarter at Penn National, and David, the tax rate is 16% on table game revenues. We did see a migration over the past year of customers playing electronic table games, which were taxed at a much higher rate moving over to live table games taxed at a 16%. That has been somewhat of a contributor to the improved margins there.

Plus, we continue as we've had to take a look at certain sectors of customers that had shown low levels of profitability, and redefined the terms of engagement with them, continuing to pull back reinvestment where we think it makes sense. And given the fact that we're operating in the central part of the state, and primarily dependent upon Harrisburg, York, Lancaster, and the regional areas of central Pennsylvania, we don't have a lot of competitive pressure from other licensees in the state of Pennsylvania. So, all of that really sums up how we are able to continue to improve our margins at Penn National as we continue to evolve that business, which is now in year, beginning year 4.

Right. And do you feel like you still have some innings left to go, in terms of pushing profitability levels higher there?

Well, that never stops. I think it continues -- you continue to shave away things, and I've said this before on our previous calls -- if we see any nice lift in revenue across these regional markets when the economy does turn in our favor, I think we have cost structures that will yield those improved margin results even above what we're showing today.

Okay. And I sort of lied. I wanted to ask about 2 other things. One, I was -- I think we were expecting a little bit more out of M Resort this quarter, and then the other issue really is around Toledo. And hopefully it's helpful for others because I think we've been engaging in debate about how Toledo will start out, ramp up, and max out over time. I think most agree that you will do well, and you've communicated that, but there's certainly degrees of well. And if you could talk about some of the particulars like the population base and the net worth around that area relative to what their other existing properties, let's say such as Pennsylvania, and give us some perspective around how well Toledo could be, please?

Let me just comment on the M, David, and then I'll turn Toledo over to Bill. We took over that property on June 1, and became the 18th casino property within the Penn portfolio. The local gaming market in Las Vegas continues to be very, very challenging. Second quarter is not as strong, typically, as the first quarter is in the market. We continue to see good strength from our group and convention business there, but the primary driver of business is the Las Vegas locals, and that continues to be somewhat of a struggle.

That said, we have engaged with the property management there, very, very recently, and are working on continued refinement of our marketing reinvestment that's going to roll out in the third quarter there. They continue to look at other areas of costs to take out of that business, and we are encouraged with what we're seeing in the general trends there, and think there are still more opportunities to improve the margins in that business, and hopefully down the road -- and we're not expecting it in the near term. The Las Vegas locals will get better. We still have a very bright expectation for very good returns for that investment we made there.

I'll just add to that, that in -- David, if you're looking at the $1.126 million, that includes $970,000 worth of expenses related to the professional services around the closing that are required to be run through EBITDA. We've got a footnote in there, and there and there is a schedule in the back that explains that, so that leaves us about $2.1 million for the month of June.

Got it.

So, I don't know if you are expecting better than $2.1 million a bad month in Las Vegas, but we're actually pretty happy with our June results.

Okay.

And I forgot your question on Toledo, I apologize.

I was looking -- we were just looking for some perspective around Toledo. Everyone agrees you'll do well. We just don't know how well?

We pretty much refrain from any kind of specific thought processes on exactly how much the property is going to do. Our general methodology at Penn, and I think it's appropriate here, is to look at the adult population and the market. And when we've done that and we've made some assumptions relative to -- that people who are 10 seconds closer to our property versus 10 seconds closer to the Detroit property will go to their respective home market. When we look at that, Toledo is roughly 1 million people.

You compare that against the Penn National market, which is at roughly 1.2 million, about 80% of the potential from a population perspective, which is really the main driver of what is going to drive revenue. And I think if people were to look at where Penn National opened and what the growth rates have been there, I think that will give them -- give everybody a reasonable proxy for a range of estimates that make sense. The margin, I think, in our view, we look at it from the perspective that, again, I think Penn National is a good example, or a good proxy and take our operating margins at Penn National and account for the difference in the tax rate, and that should get you approximately into the range of what we would expect our profitability to be in Toledo.

Okay. That's very helpful. Appreciate it.

Our next question comes from Felicia Hendrix from Barclays Capital. Please proceed.

Regarding your favorite state, Illinois, I was just wondering if you could share with us your view on the deal to expand gaming that was passed there? And then also if you could comment on whether or not you see the VLT's having an impact on your business there?

That's a perfect question for Eric Schippers. Eric?

I'll take the first half of that, and let somebody else handle the impact of VLTs or lack thereof. The Governor, clearly, is wrestling with this. I think it's no secret that he thinks it's overly expansive, what the Legislature ultimately did.

As to what type of compromise he's looking for, he's been playing his cards very close to his vest. I think it's still pretty clear that the Senate President is holding off sending him the bill because he's fearful that it could just be an outright veto. So, our sense is that there is an ongoing dialogue to see what type of new package they might be able to put together on it, so we're looking at this more as a potential fall issue as opposed to over the next couple of weeks.

Okay. Helpful.

The other thing, Felicia, about the VLTs in Illinois that have been now approved by the courts, we've talked about this in the past, we do not see any negative impact on the existing licensees of having 5 VLTs in larger taverns in and around the state. We know there is already a legal product out there, this will legitimize that. And we've seen in the past in West Virginia the similar kind of authorization of VLTs that bars and taverns have minimal if not no effect on our operation in West Virginia, and we expect similar kinds of effects or no effect at all in Illinois as well.

Let me ask Eric, I think it might be helpful to talk about what the Governor's options are. It's kind of a mix and match. There's a lot of things that he could do depending upon what ultimately is presented to him.

That's right. He could certainly veto the package once it is delivered to him. And as I said, it has not been sent to his desk yet. And on a parallel path, try to structure in a new deal that could be presented to the legislature that when they return in the fall. We don't know yet if that's the way he's headed, but there have been a number of conversations that he's had with both legislators from the host communities where the riverboats are currently located, members of the horse-racing industry with all different constituencies. And as I said, it leads us to believe that he's really wrestling with a package that's going to make sense for everybody, including us. Including the potential negative impact that it would have on us to have as an expansive a plan as has been put together.

So I think it's obviously fluid. We're trying to make our voice heard as one of the constituencies at the table on this. I should note, while this is all going on, we will see how it plays out as we head through the summer, the 3% payment stopped as of July 15, with the opening of the 10th license. So, I think, to some extent, that relieves some of the pressure on at least the [flaccid] tracks piece, because they are going to be getting now subsidies from the percentage of revenues from the operation of the 10th license. And that's certainly something that we have pointed out as well. So, there's a lot of variables that are coming into play, even today as the Governor is looking at this going forward.

But I think in summary, we don't expect that this bill is going to be signed in its present form.

We don't expect it to be. Anything can happen, but right now all the indications are that the current form is unacceptable.

Okay. Thanks.

Thanks. And as we're talking about VLTs, just wondering in Ohio, what's the timing there? How soon could you open facilities, assuming movement into Youngstown and Dayton?

Steve, do you want to do that?

Yes. Felicia, the question on clarifying the timing of the VLTs, we expect that to take place in September through the legislature. In terms of the outcome, whether or not that is challenged, appealed, et cetera, is anybody's guess. In terms of actually being able to open facilities at our proposed relocation sites, that really is from authorizing legislation probably in the 18 to 24 month time frame, just given the fact that we've not even closed on the land acquisitions nor even started the entitlement process.

So, I would say, watch for clarity in September. Stay tuned to see if there are any challenges. If there are no challenges, look 2 years out for the point in time where we would be in a position to actually open those new facilities.

That would be best case.

All right. Okay. And then just moving to Lawrenceburg, that property relative to our estimates has kind of come in lower than we expected for a while now. Wondering if you could discuss what's challenging there, and where do you think you could see improvements there?

Well, the market there overall, a 3-bow market, continues to show slight declines as it continues to move forward. The Indiana [Resinos] certainly have impacted that part of southeastern Indiana, and our focus there has continued to look at ways to improve our cost structure, and I think we've done a very good job at bringing more down to the bottom line there. And we've completed all the capital work, and don't expect Cincinnati to open up until 2013.

So, Felicia, in summary, I don't see any kind of change in the macroeconomic situation down there. It's going to continue to be one of trying to find ways to take what we do have in revenues, and we get about $35 million to $37 million in gaming revenue per month there, and trying to bring as much to the bottom line, and continue to harvest that over the next 18 months.

Okay. I have a few more. I'll get back in the queue. Thanks.

Our next question comes from Joel Simkins from Credit Suisse. Please proceed.

Hi, good morning, guys. I think the skeptics on the Penn story are certainly pointing to additional competition from Maryland, once Anne Arundel opens up next year, and obviously, Peter, you spent some time talking about Charles Town and it certainly has come a long way over the last decade-plus. Can you give us a sense how you are positioning this asset, as well as Perryville for the middle of next year?

Which asset?

Charles Town and Perryville, just sort of how you game plan for Anne Arundel?

Let me make a broad comment, I made this before, and I think it gets to how we think here at Penn. Nothing in life is static. We wake up everyday with a recognition that there are competitive things, they could drop an atomic bomb on some city where we do business, floods, earthquakes, hurricanes, we seem to get it all. That's the nature of life in business. This competition has been rising in a number of places. We recognize that reality. Always looking over our shoulder with the thought that they're gaining on us. So, our strategy has been real clear, we just run faster.

Now, built into our numbers is we look at the next few years is the recognition we're going to be impacted in Maryland. There's no doubt about that. We're going to be impacted by Ohio. But as we've said earlier, Ohio is going to happen with or without us, so we are a lot happier having that happen with us.

All that having been said, as we run the numbers internally, look at the hits to our revenue, look at the gains, we're very happy campers. I'd love to keep it all, but the reality is that ain't going to be the way it is. So that we think we positioned Charles Town, more specific to your question, to be a powerhouse, that it is going to be very hard for Maryland to compete with. We're going to lose some convenience business. There's no doubt about that. You can play a slot machine 5 minutes away, you're probably going to do it, but nobody in Maryland and certainly not the folks in Anne Arundel, are going to be able to offer, at that tax rate, the kind of amenity package and the kind of experience that we can at Charles Town.

Remember, if you cut off all of Maryland, we're still the closest to Washington, Virginia, that vast market there. Highways are getting better everyday down there. There's a lot of good stuff happening, so Charles Town isn't going to go away. Would we love to have it all forever? Sure. But I think we've done everything that we can do to gain a real control of our customers, offer an experience that will never be matched in Maryland. Lose some convenience business, and then we just move on. I think we're totally realistic about that.

The only other thing I'll add to that, Peter, is in West Virginia, we will still have the ability to allow our customers to smoke in our casinos, and Maryland does not have that. Certainly, we think will give an option to a certain group of customers that will help us preserve revenues in Charles Town. I should also mention the table games business and the completion of the facility that Peter described at the beginning, certainly give us an advantage to offer a much more complete casino environment and casino experience than what Maryland currently offers.

That's partly why we spent the money to put this new entertainment area there. If you were to come out to Charles Town on a Saturday night, you have no idea what the energy of that place is. It is wild. It's incredible. It's energized. It's amazing. So that -- that's our job. To make an offering that is going to be as bulletproof as we can. And then it'll be where it's going to be. We're not going to waste 5 seconds worrying about beyond that. Go on to the next good thing. That's our strategy.

Relative to Perryville, we really don't expect much impact from the opening of Anne Arundel. We think Perryville's impact will come at some point in the future, when downtown Baltimore finally gets their casino up and running. That's really what's going to have an impact, whatever impact there is going to be in Perryville. We really don't see much coming -- much impact from the opening next year.

And by the way, we controlled our capital spend there with an immense discipline, with that recognition in mind. We're prepared for that, we're ready for that, we expected that. If we get it, fine, if we don't, that's even better.

Two more questions for you. The first is -- I know you guys have historically shied away from having an integrated rewards program, but in the next couple of years you could have theoretically 4 to 5 more properties. You have something in Vegas now. Has your thought changed on that?

And I guess the second question, and this probably out of left field, but probably want to address it, is Asia; what's your view long term? Are there any opportunities there? Do you spend much time looking at it? Thanks.

Let me take the first question, and I'll defer to either Steve, or Peter, or Bill on the second question about Asia, Joel. We have implemented a 1-card solution now for our 2 Chicago land properties in Aurora and Joliet. That got implemented in the month of May. We're in the process -- I should say that was across 2 properties that had the Bally's ACSC slot system. We're in the process of putting a 1card solution in at the Kansas Speedway when it opens in the first quarter of next year to be compatible with our Argosy Riverside operation.

So, we are working on the technology solutions to deliver that, and when you think about having Toledo, Columbus, Lawrenceburg, and potentially 2 VLTs, 2 race tracks with VLTs in Ohio down the road, it certainly could be an environment where there's a lot of cross market visitation there as well. So, we are working right now to solve the technology issues, which have not been that significant to overcome. And I think we'll be prepared if we do have those kind of opportunities in Ohio and further cross market visitation by our customers in that part of (inaudible).

On the broader question of Asia, suffice it to say, if there is a gaming opportunity talked about, thought about, possible, anywhere in the United States or the world, Penn's there. Take that as the gospel. We've spent a fair amount of time over these last years, I think I've reported before, in Japan when there was some active talk of that possibility. We still have a very strong option opportunity there, if you will. Bill and I were in China I guess 2 weeks ago.

Look, we're out there, finding the right opportunity, and elsewhere in Asia, I believe we were there in Korea, we can go down the list. When any of these things are going to open, I can't say. I think you know the issues. But I think you need to know that we're actively looking at those markets. Looking for the right opportunities. They're few and far between at the moment, but we are there. So, this Company has been nothing if not opportunistic in surveying the world that surrounds us, and looking for where we can pounce on a good opportunity, so the only answer I can give you, we're out there and we're prepared.

Thanks a lot, guys.

Our next question comes from Larry Klatzkin from Klatzkin Advisors. Please go ahead.

Hi, Peter. Congratulations on a great quarter. On this international stuff, would you be willing to partner up with another company that's maybe more in that area of the world?

We'll do anything. We've demonstrated that all along. Look, we prefer to own everything, but you've seen already a number of joint ventures that we have quite happily pursued. Steve and I were just talking about something domestically, here in America, that may spring up, and his question -- Steve, it's 8 o'clock this morning, was would you partner with these folks? And the answer is real quick -- yes, sure, why not? We'll do whatever it takes to make something happen. I'd like a whole pie, but I'll always take a half. I hope that answers it pretty blatantly.

It does. And Massachusetts and Florida, you guys looked into those markets, and what are you guys seeing on that?

Well, I'll let Steve and Eric work on that. We waste a lot of time in those markets, go ahead.

Steve can talk about the markets, I'll just tell you in terms of timing. The Speaker has announced, along with the Senate President, that the discussion of a gaming expansion bill will begin after Labor Day, and it sounds like they're as close as they have been to a 3-party understanding of at least the framework. And the sensitivity has always been around the racetracks and the notion of a no-bid contract and that sort of thing. We will look to participate pretty actively when the debate begins in earnest after Labor Day.

All right. And then Florida, too?

Yes. In Florida, it's also fluid. As you know, the expansion bill they were debating, and the last legislative session failed. There is a huge amount of interest among gaming companies in the Miami area and elsewhere who are still looking at a model that would divvy up the state into different regions with this structure of a bid process. And so now it's about finding champions for that type of plan. We've got our operation at Sanford Orlando Kennel Club, but are exploring potential other opportunities in other areas of the state if it does get down to that kind of regional plan like you're seeing in Massachusetts as well.

Right. And then as far as Maryland maybe getting table games, I know that's a good and a bad feel, but there's been talk off and on. Any feeling on that?

The state's been talking about it. It would have to go back to a statewide vote, which, if it was going to occur, I think it would be in 2012, and certainly operators are out there pushing for it. As Peter alluded to, there is an arms race going on out there in the mid-Atlantic region, given the amount of competition. As to whether all the pieces will be put in place for 2012, it's still too early to say, but that's when the -- that would be the earliest this would be put to the voters.

All right. And then the last question, Columbus is now going to have competition, I guess you've done everything you're going to do there? When it gets close to something opening in Columbus, you have plans here to make that facility more attractive?

What?

Lawrenceburg, I'm sorry. Lawrenceburg.

No. We're done in Lawrenceburg. We are working with the city, who has proposed a hotel very close to our casino where we would partner with them and operate it and manage it for them, and be a minority investor initially in that development. That would be the only thing that we're looking at in Lawrenceburg to add about another 150 to 200 rooms in that downtown Lawrenceburg area. But beyond that, we've completed our capital program in Lawrenceburg, and we're going to be prepared for what happens in 2013.

Certainly it's going to have an impact when Cincinnati does open. Again, in Indiana, we have the ability to offer smoking to our patrons on the casino floors, which Ohio will not, which we believe will continue to create an advantage for us. But certainly it's going to have an impact when Cincinnati opens in 2013 in Lawrenceburg.

Thanks, guys. Great quarter.

Thanks.

Our next question comes from Mark Strawn from Morgan Stanley. Please proceed.

Hi, guys. One quick follow-up on Ohio. I was wondering if you could give us some ballpark figures, if you are able to move the VLT or the race track locations to accommodate VLTs. Is there a rough ballpark of CapEx that you could give us to help us out there?

Yes. It's a $150 million requirement, and then there's the question of the -- I think some of the other issues are still up in the air in terms of license fees and whether there's going to be any moving cost fees or what not. So all that stuff -- it's going to be $150 million, plus, plus. I don't know that we've got a whole lot of clarity. I'm going to turn it over to Eric.

The knowns are it's a $50 million license fee, $150 million minimum required capital spend.

With some recognition for already spent land acquisition costs.

That's exactly right. I think it's up to $25 million for land acquisition costs. The unknowns are whether there will be a premium for relocation. And that is just an ongoing open issue right now.

Look, I talked with the Governor directly, face-to-face, and point out, look, I appreciate your enthusiasm -- well, first, we've made the point to the state that you need to do what, and Pennsylvania did, look around at the map, and put these things where they're going to have the biggest impact for you. And that is to get to those population centers that are not well served. I think that's pretty obvious and logical.

Naturally, as you've seen, the Governor has been focusing on trying to maximizing revenue for the state in very, very tough times. And one of the things that [Moe] has cooked up with the state was the idea that you'd have a move in addition to the $50 million, you'd have a nice fat move the track premium. And the point I made to the Governor, I think is the obvious one. Well, you can do that, but remember that there is a finite amount of money that can be spent in these markets, so that the more you grab there, the less you are going to get on the back end.

So, I think they're thinking about these things. We don't know where it's going to go. A lot of hurdles to be crossed. Remember, this is a win-win for us either way. If they're slow to roll these things out, we're happy to operate in the meantime, but to be real clear we support the VLT effort. We would like to see it happen, we'd love to see these tracks go to the places where they really ought to be. We have tremendous local support to go to those places, and we now just have to kind of wait and see, but in the meantime all is good. So, we're going to be at the table talking about that, and we think in the end that the state will do whatever the right thing turns out to be.

Okay. Thank you very much.

Our next question comes from Joe Greff from JPMorgan. Please proceed.

Good morning, everyone. Most of my questions have been asked and answered. Just 2 relatively quick ones. On Ohio relative to 3 months ago, have your internal returns forecasts, have changed at all? I guess in other words, netting into the equation the VLTs at the tracks? And then my second question for Bill is -- can you give us cash, debt pieces, and CapEx for the quarter? Thank you.

Listen, when we scoped out along the -- we fully anticipated that there was the possibility of VLT competition in Columbus, and obviously, we've factored in the fact that we had the track in Toledo. So, I would say no, there haven't been any internal modifications, because that's basically how we were looking at the process all along.

Relative to where we are on cash and debt balances, obviously, we've seen the credit facilities, but at the end of the second quarter we had $304.6 million in cash -- I'm sorry, total cash was $321 -- actually $322 million. Total debt, bank debt was $1.518 billion. We had some capital leases in Aurora Police service for roughly another $5 million, and then we had the 2 bonds for the $250 million and the $325 million, which we also put out a release yesterday of what we're going to do is basically call the bonds, the 2015 bonds at 6.75%, we're going to draw down our revolver and use some of our remaining cash at corporate to fund that calling, gives us total debt of roughly $2.1 billion at the end of the second quarter.

Looking forward on the CapEx in the second quarter, we had a total CapEx of roughly $69 million. Breaks out $14.6 million of maintenance CapEx. We spent roughly $16.3 million at Kansas, in our share of Kansas was $16.3 million. And then our project CapEx was roughly $37.9 million for the quarter.

The only thing I'll add to Bill's first part of his answer is -- the other thing that happened in the second quarter is we reached an agreement with the Governor's office through [Mullis] on incremental payments over a 10-year period that provides us economic certainty for our 2 land-based operations, and clarified a bunch of tax items, one of which was the commercial activities tax. And with that settlement that we've reached, that also doesn't really change our expected returns on our investments in Toledo and Columbus as well.

Thank you.

Our next question comes from Steven Ruggiero from CRT Capital. Please proceed.

Yes. Just one follow up question to Joe's that is just asking a little differently. That's with regards to Columbus and Toledo. As the economy has evolved and the projects have evolved, are you still looking at your penetration rates and win per capita the same way in your model as you had when you first took on these projects?

Yes. When we do these analysis, the reality is the penetration -- we look at it on a penetration level, and obviously, generally speaking, we've got a pattern of what you'll see in your revenues in the first year, and you'll see very nice growth rates for a property in the second, third, and fourth years. And, candidly, I think a good proxy for that is what happened with Penn National in the opening, and you'll see it again with other projects that we open up, that there will be a relatively impressive growth rate that will kick in through the second, third, and fourth years of operation.

Clearly, the economy can have some impact. Candidly, the decisions that we make relative to the marketing spend and the awareness and the media's attention can be much more important than what we're seeing in the current economy relative to fluctuations in business volumes. In other words, how much free publicity, how much excitement there is in the market for the new property is going to have a much bigger impact on that first year's operating results than what the necessarily where the economy might affect it.

Great. Thank you very much.

Our next question comes from Brian Egger from Forecastle Research. Please proceed.

Good morning. Maybe too early to get a read, but I'm just wondering if this week's opening of the Rivers and Des Plaines has affected Aurora in any way. I know there were initial reports of pretty severe traffic congestion from the north, which would suggest that maybe the big draw is not from Aurora, which I think is about 35 miles southwest, but just curious to know if you had any initial read on its impact on the market?

Brian, it's way too early to give you any direction on that. You're right, the crowds have been strong. We haven't seen any noticeable effect in Aurora, but it's way too early to draw any conclusions. I'm sure there's been a lot of just lookers in Des Plaines, seeing the facility that have caused the crowds to form there, but we are -- it's going to take us a good 2, 3 months to properly assess the initial impact of the 10th license in Illinois on our Aurora operation.

Great. Thanks. If I could just ask a quick follow-up, I'm also assuming, because it's quite a bit further way, the opening of the Grand Falls Casino in June, seems to be pretty much targeting Sioux Falls, South Dakota, and that market. I'm assuming, and certainly based on the June numbers, I can see this is a case of not having much effect on your Sioux City property. I know it's about a 100 mile distance?

Yes. We haven't seen much effect. There's been a lot of noise out there in western Iowa, we've had a couple of the Indian casinos close due to the flooding, coupled with the opening of the casino in Lyons County, so it's tough to say what the effect has been, but as you said, the June results in Sioux City were very solid. We haven't seen any material effect on that operation, which, as you said is about 85 miles away from us, affecting our business there yet.

Okay. Thank you for the additional color.

Our next question comes from Dennis Forst from KeyBanc. Please proceed.

Yes. Good morning. First, I wanted to ask Bill about capitalized interest in the quarter.

Cap interest in the second quarter was $1.027 million.

Okay. And that should continue to go up through the opening of Columbus?

Yes. It will climb. I think we're projecting $1.750 million in the third quarter, and then cap interest for the year is $6.2 million.

That's very helpful, thanks. Then I wanted to drill down somewhat on M Resort. Can you give us an idea of the depreciation quarterly going forward or on an annualized basis? It's certainly different basis than previous owners.

Yes. We clearly needed -- well, just to give some color to what happened, clearly we didn't have the asset segregation analysis done when we were giving guidance last time. As we got that done, we took the very conservative view that obviously there is an enormous delta between what the building cost to build and what we paid for it, and we were assuming that in the cost segregation analysis that all of the short lived item assets would stay at par, and that the reduction in the values would all come out of the building. The reality is it was much more proportional, which caused us to have a much lower level of depreciation into M. I think what we're looking on a going forward basis, depreciation rates at the end should be roughly $1.750 million a quarter. So, hopefully that's helpful.

Yes. It certainly is. And then staying with M Resort, the transaction cost of $950,000, where is that in the income statement? Is that in overhead?

No, M operating results for the quarter, in terms of how it's reflected in the statement. So, it's basically reflects that expense, which is why you're seeing the $1.1 million EBITDA results in June, and those were for advisor fees and other costs and legal fees, et cetera.

Right. But is it in the corporate overhead part or in normal G&A?

It's in the -- I guess what I'll do is refer you back to page -- there's a page in the back that's kind of -- page 13 -- I don't know if it's 13 in yours, but basically reflects not only the quarter's results, but as you look at page 7 and 8, the numbers that are reflected their in the M Resort result was the $1.126 million includes the expense. So, if I were to back out the transaction cost expense, instead of being $1.126 million in the second quarter of '11, that number would be closer to $2.1 million.

Right. And then the quarterly number that you've got in a table near the end of $4.26 million for the quarter, EBITDA, would actually be $5.2 million?

That's correct.

Okay. And then lastly, still on M, if my recollection is right, someone on one of these calls said that M did about $14 million in cash flow last year?

That's right.

But it did $9 million in the first half? Is that consistent, I guess the first half of the year does much better than the second half?

First half of the year is generally better in Las Vegas than the second half, but we're also ramping, and I think there is some -- the numbers we've given have kind of taken out some of the abnormal 1-time type charges on the restructurings and what not that we've had going on at the M. So, we've tended to try to reflect what we thought the true operating performance of the property was when we quoted numbers in the past.

Okay. Good. And then I just have $0.25 worth of free advice for Peter. In Ohio, you made a good point about the state benefiting from the relocation of race tracks to where the populations are. Maybe they should consider giving you a relocation discount rather than charging you to relocate.

If you'd like to talk to Governor Kasich about that on our behalf, I'd certainly welcome that.

There is logic there, is there not?

I'll just say a funny little -- just a very, very short story, an uncharacteristic story, when Pennsylvania was being talked about, Steve and I had a dinner with the then Speaker of the House and talking about the bill, and he made the observation -- we'd love to get more money up front from you guys. By the way, the $50 million was almost unprecedented at that time -- we'd love to get more, but we recognize that the more we grab from you guys up front, the less we will get in the end. And I said to him -- I've been in this business for a long time, and I've never heard a politician utter words like that. Because they never get it. Generally don't -- that there's a limit to what you can do. Tax more, get less. Anyway, that's a debate for another day. Let's see how it plays out in Ohio.

Okay. Great. Thank you.

Our next question comes from Larry Haverty from GAMCO. Please proceed.

Hi, Peter, Tim. Two short questions that will probably have long answers. One, Tim especially would be knowledgeable here. What do you folks think is going to happen in Atlantic City? And two, you have a lot of slot machines all over the country. Do you see anything in the way of slot technology that you think might accelerate your business, which is kind of stuck in a rut?

Answering your second question, Larry, I don't see anything yet on the slot technology side that's going to jump start any new sources of revenue out there for us. And obviously the gaming shows coming up in the fall and everybody's going to be introducing new products there. But there's nothing yet that has been put in front of us that says there's something new and emerging that's going to create new segments of business for us.

With regard to Atlantic City, I'll just give you my two cents. Reynolds going to open up next year. There's some potential for the smaller casinos to open up with the new legislation that was passed in Trenton. I still see that market contracting over the next couple of years. Aqueduct is going to open up in the fall. Pennsylvania is still just 1 year anniversarying table games introduction. There's still product there that I think is dated that needs to go out of the market. And it continues to be a market that we don't have an interest in right now, because of all those macroeconomic factors. So, Rebel opening will certainly be new and exciting, but there's still too much supply in the market to cater to the demand levels.

Great. Thanks, Tim.

Our next question comes from Shaun Kelley from Bank of America. Please proceed.

Hi, good morning, guys. I just wanted to ask real quickly, Bill, about the balance sheet. You guys just completed a fairly extensive refinancing on the credit facility side. Could you -- on my numbers at least, you are running at around 3 times gross leverage, and you are throwing off enough cash flow to be able to fund a good chunk of what you guys have left in Ohio. So could you give us a sense and just what may be the next 1 or 2 balance sheet priorities for you is, and kind of what level of gross leverage your kind of comfortable with over the cycle? That would be helpful. Thanks.

Yes. Obviously, we've looked at future projections and we've looked at what our CapEx spend is, and that got us incredibly comfortable with the concept of being able to call the 6.75% bonds using our revolver there, which in effect obviously, we're going to have to overcome the extinguishment of debt expenses, but we do that in about 6 months. And then from that point forward, we're looking to save probably $10 million a year on the interest expense line.

I think generally speaking, as a Company, I wouldn't recommend us going over 5 times on a gross leverage level. However, having said that, never say we wouldn't because if we saw an opportunity that made a lot of sense for us that took us over 5, and we could see a very quick and secure way to know that you could delever below that quickly, I'm sure we would do that.

The one thing that I think we've still got going here in terms of using this is from a -- buying back equity, which is generally what people -- what the issue is. We are very focused on what we have with the preferred equity sitting out there right now, which is fully diluted in our share count, so roughly 27 million shares, and we'll just -- slightly north of $1.2 billion, and that's in 2015, with 0% coupons associated with that through maturity. And so we know that as the stock sits between 45 and 67, that that liability stays fixed. And for that reason, we've been particularly not that concerned with making -- accelerating the equity repurchase because it's sitting there and basically sitting there waiting for us in 2015 for $1.2 billion.

So, we can certainly satisfy that obligation completely in cash if we choose to. We could also satisfy that within the stock, clearly given what we see on the profile today and our cash flows that we're going to be generating between now and then and the amount of [price] we've got. Short of us finding new opportunities, it would be our -- absolutely our intent barring any other event to complete -- to basically pay that off in 2015, and we could easily do that well inside our leverage and covenant levels and comfort levels around debt.

Thank you very much.

The follow-up question from Felicia Hendrix from Barclays Capital. Please proceed.

Thanks. I think you were about to say that it was over, but just quickly on M Resort. Just wondering, obviously you're going to see growth there from the recovery in Vegas, but as you think about that property's growth ex-recovery, just wondering what some thoughts were there. For example, is there enough hotel capacity, can you get some upside in margins as you can go through the operations, that sort of thing?

Yes, Felicia. There are 4 segments of business that drive the performance at M. One is obviously the Las Vegas locals. The second is the southern California traffic that comes in on Interstate 15. The third is the convention and group business, and the fourth one that's continuing to emerge is the Penn regional database. And we saw in the month of June, I believe, hotel occupancy about 91%. That continues to show strength, and our database is probably contributing 3 or 4 occupancy points to that story, coupled with strong convention and group business that they've seen, and will continue to see through the balance of the year.

So, we do think there are other segments of business besides the Las Vegas locals that will continue to, I think, show modest strength coupled with things we're working on with management there to improve our marketing spend and continue to pair down our cost structure there overall. It's going to be something that's going to take quarters of time to fully realize, and hopefully, and we're not optimistic in the near term that the Las Vegas locals will come back, but the other segments of business will continue to show strength. If we continue to show very strong hotel demand and continue to push the envelope at 390 rooms down the road, there is always the potential for looking at more hotel rooms at that resort to take advantage of the strength of hotel demand.

Felicia, just as a cute little aside, we bring our senior management group out to G2E every year, and naturally we assume we'd be staying at the M. Unfortunately we can't get in, so we've had to go elsewhere. They are doing particularly well in the group segment.

That's great to hear, and thanks for taking my follow-on question.

Thanks. Why don't we take 1 more from wherever it comes if there is 1 out there.

Mr. Carlino, there are no further questions at this time. Please continue with your presentation or closing remarks.

Perfect. People are looking at their watches, as do we, and the 11 o'clock witching hour has arrived, so with that, I thank you all. See you next quarter.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Have a great day, everybody.