PENN ENTERTAINMENT, INC. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . EXECUTIVE OVERVIEW Our Business OnAugust 4, 2022 ,Penn National Gaming, Inc. was renamedPENN Entertainment, Inc. PENN Entertainment, Inc. , together with its subsidiaries ("PENN," the "Company," "we," "our," or "us"), isNorth America's leading provider of integrated entertainment, sports content, and casino gaming experiences. PENN operates 43 properties in 20 states, online sports betting in 14 jurisdictions and iCasino in five jurisdictions, under a portfolio of well-recognized brands including Hollywood Casino®, L'Auberge®, Barstool Sportsbook®, and theScore Bet Sportsbook and Casino®. PENN's highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by its investments in market-leading retail casinos, sports media assets, technology, including a state-of-the-art, fully integrated digital sports and online casino betting platform, and an in-house iCasino content studio. The Company's portfolio is further bolstered by its industry-leading mychoice® customer loyalty program (the "mychoice program"), which offers our approximately 26 million members a unique set of rewards and experiences across business channels. The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the PENN Master Lease and the PinnacleMaster Lease (as such terms are defined in "Liquidity and Capital Resources" and collectively referred to as the "Master Leases"), with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) ("GLPI"), a real estate investment trust ("REIT").
Recent Acquisitions, Development Projects and Other
OnJanuary 11, 2022 , PENN entered into a definitive purchase agreement to sell its outstanding equity interest inTropicana Las Vegas Hotel and Casino, Inc. ("Tropicana"), which has the gaming license and operates the Tropicana, toBally's Corporation. The transaction closed onSeptember 26, 2022 . OnAugust 17, 2022 , the Company exercised its call rights to bring its ownership ofBarstool Sports Inc. ("Barstool") to 100%. The acquisition of the remaining Barstool shares is expected to be completed inFebruary 2023 , after which Barstool will be a wholly-owned subsidiary of PENN. Completion of the acquisition at that time is subject to the satisfaction of certain conditions, including regulatory approval. Subsequent to quarter end, onOctober 9, 2022 , as described in Note 9, "Leases," in the notes to our unaudited Consolidated Financial Statements, the Company entered into a binding term sheet (the "Term Sheet") with GLPI. As part of the Term Sheet, PENN plans to relocate its riverboat casinos to new land-based facilities atHollywood Casino Aurora ("Aurora") andHollywood Casino Joliet ("Joliet"), and to build a hotel atHollywood Casino Columbus ("Columbus") and a second hotel tower at theM Resort Spa Casino ("M Resort"). Pursuant to the Term Sheet, the Company and GLPI agreed to amend the PENN Master Lease to (i) remove the land and buildings forAurora , Joliet, Columbus,Hollywood Casino Toledo ("Toledo") and M Resort and (ii) make associated adjustments to the rent under the PENN Master Lease; (iii) terminate the existing leases associated withHollywood Casino atThe Meadows ("Meadows") andHollywood Casino Perryville ("Perryville"); and (iv) enter into a new master lease (the "New Lease"), effective on the expected date ofJanuary 1, 2023 , specific to the property associated withAurora , Joliet, Columbus,Toledo , M Resort, Meadows and Perryville. The New Lease will be cross-defaulted, cross-collateralized and coterminous with the PENN Master Lease, and subject to a parent guarantee. The New Lease will include a base rent (the "New Lease Base Rent") equal to$232.2 million and additional rent (together with the New Lease Base Rent, the "New Lease Rent") equal to (i) 7.75% of any project funding received by PENN from GLPI for an anticipated relocation of PENN's riverboat casino and related developments with respect toAurora (the "Aurora Project ") and (ii) a percentage, based on then-current market conditions, of any project funding received by PENN from GLPI for certain anticipated development projects with respect toJoliet , Columbus and M Resort (the "Other Development Projects"). GLPI will fund up to$225 million for theAurora Project , and GLPI has committed to fund, upon PENN's request, up to$350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set 39
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forth in the Term Sheet. The New Lease Rent will be subject to a one-time increase of$1.4 million , effective the fifth anniversary of the effective date. The New Lease Rent will be further subject to a fixed escalator of 1.5% onNovember 1, 2023 and annually thereafter. PENN may elect not to proceed with or to abandon any development project, provided that GLPI will be reimbursed for any out-of-pocket costs associated with an abandoned project.The Aurora Project and theOther Development projects are all subject to necessary regulatory and other government approvals. We believe that our portfolio of assets provides us with the benefit of geographically-diversified cash flow from operations. We expect to continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and investments, and the development of new gaming properties. In addition, the partnership with Barstool and the acquisition ofScore Media and Gaming, Inc. ("theScore") reflect our strategy to continue evolving from the nation's largest regional gaming operator to a best-in-class omni-channel provider of retail and online gaming and sports betting entertainment.
Operating and Competitive Environment
Most of our properties operate in mature, competitive markets. We expect that the majority of our future growth will come from new business lines or distribution channels, such as retail and online gaming and sports betting; improvements, expansions or relocations of our existing properties; entrance into new jurisdictions; expansions of gaming in existing jurisdictions; and strategic investments and acquisitions. Our portfolio is comprised largely of well-maintained regional gaming facilities, which has allowed us to develop what we believe to be a solid base for future growth opportunities. We continue to adjust operations, offerings, and cost structures at our properties to reflect changing economic and health and safety conditions. We also continue to focus on revenue and cost synergies from recent acquisitions, technology enhancements, and offering our customers additional gaming experiences through our omni-channel distribution strategy. We seek to grow our customer database by partnering with third-party operators to expand our loyalty program, such as Choice Hotels International, Inc., as well as through accretive investments or acquisitions, such as Barstool and theScore, to capitalize on organic growth opportunities from the development of new properties or the expansion of recently-developed business lines, and to develop partnerships that allow us to enter new jurisdictions for iCasino and sports betting. The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos; dockside casinos; land-based casinos; video lottery; "iGaming" (which includes online sports betting and online social casino, bingo, and iCasino products); online and retail sports betting; gaming at taverns; gaming at truck stop establishments; sweepstakes and poker machines not located in casinos; the potential for increased fantasy sports; significant growth of Native American gaming tribes, historic racing or state-sponsored i-lottery products in or adjacent to states we operate in; and other forms of gaming in theU.S. See the
"Segment comparison of the three and nine months ended
Key Performance Indicators
In our business, revenue is driven by discretionary consumer spending. We have no certain mechanism for determining why consumers choose to spend more or less money at our properties or on our iGaming products from period-to-period; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers' spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact than others. For example, decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as recessions, inflation, rising interest rate environments, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, high fuel or other transportation costs, and the effects of the COVID-19 pandemic. In addition, visitation and the volume of play have historically been negatively impacted by significant construction surrounding our properties, adverse regional weather conditions and natural disasters. In all instances, such insights are based solely on our judgment and professional experience, and no assurance can be given as to the accuracy of our judgments. The vast majority of our revenues is gaming revenue, which is highly dependent upon the volume and spending levels of customers at our properties. Our gaming revenue is derived primarily from slot machines (which represented approximately 83% and 85% of our gaming revenue for the nine months endedSeptember 30, 2022 and 2021, respectively) and, to a lesser extent, table games and sports betting. Aside from gaming revenue, our revenues are primarily derived from our hotel, dining, retail, commissions, program sales, admissions, concessions and certain other ancillary activities, and our racing operations. 40
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Key performance indicators related to gaming revenue are slot handle and table game drop, which are volume indicators, and "win" or "hold" percentage. Our typical property slot win percentage is in the range of approximately 7% to 11% of slot handle, and our typical table game hold percentage is in the range of approximately 15% to 27% of table game drop. Slot handle is the gross amount wagered during a given period. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Given the stability in our slot hold percentages on a historical basis, we have not experienced significant impacts to net income from changes in these percentages. For table games, customers usually purchase chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit-worthy customers) are deposited in the gaming table's drop box. Table game hold is the amount of drop that is retained and recorded as gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional gaming markets, our table game hold percentages are fairly stable since the majority of these markets do not regularly experience high-end play, which can lead to volatility in hold percentages. Therefore, changes in table game hold percentages do not typically have a material impact to our results of operations and cash flows. Under normal operating conditions, our properties generate significant operating cash flow since most of our revenue is cash-based from slot machines, table games, sports betting and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate sufficient cash to satisfy our obligations under the Triple Net Leases (as defined in "Liquidity and Capital Resources" ), repay debt, fund maintenance capital expenditures, repurchase our common stock, fund new capital projects at existing properties and provide excess cash for future development and acquisitions. Additional information regarding our capital projects is discussed in
"Liquidity and Capital Resources" below.
Reportable Segments
We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate: Northeast, South, West, and Midwest. Our Interactive segment includes all of our iCasino and online sports betting operations, management of retail sports betting, media, and our proportionate share of earnings attributable to our equity method investment in Barstool. We view each of our gaming and racing properties as an operating segment with the exception of our two properties inJackpot, Nevada , which we view as one operating segment. We consider our combinedVideo Gaming Terminal ("VGT") operations, by state, to be separate operating segments. For a listing of our gaming properties and VGT operations included in each reportable segment, see Note 2, "Significant Accounting Policies," in the notes to our unaudited Consolidated Financial Statements. 41
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RESULTS OF OPERATIONS
The following table highlights our revenues, net income, and Adjusted EBITDA, on
a consolidated basis, as well as our revenues and Adjusted EBITDAR by reportable
segment. Such segment reporting is consistent with how we measure our business
and allocate resources internally. We consider net income to be the most
directly comparable financial measure calculated in accordance with generally
accepted accounting principles in the United States ("GAAP") to Adjusted EBITDA
and Adjusted EBITDAR, which are non-GAAP financial measures. Refer to "Non-GAAP
Financial Measures" below for the definitions of Adjusted EBITDA, Adjusted
EBITDA margin, Adjusted EBITDAR, and Adjusted EBITDAR margin; as well as a
reconciliation of net income to Adjusted EBITDA and Adjusted EBITDAR and related
margins.
For the three months ended For the nine months ended
September 30, September 30,
2022 2021 2022 2021
Revenues:
Northeast segment $ 685.4 $ 672.4 $ 2,028.8 $ 1,895.8
South segment 329.8 318.2 1,009.8 982.3
West segment 156.5 145.7 451.2 382.7
Midwest segment 298.4 285.7 877.6 815.2
Interactive segment 158.7 93.0 455.1 275.3
Other (1) 4.2 3.5 17.4 6.8
Intersegment eliminations (2) (8.0) (6.7) (23.8) (25.6)
Total $ 1,625.0 $ 1,511.8 $ 4,816.1 $ 4,332.5
Net income $ 123.2 $ 86.1 $ 200.9 $ 375.7
Adjusted EBITDAR:
Northeast segment $ 217.9 $ 221.1 $ 637.5 $ 645.9
South segment 139.9 137.0 429.7 448.0
West segment 60.5 54.5 171.4 151.1
Midwest segment 129.4 125.8 386.2 374.0
Interactive segment (49.3) (32.0) (80.1) (29.5)
Other (1) (26.5) (26.1) (73.6) (75.6)
Total (3) 471.9 480.3 1,471.1 1,513.9
Rent expense associated with triple net
operating leases (4) (31.5) (116.0) (119.6) (342.9)
Adjusted EBITDA $ 440.4 $ 364.3 $ 1,351.5 $ 1,171.0
Net income margin 7.6 % 5.7 % 4.2 % 8.7 %
Adjusted EBITDAR margin 29.0 % 31.8 % 30.5 % 34.9 %
Adjusted EBITDA margin 27.1 % 24.1 % 28.1 % 27.0 %
(1)The Other category consists of the Company's stand-alone racing operations,
namely Sanford-Orlando Kennel Club , and Sam Houston and Valley Race Parks (the
remaining 50% was acquired by PENN on August 1, 2021 ), the Company's joint
venture interests in Freehold Raceway , and our management contract for Retama
Park Racetrack . Expenses incurred for corporate and shared services activities
that are directly attributable to a property or are otherwise incurred to
support a property are allocated to each property. The Other category also
includes corporate overhead costs, which consist of certain expenses, such as:
payroll, professional fees, travel expenses and other general and administrative
expenses that do not directly relate to or have not otherwise been allocated to
a property.
(2)Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
(3)The total is a mathematical calculation derived from the sum of reportable segments (as well as the Other category). As noted within "Non-GAAP Financial Measures" below, Adjusted EBITDAR, and the related margin, is presented on a consolidated basis outside the financial statements solely as a valuation metric. (4)Solely comprised of rent expense associated with the operating lease components contained within our triple net master lease datedNovember 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition ofPinnacle Entertainment, Inc. , our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana (terminated onSeptember 26, 2022 ) andHollywood Casino atThe Meadows , and our individual triple net leases with VICI Properties Inc. (NYSE: VICI) ("VICI") for the real estate assets used in the operations of 42
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Margaritaville Resort Casino andHollywood Casino atGreektown (of which the Tropicana Lease, Meadows Lease, Margaritaville Lease and the Greektown Lease are defined in "Liquidity and Capital Resources" ) and are referred to collectively as our "triple net operating leases". As a result of the Lease Modification defined in Note 9, "Leases" to our unaudited Consolidated Financial Statements, the land and building components associated with the operations of Hollywood Gaming atDayton Raceway and Hollywood Gaming at Mahoning ValleyRace Course are classified as operating leases which is recorded to rent expense, as compared to prior to the Lease Modification, whereby the land components of substantially all of the Master Lease properties were classified as operating leases and recorded to rent expense. Subsequent to the Lease Modification, the land components associated with the Master Lease properties are primarily classified as finance leases.
Consolidated comparison of the three and nine months ended
Revenues
The following table presents our consolidated revenues:
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2022 2021 $ % 2022 2021 $ %
Revenues
Gaming $ 1,317.5 $ 1,256.2 $ 61.3 4.9 % $ 3,934.3 $ 3,643.7 $ 290.6 8.0 %
Food, beverage, hotel and
other 307.5 255.6 51.9 20.3 % 881.8 688.8 193.0 28.0 %
Total revenues $ 1,625.0 $ 1,511.8 $ 113.2 7.5 % $ 4,816.1 $ 4,332.5 $ 483.6 11.2 %
Gaming revenues for the three months endedSeptember 30, 2022 increased$61.3 million compared to the prior year period, primarily due to increases in our Interactive segment resulting from continued growth in our online revenues, partially due to the acquisition of theScore onOctober 19, 2021 , and the inclusion of the full quarter operating results of two new properties:Hollywood Casino York , which openedAugust 12, 2021 , andHollywood Casino Morgantown , which openedDecember 22, 2021 . For the nine months endedSeptember 30, 2022 , gaming revenues increased by$290.6 million primarily due to increases in our Interactive segment resulting from continued growth in our online revenues, partially due to the acquisition of theScore, the inclusion of the full period operating results of three new properties, includingHollywood Casino Perryville , which was acquired onJuly 1, 2021 ,Hollywood Casino York , andHollywood Casino Morgantown , and increases in gaming revenues in most of our properties in the West and Midwest segments, partially offset by decreases in gaming revenues in our Northeast segment properties primarily related to ourAmeristar East Chicago property due to increased competition in theIndiana region. Food, beverage, hotel and other revenues for the three and nine months endedSeptember 30, 2022 increased$51.9 million and$193.0 million , respectively, compared to the prior year corresponding periods, primarily due to increases in gaming tax reimbursement amounts charged to third-party partners for online sports betting and iCasino market access, the inclusion of the operating results from our new properties as discussed above, and revenues from theScore, as well as the impact of easing of restrictions, strong visitation levels to our food and beverage outlets, and increased offerings and hours of operations from the prior periods.
See "Segment comparison of the three and nine months ended
Operating expenses
The following table presents our consolidated operating expenses:
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2022 2021 $ % 2022 2021 $ %
Operating expenses
Gaming $ 757.9 $ 652.4 $ 105.5 16.2 % $ 2,158.1 $ 1,801.1 $ 357.0 19.8 %
Food, beverage, hotel and other 199.2 160.1 39.1 24.4 % 557.9 431.8 126.1 29.2 %
General and administrative 277.9 376.5 (98.6) (26.2) % 847.2 1,019.2 (172.0) (16.9) %
Depreciation and amortization 148.7 83.7 65.0 77.7 % 417.2 246.9 170.3 69.0 %
Impairment losses 104.6 - 104.6 - % 104.6 - 104.6 - %
Total operating expenses $ 1,488.3 $ 1,272.7 $ 215.6 16.9 % $ 4,085.0 $ 3,499.0 $ 586.0 16.7 %
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Gaming expenses consist primarily of gaming taxes, payroll, marketing and promotional, and other expenses associated with our gaming operations. Gaming expenses for the three and nine months endedSeptember 30, 2022 increased$105.5 million and$357.0 million , respectively, compared to the prior year corresponding periods, primarily due to higher third-party service provider fees from higher online gaming activity, higher payroll expenses, and an increase in gaming taxes resulting from the increase in gaming revenues. Also included in gaming expenses are non-recurring transaction costs of$26.0 million for both the three and nine months endedSeptember 30, 2022 , related to third-party contract termination fees as we execute on our strategy to deploy our internally built technology stack, consisting of a player account management system and proprietary risk and trading platform, specific to the Interactive segment. Additionally, the nine months endedSeptember 30, 2022 includes increased variable marketing and promotional expenses compared to the prior period. Food, beverage, hotel and other expenses consist primarily of payroll expenses, costs of goods sold and other costs associated with our food, beverage, hotel, retail, racing, and interactive operations. Food, beverage, hotel and other expenses for the three and nine months endedSeptember 30, 2022 increased$39.1 million and$126.1 million , respectively, compared to the prior year corresponding periods, primarily due to increased volumes, which resulted in increases in payroll expenses and cost of sales, and increases in gaming tax reimbursement amounts charged to third-party partners for online sports betting and iCasino market access. General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, lobbying expenses, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include stock-based compensation expense; pre-opening expenses; acquisition and transaction costs; gains and losses on disposal of assets; insurance recoveries, net of deductible charges; changes in the fair value of our contingent purchase price obligations; expense associated with cash-settled stock-based awards (including changes in fair value thereto); and rent expense associated with our triple net operating leases. For the three and nine months endedSeptember 30, 2022 , general and administrative expenses decreased by$98.6 million and$172.0 million , respectively, primarily due to a decrease in rent costs associated with our Master Leases of$84.5 million and$223.3 million , respectively, representing changes in lease classifications from operating to finance as a result of the Lease Modification as described in Note 9, "Leases" to our unaudited Consolidated Financial Statements. For the nine months endedSeptember 30, 2022 , the decrease was partially offset by increased payroll costs of$35.4 million , which reflect the current operating environment, a$12.4 million increase in facility costs due to increased volumes, and a$6.4 million loss on the sale of land. Depreciation and amortization for the three and nine months endedSeptember 30, 2022 increased period over period primarily due to increased amortization costs associated with our Master Leases of$46.8 million and$123.7 million , respectively, representing changes in lease classifications from operating to finance as a result of the Lease Modification as described in Note 9, "Leases" to our unaudited Consolidated Financial Statements. In addition, for the three and nine months endedSeptember 30, 2022 , amortization on other intangible assets increased by$12.3 million and$37.5 million , respectively, primarily due to the amortization of other intangible assets that resulted from our acquisition of theScore. Impairment losses for both the three and nine months endedSeptember 30, 2022 primarily relate to impairment charges at ourHollywood Casino atGreektown property for goodwill and other intangible assets of$37.4 million and$65.4 million , respectively, as a result of an interim impairment assessment during the third quarter of 2022. See Note 7, "Goodwill and Other Intangible Assets" to our unaudited Consolidated Financial Statements for further discussion. There were no impairment losses during the three and nine months endedSeptember 30, 2021 . Other income (expenses)
The following table presents our consolidated other income (expenses):
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2022 2021 $ % 2022 2021 $ %
Other income (expenses)
Interest expense, net $ (193.3) $ (144.9) $ (48.4) 33.4 % $ (547.7) $ (418.6) $ (129.1) 30.8 %
Income from unconsolidated
affiliates $ 6.6 $ 9.1 $ (2.5) (27.5) % $ 17.1 $ 27.8 $ (10.7) (38.5) %
Other $ (8.8) $ 19.2 $ (28.0) N/M $ (77.7) $ 43.1 $ (120.8) N/M
Income tax benefit (expense) $ 182.0 $ (36.4) $ 218.4 N/M $ 78.1 $ (110.1) $ 188.2 N/M
N/M - Not meaningful
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Interest expense, net increased for the three and nine months ended
Note 9, "Leases" to our unaudited Consolidated Financial Statements of
Income from unconsolidated affiliates relates principally to our investment in Barstool and ourKansas Entertainment andFreehold Raceway joint ventures. The decrease for the three and nine months endedSeptember 30, 2022 , compared to the prior year corresponding periods, is due to lower income earned from our investments in unconsolidated affiliates. We record our proportionate share of Barstool's net income or loss one quarter in arrears. Other primarily relates to realized and unrealized gains and losses on equity securities (including warrants), held by PENN Interactive, losses on early retirement of debt, unrealized gains and losses related to certain Barstool shares as well as miscellaneous income and expense items. Equity securities were provided to the Company in conjunction with entering into multi-year agreements with sports betting operators for online sports betting and iCasino market access across our portfolio. For the three months endedSeptember 30, 2022 , other income primarily consisted of unrealized holding losses of$10.8 million . For the three months endedSeptember 30, 2021 , other income primarily consisted of a realized loss of$20.1 million offset by an unrealized holding gain of$10.1 million , and a$29.9 million gain related to the valuation of our joint venture investment inSam Houston and ValleyRace Parks prior to the acquisition of the remaining 50% onAugust 1, 2021 . For the nine months endedSeptember 30, 2022 , other income primarily consisted of unrealized holding losses of$66.4 million on equity shares, as well as a$10.4 million loss on the early extinguishment of debt in connection with refinancing our Senior Secured Credit Facilities, as described in "Liquidity and Capital Resources." For the nine months endedSeptember 30, 2021 , other income primarily consisted of a realized loss of$20.1 million offset by an unrealized holding gain of$28.9 million , and a$29.9 million gain related to our investment inSam Houston and ValleyRace Parks as previously described. Income tax benefit (expense) was a$182.0 million and$78.1 million benefit for the three and nine months endedSeptember 30, 2022 , respectively, as compared to a$36.4 million and$110.1 million expense for the three and nine months endedSeptember 30, 2021 , respectively. Our effective tax rate (income taxes as a percentage of income from operations before income taxes) including discrete items was 226.7% and (62.9%) for the three and nine months endedSeptember 30, 2022 as compared to 29.7% and 22.7% for the three and nine months endedSeptember 30, 2021 , respectively. The change in the effective rate for both the three and nine months endedSeptember 30, 2022 as compared to the prior year corresponding periods was primarily due to the decreases to income before taxes and the release of our valuation allowance. The reversal of our valuation allowance during the three and nine months endedSeptember 30, 2022 was primarily due to (i) sustained growth in our three-year cumulative pretax earnings; (ii) substantial total revenues and earnings growth for the retail operating segment measured over prior periods, and (iii) lack of significant asset impairment charges. Accordingly, the valuation allowance has been reduced by$172.7 million resulting in a substantial decrease to income tax expense for the three and nine months endedSeptember 30, 2022 . See Note 11, "Income Taxes" to our unaudited Consolidated Financial Statements for further discussion. Our effective income tax rate can vary each reporting period depending on, among other factors, the geographic and business mix of our earnings, changes to our valuation allowance, and the level of our tax credits. Certain of these and other factors, including our history and projections of pre-tax earnings, are considered in assessing our ability to realize our net deferred tax assets. 45
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Segment comparison of the three and nine months endedSeptember 30, 2022 and 2021 Northeast Segment For the three months ended For the nine months ended September 30, Change September 30, Change (dollars in millions) 2022 2021 $ % 2022 2021 $ % Revenues Gaming$ 616.8 $ 616.2 $ 0.6 0.1 %$ 1,837.3 $ 1,745.7 $ 91.6 5.2 % Food, beverage, hotel and other 68.6 56.2 12.4 22.1 % 191.5 150.1 41.4 27.6 % Total revenues$ 685.4 $ 672.4 $ 13.0 1.9 %$ 2,028.8 $ 1,895.8 $ 133.0 7.0 % Adjusted EBITDAR$ 217.9 $ 221.1 $ (3.2) (1.4) %$ 637.5 $ 645.9 $ (8.4) (1.3) % Adjusted EBITDAR margin 31.8 % 32.9 % -110 bps 31.4 % 34.1 % -270 bps The Northeast segment's revenues for the three months endedSeptember 30, 2022 increased by$13.0 million over the prior year period, primarily due to inclusion of full quarter operating results of two new properties:Hollywood Casino York , which openedAugust 12, 2021 , andHollywood Casino Morgantown , which openedDecember 22, 2021 , partially offset by a decrease in total revenues at ourAmeristar East Chicago property due to increased competition in theIndiana region. The Northeast segment's revenues for the nine months endedSeptember 30, 2022 increased by$133.0 million over the prior year period, primarily due to the inclusion of the operating results of the two new properties discussed above as well as the inclusion of Perryville, which was acquired onJuly 1, 2021 . In addition, food, beverage, hotel and other revenues increased as we operated with increased offerings and extended hours of operations, and were partially offset by a decrease in gaming revenues at ourAmeristar East Chicago property mentioned above. For the nine months endedSeptember 30, 2021 , our Northeast segment's operating results were negatively impacted as our properties operated within locally-restricted gaming capacity and limited food and beverage and other amenity offerings. Additionally, ourPennsylvania properties were temporarily closed for three days inJanuary 2021 , due to COVID-19 restrictions. For the three months endedSeptember 30, 2022 , the Northeast segment's Adjusted EBITDAR decreased$3.2 million , and Adjusted EBITDAR margin decreased to 31.8%, primarily due to additional payroll costs. For the nine months endedSeptember 30, 2022 , the Northeast segment's Adjusted EBITDAR decreased$8.4 million , primarily due to increased gaming taxes, variable marketing and promotional expenses, which remain below pre-pandemic levels, and payroll expenses, resulting in an Adjusted EBITDAR margin of 31.4%. South Segment For the three months ended For the nine months ended September 30, Change September 30, Change (dollars in millions) 2022 2021 $ % 2022 2021 $ % Revenues Gaming$ 260.0 $ 253.0 $ 7.0 2.8 %$ 807.6 $ 802.8 $ 4.8 0.6 % Food, beverage, hotel and other 69.8 65.2 4.6 7.1 % 202.2 179.5 22.7 12.6 % Total revenues$ 329.8 $ 318.2 $ 11.6 3.6 %$ 1,009.8 $ 982.3 $ 27.5
2.8 %
Adjusted EBITDAR$ 139.9 $ 137.0 $ 2.9 2.1 %$ 429.7 $ 448.0 $ (18.3) (4.1) % Adjusted EBITDAR margin 42.4 % 43.1 % -70 bps 42.6 % 45.6 % -300 bps The South segment's revenues for the three months endedSeptember 30, 2022 increased by$11.6 million from the prior year period, primarily due to the negative impact of temporary closures during the hurricane season for the three months endedSeptember 30, 2021 . Revenues for the nine months endedSeptember 30, 2022 increased by$27.5 million from the prior year period, primarily due to strong visitation levels to our food and beverage outlets, and increased spend per guest during the first quarter of 2022. 46
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For the three months endedSeptember 30, 2022 , the South segment's Adjusted EBITDAR of$139.9 million and Adjusted EBITDAR margin of 42.4% remained relatively unchanged compared to the prior year quarter. For the nine months endedSeptember 30, 2022 , the South segment's Adjusted EBITDAR decreased$18.3 million and Adjusted EBITDAR margin decreased to 42.6% primarily due to higher payroll expenses associated with hotel and food and beverage offerings and higher variable marketing and promotional expenses in previous quarters, which remain below pre-pandemic levels. West Segment For the three months ended For the nine months ended September 30, Change September 30, Change (dollars in millions) 2022 2021 $ % 2022 2021 $ % Revenues Gaming$ 102.8 $ 96.7 $ 6.1 6.3 %$ 295.8 $ 262.5 $ 33.3 12.7 % Food, beverage, hotel and other 53.7 49.0 4.7 9.6 % 155.4 120.2 35.2 29.3 % Total revenues$ 156.5 $ 145.7 $ 10.8 7.4 %$ 451.2 $ 382.7 $ 68.5 17.9 % Adjusted EBITDAR$ 60.5 $ 54.5 $ 6.0 11.0 %$ 171.4 $ 151.1 $ 20.3 13.4 % Adjusted EBITDAR margin 38.7 % 37.4 % 130 bps 38.0 % 39.5 % -150 bps
The West segment's revenues for the three months ended
During the nine months endedSeptember 30, 2021 , our West segment's operating results were negatively impacted by the temporary closure of ourZia Park property due to the COVID-19 pandemic, which remained closed untilMarch 5, 2021 and for an additional thirteen days in April of 2021, and our properties operated within locally restricted gaming and hotel capacity and limited food and beverage and other amenities offerings. For the three months endedSeptember 30, 2022 , the West segment's Adjusted EBITDAR increased$6.0 million and Adjusted EBITDAR margin increased to 38.7%, primarily due to increases in gaming and non gaming revenues from the prior year quarter. For the nine months endedSeptember 30, 2022 , the West segment's Adjusted EBITDAR increased$20.3 million primarily due to increases in gaming and non gaming revenues, offset by higher payroll expenses related to volume increases and higher variable marketing and promotional expenses, which remain below pre-pandemic levels, reflected in Adjusted EBITDAR margin, which decreased by 150 basis points to 38.0%.
Midwest Segment
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in
millions) 2022 2021 $ % 2022 2021 $ %
Revenues
Gaming $ 268.7 $ 259.3 $ 9.4 3.6 % $ 792.2 $ 748.3 $ 43.9 5.9 %
Food, beverage,
hotel and other 29.7 26.4 3.3 12.5 % 85.4 66.9 18.5 27.7 %
Total revenues $ 298.4 $ 285.7 $ 12.7 4.4 % $ 877.6 $ 815.2 $ 62.4 7.7 %
Adjusted EBITDAR$ 129.4 $ 125.8 $ 3.6 2.9 %$ 386.2 $ 374.0 $ 12.2 3.3 % Adjusted EBITDAR margin 43.4 % 44.0 % -60 bps 44.0 % 45.9 % -190 bps The Midwest segment's revenues for the three months endedSeptember 30, 2022 increased by$12.7 million over the prior year period. The Midwest segment's revenues for the nine months endedSeptember 30, 2022 increased by$62.4 million over the prior year period, due to increased length of play and increased spend per guest, particularly at table games. During the nine months endedSeptember 30, 2021 , our Midwest segment's operating results were negatively impacted as our properties operated within locally-restricted gaming capacity and limited food and beverage and other amenity offerings. Additionally, our 47
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For the three months endedSeptember 30, 2022 , the Midwest segment's Adjusted EBITDAR increased$3.6 million primarily due to increased gaming and non gaming revenues, partially offset by higher payroll expenses, reflected in Adjusted EBITDAR margin, which decreased by 60 basis points to 43.4%. For the nine months endedSeptember 30, 2022 , the Midwest segment's Adjusted EBITDAR increased$12.2 million primarily due to increases in gaming and non gaming revenues, offset by higher payroll expenses and higher variable marketing and promotional expenses, which remain below pre-pandemic levels, reflected in Adjusted EBITDAR margin, which decreased by 190 basis points to 44.0%. Interactive Segment For the three months ended For the nine months ended September 30, Change September 30, Change (dollars in millions) 2022 2021 $ % 2022 2021 $ % Revenues Gaming$ 69.2 $ 31.0 $ 38.2 123.2 %$ 201.4 $ 84.4 $ 117.0 138.6 % Food, beverage, hotel and other 89.5 62.0 27.5 44.4 % 253.7 190.9 62.8 32.9 % Total revenues$ 158.7 $ 93.0 $ 65.7 70.6 %$ 455.1 $ 275.3 $ 179.8 65.3 % Adjusted EBITDAR$ (49.3) $ (32.0) $ (17.3) 54.1 %$ (80.1) $ (29.5) $ (50.6) 171.5 % Adjusted EBITDAR margin (31.1) % (34.4) % 330 bps (17.6) % (10.7) % -690 bps The Interactive segment's revenues for the three and nine months endedSeptember 30, 2022 increased by$65.7 million and$179.8 million , respectively, over the prior year corresponding periods, primarily due to continued increases in online activity with the launch of theScore Bet Sportsbook and Casino inOntario and the Barstool Sportsbook in additional states, as well as the inclusion of revenues from theScore, which was acquired onOctober 19, 2021 . Additionally, revenues are inclusive of a tax gross-up of$63.0 million and$168.7 million for the three and nine months endedSeptember 30, 2022 , respectively, compared to$44.0 million and$129.5 million for the three and nine months endedSeptember 30, 2021 , respectively. For the three months endedSeptember 30, 2022 , the Interactive segment's Adjusted EBITDAR decreased primarily due to increased expenses associated with the launch of online sports betting inKansas , as well as increased expenses due to increased marketing initiatives related to our first football season in theOntario andLouisiana markets. For the three months endedSeptember 30, 2022 , Adjusted EBITDAR margin increased due to revenues increasing at a higher rate than expenses. For the nine months endedSeptember 30, 2022 , the Interactive segment's Adjusted EBITDAR and Adjusted EBITDAR margin decreased primarily due to increased expenses related to ramping and launching theScore Bet Sportsbook and Casino inOntario and the Barstool Sportsbook in additional states. Other For the three months ended For the nine months ended September 30, Change September 30, Change (dollars in millions) 2022 2021 $ % 2022 2021 $ % Revenues Food, beverage, and other$ 4.2 $ 3.5 $ 0.7 20.0 %$ 17.4 $ 6.8 $ 10.6 155.9 % Total revenues$ 4.2 $ 3.5 $ 0.7 20.0 %$ 17.4 $ 6.8 $ 10.6 155.9 %
Adjusted EBITDAR
1.5 %$ (73.6) $ (75.6) $ 2.0
2.6 %
Other consists of the Company's stand-alone racing operations, as well as corporate overhead costs, which primarily includes certain expenses such as payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property. Revenues for the three and nine months endedSeptember 30, 2022 have increased as compared to the prior year corresponding periods, primarily due to the acquisition ofSam Houston , the remaining 50% of which was acquired onAugust 1, 2021 . 48
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Changes in Adjusted EBITDAR for the three and nine months ended
Non-GAAP Financial Measures
Use and Definitions
In addition to GAAP financial measures, management uses Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDA margin, and Adjusted EBITDAR margin as non-GAAP financial measures. These non-GAAP financial measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. Each of these non-GAAP financial measures is not calculated in the same manner by all companies and, accordingly, may not be an appropriate measure of comparing performance among different companies. We define Adjusted EBITDA as earnings before interest expense, net; income taxes; depreciation and amortization; stock-based compensation; debt extinguishment and financing charges (which are included in "other (income) expenses"); impairment losses; insurance recoveries, net of deductible charges; changes in the estimated fair value of our contingent purchase price obligations; gain or loss on disposal of assets; the difference between budget and actual expense for cash-settled stock-based awards; pre-opening expenses; and other. Adjusted EBITDA is inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as interest expense, net; income taxes; depreciation and amortization; and stock-based compensation expense) added back forBarstool Sports, Inc. and ourKansas Entertainment, LLC joint venture. Adjusted EBITDA is inclusive of rent expense associated with our triple net operating leases (the operating lease components contained within our triple net master lease datedNovember 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition ofPinnacle Entertainment, Inc. , our individual triple net leases with GLPI for the real estate assets used in the operation ofTropicana Las Vegas Hotel and Casino (terminated onSeptember 26, 2022 ), Inc. andHollywood Casino atThe Meadows , and our individual triple net leases with VICI for the real estate assets used in the operations ofMargaritaville Casino Resort andHollywood Casino atGreektown ). Although Adjusted EBITDA includes rent expense associated with our triple net operating leases, we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our consolidated results of operations. We define Adjusted EBITDA margin as Adjusted EBITDA divided by consolidated revenues. Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We present Adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, and to fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their Adjusted EBITDA calculations of certain corporate expenses that do not relate to the management of specific casino properties. However, Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a commonly used measure of performance in the gaming industry and that it is considered by many to be a key indicator of the Company's operating results. We define Adjusted EBITDAR as Adjusted EBITDA (as defined above) plus rent expense associated with triple net operating leases (which is a normal, recurring cash operating expense necessary to operate our business). Adjusted EBITDAR is presented on a consolidated basis outside the financial statements solely as a valuation metric. Management believes that Adjusted EBITDAR is an additional metric traditionally used by analysts in valuing gaming companies subject to triple net leases since it eliminates the effects of variability in leasing methods and capital structures. This metric is included as supplemental disclosure because (i) we believe Adjusted EBITDAR is traditionally used by gaming operator analysts and investors to determine the equity value of gaming operators and (ii) Adjusted EBITDAR is one of the metrics used by other financial analysts in valuing our business. We believe Adjusted EBITDAR is useful for equity valuation purposes because (i) its calculation isolates the effects of financing real estate; and (ii) using a multiple of Adjusted EBITDAR to calculate enterprise value allows for an adjustment to the balance sheet to recognize estimated liabilities arising from operating leases related to real estate. However, Adjusted EBITDAR when presented on a consolidated basis is not a financial measure in accordance with GAAP, and should not be viewed as a measure of overall operating performance or considered in isolation or as an alternative to net income because it excludes the rent expense associated with our triple net operating leases and is provided for the limited purposes referenced herein. 49
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Adjusted EBITDAR margin is defined as Adjusted EBITDAR on a consolidated basis divided by revenues on a consolidated basis. Adjusted EBITDAR margin is presented on a consolidated basis outside the financial statements solely as a valuation metric. We further define Adjusted EBITDAR margin by reportable segment as Adjusted EBITDAR for each segment divided by segment revenues.
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
The following table includes a reconciliation of net income, which is determined in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures, as well as related margins:
For the three months ended For the nine months ended
September 30, September 30,
(dollars in millions) 2022 2021 2022 2021
Net income $ 123.2 $ 86.1 $ 200.9 $ 375.7
Income tax (benefit) expense (182.0) 36.4 (78.1) 110.1
Income from unconsolidated affiliates (6.6) (9.1) (17.1) (27.8)
Interest expense, net 193.3 144.9 547.7 418.6
Other (income) expenses 8.8 (19.2) 77.7 (43.1)
Operating income 136.7 239.1 731.1 833.5
Stock-based compensation (1) 13.6 8.5 45.1 21.9
Cash-settled stock-based award variance (1)(2) (3.8) 5.2 (16.2) 14.3
Loss (gain) on disposal of assets (1) (0.2) 0.3 7.0 0.1
Contingent purchase price (1) 0.1 0.6 (0.9) 1.9
Pre-opening expenses (1)(3) 0.5 1.6 4.1 2.8
Depreciation and amortization 148.7 83.7 417.2 246.9
Impairment losses (4) 104.6 - 104.6 -
Insurance recoveries, net of deductible charges (1) (1.9) - (10.7) -
Income from unconsolidated affiliates 6.6 9.1 17.1 27.8
Non-operating items of equity method investments (5) 2.6 3.0 4.7 6.0
Other expenses (1)(3)(6) 32.9 13.2 48.4 15.8
Adjusted EBITDA 440.4 364.3 1,351.5 1,171.0
Rent expense associated with triple net operating
leases (1) 31.5 116.0 119.6 342.9
Adjusted EBITDAR $ 471.9 $ 480.3 $ 1,471.1 $ 1,513.9
Net income margin 7.6 % 5.7 % 4.2 % 8.7 %
Adjusted EBITDA margin 27.1 % 24.1 % 28.1 % 27.0 %
Adjusted EBITDAR margin 29.0 % 31.8 % 30.5 % 34.9 %
(1) These items are included in "General and administrative" within the Company's unaudited Consolidated Statements of Operations.
(2) Our cash-settled stock-based awards are adjusted to fair value each reporting period based primarily on the price of the Company's common stock. As such, significant fluctuations in the price of the Company's common stock during any reporting period could cause significant variances to budget on cash-settled stock-based awards. (3) During the first quarter of 2021, acquisition costs were included within pre-opening and acquisition costs. Beginning with the quarter endedJune 30, 2021 , acquisition costs are presented as part of other expenses.
(4) Amount primarily relates to a
(5) Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with Barstool and ourKansas Entertainment joint venture. We record our portion of Barstool's net income or loss, including adjustments to arrive at Adjusted EBITDAR, one quarter in arrears. (6) Consists of non-recurring acquisition and transaction costs, and finance transformation costs associated with the implementation of our new EnterpriseResource Management system. 50
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources have been and are
expected to be cash flow from operations, borrowings from banks, and proceeds
from the issuance of debt and equity securities. Our ongoing liquidity will
depend on a number of factors, including available cash resources, cash flow
from operations, acquisitions or investments, funding of construction for
development projects, and our compliance with covenants contained under our debt
agreements.
For the nine months ended
September 30, Change
(dollars in millions) 2022 2021 $ %
Net cash provided by operating activities $ 760.0 $ 779.0 $ (19.0) (2.4)%
Net cash used in investing activities $ (180.0) $ (269.5) $ 89.5 (33.2)%
Net cash (used in) provided by financing
activities $ (705.2) $ 375.2 $ (1,080.4) N/M
N/M - Not meaningful
Operating Cash Flow
Trends in our operating cash flows tend to follow trends in operating income,
excluding non-cash charges, but can be affected by changes in working capital,
the timing of significant interest payments, tax payments or refunds, and
distributions from unconsolidated affiliates. Net cash provided by operating
activities decreased by $19.0 million for the nine months ended September 30,
2022 , primarily due to a negative impact in changes in working capital related
to gaming taxes and other gaming liabilities and payroll related liabilities,
partially offset by a decrease in cash paid for taxes.
Investing Cash Flow
Cash used in investing activities for the nine months endedSeptember 30, 2022 of$180.0 million is primarily due to capital expenditures of$189.6 million and the acquisition of a$15.0 million cost method investment, offset by insurance proceeds received for losses incurred due to Hurricane Laura in 2020. For the nine months endedSeptember 30, 2021 , cash used in investing activities of$269.5 million was primarily due to the acquisitions of HitPoint, Perryville, and the remaining 50% interest ofSam Houston , purchases of gaming licenses, and capital expenditures. Capital Expenditures Capital expenditures are accounted for as either project capital (new facilities, expansions or return generating growth projects) or maintenance (replacement) capital expenditures. Cash provided by operating activities, as well as cash available under our Amended Revolving Credit Facility and Revolving Facility, was available to fund our capital expenditures for the nine months endedSeptember 30, 2022 and 2021, respectively. Capital expenditures for the nine months endedSeptember 30, 2022 and 2021 were$189.6 million and$137.8 million , respectively. Capital expenditures related to ourYork and Morgantown development projects were$15.2 million and$46.6 million for the nine months endedSeptember 30, 2022 and 2021, respectively. During the nine months endedSeptember 30, 2022 , capital expenditures also included$20.8 million in construction costs related to hurricane damage sustained at ourLake Charles property of which insurance proceeds were previously received. For the year endingDecember 31, 2022 , our anticipated capital expenditures are approximately$300 million , which include capital expenditures of$189.6 million incurred for the nine months endedSeptember 30, 2022 and capital expenditures required under our Triple Net Leases, which require us to spend a specified percentage of net revenues.
Financing Cash Flow
For the nine months endedSeptember 30, 2022 , net cash used in financing activities totaled$705.2 million , primarily related to$510.1 million common stock repurchases, net debt repayments of$28.1 million ,$18.2 million in debt issuance costs, and$129.4 million in principal payments on our finance leases and finance obligations.
During the nine months ended
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Borrowings and Repayments of Long-term Debt
OnMay 3, 2022 , the Company entered into a Second Amended and Restated Credit Agreement with its various lenders (the "Second Amended and Restated Credit Agreement"). The Second Amended and Restated Credit Agreement provides for a$1.0 billion revolving credit facility, undrawn at close, (the "Amended Revolving Credit Facility"), a five-year$550.0 million term loan A facility (the "Amended Term Loan A Facility") and a seven-year$1.0 billion term loan B facility (the "Amended Term Loan B Facility") (together, the "Amended Credit Facilities"). The proceeds from the Amended Credit Facilities were used to repay the existing Term Loan A Facility and Term Loan B-1 Facility balances. AtSeptember 30, 2022 , we had$2.8 billion in aggregate principal amount of indebtedness, including$1.5 billion outstanding under our Amended Credit Facilities,$400.0 million outstanding under our 5.625% senior unsecured notes,$400.0 million outstanding under our 4.125% senior unsecured notes,$330.5 million outstanding under our 2.75% Convertible Notes, and$157.2 million outstanding in other long-term obligations. No amounts were drawn on our Amended Revolving Credit Facility. After the refinancing of our Senior Secured Credit Facilities discussed above, we have no debt maturing prior to 2026. As ofSeptember 30, 2022 we had conditional obligations under letters of credit issued pursuant to the Amended Credit Facilities with face amounts aggregating to$22.7 million resulting in$977.3 million available borrowing capacity under our Amended Revolving Credit Facility.
Covenants
Our Amended Credit Facilities, 5.625% Notes and 4.125% Notes require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Amended Credit Facilities, 5.625% Notes and 4.125% Notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the PENN Master Lease and the Pinnacle Master Lease (both of which are defined in Note 9, "Leases" to our unaudited Consolidated Financial Statements), each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an acceleration of payment terms.
As of
See Note 8, "Long-term Debt," in the notes to our unaudited Consolidated Financial Statements for additional information of the Company's debt and other long-term obligations.
Share Repurchase Authorization
OnFebruary 1, 2022 , the Board of Directors of PENN approved a$750.0 million share repurchase authorization. The three-year authorization expires onJanuary 31, 2025 . Repurchases by the Company will be subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the Company is required to repurchase and the repurchase authorization may be suspended or discontinued at any time without prior notice. During the three months endedSeptember 30, 2022 , the Company repurchased 5,348,809 shares of its common stock in open market transactions for$168.0 million at an average price of$31.40 per share. During the nine months endedSeptember 30, 2022 , the Company repurchased 14,690,394 shares of its common stock in open market transactions for$510.1 million at an average price of$34.72 per share. The cost of all repurchased shares is recorded as "Treasury stock" within our unaudited Consolidated Balance Sheets. Subsequent to the quarter endedSeptember 30, 2022 , the Company repurchased 1,005,188 million shares of its common stock at an average price of$28.95 per share for an aggregate amount of$29.1 million . The remaining availability under our$750.0 million share repurchase authorization was$211.1 million as ofNovember 2, 2022 .
Barstool
OnAugust 17, 2022 , the Company exercised its call rights to bring its ownership of Barstool to 100%. The acquisition of the remaining Barstool shares, which can be settled in cash or a combination of cash and equity at PENN's election, is expected 52
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to be completed inFebruary 2023 , after which Barstool will be a wholly-owned subsidiary of PENN. Completion of the acquisition at that time is subject to the satisfaction of certain conditions, including regulatory approval. See Note 10, "Investments in and Advances to Unconsolidated Affiliates," in the notes to our unaudited Consolidated Financial Statements for further discussion.
Triple Net Leases
The majority of the real estate assets used in the Company's operations are subject to triple net master leases; the most significant of which are the PENN Master Lease and the PinnacleMaster Lease . In addition, six of the gaming facilities used in our operations are subject to individual triple net leases. We refer to the PENN Master Lease, the PinnacleMaster Lease , the Perryville Lease, the Meadows Lease, the Margaritaville Lease, the Greektown Lease, the Tropicana Lease (terminatedSeptember 26, 2022 ) and the Morgantown Lease, collectively, as our Triple Net Leases. The Company's Triple Net Leases are accounted for as either operating leases, finance leases, or financing obligations. Subsequent to quarter end, on October 9, 2022, as described in Note 9, "Leases," in the notes to our unaudited Consolidated Financial Statements, the Company entered into the Term Sheet with GLPI. Pursuant to the Term Sheet, the Company and GLPI agreed to amend the PENN Master Lease to (i) remove the land and buildings forAurora ,Joliet , Columbus,Toledo , and M Resort and (ii) make associated adjustments to the rent under the PENN Master Lease; (iii) terminate the existing leases associated with Meadows and Perryville; and (iv) enter into the New Lease, effective on the expected date ofJanuary 1, 2023 , specific to the property associated withAurora ,Joliet , Columbus,Toledo , M Resort, Meadows and Perryville. The New Lease will be cross-defaulted, cross-collateralized and coterminous with the PENN Master Lease, and subject to a parent guarantee. The New Lease will include New Lease Base Rent equal to$232.2 million and additional rent equal to (i) 7.75% of any project funding received by PENN from GLPI for theAurora Project and (ii) a percentage, based on then-current market conditions, of any project funding received by PENN from GLPI for the Other Development Projects. GLPI will fund up to$225 million for theAurora Project , and GLPI has committed to fund, upon PENN's request, up to$350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Term Sheet. The New Lease Rent will be subject to a one-time increase of$1.4 million , effective the fifth anniversary of the effective date. The New Lease Rent will be further subject to a fixed escalator of 1.5% onNovember 1, 2023 and annually thereafter. Under our Triple Net Leases, in addition to lease payments for the real estate assets, we are required to pay the following, among other things: (i) all facility maintenance; (ii) all insurance required in connection with the leased properties and the business conducted on the leased properties; (iii) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (iv) all tenant capital improvements; and (v) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Additionally, our Triple Net Leases are subject to annual escalators and periodic percentage rent resets, as applicable. See Note 9, "Leases," in the notes to our unaudited Consolidated Financial Statements for further discussion and disclosure related to the Company's leases. 53
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Payments to our REIT Landlords under Triple Net Leases
Total payments made to our REIT Landlords, GLPI and VICI, were as follows:
For the three months ended For the nine months ended
September 30, September 30,
(in millions) 2022 2021 2022 2021
PENN Master Lease $ 120.2 $ 118.4 $ 360.0 $ 357.1
Pinnacle Master Lease 84.2 82.4 250.1 245.8
Perryville Lease 1.9 1.9 5.8 1.9
Meadows Lease 6.2 6.2 18.6 18.6
Margaritaville Lease 5.9 5.9 17.8 17.6
Greektown Lease 12.8 12.9 38.5 40.3
Morgantown Lease 0.8 0.8 2.3 2.3
Total (1) $ 232.0 $ 228.5 $ 693.1 $ 683.6 (1)Rent payable under the Tropicana Lease was nominal prior to termination on
Outlook
Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our Amended Credit Facilities, will be adequate to meet our anticipated obligations under our Triple Net Leases, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, our ability to generate sufficient cash flow from operations will depend on a range of economic, competitive and business factors, many of which are outside our control. We cannot be certain: (i) of the impact of global supply chain disruptions, price inflation, and rising interest rates on theU.S. economy and the ability of our business to maintain its recovery from the impacts of the COVID-19 pandemic; (ii) that our anticipated earnings projections will be realized; (iii) that we will achieve the expected synergies from our acquisitions; and (iv) that future borrowings will be available under our Amended Credit Facilities or otherwise will be available in the credit markets to enable us to service our indebtedness or to make anticipated capital expenditures. We caution you that the trends seen at our properties, such as strong visitation and increased length of play, may not continue. In addition, while we anticipated that a significant amount of our future growth would come through the pursuit of opportunities within other distribution channels, such as retail and online sports betting, social gaming, retail gaming, and iGaming; from acquisitions of gaming properties at reasonable valuations; greenfield projects; development projects; and jurisdictional expansions and property expansion in under-penetrated markets; there can be no assurance that this will be the case. If we consummate significant acquisitions in the future or undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. See Part I, Item 1A. "Risk Factors" of the Company's Form 10-K for the year endedDecember 31, 2021 for a discussion of additional risks related to the Company's capital structure. We have historically maintained a capital structure comprised of a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally-generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity. 54
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CRITICAL ACCOUNTING ESTIMATES
A complete discussion of our critical accounting estimates is included in our
Form 10-K for the year ended December 31, 2021 . With the exception of the table
below, which provides updated sensitivity on the impairment of goodwill and the
gaming license at Hollywood Casino at Greektown , as discussed in Note 7,
"Goodwill and Other Intangible Assets," and the income tax valuation allowance
discussion below, there have been no significant changes in our critical
accounting estimates during the nine months ended September 30, 2022 .
Increase (decrease) in the Recorded Amount of
Impairment Loss as a Result of:
Discount Rate Terminal Growth
(in millions) Carrying Amount +100 bps Rate -50 bps
Goodwill
Hollywood Casino at Greektown $ 67.4 $ 0.4 $ (0.1)
Gaming licenses
Hollywood Casino at Greektown $ 166.4 $ 14.0 $ 1.0
As of September 30, 2022 , the Company determined that a valuation allowance was
no longer required against its federal, foreign, and state net deferred tax
assets for the portion that will be realized, as discussed in detail in Note
11, "Income Taxes" . As a result, the Company released $172.7 million of its
total valuation allowance during the three and nine months ended September 30,
2022 , due to the positive evidence outweighing the negative evidence thereby
allowing the Company to achieve the "more-likely-than-not" realization standard.
The most significant positive evidence that led to the reversal of the valuation
allowance during this interim period included the achievement and sustained
growth in our three-year cumulative pretax earnings, substantial total revenue
and earnings for the retail operating segment growth over the last seven
quarters, and a lack of significant asset impairment charges expected for the
Company's retail business operations or projections for the foreseeable future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSFor information with respect to new accounting pronouncements and the impact of these pronouncements on our unaudited Consolidated Financial Statements, see
Note 3, "New Accounting Pronouncements," in the notes to our unaudited Consolidated Financial Statements.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements can be
identified using forward-looking terminology such as "expects," "believes,"
"estimates," "projects," "intends," "plans," "goal," "seeks," "may," "will,"
"should," or "anticipates" or the negative or other variations of these or
similar words, or by discussions of future events, strategies or risks and
uncertainties. Specifically, forward-looking statements include, but are not
limited to, statements regarding: the Company's expectations of future results
of operations and financial condition, the assumptions provided regarding the
guidance, including the scale and timing of the Company's product and technology
investments; the Company's anticipated share repurchases; the Company's
expectations regarding results, and the impact of competition, in
retail/mobile/online sportsbooks, iGaming and land-based operations; the
Company's development and launch of its Interactive segment's products in new
jurisdictions and enhancements to existing Interactive segment products,
including content for the Barstool and theScore Bet iCasino apps and the
migration of the Barstool Sportsbook into both our player account management
system and risk and trading platforms; the Company's expectations regarding its
future investments and the future success of its products; the Company's
expectations with respect to the integration and synergies related to the
Company's acquisition of Barstool Sports ; the continued growth and monetization
of the Company's media business; the Company's expectations with respect to the
ongoing introduction and the potential benefits of the cashless, cardless and
contactless (3C's) technology; the Company's development projects, including the
recently-announced prospective development projects at Hollywood Casinos Aurora,
Joliet , Columbus, and the M Resort; our ability to obtain financing for our
development projects on attractive terms; and the timing, cost and expected
impact of planned capital expenditures on the Company's results of operations.
Such statements are all subject to risks, uncertainties and changes in
circumstances that could significantly affect the Company's future financial
results and business. Accordingly, the Company cautions that the forward-looking
statements contained herein are qualified by important factors that could cause
actual results to differ materially from those reflected by such statements.
Such factors include: the effects of economic and market conditions in the
markets in which the Company operates; competition with other entertainment,
sports content, and casino gaming experiences; the timing, cost and expected
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impact of product and technology investments; risks relating to international operations, permits, licenses, financings, approvals and other contingencies in connection with growth in new or existing jurisdictions; and additional risks and uncertainties described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with theU.S. Securities and Exchange Commission . The Company does not intend to update publicly any forward-looking statements except as required by law. Considering these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q may not occur.
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