PENN Entertainment, Inc. (PENN) Q1 2013 Earnings Report, Transcript and Summary

Joseph Jaffoni Peter M. Carlino - Chairman of the Board and Chief Executive Officer Timothy J. Wilmott - President and Chief Operating Officer Jordan B. Savitch - Senior Vice President and General Counsel Steven T. Snyder - Senior Vice President of Corporate Development William J. Clifford - Chief Financial Officer and Senior Vice President of Finance Eric Schippers - Senior Vice President, Public Affairs & Government Relations Steve Ducharme - Chairman of Compliance Committee

Joseph Greff - JP Morgan Chase & Co, Research Division Joseph Stauff - Susquehanna Financial Group, LLLP, Research Division Felicia R. Hendrix - Barclays Capital, Research Division Shaun C. Kelley - BofA Merrill Lynch, Research Division Joel H. Simkins - Crédit Suisse AG, Research Division Carlo Santarelli - Deutsche Bank AG, Research Division Richard A. Hightower - ISI Group Inc., Research Division Thomas Allen - Morgan Stanley, Research Division Justin T. Sebastiano - Brean Capital LLC, Research Division

Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming First Quarter Results Conference Call. [Operator Instructions] And I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.

Thank you, Amanda, and good morning, everyone, and thank you for joining Penn National Gaming's 2013 First 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 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 Form 10-K and Form 10-Q. Penn National Gaming assumes no obligation 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. 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, will be found in today's news announcement, as well as on the company's website. With that, I'm delighted to turn the call over to Peter Carlino, the company's Chairman and CEO. Peter?

Thank you very much, Joe. Good morning, everyone, and welcome to our first quarter call. Given the state of the economy and the general state of the world, we're happy to report a very, very solid quarter. We, as you know, don't make a lot of preliminary comments, but I thought it might be helpful upfront to ask Tim Wilmott to share just some broad operational observations and also Jordan Savitch to talk a bit about the progress with our REIT approvals around the United States. So with that, Tim, go ahead.

Thanks, Peter. We just concluded the first quarter and I need to remind everyone that if you recall, 2012 was an especially good winter weather period. In fact, on a same-store basis, 2013, which I would characterize as a normal winter, had twice as many snow days impacting our operations in the Midwest and Northeast, as we did a year ago. And it was more in line with what we saw in terms of weather in 2011. Despite that fact and despite the fact that we've had supply come into the markets to affect businesses like Charles Town, Lawrenceburg, Riverside and Baton Rouge year-over-year, I'm pleased with the Penn's operating team results in delivering margins that were very, very solid. And I think we've managed in these markets where we've had this new supply, managed our cost structure to these new business levels very, very well.

Great, Tim. Jordan?

Yes, we're very pleased with how productive we've been in the last couple of months, pushing forward this transaction. There's a lot of moving pieces and we've particularly been focused on the regulatory piece and have been working productively with all of our regulators, giving them the documents and information they need, answering the questions as quickly as we can and feel like we're still on course to hopefully get this transaction completed by the end of the year.

Well, that's succinct. Thanks, Jordan. And Amanda, would you open the floor for questions?

[Operator Instructions] And our first question comes from the line of Joe Greff with JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Peter, I was hoping you can elaborate on the comments in the press release about how you guys are in active dialogue with the Ohio State Racing Commission. I guess maybe more specifically, what are you in dialogue specifically about? Is it level of capital investment, scope of investment? If you can help us understand that, that would be helpful.

I'm going to let Steve Snyder handle that because Steve really is point on all that process in Ohio. But broadly, the difficulty is that the racing commission -- it's not just in Ohio but elsewhere. Just haven't caught up with reality that the kind of racing business that we've known in the past is no more. So that facilities being built today are built with reality in mind. And frankly, it's just simply a debate about the -- frankly, it's down to seating. But I'll let Steve answer that question. I think in the end, it will get resolved. Steve, go ahead, please.

Yes, Joe, real quickly, I mean, we've been summoned now to the weekly meet, what have become weekly meetings of the Ohio State Racing Commission because the commissioned does remain or claims they remain committed to seeing these investments and these projects completed. But they have a notion of where the state of affairs are in racing in the United States in 2013, that it's just obsolete and is not reflective of where racing patronage and therefore, racing facilities need to be. We've invited them to visit our facilities to see our newer product to get a better understanding. We've encouraged them to visit other facilities outside the state of Ohio. They, for budgetary reasons, have refused. So we continue negotiations to try and create an environment on the racing side that is not obsolete from day one, does not have a bunch of empty seats for every event. And they remain steadfast in encouraging us to maintain a higher level of seating than we think is anywhere remotely appropriate for current market conditions. So as I said, with weekly meetings now, they seem to be engaged in trying to get to something for these 2 new facilities to be relocated that makes sense and do not require us to spend capital in places that will just not generate any returns at all. So as we've said in the statement, we hope to be able to get to an accommodation but right now, we do not have clarity on what that accommodation will look like nor when it will occur.

Yes, I should point out, Joe, that the deal in Ohio with respect to the racetracks involves very substantial upfront fees that go to the state. First, for the -- just the licensing of the facility and a relocation fee that again has been publicized before. Given that, I think, there is just a finite amount of money that can be spent on this facility. And we will be, as we always have been, extraordinarily disciplined about what we'll spend there. So it's -- there's not -- there's really not any room here to go much further. We've got a facility, it's a terrific facility. We've invited them and actually presented in extreme detail what else is being done around the United States with new facilities and so forth. What we propose, of course, is completely aligned with that. So it's our hope that sooner or later, they will come around to recognize that what we propose is what ought to be there. So let's leave it at that. Joseph Greff - JP Morgan Chase & Co, Research Division: Okay, great. And then, Bill, with respect to your pro forma PropCo and OpCo guidance, has anything changed versus 3 months ago with respect to debt financing costs or with respect to capital structure?

No, we've made no changes in our guidance on anything dealing with the debt structure. Certainly, there's been some adjustments as reflected in the release around anticipating -- how we're going to solve for the related party tenant rules around the 9.9% ownership with the Carlino family, as well as a result of some of those adjustments, has allowed us to reduce the buydown required for the Fortress group. And we've also obviously talked -- come to a resolution around the preferred equity that's held by the parties other than Fortress, one of which was a very small plug we actually repurchased in the first quarter, and then the other one, we have an agreement on the repurchase agreement as to -- at the effective date of the transaction. But the short answer to your question is no, there's no changes on the debt structure, no changes on the implied interest rate. Joseph Greff - JP Morgan Chase & Co, Research Division: Perfect. And then 2 quick ones for you, Bill. With respect to financial guidance for Penn National Gaming, one of the items you referenced is an increase of about $11 million of full year corporate overhead related to a number of different things. How much of that was recognized in the first quarter? How much of that incremental $11 million was recognized in the first quarter here?

Well, how much of that? Let me kind of word it a different way. What we have in the second to the fourth quarter is approximately an incremental $9 million of corporate overhead for the second through the fourth quarter, of which we think about $3.5 million to $4 million is related to development costs and roughly $5.5 million for the stock price movement through March 31. That expense will go higher assuming -- because our stock was at roughly $54 at the end of the quarter. Clearly, it's trading higher. So we will continue to see some additional expenses there. But we're not reflecting guidance because obviously I can't foretell where the stock price is going to be between now and the end of the quarter.

But you'll get that back on the share count coming down, assuming the share price goes up. Okay. And then, Bill, last one here. If you can give us cash and debt balance at the end of the quarter, maintenance and project capital, expenditures in the first quarter and what your expectations are for the balance of this year.

Sure. Cash at the end of the first quarter was $247.7 million. Total debt was $2,614,000,000, of which $2,276,000,000 was bank debt; capital leases of roughly $2 million on $325 million and $10 million for other. That represents roughly a $117 million reduction since the fourth quarter. Going forward on the CapEx, CapEx for the first quarter was a total of $62.7 million, of which we would characterize $21.8 million of that as maintenance CapEx and $40.8 million of project CapEx. Primarily the project CapEx, roughly half the project CapEx was wrap-up spending between Columbus and Toledo. We've spent roughly $6.6 million in Dayton and Youngstown on site prep and other design costs. And then the last piece that's the predominant number is what we've spent in Hollywood, St. Louis, on the conversion, that's roughly $12.3 million. Looking out for the year, we're expecting maintenance CapEx at $94.3 million, project CapEx of roughly $277 million. That would include total expenditures for Columbus and Toledo wrapping to be around $36 million. We do have in our number and this is obviously subject to outcome of discussions with Ohio, there's roughly $173 million that we were planning on spending this year on the tracks, that may get -- depending on the outcome and the timing, that may or may not happen but -- and that may not be a great proxy for what we're going to spend this year. It won't be any higher than that, obviously, because we've obviously are not spending at the rate that this guidance contemplates. And then we've got $13 million for the hotel at Zia. And then we expect to spend another $47.8 million in St. Louis, and then there's some other stuff kind of floating through that gets us to a total of project CapEx of $277 million for the year.

And our next question comes from the line of Felicia Hendrix with Barclays.

Jordan, can you just maybe help us think about when you might start hearing from the state regulators in terms of approvals? Do you have any better sense now than you did maybe a few months ago?

Yes, that's always a murky crystal ball to look into. It's wholly within their discretion when they're ready to put us on agendas. So I can only offer a guess. And I think that the guess is that I'm hopeful that we will start seeing a few put us on agendas in the second quarter. And I am more hopeful that we'll see a lot more being ready by the third quarter. But you just have to keep in mind this is a novel transaction, there's some new things that they're looking at. So they're going to -- they'll put us on the agendas when they're ready and they're done with their investigations. And all we can really do is just answer their questions as quickly as they come up.

And given what you know now after kind of working through this process, is there anything that makes you more or less optimistic that this will be just as smooth -- relatively smooth process?

I am not. I remain optimistic that it's -- look, they've -- things are focused, I know I can give you a little color. They're looking at the REIT and what the REIT's relationship is going to be to Penn. They're trying to figure out -- it doesn't fit into one of the really easy pre-existing buckets of a supplier or vendor or investor. So they're looking hard with which of the buckets, what kind of licensing, what kind of suitability review do they want with the REIT. And then they're looking at the financing impact, the new finance, basically, there's a new capital structure coming in for Penn not just as a result of the REIT. But there's new financing that's contemplating. So they're looking at it like they look at any other new financing and make sure they understand the capital structure and what the impact on the financial viability under price will be going forward. I think we answer their questions as they come up. And like I said, it's been a very productive process.

And are you confident that there -- I mean, because you know how committees could be and boards and things like that. Is there a risk that they could delay the whole process?

There's always a risk. What I guess -- I mean, we see nothing today's to suggest this is going to be a problem. Fair enough, but as long as we can make it. We meet regularly on this as a group, okay, and we beat up on Jordan. Believe me, we do. And look, things seem to be going fine. So until they're not going fine, in which case, we'll let you know but right now, they're moving along as well as we would hope.

Okay, great, good to hear, yes. And this is either for Bill or for Tim. Just wondering if you could perhaps discuss the drivers with your guidance. You slightly reduced revenues, so just wondering what some of the drivers behind that might have been?

Well, I mean, the revenue guidance, I mean, it's kind of a little bit here and there. I would -- we're taking a look at kind of trend lines across the different properties. We're actually taking our property level guidance up in the second through fourth quarter versus where we were before by roughly $7.2 million. And as I touched on earlier, we're offsetting that with some expectations around development costs and the stock employee expenses of $9.1 million. So on a full year basis in the second to the fourth quarter, we did take it down a couple of million. But I would characterize that as actual trendline improvement from the property levels, offset by some corporate expenses related to what we're doing in the different jurisdictions.

Okay, helpful. And then just finally, Ohio revenues, they ramp nicely through the quarter. Just wondering, Tim, are you seeing the continued ramping in April?

I think the trends are continuing. Typically, Felicia, we're -- March is one of the strongest months of the year that we see. Even in new property openings, we're hitting month 6, month 7 now in Columbus. And as we have seen in Kansas, saw in Toledo, there's going to be a period of continuing to build. But I think you're you going to see another build at the start of the July-August timeframe, as we hit the summer months as well. But I was pleased to see in March versus February in Columbus, for example, we had almost a 14% growth in revenues. And we've shown sequential growth. And we're still working on marketing activities to continue to expose our new property to customers for the first time. And that's gone very well. Our repeat visitation has been very, very strong. Our database growth continues to be very, very strong. So this is very typical what we've seen and how Penn National opens their property in both Toledo and Columbus.

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

Just wanted to maybe follow up on specific markets while we're speaking on Ohio. Could you just give us an update on your thoughts around some of the possible restrictions on Internet cafés? Tim, is this a big issue that you guys actually think is impacting your slot volumes there or -- and that this could be a meaningful positive or do you think it's more of a kind of a one-off?

Thank you for this question. I think the Internet cafés, of which there's potentially over 800 locations in the state, have had a material impact on our operations, both in Toledo and in Columbus. We just can't understand why they continue to exist. We saw this week that the Attorney General has started to do a bus out of these operations, and we applaud his efforts. We know we've got a bill that cleared the house to severely limit these operations. And we know the governor is behind it, and we're waiting for that Senate to act as well. It's been frustrating for all of us. I'll let Eric add on what I miss in responding to this comment. But I'd seen estimates that these Internet cafés that are unlawful, not being taxed, unregulated that destroy the public trust and confidence of gaming within a state that has authorized it, can generate potentially up to $500 million of revenues. And it has -- and there's no doubt in my mind, it's had a material impact on our operations there. That's why we want to see the legislation and law enforcement act quickly to put a stop to this.

Yes, the only thing I'll add, if you look at the front page of the Cleveland Plain Dealer today, you can see the photos from the bus Tim was talking about where they had these computer monitors that are actually incorporated into slot machine cabinets. And so we really are talking about mini casinos. The Senate has held one hearing on this. Unfortunately, they have talked about including this issue as a part of a broader more comprehensive look at gaming issues. And we're trying to lobby them to peel this away from those other unrelated issues and just focus on this. And so we've got a very aggressive lobbying effort underway right now to try to get the Senate to act as quickly as possible.

But either way, Gary, the Attorney General has clearly recognized that the -- and have said publicly that this is an illegal activity. And he is meeting with prosecutors around the state to devise a plan to do an across-the-board wipeout of this unlawful industry. So we're very heartened by what we've just seen and what you can find in the press today.

And in fact, the courts have ruled to give the Attorney General the support that they have ruled that these are illegal operations and should not exist. So we're hopeful we're going to get these things closed. And I think once we do, you'll see some nice impact to our slot volumes in both of our Ohio locations.

That's helpful. And just curious, I mean, are there any other states where you think this is a -- kind of a -- like a legitimate subindustry that's undermining maybe what else we're seeing in regional gaming? And we've heard places like North Carolina and Texas, which aren't so big for commercial gaming but curious, do you guys see this as a broader issue endemic kind of around the United States? Because frankly, prior to Ohio, this wasn't something that was hugely on our research radar screen until we actually went into one of these things.

Yes, and there's different forms. I mean, in Ohio, the issue is Internet gaming, in other states, it's pull tabs. In other states, it's some form of Gray Machines. There has been proliferation of what we would refer to as unlawful or at least, gray gaming going on around the states. You probably noticed in Florida this issue actually brought down the Lieutenant Governor of Florida. And so they're very controversial. You all tend to speak to our specific jurisdictions, but we have seen this across the country. And the American Gaming Association has just recently completed the white paper that's available on their website that talks about the impact of these types of Internet cafés across the country.

But besides Ohio, to specifically answer your question with regards to respect of Penn National, this is the only jurisdiction that is having any effect, we believe, on our operations.

Okay, that's very helpful. Moving on to just West Virginia for a quick second. You guys probably should have a first glance on the impact that tables at Maryland Live! are starting to, like, happen now through April, is that kind of within the boundaries of your original estimates for kind of how that impact is trending?

It's only been open a week, way too early. They're getting a lot of trial. In fact, I was at Maryland Live! yesterday to see the business first hand, and it was very, very brisk. But given the -- just the seven-day opening of table game operations, it's way too early to give you any indication at this point what the effect is going to be. We saw about a 15%, 17% effect on slot volumes. It's tough to predict this early what it's going to mean for table customers. The big variable here, I believe, is the long-term effect of customers that smoke in West Virginia they can't smoke in Maryland that like to play table games that have mostly an Asian origin of ethnicity. So I don't want to speculate too early yet.

Okay. Maybe and then maybe just one last one. Broadly, on the core consumer, obviously, the March data came in better, slightly better weather, you don't have the leap year, kind of the extra day issue, probably a better weekend calendar. But when you guys look at traffic versus kind of ticket, it seemed like the issue wasn't admission, the issue was really spend per visitor. Have you seen any signs of improvement to that in March and April and kind of what are you just feeling out of the core gaming consumer right now relative to last quarter?

Most of our data suggests that the weather had a big impact on visitation. We didn't see much change in spend per visit at our core properties year-over-year. Most of the effect was admission trends and visitation trends that I think were either impacted by new competition in our markets or weather-related. It doesn't seem to be any change in consumer spending when they do visit our properties. It's been more of the same, generally flat.

I would agree, and we've done -- this is Bill. We've done some analysis looking back at '11 comparing '11 and '12 and '13. And after you look at really of factoring out cannibalization from new competition, 2013 feels an -- looks and feels an awful lot like 2011, with '12 being the aberration. Last year was the weather. I would -- quite candidly, I think it's just more of the same. I don't particularly see any trends that would give me any indication that things are getting any better or any worse. They just seem to be just kind of moving along on a fairly steady pace.

And our next question comes from the line of Joel Simkins with Crédit Suisse. Joel H. Simkins - Crédit Suisse AG, Research Division: A couple of questions on new jurisdictions, maybe starting with Maryland and the RFP that's due shortly for PG County. Just curious on how that's shaping up and if you expect any additional competitors besides yourselves and MGM to emerge for that opportunity?

Steve?

Sure, Peter. There are obviously others that we've heard are looking in Prince George's County. The deadline for the submission is May 10. We'll have to wait and see who shows up and in what form on May 10, there's really not much more to say at this point in time. Joel H. Simkins - Crédit Suisse AG, Research Division: Okay. And one other follow-up on Charles Town. Obviously, the property has taken a bit of a hit, the entire market has taken a hit from the ramp of Maryland, as well as Pennsylvania. Is there any talk with the state about getting some tax relief, maybe less racing days, some reduced subsidies to the horseman?

Boy, that's a tough one, and you might get a couple of different opinions. Look, the state itself is not in perfect financial shape, by no means is the worst economy there. So I -- this is just my sense that I don't expect a lot of sympathy, concern but probably no adjustment that we'd be prepared to ask for. In other words, we view ourselves as partners of the state in every way. They've been a great state frankly to do business in. They've been stable, they've been reliable. So we -- and they recognize the kind of competitive situation that we have. But they're also hurting, too. So I can't, I must say, conscionably ask the state to help us when frankly they are suffering equally along with us from competition. So what we really want to ask from them is their support. Now as it relates to racing purses, things like that, I wouldn't want to speculate on what the state might do. If they were to step in and say, we think that perhaps purses have risen to just too high a level or too much money is allocated to that area, more likely they'd grab it back themselves. Now I'm not suggesting that's what they have in mind, I have no intelligence around that. But I mean, that is much more logical. So it's not likely to come to us but -- and we're not about to ask for anything. We're very happy with our working relationship there. And what we do ask for is just strong support and the status quo. Joel H. Simkins - Crédit Suisse AG, Research Division: And maybe one follow-up for Tim on the development front. The Jamul announcement was kind of incremental, certainly a new wrinkle for Penn in terms of travel gaming management. How should we be thinking about the strategy going forward when you guys continue to look for other sort of asset-light management opportunities?

Well, I think this, Joel, certainly fits into Penn National moving forward post-spin very, very well. We were fortunate enough to get ourselves involved with the whole tribe and filed our documents with the NIGC. I think next week, Steve, we have a meeting with the NIGC to begin discussions about the submission and hope to get this done in the next couple of quarters. And this location is really, really ideal for the consumers in Downtown San Diego, about 19 miles due east. Now if there are other like deals out there, we continue to talk with certain parties about this. This fits very well with the profile of Penn National going forward. As you know, though, Joel, the pickings around American Indian tribal management are very slim, and this was a unique opportunity and a unique market that we think will fit very well with the Hollywood brand there, but we continue to look.

And our next question comes from line of Carlo Santarelli with Deutsche Bank.

So just a quick question on some of the financing and the approvals and the timeline and how we should be thinking about that. Is it still your understanding or to the extent that you could provide color on it, are you guys able to get your state regulatory stamps of approval done prior to the pro forma or the split company's financing being in place? Or is there a chicken-and-egg situation there?

No, I mean, it's going to be just -- we've certainly given regulators proposed term sheets and whatnot on the financing side. I would -- it's probably -- it's no different than any other type of arrangement where you've got to get the regulatory bodies to approve it. But it's all done as part of the deal and everybody understands that you'll start out with a basic level, and it's all subject to the extent that there are any modifications in your terms during the marketing process there may be minor modifications, which you have an obligation then to update the state regulators on if, in fact, you should incur any of those. And there's an understanding that there's not going to be massive changes to anything that's totally structural. So I don't -- we don't really see any issues on the -- from that perspective.

Great. And then, Tim, if I can, on the casino side. It seems like you guys have continually driven casino margins higher and obviously, kept the promotional environment relatively in check. Could you talk a little bit about, I guess, the delta if you think about 140 basis points of margin growth year-over-year, just on the casino side. How much of that is mix related and how much of that is some operating efficiencies you guys are providing?

Well, it's a combination of both. The mix of adding Ohio operations certainly has had an effect on the overall margin. But as I said at the outset of my introductory comments, the operating teams have done a very good job responding to new business volumes. I look at the team in Lawrenceburg and how we've responded to the effect of Columbus that hit in the fourth quarter and then the Horseshoe Cincinnati opening in early March. That team has reacted very well in managing its labor to the new world of volumes. So I think it's -- I characterize it as about half-and-half change in mix and then the response in terms of our overall marketing reinvestment and labor management that's contributed to the margin improvement.

So if I could just go a step further, would you say in terms of the properties where you guys are seeing the competitive threats whether it be Charles Town, whether it be Lawrenceburg, if we were to look back to normal run rates for those properties, would you say that EBITDA margins have been relatively in line with what the historical experience is by lower revenue levels?

When you have this kind of hit in business volumes, you do have certain fixed expenses that just can't get covered as you would. So I don't think it's a fair statement to say they've been maintained, but I think they've been managed well.

And our next question comes from line of Rich Hightower with ISI Group.

A couple of questions. First, on Columbus. I know that in the press release, it was acknowledged that the ramp-up has been slower than expected. But I noticed you took out 500 slot machines from fourth quarter to the end of this quarter, and I'm wondering if that was a permanent shift, is that a seasonal shift with the weather? Is that going to change with -- after the Internet café crackdown? Just want to know what your thoughts are there.

Well, we certainly looked at the slot count at 3,000 and felt that we can reallocate those 500 units around to the rest of the Penn properties so that we could better use those slot machines elsewhere to upgrade the facilities there. We feel very comfortable today that the 2,500-unit count is right for the business volumes. And it will be dependent upon where these volumes go and what our win per units are. My expectation is once the Internet cafés do get contained, we will see improved business volumes and it's just going to be a wait-and-see approach on how we address the overall count in the Columbus operation. But I would expect at this point that the 2,500 count that we have there today will get us through 2013.

Okay. And then second question, on the OpCo and PropCo guidance that you've given, it looks like there's some cost shifting in terms of depreciation interest, there's -- it's share count changes, there's a lot of stuff going on from quarter-to-quarter versus previous guidance. And I'm wondering is that a function of accounting interpretation or what really is changing that from quarter-to-quarter? And just some of your thoughts on the accounting there, I guess, is the general question.

Well, I think we -- I thought we did a reasonably good job of delineating the things that are changing on the -- from the last set of guidance. I mean, the reality is when you separate 2 companies that weren't formerly already segregated into separate operating businesses, the process of digging through the detail is rather huge, is basically putting it. And it's very complicated, and there's a lot of subject of interpretation, and we put out some original estimates, again trying to be as conservative as possible or knowing that we -- giving ourselves when we made those original estimates, for instance, around depreciation, we took a conservative view because obviously, as we refine the view and as more depreciation has been, not necessarily moved but as the assets identified more specifically in amount of depreciation, it's clearly helpful that depreciation is increasing on the OpCo and decreasing on the PropCo side for, obviously, for the tax benefits associated with that. So I think from that perspective, it's really nothing more than refinement and an actual digging through the 100,000-plus assets sitting out on a fixed asset ledger and going through piece by piece and asset by asset to come to an allocation. We're still not 100% done on that, but we know that we've moved enough that we felt it was appropriate to change what was in our guidance. There may, in fact, be some slight additional movement again in the same direction that we've gone now. But we felt that given that we know what we've got, we should basically incorporate that into the guidance. The other components of some of the stuff that's changing is we're still working through the details of some of the solutions for some of the problems that we've gotten in terms of solving for the related party tenant rules and whatnot. And in our guidance, we always want -- we took -- we knew that there might be alternative solutions that could yield a better result, but we didn't want to necessarily assume that we could successfully get there. So as we get through these hurdles and as we work through it with our advisers, both on the accounting, the tax and legal side and as we come up with solutions that are advantageous to the transaction, and as we know that they're doable and feasible, we're incorporating those into the guidance as well. So I think that's about the best color I can give you on what's been happening.

Okay, that's helpful. And can we -- do you know when we can expect perhaps the S11 to be filed? Is it second quarter, third quarter?

Yes, we would expect the S11 to be filed in the second quarter. So that probably leaves me about 2.5 months. But that will be the initial filing on the S11 should get filed sometime this quarter.

Okay, great. And then final question, more broadly speaking, from PropCo's perspective going forward on the acquisition front, are there any markets around the U.S. that you're especially excited about in terms of acquiring properties, and I know you can't be having those conversations right now but just generally speaking, areas in the U.S. where you think the economy is recovering that better than the average and so forth or where competition is more limited? And then second question on that front, what -- if you can provide it, what sort of unlevered IRRs would you be targeting on these acquisitions?

Listen, I think I'll address -- the reality is on a going-forward PropCo basis, I would expect that we'll be looking -- it'll be an asset-by-asset situation and clearly, we'll be more excited about markets where we believe that the stability of the cash flow is certain. Obviously, most excited, obviously, in those areas where we might think there is potential for growth, stability, second, and it's the declining market are less exciting. I think relatively speaking, I mean, there's markets -- some markets we're more excited about than others. It's also going to be a function of finding people willing to do the other side of the transaction is probably more indicative of where we're going to be excited versus regions, and we'll make adjustments as appropriate in terms of looking at what kind of rent coverage we need or expect relative to the long-term prospects of the individual property and the market generally. I think it's a little too early to comment on what we think cap rates are going to be on acquisitions. I think that's, again, going to be a function of scale, diversification, as well as the market prospects in the market. So all of those factors will kind of come into play. And I think that's candidly what will differentiate ourselves from other people who want to get into the gaming space. And we certainly have indications that there's other REITs who are, in fact, looking at gaming assets. I think what differentiates us from them is a long track record in history of understanding the nuances of the different gaming markets which, although not rocket science, can be a little bit challenging for people who are outside the market and haven't been living and eating and breathing gaming risks, whether it be cannibalization, legislative, tax rates, et cetera, et cetera. So I'd say stay tuned on that front. And you are correct that we are -- we cannot enter into conversations today, and it is killing us to not be able to come out with -- to start negotiations 3 months ago. But we are focused on one step at a time in getting the transaction done and then entering into negotiations as quickly as possible thereafter.

Can you disclose whether you're getting incoming calls from potential sellers that you just can't return their calls?

We are.

And our next question comes from the line of Thomas Allen with Morgan Stanley.

Following up on the OpCo PropCo questions, can you help us think about the best way to extrapolate the 2013 guidance you give forward every year? So I'm not asking for 2014 guidance, but can you just walk us through how to think about the various rent escalators, how margins should evolve, things like that?

Sure. I mean, looking forward to '14, we're going to be setting -- I think there's -- the rent has basically broken out into what I call 3 components. The one component is building values, which won't change. That's looking at '13 guidance and extrapolating forward, the only thing you would add on for that would be new projects coming online, of which the 2 that are obviously in the pipeline are the Ohio racetracks with obviously -- the cost of those buildouts would get incorporated into the building rent going forward. The other piece is other than Columbus and Toledo, the land rent base is going to be based on 2013 at 4%. So clearly, as all of the non-Columbus and Toledo properties perform this year, we'll be setting the base rent for the next 5 years for the land rents on the 4% fee. And then there's the 20% of Columbus and Toledo going forward. So those are the 3 rent components in terms of what can get adjusted. The beauty of PropCo is really the margins are going to be rent less corporate overhead because they are an interest expense. So forecasting whatever interest expense is going to be and whatever corporate overhead is going to be is going to basically tells the whole story on PropCo. But so -- I think the piece people should be focused on is obviously looking forward to '14 is factoring in -- and there's a 2% escalator on the building values, assuming that there's a rent coverage of 1.8x or better that also kicks in. But other than that, it's really just a matter of forecasting revenues in terms of where you think 2013 is going to be for all of the non-Columbus and Toledo properties factoring in next year where revenues is going to be for Columbus and Toledo. And that should give you rent expectations for 2014 and moving forward.

Okay. And then can you just give us an update on where you are with any kind of strategy for online gaming?

I'll try to take that, Thomas. We were surprised in New Jersey that Governor Christie in February signed a bill that went beyond online poker. And we're watching how that gets advanced and eventually operationalized. I think that the net result in New Jersey will be increased revenues for the state but probably decreased visitation to Atlantic City and probably a contraction of jobs overall in Atlantic City given the decreased visitation. And a real question about whether it's going to increase profitably or not. That said, we continue to have active discussions with partners that are very interested in talking to Penn National about working together for online poker or online gaming as it advances state-by-state. We continue to see that it's not something that's going to happen at the federal level in 2013. We think it will continue to evolve state-by-state. It's very difficult to predict how quickly, but we will be prepared if there is an opportunity to do this both from a legislative standpoint to make sure it doesn't affect our bricks-and-mortar operations, as best we can and then take advantage of an opportunity if it's there in a jurisdiction where we operate today.

Okay. And then just finally, on your Perryville property, I know it's not a huge property, but I think you recently added around 20 table games? I mean, how should we think about that property run rate, revenue run rate going forward assuming you're also taking some impact from Maryland Live!?

No question, we were the first in Maryland to open up table games in March. And we had a nice lift in business with that addition. But again, with only 1 week under our belt at Maryland Live! with table games, it's too early to predict the run rate out of Perryville. They're just going to settle down. We're going to need a couple of months of time before we could provide an answer to your question with any degree of precision.

[Operator Instructions] And our next question comes from line of Justin Sebastiano with Brean Capital.

In the release, you state that you were rational marketers and promoters in Q1. Was this an enterprise-wide initiative or was this market-specific or property-specific?

No, I think the philosophy of being rational marketers is an enterprise-wide discipline that we have. It's not market to market, and we have to take a look at competitive conditions in every one of our markets and look at trends of where business is defecting and becoming inactive. So it's an overall enterprise discipline, but it's applied market by market based on the unique set of competitive conditions at each of our operations phase.

Okay. And so have your competitors been rational marketers as well?

I think generally, yes, it continues to be more the same of what we saw in 2012. We don't see anyone out there chasing revenues to think that they can gain share and gain EBITDA growth. So I would continue to characterize overall the promotional activity across these regional markets as fairly stable.

And that's continued through where we are today in April?

Yes.

And we have no further questions on the telephone lines. I will turn the call back to you.

Okay. Before we wind up and we thank you for participating today, there's some late breaking news that we think we should share with you. I think in the last 10 minutes, we just got a notice that the Iowa Gaming and Racing Commission has just awarded a license to Hard Rock casino to build a facility in Sioux City, which we find to be both a mystifying and actual shameful development. In light of the fact that we are the licensee in the city and for the new land-based facilities had proposed to are what clearly the best choices in the market from every economic and practical standpoint. Tim, do you want to make a couple of comments about that?

Yes, the comment I have is just how difficult it is for all of us to rationalize this decision given that our project had the highest amount of capital investment, provided the most certainty regarding financing given the strength of our balance sheet, and that we have 20 years of operating experience operating in the Sioux City market, that's why as Peter characterize this decision as mystifying. We don't understand it and certainly, I want to sympathize and empathize with our employees there who've done a terrific job maintaining a high-quality casino experience. And we're going to work with them whenever the outcomes, eventual outcomes have here to make sure that know they're valued members of the Penn family.

Yes, and look, this is not the forum now. We just got this information but suffice it to say that this is not the last word on this subject. So we look forward to exploring this further. That's the most charitable way I can describe it. And we just thought you should be aware of that event. So with that, we thank you for tuning in today, and 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.