PENN Entertainment, Inc. (PENN) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 21, 2011. I would now like to turn the conference over to Mr. Joe Jaffoni of Investor Relations. Please go ahead, sir.

Thanks, Frank. Good morning, and thank you for joining Penn National Gaming's Second Quarter 2011 Conference Call. We'll get to managements presentation and comments momentarily as well as your questions and answers, but first I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results can vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's new 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 Gaming assumes no obligations to publicly update or revise any forward-looking statements. Today's call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP will be found in today's news announcement as well as on the company's website. And with that, I will turn the call over to Peter Carlino, the company's Chairman and CEO. Peter?

Thanks, Joe, and good morning, everyone. Happy to be here to talk about our second quarter results. Obviously, it's a whole lot more fun to talk about a good quarter than less than good quarters. So we're pleased to be here today. This is a quarter when a lot of good things or things that we were working on have sort of came together. And as we get into the Q&A, I suspect we'll cover a lot of the issues, some of the state challenges that we've been facing and have been working with. We'll talk about that. And as usual, my comments are going to be very limited upfront, and we'll get to the things that you folks care about. But first, I'll tell you parenthetically that as we we're sitting here, killing time, waiting for the start of this call, we're talking a bit about Charles Town. I was there just the other day to look at the latest of the late -- that is the expansion of our table games and the new entertainment area that we have constructed there, landscaping, a whole host of things that we have been doing over the last months. And I got to tell you and you don't hear me say this very often, it was spectacular. I marveled myself that Charles Town is one of the great gaming properties in America. It would be on a very, very short list of among the most, well, certainly among the largest, but also one of the most exciting and dramatic. And it surprises me sometimes that many out there, if not most folks in the world, don't really know about it. So anyway, I'm very pleased with what we've done down there. It is just terrific. Also I thought it would be helpful, because I know you're going to get there anyway, to ask Tim to give you kind of his sense of the pulse of what's going on in the industry and what are the trends that we're seeing. So Tim, why don't we start off with that?

Thanks, Peter. Just wanted to cover what we're seeing across the regional markets in the second quarter. If you look at our results and if you look at -- and extract the table games impact in Pennsylvania and West Virginia, you also remove the flood closure that we had in Tunica, generally, we're seeing very stable but very, very slight growth in revenues, coupled with a very, very rational promotional environment out there across all these regional markets that has given us the ability to continue to be more intelligent about our marketing spend and continue to look at our overall cost structure that produce these second quarter results. When you get into the details of what segments of business are doing what, the only strength we're seeing is in the VIP segment, the cost versus spend in excess of $400 a day with us on our casino floors. That is showing some modest growth. Below that, it's still struggling. It's not getting as we've seen over the past 5 or 6 quarters, not getting any worse. But there's really no strength in the lower level segments of our business, the retail segments. But the better quality customers are showing some modest signs of life as we look to the second quarter results. Hope that helps.

Okay. Then operator, let's open the call for questions please.

[Operator Instructions] Our first question comes from David Katz, Jefferies & Co. David Katz - Jefferies & Company, Inc.: I wanted to ask about 2 things. One, in Pennsylvania, I was struck by the profitability level there, and I wondered if you could just talk about what drove that and perhaps revisit the notion of where you think profitability can max out. We obviously considered the tax rate environment, et cetera. And then I had other one quick question.

Let me cover the Pennsylvania results. We certainly have continued to look at the evolution of table games. It's now in its fourth quarter at Penn National. And David, the tax rate is 16% on table game revenues. We did see a migration over the past year of customers playing electronic table games, which were taxed at a much higher rate, moving over to live table games taxed at a 16%. That has been somewhat of a contributor to the improved margins there. Plus we continue, as we've had, to take a look at sectors of customers that had shown low level of profitability and redefined the terms of engagement with them, continue to pull back reinvestment where we think it makes sense. And given the fact that we're operating in the central part of the state and primarily dependent upon Harrisburg, York, Lancaster and the regional areas at Central Pennsylvania, we don't have a lot of competitive pressure from other licensees in the state of Pennsylvania. So all of that really sums up how we're able to continue to improve our margins at Penn National as we continue to evolve that business, which is now beginning year 4. David Katz - Jefferies & Company, Inc.: And do you feel like you still have some innings left to go in terms of pushing profitability levels higher there?

Well, that never stops. I think you continue to shave away things. I've said this before on our previous calls, if we see any nice lifts in revenue across these regional markets. When the economy does turn in our figure favor, I think we have cost structures that will yield those improved margin results, even above what we're showing today. David Katz - Jefferies & Company, Inc.: I sort of lied. I wanted to ask about 2 other things. One I was I think we were expecting a little bit more about M Resort this quarter. And then the other issue really is around Toledo, and hopefully it's helpful for others because I think we've been engaging in about how Toledo will start out, ramp up and max out over time. I think most agree that you will do well, and you've communicated that. But there's certainly degrees of well. And if you could talk about some of the particulars like the population base and the net worth around that area relative to what your existing properties, let's say, such as Pennsylvania and just give us some perspective around how well Toledo could be.

Let me just comment on the M, David, and then I'll turn Toledo over to Bill. We took over that property on June 1, and became the 18th casino property within the Penn portfolio. And the local gaming market in Las Vegas continues to be very, very challenging. Second quarter is not as strong; typically, it's the first quarter is in the market. We continue to see good strength from our Group and Convention business there, but the primary driver of business is the Las Vegas locals, and that continues to be somewhat of a struggle. That said, we have engaged with the property management there very, very recently and they're working on continued refinement of our marketing reinvestment. That's going to rollout in the third quarter there. They continue to look at other areas of cost to take out of that business. And we're encouraged with what we're seeing in the general trends there and think there are still more opportunities to improve the margins in that business. And hopefully, down the road, and we're not expecting it in the near term, the Las Vegas locals will get better. And we still have a very bright expectation for very good returns for that investment we made there.

I'll just add to that. If you're looking at the $1.26 million, that includes $970,000 worth of expenses related to the Professional Services around the closing that will require to be run through EBITDA. We've got a footnote in there, and there's a schedule at the back that kind of explains that. So that leaves us about $2.1 million for the month of June. So I don't know if you're expecting better than $2.1 million that month in Las Vegas, but we're actually pretty happy with our June results.[indiscernible] Toledo, I apologize. David Katz - Jefferies & Company, Inc.: Well, I was just looking -- we were just looking for some perspective around Toledo. Everyone agrees you'll do well, which is good.

Yes, listen. We've pretty much refrained from any kind of specific thought processes on exactly how much the profit's going to do. Our general methodology at Penn, and I think it's appropriate here, is to look at the adult population in the market. And we've done that, and we've made some assumptions relative to -- that people who are 10 seconds closer to our property versus 10 seconds closer to the Detroit property will go to their respective home markets. When we look at that, Toledo's roughly 1 million people. And you compare that against the Penn National market, which is at roughly 1.2 million. That's about 80% of the potential from a population perspective, which is really the main driver of what's going to drive revenue. And I think if people were to look at where Penn National opened and what the growth rates have been there, I think that'll give everybody a reasonable proxy for a range of estimates and make sense. On the margins, I think in our view, we look at it from a perspective that, again, I think Penn National is a good example or a good proxy, and takes our operating margins at Penn National and account for the difference in the tax rate. And that should get you approximately into the range of what we expect our profitability to be in Toledo.

Our next question comes from Felicia Hendrix from Barclays Capital.

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

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

Yes, and Felicia, I'll take the first half of that and let somebody else handle the impact of the VLTs or lack thereof. The governor clearly is wrestling with this. I think it's no secret that he thinks it's overly expansive, what the legislature ultimately did. As to what type of compromise he's looking for, he's been playing his cards very close to his vest. I think it's still pretty clear that the Senate President is holding off sending him the bill because he's fearful that it could just be an outright veto. And so our sense is that there's an ongoing dialogue to see what type of new package they might be able to put together on this. So we're looking at this more as a potential fall issue as opposed to over the next couple of weeks.

The other thing, Felicia about the VLTs in Illinois that have been now approved by the courts, we talked about this in the past. We do not see any negative impact on the existing licensees of having 5 VLTs in larger taverns in and around the state. We know there's already a legal product out there that will legitimize that. We've seen in the past in West Virginia the similar kind of authorization of VLTs at bars and taverns have minimal, if not, no effect on our operation in West Virginia. And we expect similar kinds of effects or no effect at all in Illinois as well. Let me ask Eric. I think it might be helpful to talk about what the governor's options are. It's kind of a mix and match. There's a lot of things that he could do. Depending on what ultimately is presented to him.

Yes, that's right. So he could certainly veto the package once it is delivered to him. And as I said, it has not been sent to his desk yet. And on a parallel path, trying to structure a new deal that could be presented to the legislature when they return in the fall. We don't know yet if that's the way he's headed, but there have been a number of conversations that he's had with both legislators from the host communities, where the riverboats are currently located, members of the horseracing industry, with all different constituencies. And as I said, it leads us to believe that he's really wrestling with a package that's going to make sense for everybody, including us, including the potential negative impact that it would have on us as an expansive plan as has been put together. So I think it's obviously fluid. We are trying to make our voice heard as one of the constituencies at the table on this. And I should note while this is all going on and we'll see how it plays out as we head through the summer, the 3% payment stopped as of July 15 with the opening of the 10th license. And so I think, to some extent, that relieves some of the pressure on at least the slots that tracks piece, because they are going to be getting now subsidies from the percentage of revenue from the operation of a 10th license. And that's certainly something that we have pointed out as well. So there's a lot of variables that are coming into play even today as the governors are looking at this going forward.

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

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

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

Steve, do you want to do that?

Yes, Felicia, the question on clarifying the timing of the VLTs, we expect that to take place in September through the legislature. In terms of the outcome, whether or not that is challenged, appealed et cetera, it's anybody's guess. In terms of actually being able to open facilities in our proposed relocation sites, that really is from authorizing legislation probably in the 18- to 24-month timeframe just given the fact that we have not even closed on the land acquisitions nor even started the entitlement process. So I would say watch for clarity in September, stay tuned to see if there are any challenges. And if there are no challenges, look 2 years out for the point in time where we'd be in a position to actually open those new facilities.

That would be the best case.

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

Well, I mean, the market here overall, the 3-boat market continues to show slight declines that it continues to move forward. The Indiana casino has certainly have impacted that part of Southeastern Indiana. And our focus there is continue to look at ways to improve our cost structure, and I think we've done a very good job at bringing more down to the bottom line there. And we've completed all the capital work and don't expect Cincinnati to open up until 2013. So Felicia, in summary, I don't see any kind of change in the macroeconomic situation down there, and it's going to continue to be one of trying to find ways to take what we do have in revenues. We get about $35 million to $37 million of gaming revenue per month there and trying to bring as much to the bottom line and continue to harvest that over the next 18 months.

Our next question comes from Joel Simkins from Crédit Suisse. Joel Simkins - Crédit Suisse AG: I think the skeptics on the Penn story are certainly pointing to additional competition from Maryland, Anne Arundel opens up next year. And obviously, Peter, you've spent some time talking about Charles Town. It certainly has come a long way over the last decade plus. Can you just give us a sense of how your positioning this asset as well as Perryville for the middle of next year?

Which assets? Joel Simkins - Crédit Suisse AG: With Charles Town and Perryville just sort of how you kind of game plan for Ann Arundel.

Let me make a broad comment. I've made this before, and I think it gets to just how we think here at Penn. Nothing unlike the static. I mean, we wake up everyday with the recognition that are competitive things. I mean, you can drop an atomic bomb on some states where we do business: floods, earthquakes, hurricanes. I mean, we seem to get it all. That's the nature of life in business. Competition has been rising in a number of places. We recognize that reality. Always looking over our shoulder with the thought that they're gaining on us. So our rap sheet has been real clear; we just run faster. Now we both know our numbers as we look at the last few years. Here's a recognition. We're going to be impacted in Maryland. There's no doubt about that. We're going to be impacted by Ohio. But as we said earlier, Ohio was going to happen with or without us. So we're a lot happier to have it happen with us. All that having been said, as we run the numbers internally, look at the hits to our revenue, look at the gains; we're very happy campers. I mean, look, I'd love to keep it all. But the reality is that it isn't going to be the way it is. So that we think we've positioned Charles Town, more specific to your question, to be a powerhouse that is going to be very hard for Maryland to compete with. We're going to lose some convenience business, there's no doubt about that. If you can play a slot machine 5 minutes away, you're probably going to do it. But nobody in Maryland, and certainly not the folks in Ann Arundel, are going to be able to offer at that tax rate the kind of amenity package and the kind of experience that we can at Charles Town. Remember, if you cut off all of Maryland, we're still the closest to Washington, Virginia; that vast market there. Highways are getting better every day down there. There's lots of good stuff happening. So Charles Town isn't going to go away. We would love to have it all forever, sure. But I think we've done everything that we can do to gain a real control of our customers, offer an experience that'll never be matched in Maryland, lose some convenience business and then we just move on. And then I think we're totally realistic about that.

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

It's probably why we spent the money to put this new entertainment area there. I mean, if you were to come out to Charles Town on a Saturday night, I mean, you have no idea what the energy of that place is. It is wild. It's incredible. It's energizing. It's amazing. So that's our job, to make an offering that is going to be as foolproof as we can. And then it will be where it's going to be. And we're not going to waste 5 seconds worrying about it beyond that. And we'll move on to the next good thing. So I mean, that's our strategy.

And relative to Perryville, we really don't expect much impact from the opening at Ann Arundel. We think those impacts will come if, at some point in the future, when downtown Baltimore finally gets their casino up and running. That's really what's going to have an impact, whatever impact it's going to be in Perryville. We really don't see much coming, much impact from the opening next year.

And by the way, we control our capital spend there with an immense discipline with that recognition in mind. So we're prepared for that. We're ready for that. We expected that. If we get it, fine. If we don't, that's even better. Joel Simkins - Crédit Suisse AG: Two more questions for you. The first is I know you guys have historically shied away from having an integrated rewards program. But in the next couple of years, you could have, theoretically, 4 to 5 more properties. Do you have something in Vegas now? Has your thought changed on that? And I guess, the second question and I know this is probably out of left field, but probably you want to address it is Asia. What's your view long term? Are there any opportunities there? Do you spend much time looking at it?

Let me take the first question, and then I'll defer you to either Steve or Peter or Bill on the second question about Asia, Joel. We have implemented a one-card solution now for our 2 Chicago land properties in Aurora and Joliet. That got implemented in the month of May. We're in the process -- and I should say that was across 2 properties that have the Bally ACSC slot system. We're in the process of putting a one-card solution at the Kansas Speedway when it opens in the first quarter of next year to be compatible with our Argosy Riverside operation. So we are working on the technology solution to deliver that. And when you think about having Toledo, Columbus, Lawrenceburg and potentially 2 VLTs, 2 race tracks with VLTs in Ohio down the road, it certainly could be an environment where there's a lot of cross-market visitation there as well. So we are working right now to solve the technology issues, which have not been that significant to overcome. And I think we'll be prepared if we do have those kind of opportunities in Ohio and further cross-market visitation by our customers in that part of the country.

On the broader question of Asia, look, suffice it to say, if there's a gaming opportunity talked about, thought about, possible anywhere in the United States or the world, Penn's there. Take that as the gospel. We have spent a fair amount of time over these last years. I think I've reported before, in Japan, when there was some active talk of that possibility, we still have a very strong opportunity there, if you will. Bill and I were in China, I guess, what, 2 weeks ago. Look, we're out there, finding the right opportunity. And elsewhere in Asia, believe me, we're there. Korea's down the list. When any of these things are going to open, I can't say. And I think you know the issues. But I think you need to know that we're actively looking at those markets, looking for the right opportunity. They are few and far between and the moment, but we're there. This company has been nothing if not opportunistic in surveying the world that surrounds us and looking for where we can pounce on, on a good opportunity. So it's the only answer I can give you. We're out there, and we're prepared.

Our next question comes from Larry Klatzkin from Claxton Advisors. Lawrence Klatzkin - Jeffries & Co.: On this international stuff, would you be willing to partner up with another company that's maybe more in that area of the world?

We'll do anything. I mean, we've demonstrated that all along. Look, we prefer to own everything. But you've seen already a number of joint ventures that we have quite happily pursued. What Steve and I were just talking about something domestically here in America that may spring up. And his question, what, Steve at 8:00 this morning or something like that was, "Would we partner with these folks?" And the answer is real quick, "Yes, sure. Why not?" Look, we'll do whatever it takes to make something happen. I like the whole pie, but I’ll take half. I mean, I hope that answers it pretty plainly. Lawrence Klatzkin - Jeffries & Co.: It does. And Massachusetts and Florida, you guys would you look at those markets and what do you guys seeing on that?

Well, we'll work on that. We waste a lot of time on those markets. So go ahead.

Well, if we can talk about the market, I'll just tell you that in terms of timing, the Speaker has announced, along with the Senate President, that discussion of a gaming extension will begin after Labor Day. And it sounds like they're as close as they've been to a 3-party understanding of at least the framework. And the sensitivity has always been around the racetrack and the notion of a no-bid contract and that sort of thing. But we'll look to participate pretty actively once the debate begins in earnest after Labor Day. Lawrence Klatzkin - Jeffries & Co.: And then Florida, too?

Yes, Florida is also fluid. As you know, the expansion bill that we're debating in the last legislative session failed. There's a huge amount of interest among gaming companies in the Miami area and elsewhere who are still looking at a model that would divvy up the state into different regions with this structure of a bid process. And so now, it's about finding champions for that type of plan. We've got our operation at Sanford Orlando Kennel Club, but are exploring potential other opportunities in other areas of the state if does get down to that kind of regional plan like in Massachusetts as well. Lawrence Klatzkin - Jeffries & Co.: And then as far as Maryland may be getting table games, I know that's a good and the bad feel, but there's been talk off and on. Any feeling on that?

The states that have been talking about it. It would have to go back to a statewide vote, which if it was going to occur, I think it would be in 2012. And certainly, the other operators are out there pushing for it. As Peter alluded to there is an arms race going out there in the mid-Atlantic region given the amount of competition. As to whether all the pieces will be put in place for 2012, it's still too early to say. But that will be the earliest that this would be put to the voters. Lawrence Klatzkin - Jeffries & Co.: And then the last question, Columbus is not going to have competition. I guess, you've done everything you're going to do there. When it gets closer to something opening in Columbus, do you have plans to make that facility more attractive?

Yes. Lawrence Klatzkin - Jeffries & Co.: I mean, Lawrenceburg, I'm talking about. I'm sorry, Lawrenceburg.

I mean, we're done in Lawrenceburg. We are working with the city who has proposed a hotel very close to our casino where we would partner with them and operate and manage it for them and be a minority investor, initially, in that development. That would be the only thing that we're looking in Lawrenceburg, to add about 150 to 200 rooms in that downtown Lawrenceburg area. But beyond that, we've completed our capital program in Lawrenceburg, and we're going to be prepared for what happens in 2013. Certainly, it's going to have an impact when Cincinnati does open. Again, in Indiana, we have the ability to offer smoking to our patrons on the casino floors, which Ohio will not, which we believe will continue to create an advantage for us. But certainly, it's going to have an impact when Cincinnati opens in 2013 in Lawrenceburg.

Our next question comes from Marc Strawn from Morgan Stanley.

One quick follow up on Ohio. I was wondering if you can give us some ballpark figures if you're able to move the VLT or the racetrack locations to accommodate VLTs, is there a rough ballpark of CapEx that you could give us to help us out there?

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

I mean, the knowns are, it's a $50 million license via a $150 million minimum required capital spend. The unknown...

With some recognition for already spent land acquisition cost.

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

Yes, look, and I've talked with the Governor directly. I mean, face-to-face, and pointed out, look, I appreciate your enthusiasm. First, we've made the point to the state that you need to do what, and the Pennsylvania did. Look around at the map and put these things where they're going to have the biggest impact for you. And that is to get to those population centers that are not well served. I mean, I think that's pretty obvious and logical. Naturally, as you've seen, the governor has been focusing trying to -- maximizing revenue for the state in very, very tough times, and one of the things that [indiscernible] has picked up with the state was the idea that you have a move, in addition to the $50 million, you have a nice, fat -- move the track premium. And the point I made to the governor I think is the obvious one. Well, you can do that. But remember that there's a fine amount of money that can be spent in these markets. So the more you grab there, the less you're going to get on the back end. I mean, they're thinking about these things, we don't know where it's going to go, a lot of hurdles to be crossed. Remember, this is a win-win for us either way. If they're slow to roll these things out, we're happy to operate in the meantime. But to be real clear, we support the VLT efforts. We'd like to see it happen, we'd love to see these tracks go to the places where they really ought to be. We have tremendous local support to go to those places, and we now just have to kind of wait and see. But in the meantime, all is good. So we're not -- we're going to be at the table talking about that. We think, in the end, that the state will do whatever the right thing turns out to be.

Our next question comes from Joe Greff from JP Morgan. Joseph Greff - JP Morgan Chase & Co: Most of my questions have been asked and answered. Just 2 relatively quick ones. On Ohio relative to 3 months ago, have your internal returns forecast have changed at all, I guess, in other words, netting into the equation, the VLTs of the tracks? And then my second question for Bill is can you give us cash, debt pieces and CapEx for the quarter?

When we scoped around that, we fully anticipated that there was a possibility of VLT competition in Columbus and obviously we expect that, that could fast track and believe so. I would say, no, there hasn't been any internal modification because that's basically how we were looking at the project all along. But relative to where we're on cash and debt balances, obviously [indiscernible] that at the end of second quarter, we had $304.6 million in cash. I'm sorry, total cash is $321 million -- or actually $322 million. Total debt, bank debt, was $1.518 billion. We had some capital leases on Aurora 3 service for roughly another $5 million, and then we have the 2 bonds for the $250 million and the $325 million, which we also put out on release yesterday. What we're going to do is to call the bond, the 2015 bonds, to $6.75 billion. We're going to just drawdown our revolver and use some of our remaining cash, so it's just the corporate, to fund that calling. It's a total debt of $2.1 billion at the end of the second quarter. Looking forward on the CapEx in the second quarter, we had a total CapEx of roughly $69 million. Break that $14.6 million of maintenance CapEx, we spent roughly $16.3 million at Kansas on the -- our share of Kansas was $16.3 million, and then our project CapEx was roughly $37.9 million for the quarter.

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

Our next question comes from Steven Ruggiero from CRT Capital.

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

Yes. I mean, when we do the analysis, the reality is to penetrate -- we look at it on a penetration level. And obviously, and generally speaking, there's a pattern of what you'll see in your revenues. In the first year, you'll see very nice growth rates for a property in the second, third and fourth years. And candidly, I think, as good proxy for that is what happened with Penn National in the opening. And you'll see it again with other projects that we open up, that there'll be a relatively impressive growth rate that will kick in through the second, third and fourth years of operations. Currently, the economy can have some impact. But candidly, the decisions that we make relative to the marketing spend and the awareness and the media attention can be much more important than at least what we're seeing in the current economy relative to the fluctuations in business volumes. How much free publicity, how much excitement there is in the market so the new property is going to have a much bigger impact on that first year's operating results than what the necessarily -- where the economy might affect it.

Our next question comes from Bryan Egger from forecastle research.

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

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

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

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

Our next question comes from Dennis Forst from KeyBanc.

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

CapEx in the second quarter was $1,027,000.

And that should continue to go up through the opening in Columbus?

Yes, it will climb. I think we're projecting $1,750,000 in the third quarter and then a cap interest for the year of $6.2 million.

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

We clearly needed -- well, I mean just to give some color to what happened. Clearly, we didn't have the asset segregation analysis done when we're giving guidance last time. As we got that done, we took the very conservative view that, obviously, there's an enormous delta between what this building cost to build and what we paid for it. And we were assuming that in the cost segregation analysis, that all of the short lived item assets would stay at par and that the reduction in the value would all come out of the building. The reality is it was much more proportional, which caused us to have a much lower level of depreciation. And I think what we're looking on a going-forward basis, depreciation rates at the end should be roughly $1,750,000 a quarter. So, hopefully, that's helpful.

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

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

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

It's in the -- I guess what I'll do is refer you back to page -- there's a page in the back, Page 13, I don't see 13 in there, but basically it reflects kind of the quarter's results. But as you look at Page 7 and 8, the numbers that are reflected there in The M Resort's results was $1,126,000, includes the expense. So if I were to back out the transaction cost expense, it's going to be $1,126,000. In the second quarter of '11, that number would be closer to $2.1 million.

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

That's correct.

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

That's right.

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

The first half of the year is generally a better month than it is in the second half. But we're also ramping, and I think there's some -- the numbers we've given have kind of taken out some of the abnormal one-time type charges on the restructurings and whatnot that we have going on at M. So we've tended to try to reflect what we thought the true operating performance of the property was when we put those numbers in the past.

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

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

I mean, there is logic there, is there not?

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

Our next question comes from Larry Haverty from GAMCO.

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

I don't see -- answering your second question, Larry, I don't see anything yet on the slot technology side that's going to jumpstart any new sources of revenue out there for us. And obviously, the gaming show is coming up in the fall, and everybody's going to be introducing new products there. But there's nothing yet that has been put in front of us that says there's something new and emerging, that's going to create new segments of business for us. With regard to Atlantic City, I'll just give you my two cents. Relative to opening up next year, there is some potential for the smaller casinos to open up with the new legislation that was passed in Trenton. I still see that market contracting over the next couple of years. The aqueduct is going to open up in the fall. Pennsylvania is still just one year anniversary-ing table games introduction. There's still product there that I think is dated that needs to go out of the market and it continues to be market that we don't have an interest in right now because of all those macroeconomic factors. So Revel opening will certainly be new and exciting but there's still too much supply in the market to cater to the demand level.

Our next question comes from Shaun Kelley, Bank of America.

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

Obviously, we've looked at future projections and we've looked at what our CapEx spend is, and that got us incredibly comfortable with the concept of being able to call the 6 3/4% bonds using our revolver there, which in effect is going to -- obviously, overcome the extinguishment of debt expenses, we do that in about 6 months. And then from that point forward, we're looking to save probably $10 million a year on the interest expense line. I think generally speaking as a company, I wouldn't recommend us going over 5x on a gross leverage level. However, having said that, never say we wouldn't, because if we've got an opportunity that made a lot of sense for us that put us over 5x and we could see a very quick and secure way that you could delever below that quickly, I'm sure we would do that. The one thing that I think we've still got going here in terms of using this is from buying back equity, was that I think it generally what people -- what the issue is, we are very focused on what we have with the preferred equity sitting out there right now, which is fully diluted in our share count to roughly 27 million shares, and we hold just slightly north of 1.2 billion, that's in 2015, with 0% coupon associated with that through maturity. And so we know that as the stock sits between 45 and 67, that that liability saves it. And for that reason, we've been particularly not that concerned with accelerating the equity repurchase because it's sitting there and basically sitting there waiting for us in 2015 for $1.2 billion. So we can certainly satisfy that obligation completely in cash if we choose to. We could also satisfy that with existing stock, clearly, given what see on the folks out today and our cash flows that we're going to be generating between now and then and the amount of price we've got, short of us finding new opportunities, it will be absolute our intent borrowing in the other event to basically pay that off in 2015. The can easily do that well inside our leverage and covenant levels and comfort levels around that.

A follow-up question from Felicia Hendrix from Barclays Capital.

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

Yes, Felicia. There are 4 segments business that drive the performance at M: one, is obviously the Las Vegas local; the second is the Southern California traffic that comes in at Interstate 15; the third is the convention and group business; and the fourth one that's continuing to emerge is the Penn regional database. And we saw in the month of June, I believe, hotel occupancy about 91%. That continues to show strength and our database is probably contributing 3 or 4 occupancy points to that story, coupled with strong convention and group business that they've seen and will continue to see through the balance of the year. So we do think there are other segments of business besides the Las Vegas locals that will continue to, I think, show modest strength, coupled with things we're working on with management there to improve our marketing spend and continue to pare down our cost structure there overall. It's going to be something that's going to take quarters of time to fully realize, and hopefully, we're not optimistic in the near term that the Las Vegas locals will come back, but the other segments of business will continue to show strength in. If we continue to show very strong hotel demand and continue to push the envelope at 390 rooms, down the road, there's always the potential for looking at more hotel rooms at that resort, take advantage of the strength of hotel demand.

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

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

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

Perfect. People are looking at their watches as do we. And the 11:00 witching hour has arrived. So with that, I thank you all, see you next quarter.

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