PENN Entertainment Inc (PENN) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming second quarter results 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)

I would now like to turn the conference over to Joe Jaffoni. Please go ahead, sir.

Thanks, Benjamin. Good morning, everyone, and thank you for joining Penn National Gaming's 2013 second quarter conference call. We'll get to the Management's presentation and comments momentarily, as well as your questions and answers, but first I'm going to need to read 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 may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

In addition, today's call and webcast will include information regarding Gaming and Leisure Properties, which has filed an initial registration statement, including a prospectus, with the Securities and Exchange Commission for the proposed transaction whereby Penn National will separate its operating assets from its real estate assets. You should read the registration statement because it contains more complete information about Gaming and Leisure Properties and its separation from the Company, including financial information and disclosures regarding Gaming and Leisure Properties capital structure, senior management and relationship with Penn National. You may get the initial registration statement by visiting the SEC's EDGAR website or you may request it by emailing Penn@JCIR.com or by calling toll-free (855) 505-8916.

Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G, and when required reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP will be found in today's news announcement as well as in the Company's website.

With that I'd like to turn the call over to Peter Carlino the Company's Chairman and CEO. Peter?

Thanks, Joe. Good morning, everyone, and welcome to our second quarter conference call. Sorry for the delay, we had an unusually large number of folks dialing in this morning. Let's talk about the second quarter. It's obviously disappointing to us and I expect to some of you, as well. But, I think it's important to take a moment to consider what the quarter is and what it is not. Yes, there is a general softness out there throughout the United States and we felt it through most of our properties. We'll take some time to talk about that, but that's really not a disposition factor for this quarter.

Yes, there has been a cannibalization effect that many of you have written about, but that was pretty well taken into account by our estimates. So, that when you look at the quarter and try to figure out what has occurred or what is occurring, frankly it's just an issue of missed expectations. The issue has largely been that Ohio has not has ramped up as quickly as we would have hoped, and that's where the bulk of all this is.

However, I want to underscore that if you look at what we have produced in operating results in our higher properties, there actually terrific and the kind of returns on investment that most gaming companies in America would be thrilled to have. And, we do believe in the end, of course, these properties will do everything that we think they will. We're going to take some time, I think in this preamble, which we usually keep short, to talk about that. So, I think the focus is the performance in Ohio and the issues in Ohio, but let's not lose sight of the fact that Ohio is and will be a terrific investment for us, and we're pleased enough with the returns as they are today. We just thought we'd get there a little bit faster.

Tim, do you want to -- I'm going to add -- Tim is going to make some comments and followed by Bill, who I think will help fill in the blanks on this issue.

Thanks, Peter. Peter did mention that overall in the second quarter we did see softness in the consumer. As we looked at stable markets that were not impacted by infusion of new supply. Clearly, there was softness, most of you saw that in the reported state results and generally the softness was in lower trip visitation across these stable businesses, which is something a little bit different than we've seen the past. Which in the past, softness has been more attributed to spend per visit. This time it was trip visitation.

I wanted to highlight five properties, regarding their second quarter performance and I'll end with Columbus but I'll start with where I was yesterday and that's in St. Louis. The second quarter in St. Louis was impacted by a tornado that hit the property the last day of May and impacted, significantly, the first couple days of June, which was the first weekend of the month. The good news is that the facility had some damage with the tornado but nothing that's going to impact long term. What's more impactful for this year in 2013 is we continue to have significant construction disruption as we rebranded that property to a Hollywood, the second quarter. In my estimation it was probably the worst in terms of disruption, with half of the public areas that provide access to the casino shutdown for most of the quarter. Unfortunately, we have about five more months of construction left to fulfill this $60 million project and deliver a much improved facility to the St. Louis market. What's there today looks terrific but there's much more to come over the next five months. We're going to do our best to manage the customer experience, but it's not going to be without frustration for the customer in that market as they try to find their slot machine or find their table game as product gets moved to rebuild the area section by section.

The next property I want to talk about is Lawrenceburg. Lawrenceburg had to sustain the first full quarter of Horseshoe Cincinnati's opening. Clearly, from the numbers we see out of Horseshoe Cincinnati, their strategy that to significantly discount to create trial has caused us to fight and try to maintain as best the profitable share business as we possibly can. I can't think in my almost 30 years in this business a new property opening that discounted their product, their brand-new product, to these levels to try to create trial at the expense of profitability. I wanted to read a letter that I got from a female customer from Dayton, Ohio about why she hasn't visited Lawrenceburg in our Columbus property since Horseshoe Cincinnati's opened. I just want to read three sentences in this letter verbatim. Horseshoe Cincinnati has kept me so busy with promo-playing giveaways they don't get a day on my days off to get up to your place. I'm at a point where I can't even remember when I last used my own money to gamble there. I won a $15,000 jackpot last week on a triple-strike dollar machine on their money.

So, that's what we're experiencing right now in the Cincinnati market. We will continue to defend, especially our quality slot play there, but not chase this insanity and try to make sure that we look at our marketing reinvestment with sustainable profitability in mind as we always do. We are beginning year two. We're beginning year two in Toledo and the margins continue to get better there but we have very high expectations for that property and they will continue to get better as we continue to grow the business. We expect year two to be than year one. The only concern we have is with the new ownership of Greektown and making sure that Detroit does not get Cincinnati-like in their reinvestment, so we're watching that very, very closely.

The fourth property is Charles Town and we are certainly experiencing the effect of Maryland Live! I think the results of Charles Town have been generally in line with our expectations. The good news is the operators of Maryland Live! continue to be very rational and obviously they're enjoying the fruits of their location in between Baltimore and Washington. Everything from a Charles Town standpoint, as I've I said, is fairly much in line with our expectations.

The last property I wanted to talk about, and really the one, if you look at our guidance in the second quarter, that represented the majority of our guidance miss, is Columbus. Clearly the market has not met our expectations and our performance there vis-a-vis Scioto, hasn't met my expectations. I expect ourselves to be the market leader there in net-slot win, and we're right now at a 50-50 level with Scioto, even though they are out spending us roughly two to one. We'll continue to reinvest widely and garner more share, but that's the folks of the property to continue to grow our share of the business and let that market mature as we fully expect it will.

We recently did some market research that followed up from six months ago, some research that we did post opening. At all of the indicators in terms of customer preferences and attitudes regarding Hollywood Columbus continue to move in the right direction. We fully expect this business to build over the next couple years. I would suggest to the audience there, who look at the Indianapolis market, when the racino is opened in 2008 and how that performance evolved into 2010 and 2011, Indianapolis is roughly the same size as Columbus. We expect this market to behave like Indianapolis did in that three-year period as well. As we opened properties we stay focused early on on profitability and we don't take our eye off the ball on margins. It takes us a couple years to build these businesses up to their full potential and that's going to be the strategy for both Toledo and Columbus as we continue to evolve in the Ohio markets.

With that, I will turn it over to Bill.

Thanks, Tim. Obviously, people are, I'm sure, concerned about where we've taken guidance for the year and third and fourth quarter. I just wanted to give people a little bit of perspective in terms of how we got to where we're at. When I look at first quarter -- first of all this was a ground-up analysis, starting over from scratch from the perspective of looking at it and saying, forget where we were, let's take a look at what the history is and go from there. Reality is in the second quarter, once you take out the noise of some of the stuff relative to the floods and the tornadoes and all the rest of it, and offset that with what we saw in terms of some one-time settlements that are running through EBITDA, second quarter really was a miss by about $15 million. When I look back at the original guidance, quite candidly, I would have to say that it was a little bit backend loaded in the third and fourth quarter in terms of expectations, things getting better. We have, quite candidly, now gone back and looked at how we've been doing over the last 12 months, more particularly how we've been doing really since -- in the last six months.

Those trends are not supporting the level of guidance that we gave previously. We had particular focus and analysis on Columbus and Toledo. I think recognizing both properties are generating a very reasonable return. In fact, I would point out with a little more specificity based on our guidance, even as it stands today, we expect, on a combined basis, Columbus and Toledo, that we're going to have slightly north of 20% cash-on-cash return in the first year. By any stretch of the imagination, we would do projects all day long forever if we can get projects at a 20% return in the first year, because we are absolutely confident that those return metrics are going to improve over time. Next year will be better. Year after that will be even better. So, we are not at all in any shape or form panicked about our returns. Did they hit some of our -- at this point look like fantasy expectations? No. But, 20% returns are certainly well within the reason of a good project.

In our guidance, we had expected that the construction disruption, although we certainly planned for construction through the end of December, our expectations as we now get a better understanding the level of disruption in the second half of the year is higher than what we had originally anticipated. And so, we have in fact brought those down a bit. I would summarize that cannibalization is not the problem. When we look at all of the properties across our portfolio this year, and we've always known that this year was going to be a rough year in terms of new competition. I will tell you that we are not -- they are well within the range of expectations from the beginning of the year relative to what we would see in cannibalization. And, that cannibalization is in a number of locations. Obviously, it's in Lawrenceburg. It's Maryland Live's impact on Charles Town, Perryville, even Bangor got some issues. Baton Rouge has got issues as well, with cannibalization, but we are all -- all of those properties collectively are well within what we expected.

I think I'll just touch on a couple more points, which is Penn's strategy and both Peter and Tim talked about this, is to maximize our cash returns from the beginning. We believe that with rational marketing in the first year that we can generate better cash-on-cash returns out of the get go, to the detriment of revenue. Obviously, you can drive higher revenues if you do some of the stuff that we're seeing in the market today, but our belief is that you're going to get a better return. And, we can see that. We clearly have seen that when our properties' open up, we generate better EBITDA returns in the first year than almost any of our other competitors do. They start with higher revenues, more marketing, less EBITDA. We all end up at the same place. It's not like one strategy is necessarily going to end in an end result significantly different from ours or that ours is going to be different than theirs on a mature basis. It's just that our thought process is we take a little more different approach to that.

With that, I think I'll turn the call over to back to --

Thanks, Bill. I think it's time to open the call to questions. Operator, would you please do that?

(Operator Instructions)

Joseph Greff, JPMorgan.

I'll start off with just a broad-based question and maybe this is for Tim. Excluding some of the properties that are facing competition and cannibalization, the gaming consumer was particularly weak in June. Can you talk about what you're seeing in July? Generally, Tim, what are your property guys telling you about this reduced trip dynamic or budgets? Are they spending more somewhere else, or on their home? Can you help us understand maybe just the psyche of the regional gaming consumer over the last few months? That would be helpful in understanding your guidance as well.

All right, Joe. With regard to what we're seeing in July, it is looking very much like June did. So, that's the read for the first 20 days of July. With regard to what we're hearing from the operators out there in the regional markets, it's clearly more that the customer visitation patterns have lessened. It's not spend per visit. That's held up quarter over quarter fairly well. It's just that there's generally been less overall attendance in the facilities, down 2 percentage points. In markets where, in some cases, we're the only choice for casino visitation given proximity, they're just seeing generally lower visitation. That's what the operators are saying out there. It's not that they're going to the competition, it's that the consumer is just being more conservative with their discretionary entertainment dollar.

If you guys are talking about a 20% cash-on-cash return in the first year for Columbus and Toledo, and that's where you're getting right now, what was in your previous guidance for the two Ohio properties? Bill?

Higher. (laughter) It was significantly higher.

Okay. So, when I look at the $71 million of second-half EBITDA reduction, if you maybe can help us understand, if you want to itemize that for Ohio? But maybe also help us, I'm sure it's not a lot, but the severance accruals and legal fees for Sioux City and maybe you can also quantify the magnitude of that disruption in St. Louis in the second half?

Yes. How would I describe that? I think when we look at the Columbus and Toledo -- first of all, the $15 million in the second quarter is part of the overall year's reduction. Right? Clearly we're reflecting actual results. You then can -- it's an overly simplistic way of looking at it, but you can then take that run rate, assume that that applies in the third and fourth quarter, so that gets you to roughly $45 million. The rest of it is spread on -- there are some expectations for additional legal and employee, not necessarily severance costs, but bonus costs in Sioux City that are probably not an enormous number, $2 million. We've got -- not sure. St. Louis, we've certainly brought that down within reasonable expectations. We really don't, quite candidly, we don't comment and I know we've gotten much more granular this time relative to guidance in terms of discussing particular returns, especially in Columbus and Toledo, but we're sticking with our regional concept. So, I'm not going to really give property specifics.

I think the concept of helping people understand Columbus and Toledo was to help ground people to help them realize that somehow or another we've all gotten ourselves into the framework that Columbus and Toledo is a disaster. It's anything but a disaster. It's really why we made the point to talk about what our cash-on-cash return is in the first year and the fact that we do expect it to get better. We had some, quite candidly, what would now look like quote, an [ex-share] irrational exuberance relative to what our expectations were in Columbus and Toledo. I will tell you the guidance does not assume that we improve our Columbus and Toledo trends. I think from a market share perspective, we're assuming the same. I know we're going to work diligently, and the guys are highly focused on figuring out how to do that in a profitable way. The guidance does not reflect that.

The guidance also doesn't reflect that there's going to be significant improvements in the margins at both properties. We do think, quite candidly, both properties have got some room for improvement there. That's not reflected in the guidance because we haven't -- it's kind of like -- it's very close to the concept of, if it hasn't happened yet I'm not going to put it in the guidance. Guidance is not based on faith or hope, it's based on what we're seeing on the trends and significantly looking at where we see the business levels at. I can tell you the guidance is -- across-the-board, in other words almost all properties across the entire portfolio have come down from the previous guidance based on the trends that we've seen. Certainly does not assume that the economy is going to significantly improve. Also doesn't assume that the economy is going to get any worse. So, that's about the best color I can give you with the guidance.

Okay. Then I have a couple of questions on the proposed transaction. You put a lot of information in the press release, thank you, with respect to regulatory approvals. Based on what you've already secured and your anticipation based on what you believe to be the timing dynamics to the proposed transaction, will this be the last quarter that you are reporting at Penn National? When we fast forward and you guys are reporting your third quarter results, is it -- ? Then related to the transaction, a separate question, given the new guidance do you anticipate any changes to your borrowing costs for PropCo or OpCo?

Well certainly Penn National continue to exist and then we'll have a third quarter? So regardless of when we close, with Penn National will report third quarter results. On the borrowing costs, we have not changed those. As you recall on previous calls, everybody wants -- and rightly so, pointing out that our borrowing costs or assumptions on debt were probably a little conservative in terms that online our numbers were a little higher. The credit markets have since backed up. I think we are much closer now to where actual expectations are relative to interest expense. Although, listening to my trusty bankers, they still feel like we're going to be -- that we're well within the range of where we're going to end up with final borrowing costs. Obviously, we've got a period of time here before we actually hit the market on that. We're going to hold off on any updates given the fact that I just don't have a crystal ball on where the credit markets are going.

Okay. Great. Then my last question, Bill, if you can provide cash debt at the end of the quarter? CapEx on the quarter and CapEx for the balance of the year?

Sure. Cash at June 30 was $235 million. Bank debt was $2.137 billion. Between capital leases and another end resort loan there's roughly $13 million. Bonds $225 million, gives us a total debt of $2.476 billion at the end of the quarter. CapEx for the quarter was $53.9 million. Broken out roughly between $23.9 million for maintenance CapEx and $30 million in projects. Projects is made up of close outs on Columbus, there's probably about half, or a little less than half the balance, additional close outs on Toledo, as well as we're starting to ramp up now with Dayton and Youngstown. Then the last piece of the significant CapEx, for project CapEx, is Hollywood St. Louis where we spent roughly $9.4 million. For the year, we're expecting maintenance CapEx to total of $96 million, project CapEx to be roughly $196 million.

Thank you.

Felicia Hendrix, Barclays Capital.

When we look at your pipeline, and knowing what we know about Ohio, specifically in Dayton and Youngstown, have you changed your expectations for those properties, how you're thinking about them? How you're addressing openings / operating them? Can you talk about that for a minute?

Sure, Felicia. This is Tim. What we're going to do with the opening of Dayton and Youngstown is just be a little bit more conservative with the amount of slot product we're going to put on the floor and let the market grow into the addition of more slot supply over the first couple years. I think that's the learnings from Toledo and Columbus is we're going to open with approximately 1,000 games at each of the facilities and then build the box a little bigger than that and then add product as demand warrants when our win-per-unit thresholds hit a certain number that gives us confidence that the added capital will get good returns.

Let me squeeze something in there, Tim and Felicia, you might recall that in Charles Town, where we eventually got up to a machine count, until competition came to the market, of 5,000 games, we did that over a period of probably 12 or 13 years going up in 500 unit increments. We built a little extra space. We moved into it. We built some more, moved into it. We did it very gradually. One of the issues I think we are seeing in Columbus is that we dumped, we and our competitors, 5,000 machines into the market virtually overnight, in an inexperienced, undeveloped market overnight. I think that also has had an impact on performance there. Another reason why we are satisfied that we'll grow into that. Clearly with these facilities, as Tim highlights, we'll take a more cautious approach and we'll grow into them.

That makes sense. So, my next follow up to that question was, as you think about your pipeline in other states for example in Pennsylvania and Massachusetts, maybe more particularly in Massachusetts, how might you be, knowing what you know now in Ohio, how might you be thinking about those? Pennsylvania probably not as relevant, though? As --

Who wants to take a stab at that? Let me comment that Massachusetts is still in the speculative stage. We're excited about it. If we can succeed there, in gaining a license, it could be very, very good but we have steps to follow. Tim, why don't you --

I'll let Steve comment. I'm sure he'll want to say something as well. In the slot license we're pursuing at Tewskbury, the capacity is 1,250 units. Given the market just north of Boston there, we feel very confident that number is very, very reasonable and that will be supported by the population in that part of Massachusetts. So, I don't think we have any concerns that 1,250 is going to be too many units for Tewskbury, Massachusetts.

Great. Bill, just given the regional gaming trends, as you think about PropCo and perhaps some of the acquisitions that might be making in the future, I know you guys have talked about initially, eventually diversifying out of regional gaming but as you've discussed it many times, that was something that was further down the road. Given what's going on in gaming in general in the regions, is that a strategy that you might think would get pulled forward a bit?

I don't really think so. I think at the outset, it's our expectation that we're going to be highly focused on gaming. We will certainly look to uncover every single gaming opportunity that we can find and I think that is what we would expect to see for the first couple of years, probably, I think at least. Now, that doesn't mean that if some unbelievably attractive opportunity comes along outside of gaming that we wouldn't be open to listening to it and exploring it. But, that's -- I don't believe, and Peter should probably talk to this as well, is I don't believe that our focus is going to be outside of gaming. Regional gaming trends in a lot of markets are stable enough. In other words, once you understand potential for cannibalization and new licenses and the rest of it in individual markets, there's not an underlying concern about the health of gaming. I think we're a little hyper focused right now because we're looking for quarter-to-quarter trends, but over the long term, we don't see anything that causes us to say, oh, my God, gaming's all the sudden going to go the way of cigar bars or something.

(laughter) That says it pretty well. Let me add this, Felicia, as Management of a public company, our responsibility is to continue growth for shareholders. We get up everyday with that recognition. It's a long-term game and it's one that we are highly focused on. I used to say when we first went public, and way back in '94 as a tiny little company that we were going to do everything we could do in gaming business and I suppose if we ran out of things there it could be widgets. Now, thankfully we have not so completely run out of things that we're looking at widget factories. But, I think the read itself demonstrates that as the industry has matured, we are always looking for ways to maximize shareholder value. This looks like the next smart thing for us to do.

We definitely think there's think there's a long runway over the years. I'll give you the widget analogy again, yes we could go off and do other things, but it will be the tenth in a long list of gaming opportunities that we think we can find. So, we're just going to have to stay tuned. We don't see any downside. This is a huge plus for shareholders. I'm confident that we can prove that this can be very successful and grow going forward, but we'll be ever mindful of opportunity but cautious as always.

Okay. Great. Thanks, guys.

Henry Curtis, Nomura.

I suppose that's close enough. (laughter) I'm just trying to think of the -- as you do your centric rings around Columbus, to what degree some of those customers might be more enticed to go to your facility in Dayton? Have you factored that into the returns that you're expecting out of Dayton? Then a similar question, both for Dayton and Youngstown, you are going to be competing against full-bore gaming facilities. What sort of returns are you expecting from those facilities?

I don't know that we're going to give specifics in terms of our expectations for next year. I would say relative to Dayton and Youngstown that we're actually -- this is kind of ironic, but we're actually very encouraged by prospects for that given how well Scioto has done against us in Columbus. Clearly a product that's well done, clean safe, well-maintained, in good locations. Good locations is a competitive viable product. If anything, I would say that our expectations in Youngstown and Dayton have actually, are looking up versus where we might have originally thought where we thought that the Columbus property was going to -- this is the horse and the carts, which one comes first. But the fact that we're having some troubles in Columbus is actually encouraging for Youngstown and Dayton because it says that the product and the customer is receptive to a lesser, full product of gaming than we might have originally anticipated.

So any sense of what the customer base in Columbus today might be more attracted to your Dayton facility?

Well, we do get we know, Harry, that we get business out of Dayton that goes to Columbus. Dayton is right now equidistant generally between Cincinnati and the Columbus market, so with Horseshoe Cincinnati opening it certainly has had an impact on Columbus. As we look at Columbus going forward, though, and as we do our concentric circles studies, it really is just focusing in on the 1.7 million, 1.8 million people that live in the Columbus MSA. We do factor in the fact that we are going to see erosion of business in Dayton when more supply comes there ourselves and also with the Leviton facility.

You might consider, Harry, Peter, comparing Columbus to, say, Kansas City, Missouri and look at the competition there, look at the volumes there. The cities are -- I think the markets are similar size. You can see what can evolve with a mature Columbus market. Ohio is a little strange. This is my own thought about this, a little different, similar population to Pennsylvania, but much more compact. It makes the looking at circles, as you began your question, a little trickier because there's a lot of overlaps throughout the state. It's not like Philly is at one end and Pittsburgh is that the other. It's a little more compact, but nonetheless population is there. These properties will find their own markets because the population is adequate to handle all of what is currently planned.

Okay. I appreciate that. My last question is, with the revised guidance, you guys have always been very realistic about your expectations. In this case have you built in a cushion into your latest guidance?

I would say no. But obviously, we've looked at it to try to get the numbers that we think are going to be realistic. I would tell you that I think this is as good a number done as consistently as we've done before in terms of the methodology and the thought process that we put into it. I wouldn't say that I think there's a big cushion in there, but I hope I'm wrong.

(laughter) Let me make a comment just for fun. I think in the spirit of what we're trying to accomplish here today, Tim's smiling at the other end because he think Bill's been too conservative. Bill is sticking with his number and we haven't been able to shake either party. So look, this is not a science. It is partly guesswork and art based upon very careful examinations of the numbers. I think Bill's answer about how we approached this as a ground-up exercise answered the question quite thoroughly. Bill put a number out there that, I think to quote him, probably doesn't have a cushion but it's realistic. And that's the way he's approached it. I think Tim's feeling more optimistic and let's hope that Tim is right. So, there it is. That's the best answer you can get.

Well, I certainly appreciate it. Thanks, guys.

We try to be as straightforward as we can on these calls.

Shaun Kelley, Bank of America.

So maybe just one technical question on the transaction. In the release you guys lowered the cash component of the E&P distribution. Could you just talk maybe, Bill, about the exact driver of that? Is that a lower cash balance at the end of the year, or what exactly drives the amount of that change?

At the end of the day it's a byproduct. What I mean by that is we've obviously taken a look at where our expected revised guidance is for both PropCo and OpCo. We made the judgment that we wanted to keep the leverage as close to our original expectations on leverage were going to be. At the end of the day, we came to a conclusion that having the appropriate level of debt on both companies is more important than maintaining the cash portion of the E&P distribution. Effectively, what we've done is reduced the amount that we're going to have to borrow, but that had to come from somewhere and where it comes out of is the E&P cash distribution. Leverage for PropCo is very credit and close to where it was originally. I think maybe OpCo's ends up a quarter turn higher, but certainly with this deleveraging profile OpCo will be able to get right back into the ballpark of where it needs to be very quickly. So, the E&P purge is really nothing more than reflecting where leverage is going to be for the two companies and that means we have to borrow less money. When we borrow less money, the cash needs to come from somewhere so it's coming out of the E&P purge.

That's helpful. The question that we're getting from a lot of people is the sustainability and stability of the dividend for next year given it's really only a 5% revision for this year. But as we start thinking about Sioux City and then perhaps the underwriting of some of the moving pieces in Ohio, could you just talk to us a little bit about for next year, is the contemplation that you will lose the Iowa property? And when would that flow through, and what some of the maybe potential offsets? Will that be offset by the additional EBITDA from the tracks as we start to roll forward to '14?

From a PropCo perspective the rent associated with Sioux City is fairly small. So, in terms of the impact on the dividend, it should be rather minor. Relative to Columbus and Toledo, those numbers, as we start to get into the anniversary period that we would start to expect to see year-over-year growth. Clearly the way the rent structure works for those two is based on a month to month as results come in. I would expect that from there we would see increases in rent relative to this year. The other components of the rent are all fixed. At the end of the day, once we set the rent amount for the Company, that dividend is not subject to the fluctuations that we're experiencing now. We're going to agree on a number and we're going to set the rent payment coming up here shortly. Then that number is going to be pretty much fixed, other than Columbus and Toledo, and there probably will be some sort of a provision for a reduction of the rent if in fact the Sioux City ceases to quit operating but it's not going to be a big number.

And Sean, just to clarify the fluctuation monthly is just in Toledo and Columbus. It doesn't apply to Youngstown or Dayton. That's a fixed five-year fee payment for those properties.

And, Tim, just to be clear on that is that the dollar number set up before those properties even open or is it based on run rate of what they're doing in the first quarter or something like that?

It's going to be set -- we haven't finalized that -- it's going to be set at the time when we do the spend. So, it's going to be well ahead of the time that the properties are actually up and running. A little bit of a guess, but it will be a guess that's a reasonable rate of return for PropCo and then we can have a reset in five years. That's part of the benefit of the setting the restructure so that if the property's doing better, there will be a rent increase. If our expectations are a little too high, there will be a rent adjustment the other way. That will happen five years afterwards.

That's helpful. My last question is a bigger picture, strategic one. Given the announcement for the western Pennsylvania license, in particular, just wanted to get your view on how should we -- we're a little bit surprised on that just thinking about that versus maybe maintaining some of your cash balance and your opportunities for some M&A in the future. Could you walk us through your thoughts on that market particularly, given the density of what's going on in Ohio, the amount of supply there? Their slightly lower underwriting and trends that we're seeing in some of these mid-Atlantic markets as well. How did you balance the green field opportunity there versus maybe holding back some firepower for M&A after the REIT conversion is complete?

Let me start and then Steve can hop on. I think what we've done is we've found those guys have been able to secure some pretty attractive financing and quite candidly to help fund the FF&E and the gaming license portion of it. Then on the property side, GLPI is going to be the financing source for the building costs. From an OpCo perspective, its actual use of the balance sheet is pretty small. On a GLPI side, as we do acquisitions, we fully expect that to fund those acquisitions, we will be coming out into the market with secondary equity offerings. Clearly, we've got to make sure that when we're doing a secondary equity offering that it's accretive to the shareholders at large. We would expect that the transaction in western Pennsylvania would in fact meet that return threshold.

Let me interject before Steve Snyder comments. That this is all financing dependent. This is a transaction that relies completely. Let's let Steve answer that.

Shaun, to that point we've had a tremendous dialogue with the County commissioners in Lawrence County. They are very committed to getting this project done, so much so that they have committed to monetize a significant portion of local share tax that they are going to receive to make sure this facility gets done. It's the first -- it's really a unique set of circumstances in the gaming development projects that we've worked on to see the equivalent of near a $50 million grant coming from the host community in the form of monetizing its tax stream. Absent that, we would not be involved in this project. To Bill's point, the GLP component of this covers itself through the rent and generates a more than adequate rate of return based on the expected cost of capital for GLP. The contribution from the County, as it relates to the intangibles, the license and the personal property, the gaming equipment, just makes it such that we're very comfortable with our underlying assumptions. We're very comfortable given the proximity with Austintown, with of course the focus being penetrating further into the Pittsburgh marketplace of this new to be constructed facility.

Great. That's really helpful, guys. Thanks a lot.

Steve Wieczynski, Stifel Nicholas.

Tim, first question for you, you called out the Cincinnati, northern Indiana market as being overly promotional. Are there any other markets out there you would call out as seeing the same type of activity? Then, the next question is how do you combat that or do you sit back at this point and take it until that type of activity dies down?

You said northern Indiana, Steve, I think you meant southern Indiana.

Southern Indiana, excuse me.

That market, Cleveland is also got very high promotional spend but that's not something that's impacting us. But I think more importantly, your question is how do we combat it? We look at zip code by zip code at where we have a fighting chance based on proximity and look at how we want to adjust the reinvestment dial. We do everything through test and control to make that sure we're doing profitable marketing interventions and we don't chase it. We are not going to chase it in Cincinnati. It's something that we don't believe is sustainable on their end because they've got to pay bills. We have done a fairly reasonable job of retaining our VIP slot play, especially older females, which we expected based on the fact that we're in a suburban environment and they're in an urban environment. We take a look at all that demographic information to make sure that we're reinvesting in the right zip codes to the right customers. Clearly, we are not going to chase what their level of reinvestment has done to that marketplace.

Look, their spend is suicidal. It makes no sense at all. If you go to Cleveland, it's them against them. So, you tell me why they've taken this course. Look, we've found -- and this my editorial comment, I've never seen an industry that's so desperate to give away its bottom line as this industry can from time to time. Our experience has been hold tight, let them blow their brains out, and eventually they come back. That's not to say we don't react, but we try to react carefully as Tim has well outlined. Bill, do you want to -- ?

I don't have the numbers with me but I think for you guys on the call, if you want to spend a little time looking at the relationship of promotional credits to the slot win in Cincinnati and Columbus, or Cincinnati and Cleveland, I think you'll find those numbers to be absolutely mind-boggling, relative to the amount of promotional credits they're giving. Especially if you factor in the concept that a good percentage of their business in the first year is going to be unrated. If you were to back out the unrated play and then calculate promotional credits as a percentage of people getting rated, it really is -- I'll use Peter's word -- insane.

Steve, I guess my final comment is based on a lot of years of experience in Atlantic City, watching that market evolve over the years and the successful properties versus the not so successful, I've always come to the belief that discounting your product through marketing reinvestment never leads to long-term sustainable excellence. And that's what we're striving for.

Okay. Thanks for the color. Last question for Peter, as you guys have been going through all the state gaming regulatory agencies and trying to get approval here, what has been their feedback with respect to the spend? What I'm getting at here is, have any states brought up any potential issues or is the process to date gone pretty smoothly?

Many states bring up many issues. That's just the nature of this process. Jordan Savitch, our General Counsel, is here and I'll let Jordan talk about that, but there's nothing unusual. Jordan, do you want to -- ?

They focus on the types of issues that they've typically focused on. They're looking at suitability. They're looking at financial viability. Obviously, they're looking at the relations between the two companies and how the rent's going to work. It's a complex transaction with a lot of moving pieces. It's been a little bit of different in each of the states. Probably one of the most challenging things is just trying to explain the many various aspects of the transaction to the regulators. It has a lot of moving pieces to it. So, just trying to present it in a way that is comprehensive and sensible has been what we've been focused on.

I think our press release had a pretty thorough outline of process and so forth. I guess the answer you want to hear, do we see any obstacles to getting to the goal line? I think at the moment, not at all. We will get there. Jordan, is that fair?

That's fair. We've got, as we noted in the press release, we feel like we're getting to the end of the process with most of the jurisdictions. We're hopeful that we'll complete it soon.

Great. Thanks, guys.

Cameron McKnight, Wells Fargo.

Question for Tim first of all. Tim, when we've we spoken about Ohio previously, you've discussed the lifecycle of gaming spend per head of population as it relates to new markets versus mature markets. Could you refresh us on some of those metrics? And how has Ohio performed on that basis relative to some of the metrics you outlined when Columbus first opened?

Cameron, could you repeat the question so I understand what you're referring to from the past?

Just some of your previous discussion on the lifecycle or evolution of gaming spend per population as it increases over time as markets mature. And how you're seeing that track in Ohio relative to the progression of more mature markets or established markets?

Bill's going to start and then I'll follow.

I think what we've measured is we've measured the gaming revenues per adult in a market to start with on a penetration level. We've, based on previous analysis, come out that a fully mature market is roughly 600 wins per adult in that market. Initially, in the first year of operations, you see something in the 25% range, which is pretty close to what we're seeing in Columbus in the first year. That grows within a few years, over sequence over time, that metric will grow eventually in 15 years you get to 90% of that number and then over time you're working from 25% up to 90%. Second year can move up anywhere from up into the 30% range. Again, each market's a little different. Probably 5% a year almost is kind of like what you see over the course of time, which can lead to some pretty strong growth metrics in the first year. Then obviously, that 5% is almost like a number obviously as it gets on a larger base, that percentage growth tends to slow down, but eventually you get to a point where you'll hit saturation in the market.

To add to that, Cameron, supply has an effect on penetration as well. There are markets, feeder markets like Atlantic City and Philadelphia and I can remember the Tunica market and Memphis with a lot of supply vis-a-vis demand where that number can get very, very high. If you recall at one time Tunica was a $1 billion market with predominately coming from the Memphis MSA when there was a lot of supply there. If Columbus continues to be a two casino market that will have an effect on how fully penetrated it gets.

Okay. Great. That's helpful. Then a slightly broader question for Bill, over the past eight months you've obviously spoken to a very wide variety of investors. One topic that comes up in a lot of our discussions is the difference between gaming real estate and other forms of real estate. What are some of the key differences that you would point to in gaming real estate assets versus perhaps more traditional forms of real estate assets that are out there?

That's a pretty broad, open question. I think at the end of the day, gaming assets as particularly we've addressed it with GLPI, is we've created a lease term where the gaming license stays with the property at the end of the lease. Therefore, what we've done is secured, although certainly gaming assets are pretty much single-purpose, we've covered that with the concept of ensuring that the gaming license stays with the building thereby guaranteeing that it will have its best commercial use for indefinite future. I think there's many other aspects to this transaction that I think are interesting. The concept of security relative to the ongoing piece and also what I think has also been somewhat of an issue that most real estate investors are still getting their heads around, is the concept that we've got a master lease with cross collateralization with enormous great geographic diversification across the country. We're in more markets than almost any of the other real estate company and I think the fact that some properties may over perform or under perform, but they're all collectively part of a master lease and therefore they support each other. I think the security of that cash flow is probably unparalleled in the real estate world.

Great. Thank you very much.

Thomas Allen, Morgan Stanley.

For the sake of time, I'll just ask one question. Just going back to your guidance a little. On the revenue side you talked earlier about extrapolating the first-half results forward. But for 3Q, you expect revenue to decline by about 6% or $45 million to $50 million and I think that run rate continues into 4Q. What's driving the overall decline? I think a component of it may be your excluding Bullwhackers, but I assume that's only about $5 million a quarter.

Bullwhackers is not --

Okay, so just the rest of it, can you explain it? Thank you.

Well, I think the rest of it is certainly part of what we're seeing is Toledo started off incredibly strong initial openings and then as we've all known has come down to more reasonable run rate that it's now building on. So, that's part of the factor. As we look at going forward, I think we've got a little bit of that in Columbus as well. When you look at the run rate in the first quarter, Columbus was clearly, from the opening in November had a little bit of slide from the opening, that's now stabilized that we're now building off of a new base. Other than that I would just tell you that it's our general overall -- on an overall basis you have to factor in within that the cannibalization that we've got out there in terms of a run rate component. Some of that is a little more recent than some of the other pieces, but then it's just our general sense of where the economy is at and where what we're seeing regional gaming trends across the United States is how I would explain the delta.

Quickly following up on Columbus, you said last call that March and then July, August are seasonally stronger at times. We've had three weeks in July -- have you seen that and should we expect that? Thanks.

I think generally across, like I said before, generally what we're seeing in July across the Enterprises is more like June and I think that's all I'm going to say specifically about the first 20 days of July.

Okay. Thank you.

Carlo Santarelli, Deutsche Bank.

Just one maintenance housekeeping type question. If you look at the $805 million that you guys put forth for this year and we start to look out to 2014, obviously acknowledging that the entity as it stands won't be reporting that year, but when you think about all the legal accruals whether it's Sioux City and some of the severance payments as well as the cost incurred for the split, how do we think about that $805 million on a recurring basis if we were to extrapolate all of the noise that we've endured this year?

We don't typically give guidance going into next year. I think within the press release, I think we've got a good chunk of the detail that you'd need there. We add a little bit more detail in terms of how much we spent on the REIT and the year to date. Obviously, there's going to be -- so you can add that back. Obviously, you've got to pull Bullwhackers out. You can pull out -- I can't assume that we're going to have another tornado in St. Louis or a flood in Alton and those types of things. Clearly, it's going to be better than the $805 million. I don't know that I necessarily want to give you guys a number on the call right now because I want to make sure I spend a little more time more specifically addressing that concept. I do believe that in the press releases -- not that I'm trying to shirk my responsibilities here -- but I do think there's enough detail in the press releases that you can come to a reasonable run rate on your own. And it's clearly higher than $805 million.

Great. Thanks. And really quickly, Tim, on the update obviously to the Ohio cafes, anything new there to speak of? I know there's been some noise recently in the press, but what's you guys' latest read?

How about Eric Schippers? Eric, do you want to take that?

Perfect.

Sure. As you know, Governor Kasich signed the internet cafe ban into law in June giving the cafe operators 90 days to collect their signatures, which will be due the first of September or the first couple of days in there. We have engaged, as part of a broad coalition of other concerned interests in Ohio, in an education effort to point out that what they're trying to do is really keep alive a unlawful industry. I think that's having some effect. We've seen from our polling the more people learn about what these entities actually are, which is unlawful mini casinos, the less likely they are to sign the petition and the more likely they are to want to keep the ban. There was a second piece of legislation that was passed out of the Senate, which would -- it's sort of belt and suspenders, also ban the cafes. And we're hopeful that the House will come back, either in a special session in August or early September when they come back to the regular session, they will follow suit with an emergency clause that would cause this to go into effect immediately thus rendering the signature gathering effort moot at that point. So, we've got a couple of lines in the water, all with the intent of trying to stop these unlawful operations.

Eric, what's the estimate, I think I know, but what's the estimate of how many dollars run through these facilities statewide? Are we prepared to offer a thought about that?

I don't know that we have a dollar estimate. We know that there were at the outset of this, 900 internet cafes that were out there, then they passed a law saying you had to register. Then, that number came down a little bit. We saw, and Tim can speak to this in Florida, an impact when they outlawed the cafes there of an upside of about 10% with the standard brick-and-mortar casino operations, just to give you some sense of the impact these things can have on a commercial industry.

Yes. The other thing I'll add to that, Carlo, I referenced it at my beginning remarks about some research we just got back from Columbus gamblers. It did point out that 10% of the respondents did visit an internet cafe within the last 12 months. So, we know it's having an effect. It's very, very difficult to give any kind of hard prediction, eventually, when they do go away, what the impact's going to be on all of the casino properties in that state, but we know it's going to be there. We just can't give you a definite figure on how much lift we're going to get.

Appreciate it, guys. Thank you.

Okay. Well then, with that we'll wind up our second quarter call. Look forward to seeing you all third quarter. Thank you very much.

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