PENN Entertainment Inc (PENN) 2016 Q4 法說會逐字稿

Welcome to the Penn National Gaming fourth-quarter results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded today, Thursday, February 2, 2017.

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

Thanks, Nelson. Good morning, everyone, and thank you for joining Penn National Gaming's 2016 fourth-quarter conference call. We'll get to management's 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 certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should, or anticipates, or the negative or other variations of these or similar words, or by discussions of future events, strategies, or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. 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 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 Form 10-K and Form 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

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

Having read that as quickly as possible, I'll now turn the call over to the Company's CEO, Tim Wilmott. Tim?

Thank you, Joe. Good morning everyone to Penn's fourth-quarter and year-end 2016 earnings conference call. Joining me today on Groundhog Day in Pennsylvania is Chris Sheffield, our Head of Penn Interactive Ventures; Eric Schippers, our Senior Vice President of Public Affairs, General Counsel, Carl Sottosanti; our Corporate Vice President of Finance, Justin Sebastiano; our CFO, BJ Fair; and our Chief Operating Officer, Jay Snowden.

First, I'd like to begin my comments by talking about the slight beat on the fourth quarter, in terms of our EBITDA guidance. In a fairly flat overall revenue environment, we continued to show improving margins in that environment, which speaks to our skills as operators to deliver the bottom-line results, in this case where the top line didn't quite materialize.

As we also close 2016, we continue to diversify our earnings story. We are making very good progress in integrating Rocket into our Penn Interactive Ventures business, and we continue to grow and integrate new VGT operators in Illinois under the banner of Prairie State Gaming. We did two small deals in the fourth quarter that closed.

I would like to next touch on in the fourth quarter, we refinanced part of our Jamul loan, and received about $270 million of proceeds, that allowed us to continue to delever. We started 2016 including rent at a leverage level of about 6.6, we ended 2016 at about 5.8, so we continue to deliver our balance sheet as we have communicated out in previous calls.

On October 10, we opened up Jamul, and had a very strong start in the first month. Unfortunately business volumes have fallen since that opening. In our guidance for 2017, we are assuming no fees from the Jamul operation from us being the manager there. We expect all or part of the loan that we have still out there will be subordinated, when that time comes. Jay Snowden will provide more color on what we are seeing in San Diego County when I turn the call over to him later.

Moving over to Las Vegas at Tropicana, we continue to make good progress on the improvements we've made in the operation on the casino floor, and in the restaurant area. We still expect the completion of our $40 million phase one capital improvement program to finish up in the third quarter of this year, with the opening of Chef Robert Irvine's new restaurant, and other improvements to our food and beverage operations.

The design work on our master plan at Tropicana continues, but we've made the decision to take a look at how effective what we're coming online in the third quarter is with our customers there, and we are going to push out our incremental master plan spend out from 2017 into 2018, to give us more time to digest all the new offerings that are coming online this year. We also now have about two months of results of the impact on National Harbor in our Hollywood Charles Town facility in eastern West Virginia.

Jay is going to provide more color on that, but we're certainly now seeing those results given us a level of encouragement that within the guidance we thought, was in the ranges we previously provided on the impact of National Harbor on Charles Town.

I'm also pleased to report in January, we completed a refinancing of our capital structure, which BJ is going to go into more detail on. We also reported in our earnings today that we got Board authorization to repurchase up to $100 million of PENN shares over a two-year period, if management believes that is the best use of our capital. The source of those funds will come from operations.

So there's a lot obviously here to digest. A lot of new information, and at this time we always provide guidance for 2017. What I would like to do now is turn the call over to BJ to talk about the capital refinancing and share repurchase. Then we will go to Jay, to provide a little bit more color into the operations, and then will come back to BJ to provide some more detail around our 2017 guidance.

BJ?

Thanks, Tim. There's two significant items I just wanted to provide some greater specificity about, which Tim just mentioned.

The first is a refinancing. As I'm sure you know, we announced in mid-January that we finalized a complete refinancing of our capital structure. Our previous credit facility was coming due in 2018, and we wanted to take advantage of the favorable market conditions that were out there. We knew that there was a favorable rate environment that we wanted to capitalize on, we wanted to extend and stagger the maturities of our different debt instruments, and we wanted to create the flexibility in our capital structure to further delever and be positioned to take advantage of the accretive acquisitions and other opportunities that faced us.

We are very pleased with the outcome. As we went to the market we were able to complete a new senior secured credit facility. That was mainly comprised of a new $700 million revolving credit facility, due in 2022. Also a $300 million term loan A facility, also due in 2022, so they're both five-year facilities.

We supplemented that with a $500 million term loan B facility, due in seven years at LIBOR plus 250. We were very pleased that we were able to basically provide the same spread as we had on our previous term B loan in increasing the size, and the timeframe that we had issued it, as well. We were also very, very pleased with a new issuance of a $400 million senior unsecured notes offering.

We were able to go out on a 10 year maturity at a 5.625% coupon, which basically was able to extend the maturity to 10 years, but also ended up getting a 25 basis points reduction, based on our current note offering that we had outside. We replaced with that offering the $300 million senior unsecured notes, due in 2021, and we redeemed approximately $149 million of those notes, just under 50% through our tender offer. The remainder will be redeemed at the expiration of our call notice, which will expire on February 6.

With the refinancing, we were very pleased, not only with the support received from our strong banking relationships but the level of the quality investors that came into the credit of our company. We value those relationships very much, and we maintain our focus on financial strength, liquidity, and strong free cash flow generation of the Company.

Switching now to the share repurchase that Tim had just mentioned, that was recently authorized by the Board. Just to provide a little historical context, Penn actually has been active in the repurchase of shares, and we believe the market conditions were appropriate. In 2008, we invested $152 million to repurchase over 4.9 million shares. In 2010 and 2011 we repurchased over 4.4 million shares for another $141 million.

In 2013, as part of the REIT transaction, we reduced the total diluted number of PENN shares by over 13 million through buybacks and exchanges of the preferred shares. In each case, the Company was able to take advantage of the attractive valuations that we felt the stock was at that time, and we ultimately delivered return to the shareholders, but we did not impact the growth of the Company and the growth opportunities of the Company.

As we look to the current conditions, and the recent transaction that the Board has just authorized a new plan, the specifics of the plan as Tim alluded to were, we have an authorization of $100 million in total potential repurchase. The authorization is valid for a two-year period. The purchases will be on open market purchases, instructed by management, and not part of a 10b5 share purchase program at this time. The purchases will be made from operating cash flow from the Company.

So management is very confident that the strong free cash flow generation that the Company will be generating in future years, we can achieve our mutual objectives of continue to delever the Company, but also execute against this repurchase program, and also be in a position to take advantage of the attractive growth opportunities that we may have come before us. So with that?

Thanks BJ. Jay?

Thanks, Tim. Good morning everyone. Our fourth-quarter EBITDA exceeded guidance due to strength in Missouri, Massachusetts, Las Vegas, Prairie State Gaming, along with prudent expense management at corporate, partially offset by unrated softness in markets where we've seen softness the last couple quarters, Biloxi, Mississippi; New Mexico; and the specific to the fourth-quarter in December, Charles Town.

Highlighting a few of our key markets, in Las Vegas, we finished the quarter and the year with record EBITDA and EBITDA margins at M Resort. We also concluded 2016 with Tropicana having generated double-digit EBITDA, a property that was barely profitable when we started our acquisition diligence at the beginning of 2015.

Moving to West Virginia, while it is still early, we are indeed encouraged, as Tim mentioned by the first 50+ days, post-MGM's opening at National Harbor on December 8. Even when adjusting for weather, our business to date has been impacted less than initially forecasted. In the month of January, our spot volumes exceeded prior year on 20 of 31 days. We remain cautiously optimistic, but want to stress again that it is still in the very early innings in West Virginia.

In Massachusetts, we continue to show positive revenue and EBITDA momentum, as we closed out 2016. Plainridge Park Casino's EBITDA margins improved nearly 500 basis points year over year in the fourth quarter.

Moving on to San Diego, after what was a very successful opening month in October, casino volumes fell off greater than anticipated in November and December, in the face of extremely aggressive marketing and customer reinvestment levels from the nearby competition. We continue to make real-time adjustments to our marketing strategy, and are encouraged by weekend volumes in January, which were up on average over 20% from the weekend volumes in November and December.

The property continues to generate meaningful cash flow every month, and we remain very optimistic about the overall prospects as we continue to make refinements to our operating and marketing practices, in order to maximize revenues and flow through for the remainder of 2017 and beyond. At the macro level, overall economic indicators, including employment and consumer confidence remains strong as we start the new year, so we have not yet observed any material change to consumer spend or behavior since the election. January weather for the most part has been mild across our key markets year over year, and we're off to a real good start here in 2017.

With that, I'll turn it back over to BJ to walk you through 2017 guidance.

Thanks, Jay. On the 2017 financial guidance, there are detailed assumptions underlying the guidance we laid out on page 5 of the press release. I'll just hit a couple of the highlights here.

For the full year, our revenue estimates are $3.0469 billion, Q1 would be $761 million of total revenue. EBITDA for the full year $840 million, in Q1 expected to be $209.3 million.

Cash on hand at 12/31/16 is $229.5 million. We anticipate that all of our debt covenants will be comfortably met. Maintenance CapEx is expected to be $78 million for the year, and $26.4 million of that expected to occur in Q1.

Project CapEx is expected to be $26 million for the year, and $8.6 million of that is expected to be in Q1. That reflects, as Tim mentioned, the shift in 2017 expected Tropicana expansion into 2018. For cash taxes, we expect to end up with a net refund of $40.6 million, and the cash generated prior to mandatory payments or project CapEx is expected to be $196.5 million for the year.

Thanks, BJ. Operator, we are now ready to take questions from the audience.

(Operator Instructions)

Carlo Santarelli, Deutsche Bank.

If you, and you might have just said it, but I think the phone cut out a little bit. When I just look at your gross free cash flow before the modest $26 million of project CapEx for next year, it looks like close to $290 million with the cash tax refund. As you think about the buyback program, coupled with other tuck-in acquisitions and debt paydown, in an ideal scenario, how do you think about the distribution between those buckets of that incremental free cash?

I'm sorry Carlo, the last question was?

How do you think about the distribution between those buckets of that free cash flow number?

We don't think about that Carlo in terms of any numerical conclusions here. It all depends on what we see out there in terms of the quality of the accretive M&A acquisitions, where our share price may be, and our continued focus to delever. I would be hesitant to put any priority on any of that, because things change so quickly. We are just going to look at things, as we do real time, and make decisions that are going to be the most accretive to shareholders.

Great. Jay, if you don't mind, you mentioned January was off to really good start. Obviously, we did have that Northeast storm in the third week of January, I believe, last year. If you look at the majority of the portfolio, which wasn't impacted by that storm and comps are not necessarily disrupted by anything, would you be able to make the same comment, i.e., off to a really good start?

I might take out the really. I'd say we're off to a good start when you take out that blizzard impact from 2016, Carlo. But I would have to say that one thing I am encouraged by in the fourth quarter, and we're seeing it bleed through into January again, even when you factor out the weather is that our rate of business across the organization is really strong, relative to where was in previous quarters.

We actually saw visitation growth, and rated revenue growth in all of our segments, including the lower segments, which I think is encouraging. It's a little too early to say that's a new trend. That's what we saw in the fourth quarter, we're seeing in January. The only softness really from our business is the unrated business in a couple of the markets or a few of the markets that I mentioned in my opening comments.

Great. That's super helpful. Thanks.

Felicia Hendrix, Barclays, please proceed.

Regarding your share repurchase, I think I know the answer to this given the timing of your quiet period in the quarter and all that, but I do have to ask if you have repurchased any shares yet?

No, we are currently in the quiet period, and we have not made any announcements or discussions on share repurchase.

Okay thanks. BJ, on your guidance, EBITDA was a little lighter than we expected, and also relative to consensus, but revenues were higher. Can you talk about the puts and takes in there, and how come the flow through was a little bit lower than consensus?

Also, there was a comment in the GLPI release that income from rental activities was impacted by about $0.5 million due to performance at Columbus and Toledo, so I was wondering if you could address that as well?

On the guidance some of the fall through coming through, we had some changes on the pick on Jamul, which was going from pick to the current amounts that was out there. Some of the big changes, just to make sure that we are clear, talking about the 2015 to 2016 on the EBITDA, was making sure that we have the recognition of the St. Louis property tax that was in the fourth quarter of 2015 of $16.8 million.

No, I was talking about the implied flow through from your guidance.

Yes, the other component on the guidance going forward is also in addition to the change of the interest on Jamul, we had the Rocket contingency that was going to be coming in as well, and also some modifications on the book taxes.

Okay, but would the book taxes affect your EBITDA? Your revenues were higher than guidance, but the EBITDA was lower. I'm trying to understand.

The other key component is we're having the zero fees from Jamul, that were pulled out of our -- included in the EBITDA.

Wouldn't that affect revenues the same?

It would affect the revenues, but the margins would be, the flow through would be impacted by it.

Are you asking the question relative to your model?

Let's forget about my model. Just relative to consensus, your revenues were above consensus, but your EBITDA was lower, so either the Street is just totally off on what flow through should be, or there's something happening between revenue and EBITDA that I'm just trying to understand. I understand that your fees are lower, but that should hit revenues and EBITDA relatively the same. I'm just trying to figure out if there's anything in there that we don't know about yet. Or that we need to understand more.

Felicia, this is Jay. We still have to show some revenue recognition for Jamul, based on the reimbursement of management costs at the property, that will show up regardless of what happens to the fees. You really have a reduction in EBITDA by virtue of not accounting for fees in 2017, but you do still have the revenue recognition for that portion of Jamul management costs.

Okay. That's helpful. Just the comment from the GLPI release, regarding the --

We haven't seen the GLPI release. Could you say what was in there again regarding our operations?

It said income from rental activities had an unfavorable variance of $0.5 million due to performance at Penn National Gaming's Hollywood Casino Columbus and Hollywood Casino Toledo.

Felicia, in the fourth quarter we continue to have some disruption by virtue of two things at Toledo specifically, which is the roadway construction, though it has paused, the construction elements are still on the road, so you're reduced down to one lane for portions of I-75 to the north. Most of what was occurring to our south had been cleaned up, but there is still some roadway noise in the Toledo numbers.

Secondarily, we had harsh weather in December. Though January has been mild in the Midwest, was hit hard year over year. Just looking at snow impacted days for Toledo, this year we had 13 weather impacted days in December versus two last year. In Columbus we had six in December of 2016 versus zero in 2015. So it really was more weather impacted for the fourth quarter.

In fact, Felicia, in Toledo, we were required by the state to close the casino for a day because of bad weather, and that really impacted a whole weekend in December for some of the revenue softness.

Okay, helpful. Finally, Jay can you help us understand the comment in your release regarding Jamul, based on current business levels, we expect a portion of or all of term loan C to be subordinated. I understand the parts of term loan C and how they're being subordinated, I'm wondering the connection between based on current business levels and the need or decision to subordinate some of that, or all of that.

Felicia this is BJ. We have a one-time test at 365 days out of the year after operations which basically is the beginning of October next year, this year. To where we will have to be, to the extent that the leverage ratio is greater than 5 times, everything above the 5 times will become subordinated. So based upon the actual operations at that time we will make the determination exactly what a portion or all of the loan will become subordinated.

Based on our current projections Felicia, that's why we made the statement that there should be the expectation that all or part of our loan will be subordinated.

Yes, very clear. Thank you very much.

Steve Wieczynski, Stifel Nicolaus.

The first question would be around the drop, and your decision to wait until later in the year to get more color around the master plan. Should we assume in your mind, you give your stock at this point as a better investment right now, versus the potential returns you could get out of putting that money in the ground in Las Vegas?

Steve, I wouldn't come to that conclusion. I think we collectively as management feel that we want to see the impact of these new food and beverage improvements this year, because most of the incremental $200 million that we talked about will be going toward approving non-gaming amenities at Tropicana in the long term.

And since that's where the majority of the capital is projected to be spent, we want to make sure that we are seeing the results from the opening of the Robert Irvine restaurant, and the other upgrades we are making to our food and beverage operations and see the customer reaction and spend regarding these improvements, before we commit long-term to the $200 million program. I wouldn't make the conclusion that we think the return to shareholders and share repo is more attractive than the long-term prospects at Tropicana.

Steve, the other thing I would with regards to Tropicana and the timing is that the pedestrian sky bridges, you may know, you may not, the one that connects us to Excalibur was under construction for the last few months of 2016. And the one that connects to MGM is under construction, and not able to be utilized for the first six months of 2017, so there's customer visitation and pedestrian traffic patterns that are disrupted right now.

We have the new food and beverage offerings coming online midyear. The bridges will be completed midyear. So second half of the year, I think will be a great opportunity for us to make a good determination as to what the changes in behavior, both in regards to cross-property visitation from our neighbors, as well as database performance looks like when the construction is behind us, and the new offerings are online.

Steve, I'd add to that, the additional time also gives us time to further our design and really nail down some of the key issues and improvements that we've been seeing going on with the operations as well, and incorporate those into the design, as well as make the design more efficient. So I think there's some benefit to it as well.

Second question, going back to guidance for 2017. Can you help us think about how you developed your guidance, more so thinking about how you thought about the consumer trends in general moving through 2017? I would assume that you aren't making any assumptions that consumer spending gets any materially better throughout the year due to the president trying to make America great again. I would also assume that your guidance does not incorporate any buybacks for the year.

You are correct. We are not assuming that the Trump administration has any material impact on consumer behavior. We assume from a same store sales growth perspective, it's obviously a mixed bag, depending on the market, but you mix it all together and there's some slight growth there from a same store perspective.

And then we have some stronger results from any of our newer operations. Ohio still continues to ramp well, Missouri's been a great market for us, Las Vegas has been a great market for us. Those are the puts and takes.

Steve, you're absolutely correct again, the guidance does not contemplate at this time any of the buybacks.

Great. Thanks.

Thomas Allen, Morgan Stanley.

You highlighted New Mexico continued to be weak. Have you started to see any signs of oil-driven markets starting to rebound?

Thomas, I wouldn't go as far as to say rebound, but I would say in the month of December, which was important for us to see, and of course we saw it again in January. We are seeing that market stabilize, which I have not been able to say for a year. I am encouraged by at least seeing signs of stabilization, and I am cautiously optimistic that we may be able to see some growth in that market, as we conclude 2017, if we see that the oil production activity in the area picks up. At this point, it hasn't picked up, but we don't see oil rigs and workers closing up shop, like we were throughout 2016.

Helpful, thanks. Just related to the federal tax reform proposals that have been put out there, how are you thinking about them impacting our business both on a demand and fundamental side, as well as just thinking about accounting and income statement and cash flow impact? Thanks.

Thomas, right now, there's a lot of different proposals on tax reform that have been thrown out there. We've looked at it. We certainly obviously hope to see lower corporate tax rates. We think that will be beneficial, but I don't want to provide any detailed commentary on it until we see more specifically what they're talking about.

We were specific in the guidance, saying we don't anticipate any changes in all the numbers we've got are basically on a status quo [hold there].

Okay. Great. Quickly on Tropicana, and on these pedestrian bridge construction, do you still expect Tropicana EBITDA to increase in 2017 despite that impact?

We do. I think there will be some impact in the first quarter, less in the second quarter, and I anticipate a strong second half of the year, once the construction is behind us. Overall to your question, yes, we anticipate growth in EBITDA at Tropicana in 2017.

If you recall Thomas, last year, we didn't turn on Marquee Rewards channel until May 1, so we have a full year that in 2017. With all the work that we did on the casino floor to improve the products offerings, March, and April last year were pretty disruptive to the customer experience. We have that behind us, as well.

Awesome, thank you.

Joseph Greff, JPMorgan.

My first question relates to the no EBITDA contribution from Jamul in the 2017 guidance. Can you explain that? I know some of your economics is royalty top line driven and the balance of it is 30% of income. Are you basically telling us that the offset from the lack of EBIT is a wash with the royalty fees? And do you think of it first half is negative EBITDA contribution and the second half is positive EBITDA contribution, and the full year's net a wash?

Joe this is BJ. It's really a combination of a number of factors. Some of which is included in the docs which are public. The bottom line is that it really does focus on the results from the operations.

Your comment on EBT is absolutely correct. It is very strong and positive on the EBITDA side. EBT is obviously, with the level of debt that is outstanding. I think with respect, we took a look at the current volumes that were out there, and then projections going forward.

It's really going to be dependent upon the business levels that we see coming up in the next five months. As a result of that, we've taken a look and basically identified the fact that we feel the appropriate guidance is to not identify it. Were still having conversations with the tribe. We'll still be continuing to look to improve the overall operations, and to the extent that things change, we will update that at that time.

Joe this is Tim. This is a property that is generating meaningful EBITDA today, and will continue to do so. It's just the EBIT characteristic that in large part causes us to assume no EBITDA contribution for Penn in 2017.

Great. Tim onto Tropicana, is it possible that the CapEx actually comes out to less than $200 million, or additional incremental investment there? And is it possible that some of that amount can be shared with a third party or a partner? Or is this just really a pushing out of investment that you're definitely going to do there?

I think BJ highlighted, this gives us time to continue to examine our master plan program, and look at all of those options. I would say those things continue to be on the table. We don't know where that $200 million number is going to go. It could go to third party, it could not.

We have now a couple more quarters to really think this through. As I said before, take a look at the effect of the new improvements we are making today at Tropicana, when they come online in the third quarter. I do want to reiterate, we are still very bullish on the long-term prospects in Las Vegas. We think the market characteristics there are very solid for the next five years, and we think Tropicana is going to continue to enjoy growth over that time period, with the capital coming online, and what additional capital comes online beyond 2017. Jay I just wanted to make sure I heard you correctly earlier in your prepared comments, when you discussed the Tropicana in the fourth quarter, that it did double-digit EBITDA in millions in the fourth quarter absolute dollars versus double-digit EBITDA growth Somewhere $10 million or north of that. That I heard that correctly?

That was not specific to the fourth quarter, I was recapping for the year. We were double digit EBITDA as a property versus when we first started acquisition diligence on the asset in early 2015. It was just barely profitable.

My last question here, what is the implied rent coverage in 2017?

Implied for 2017, the current that's been up to date is 1.68, so the current up to this point is 1.68.

If we look at 2017, what's implied, and maybe I can talk to you offline about it. Is it comparable, how do you think about the different pieces of guidance, and how that rent coverage?

It's comparable, and we are not expecting the escalator to be occurring in 2017.

Thank you, guys.

Our next question comes from the line of Cameron McKnight with Wells Fargo. Please proceed.

Good morning. A question for Jay, first of all. Can you talk about what you are hearing from players and hosts at Charles Town, and what the impact of traffic in the DC area has been post the opening of National Harbor? And then I have a follow-up.

Sure, Cameron. It's really been mixed, of course. I would say generally positive from our perspective, in the sense that many of our customers, particularly those that are a little older, view that drive into through the Beltway and through National Harbor as challenging during most days and most hours, as any of you have frequented National Harbor know very well.

We obviously also benefit by virtue of smoking being something that we can offer in our gaming floor in West Virginia. We have comp drinks as an option for our better players. You hear a lot of customers just talking about ease of access, the ease of parking, whether valet or self-park at Charles Town versus National Harbor. Again, early feedback has been mostly positive.

Again, I would also tell you that I have been there, and we hear our customers say it's gorgeous. It's a beautiful Las Vegas-like destination. Those that are looking for that experience have that offering to consider, but there are many of our customers, like I said, particularly when you're talking 60, 65-plus in age, that just really value the convenience factor and the service level, as we have got long-standing relationships with these customers. Nearly 20 years, we feel good about that.

Thanks. Then a question for BJ or Justin just following up on Joe's earlier question. What was final rental coverage for the 2016 lease year? It must've been higher than 1.68 for the escalator to have applied.

1.82.

1.82. And is 1.68 what you're assuming you will close out the 2017 lease year at in your full-year guidance?

No. It will be slightly higher, but we still will not hit the escalator.

Okay, slightly higher than 1.68 but obviously below 1.8.

Yes. That's a fair assessment.

Perfect. You noted in the release that you did a couple of tuck-in acquisitions with Prairie State Gaming. Are you able to give us some color in terms of multiple or size of those deals?

The multiple is something that we have not provided in the past. I think it's fair to say they were accretive transactions. The size was approximately $1.5 million of EBITDA.

Great, thanks very much.

Chad Beynon, Macquarie.

Thanks for taking my question. Eric, one for you on the legislative front. It looks like Georgia and Florida are the two states with bills that have come out so far in 2017, in addition to Pennsylvania. Could you just update us in terms of how you're thinking about those markets?

I know in Florida in particular, what would be the model where there could potentially be an expansion of gaming at current racetracks. I know historically that was one of the ways in which you got into the market and ended up generating a nice return. Could you just update on those markets? And then from a bigger standpoint, just views on Japan, if that's something that you would dedicate any time or money to as this plays out? Thanks.

Sure. Why don't I start with Florida? Florida obviously flaunts that the racetracks are back on the table. It's entangled in the broader debate over the compact. Some of this is going to have to do with the diplomacy between the tribe and the state, trying to come up with the new deal.

We look at it from the perspective of if flat at tracks gets approved, and it subject to local vote, how would we fare in our local community? And right now we are still trying to chip away at what is a pretty conservative voter base there. Our local county and our city have been opposed, and we've been spending a lot of time trying to educate them on the benefits from an economic development perspective, from a new revenue perspective, just to position ourselves to be able to capitalize on the opportunity if it comes to pass. That's really where our focus has been locally, versus at the statewide level.

Moving to Georgia, the proposals there have gone from six licenses across the state to now a new agreement that appears to have the backing of the governor, that would be for two licenses. A $2 billion opportunity in Atlanta, and a $450 million investment level in either Columbus, Savannah, or Augusta. I think we've said on previous calls that we've been spending a lot of time in Savannah, and looking at relationships, building relationships, and looking at land opportunities in other markets as well.

We've spent some time there last week, meeting with legislators. We are hopeful that we can get to a legislative proposal that makes sense right now. There are some challenges with the current legislation, including right now 60% to 65% of revenues have to come from non-gaming. We think that is a little high. We think that $450 million spend should be really left up to the marketplace to decide. We are working with legislators to try to shape that legislation, as it goes through this session and maybe even next session, with the help of getting it on the ballot in 2018.

Finally in Pennsylvania, I spent some time yesterday in Harrisburg. To say the situation there is fluid would be an understatement. The Commonwealth now is looking at close to a $3 billion deficit, and all new revenue options are on the table.

We are trying to look at it, both of terms of trying to defend our existing investment and the 2,300 jobs we have at our Hollywood casino, as well as look at it opportunistically to see whether we can get i-gaming out of this. Frankly, there's been a lot of discussion around VGTs, and so we've been working on a potential model that would work for us, protect our investment, and allow some upside. Japan, Tim, do you want to handle Japan?

Chad, we are certainly watching Japan with the legislation to authorize integrated resorts. There's still lot more legislative work that has to happen to really define the opportunities for us. BJ and I have been over to Japan over the last couple years establishing relationships, and understanding the opportunities there, but it's still a long way off. With that said, it's something long-term that we certainly have to watch as a potential growth vehicle for us.

Okay, thank you very much. Follow-up, switching gears. BJ, within the press release and your financial guidance, you talked about income tax refunds of $41 million. That looks like it's going to be spread over the course of the year, based on the guidance for the first quarter. Anything that could happen that would really dramatically change that number, or do you view that as a pretty solid number as we think about cash flow puts and takes?

No, that's a pretty solid number, and it's a result of multiple years of review in past years. We feel comfortable in that number.

Thank you very much.

(Operator Instructions)

David Hargreaves, Stifel Nicolaus.

In traveling around Kansas City and Charles Town we've noticed that you have been featuring Tropicana a lot. When we look at your spend in Ohio, I'm wondering how much the increase in spend we see is driven by, you mentioned disruption and weather versus how much is going after the opportunity now that Caesars is no longer in that market? Are you getting some of those customers? Wondering how that is going.

This is Jay. Our increase in spend that you are referencing, that is public, is with regards to promo credits. That's not any incremental spend with regards to marketing Tropicana or Las Vegas in general. We do market and advertise for Tropicana and M Resort across all our properties. Our approach is no different in the state of Ohio.

The increase in promo credits is primarily at our Toledo property, when you're looking year over year, we found that in some of the fight zones between us and Detroit, there was an opportunity to be a little more aggressive towards getting a nice return on that spend. Whereas the customers closer to the property, the reinvestment levels are unchanged on a year-over-year basis.

We should consider that ongoing, it's probably not going to abate anytime soon?

That is correct. Again, we are getting a return on that spend, so I would not anticipate that changing materially in 2017.

Everything else was asked. Thank you.

John DeCree, Union Gaming Group.

I think mostly everything has been asked, but I just wanted to follow-up on a target leverage level where you feel comfortable. Obviously meaningful progress last year in deleveraging the balance sheet. You mentioned that's still focus of yours, just wondering what your comp target range might be?

I think that we are pretty much consistent in saying that our near-term target is between 5.5 and 5 on a total leverage basis. And we stay there, and we'll continue to try to delever to try to get down to that level.

Great. Thank you. Lastly, to the extent you have any color as it relates to Charles Town and the market there, it's only been about two months. I'm wondering if you have any insight on how the market has responded overall, as it relates to the promotional environment, to ramping up marketing with new supply in that market?

John, as you mentioned, it's been a little bit less than two months. It's still, as I mentioned and said earlier, it's early innings in that marketplace. MGM is building their database. Maryland Live is focused very much right now on non-gaming developments, a couple of hotels. We are focused on continuing to enhance the relationships with our best players. I think I'll have more color on that specific question as I see what reaction there may be throughout the first quarter, when we get back together in late April.

Great. Thanks for all the color.

There are no further questions at this time. Mr. Wilmott, I will turn the call back to yourself for any concluding statements.

Thank you, operator. Thanks for your attention on this call. This morning, I hope all this information leaves you with really three things to come away with from Penn.

First, we continue to deliver results, even in tough revenue environments, and that operating folks in our businesses continue to do a very good job generating the profits in these markets. We also have a continuing and emerging earnings story, that will continue to diversify and grow, and we are going to look forward to continued improvement in our interactive ventures business, and also to continue to be a consolidator in the slot route operation business over the next couple of years.

Finally, we have expectations in 2017 to deliver strong cash flow from our operations, which gives us the flexibility to delever, return capital to shareholders, and to continue to pursue accretive M&A opportunities during the course of this year and moving forward. With that, thank you for your attention this morning, and we look forward to getting back with you in April.

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