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, 2020 . EXECUTIVE OVERVIEW Our BusinessPenn National Gaming, Inc. , together with its subsidiaries ("Penn National," the "Company," "we," "our," or "us"), is a leading, diversified, multi-jurisdictional owner and omni-channel provider of gaming and racing properties, online gaming, retail and online sports betting operations, and video gaming terminal ("VGT") operations. Our wholly-owned interactive division,Penn Interactive Ventures, LLC ("Penn Interactive"), operates retail sports betting across the Company's portfolio, as well as online sports betting, online social casino, and online casinos ("iGaming"). The Company holds a 36% (inclusive of 1% on a delayed basis) equity interest inBarstool Sports, Inc. ("Barstool Sports "), a leading digital sports, entertainment, lifestyle and media company, and entered into a strategic relationship withBarstool Sports , wherebyBarstool Sports is exclusively promoting the Company's land-based and online casinos and sports betting products, including the Barstool Sportsbook and Casino mobile app, to its national audience. We launched the Barstool Sportsbook and Casino app in six additional states, bringing our total to ten live states, three of which offer online casino play. Our mychoice® customer loyalty program (the "mychoice program") currently has over 24 million members, and rewards and recognizes such members for their loyalty to both retail and online gaming and sports betting products with dynamic offers, experiences, and service levels. The Company's strategy continues to evolve from an owner and manager of gaming and racing properties into an omni-channel provider of retail and online gaming, sports betting entertainment, and sports content. InOctober 2021 , Penn National acquiredScore Media and Gaming, Inc. ("theScore"), which provides us with the technology, resources and audience reach to accelerate our media and sports betting strategy acrossNorth America . Combined with the power ofBarstool Sports , Penn National is now well positioned to beNorth America's leading digital, entertainment, sports content, gaming and technology company. Barstool's wide top of funnel audience reach is highly complementary to the news, scores and stats available on theScore's best in class media app, which will create a one-stop destination for the sports fan that does not exist today. As ofSeptember 30, 2021 , we owned, managed, or had ownership interests in 43 gaming and racing properties in 20 states. This includes the addition ofHollywood Casino York , located inYork ,Pennsylvania , which opened onAugust 12, 2021 andHollywood Casino Perryville , located inPerryville, Maryland , acquired as ofJuly 1, 2021 . In addition, we are licensed to offer live sports betting at our properties in ten states. 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 Pinnacle Master 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"). We expect to commence operations atHollywood Casino Morgantown by the end of 2021. Update on the Impact of the COVID-19 Pandemic: As ofSeptember 30, 2021 , all of our properties have reopened, and the majority of our properties are operating at full capacity while adhering to state mandated health and safety protocols. Recent Acquisitions, Development Projects and Other InFebruary 2020 , we closed on our investment inBarstool Sports pursuant to a stock purchase agreement withBarstool Sports and certain stockholders ofBarstool Sports , in which we purchased 36% (inclusive of 1% on a delayed basis) of the common stock ofBarstool Sports for a purchase price of$161.2 million . Within three years after the closing of the transaction or earlier at our election, we will increase our ownership inBarstool Sports to approximately 50% by purchasing approximately$62.0 million worth of additional shares ofBarstool Sports common stock, consistent with the implied valuation at the time of the initial investment, which was$450.0 million . With respect to the remainingBarstool Sports shares, we have immediately exercisable call rights, and the existingBarstool Sports stockholders have put rights exercisable beginning three years after closing, all based on a fair market value calculation at the time of exercise. OnOctober 1, 2021 , the terms of theFebruary 2020 stock purchase agreement were amended to (i) set a definitive purchase price of$325.0 million on the second 50% ofBarstool Sports common stock, which eliminates the floor of 2.25 times the annual revenue ofBarstool Sports and (ii) fix a number of Penn common shares to be delivered to existingFebruary 2020 employee holders ofBarstool Sports common stock, to the extent Penn's stock price exceeds a specified value defined in the amended stock purchase agreement and Penn elects to settle using a combination of cash and equity. Consistent with theFebruary 2020 stock purchase agreement: (i) theBarstool Sports 34 -------------------------------------------------------------------------------- Table of Contents common stock remains subject to our immediately exercisable call rights and the existingBarstool Sports stockholders put rights beginning inFebruary 2023 , (ii) the requirement to increase our ownership inBarstool Sports to approximately 50% by purchasing approximately$62.0 million worth of additional shares inBarstool Sports common stock remains consistent with the implied valuation at the time of the initial investment, which was$450.0 million , and (iii), we may settle the call and put options, at our sole election, using either cash or a combination of cash and equity. We areBarstool Sports' exclusive gaming partner for up to 40 years and have the sole right to utilize the Barstool Sports brand for all of our online and retail sports betting and iGaming products. Further, Penn Interactive has entered into multi-year agreements with leading sports betting operators for online sports betting and iGaming market access across our portfolio of properties. OnApril 16, 2020 , we sold the real estate assets associated with ourTropicana Las Vegas Hotel and Casino, Inc. ("Tropicana") property to GLPI in exchange for rent credits of$307.5 million , and utilized the rent credits to pay rent under our existing Master Leases and the Meadows Lease, (as defined in Note 9, "Leases" of our unaudited Consolidated Financial Statements), beginning in May 2020. Contemporaneous with the sale, the Company entered into the Tropicana Lease, (as defined and discussed in Note 9, "Leases" of our unaudited Consolidated Financial Statements). OnApril 13, 2021 , GLPI announced that it entered into a binding term sheet withBally's Corporation ("Bally's") wherebyBally's plans to acquire both GLPI's non-land real estate assets and Penn's outstanding equity interests in Tropicana, which has the gaming license and operates the Tropicana, for an aggregate cash acquisition price of$150.0 million . GLPI will retain ownership of the land and will concurrently enter into a 50-year ground lease with initial annual rent of$10.5 million . This transaction is expected to close within the first half of 2022, subject to Penn, GLPI, andBally's entering into definitive agreements and obtaining regulatory approval. OnMay 11, 2021 , we acquired 100% of the outstanding equity ofHitPoint Inc. andLucky Point Inc. (collectively, "Hitpoint"). The purchase price totaled$12.7 million , consisting of$6.2 million in cash,$3.5 million of the Company's common equity, and a$3.0 million contingent liability. OnJuly 1, 2021 , we completed the previously announced acquisition of the operations ofHollywood Casino Perryville ("Perryville"), from GLPI for a purchase price of$39.4 million , including working capital adjustments. Simultaneous with the closing, we entered into a lease with GLPI for the real estate assets associated withHollywood Casino Perryville for initial annual rent of$7.8 million per year subject to escalation. OnAugust 1, 2021 , we completed the previously announced acquisition of the remaining 50% ownership interest in theSam Houston Race Park inHouston, Texas , theValley Race Park inHarlingen, Texas , and a license to operate a racetrack inAustin, Texas (collectively, "Sam Houston"), fromPM Texas Holdings, LLC for a purchase price of$57.8 million , comprised of$42.0 million in cash and$15.8 million of the Company's common equity, which was preliminarily allocated to property and equipment. OnOctober 19, 2021 , we completed the previously announced 100% acquisition of theScore Media and Gaming Inc. , aBritish Columbia corporation ("theScore") for a purchase price of approximately$1.9 billion . Under the terms of the agreement, 1317774B.C. Ltd. (the "Purchaser"), an indirectly wholly owned subsidiary of Penn National, acquired each of the issued and outstanding theScore shares (other than those held by Penn National and its subsidiaries) forUS$17.00 per share in cash consideration, totaling$0.9 billion , and either 0.2398 of a share of common stock, par value$0.01 of Penn Common Stock or, if validly elected, 0.2398 of an exchangeable share in the capital of the Purchaser (each whole share, an "Exchangeable Share"), totaling 12,319,340 shares of Penn Common Stock and 697,539 Exchangeable Shares, or approximately$1.0 billion . Each Exchangeable Share will be exchangeable into 1 share of Penn Common Stock at the option of the holder, subject to certain adjustments. In addition, Purchaser may redeem all outstanding Exchangeable Shares in exchange for shares of Penn Common Stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances. Due to the timing of the acquisition and its proximity to the date of this report, the preliminary purchase price allocation has not been completed as the Company is currently in the process of determining the purchase price allocation to tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition provides us with the technology, resources and audience reach to accelerate our media and sports betting strategy acrossNorth America . 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; entrance into new jurisdictions; expansions of gaming in existing jurisdictions; and, to a lesser extent, improvements/expansions of our existing 35 -------------------------------------------------------------------------------- Table of Contents properties and strategic acquisitions of gaming properties. 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 have also made investments in joint ventures that we believe will allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee. As the COVID-19 pandemic evolves, we continue to adjust operations and cost structures at our properties to reflect the changing economic and health and safety conditions. We also continue to focus on revenue and cost synergies from recent acquisitions, and offering our customers additional gaming experiences through our omni-channel distribution strategy. We seek to continue to expand our customer database by partnering with third-party operators such as Choice Hotels International, Inc. to expand our loyalty program, as well as through accretive acquisitions or investments, such asBarstool Sports and theScore, capitalize on organic growth opportunities from the development of new properties or the expansion of recently-developed business lines, and develop partnerships that allow us to enter new jurisdictions for iGaming 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; 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. 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 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 lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, high fuel or other transportation costs, and most recently, 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 85% and 88% of our gaming revenue for the nine months endedSeptember 30, 2021 and 2020) 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. 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 10% of slot handle, and our typical table game hold percentage is in the range of approximately 14% 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 as 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, 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, fund new capital projects at existing 36
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Table of Contents 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 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 combined VGT operations, by state, to be separate operating segments. We aggregate our operating segments into four reportable segments: Northeast, South, West and Midwest. 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.
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RESULTS OF OPERATIONS
The following table highlights our revenues, net income (loss), and Adjusted
EBITDA, on a consolidated basis, as well as our revenues and Adjusted EBITDAR by
reportable segment. Such segment reporting is on a basis consistent with how we
measure our business and allocate resources internally. We consider net income
(loss) 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 (loss) to Adjusted EBITDA and
Adjusted EBITDAR and related margins.
For the three months ended For the nine months ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Revenues:
Northeast segment $ 672.4 $ 545.1 $ 1,895.8 $ 1,168.5
South segment 318.2 255.6 982.3 600.4
West segment 145.7 78.7 382.7 223.0
Midwest segment 285.7 229.1 815.2 493.2
Other (1) 96.5 23.7 282.1 71.6
Intersegment eliminations (2) (6.7) (2.5) (25.6) (5.4)
Total $ 1,511.8 $ 1,129.7 $ 4,332.5 $ 2,551.3
Net income (loss) $ 86.1 $ 141.2 $ 375.7 $ (681.8)
Adjusted EBITDAR:
Northeast segment $ 221.1 $ 204.8 $ 645.9 $ 325.7
South segment 137.0 120.3 448.0 217.3
West segment 54.5 33.6 151.1 55.2
Midwest segment 125.8 108.5 374.0 173.4
Other (1) (58.1) (14.6) (105.1) (42.2)
Total (3) 480.3 452.6 1,513.9 729.4
Rent expense associated with triple net
operating leases (4) (116.0) (109.0) (342.9) (310.3)
Adjusted EBITDA $ 364.3 $ 343.6 $ 1,171.0 $ 419.1
Net income (loss) margin 5.7 % 12.5 % 8.7 % (26.7) %
Adjusted EBITDAR margin 31.8 % 40.1 % 34.9 % 28.6 %
Adjusted EBITDA margin 24.1 % 30.4 % 27.0 % 16.4 %
(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 National on August 1, 2021 ), and the
Company's JV interests in Freehold Raceway ; our management contract for Retama
Park Racetrack and our live and televised poker tournament series that operates
under the trade name, Heartland Poker Tour ("HPT"). The Other category also
includes Penn Interactive, which operates our social gaming, internally-branded
retail sportsbooks, iGaming and our Barstool Sports mobile app. 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 expenses,
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. In addition, Adjusted EBITDAR of the Other category includes our
proportionate share of the net income or loss of Barstool Sports after adding
back our share of non-operating items (such as interest expense, net; income
taxes; depreciation and amortization; and stock-based compensation expense).
(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 dated November 1, 2013
with GLPI and the triple net master lease assumed in connection with our
acquisition of Pinnacle Entertainment, Inc. (primarily land), our
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individual triple net leases with GLPI for the real estate assets used in the
operation of Tropicana Las Vegas Hotel and Casino and Hollywood Casino at
Meadows Racetrack, and our individual triple net leases with VICI for the real
estate assets used in the operations of Margaritaville Casino Resort and
Greektown Casino-Hotel (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". The finance lease components contained within the Master
Leases (primarily buildings), the Perryville Lease determined to be a finance
lease (as defined in "Liquidity and Capital Resources" ), and the financing
obligation associated with the Morgantown Lease (as defined in "Liquidity and
Capital Resources" ) result in interest expense or interest expense and
depreciation expense, as opposed to rent expense.
Consolidated comparison of the three and nine months ended September 30, 2021
and 2020.
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) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 1,256.2 $ 993.6 $ 262.6 26.4 % $ 3,643.7 $ 2,155.7 $ 1,488.0 69.0 %
Food, beverage, hotel and
other 255.6 136.1 119.5 87.8 % 688.8 395.6 293.2 74.1 %
Total revenues $ 1,511.8 $ 1,129.7 $ 382.1 33.8 % $ 4,332.5 $ 2,551.3 $ 1,781.2 69.8 %
Gaming revenues for the three and nine months ended September 30, 2021 increased
$262.6 million and $1.5 billion , respectively, compared to the prior year
corresponding periods. During the three and nine months ended September 30, 2021
increases in gaming revenues primarily related to strong visitation levels,
increased length of play, continued growth in our online and sports betting
revenues and the inclusion of the operating results from our two new properties,
Hollywood Casino Perryville , which was acquired on July 1, 2021 , and Hollywood
Casino York County , which opened on August 12, 2021 .
During the prior year periods, gaming revenues were negatively impacted by
temporary closures for a portion of the year at all of our properties due to the
COVID-19 pandemic. Additionally, upon reopening occurring mainly in 2020,
restrictions on gaming patron capacity were in place across all of our
properties.
For the three months ended September 30, 2021 , we experienced continuous
engagement from our younger customers, which contributed to new growth, and
offset decreases from our older demographic due to the Delta variant of the
COVID-19 pandemic. Overall, during the nine months ended September 30, 2021 , our
properties experienced strong visitation levels and increased length of play
across all age demographics of our player database. In addition, our unrated
play continues to perform well as we work to introduce these customers into our
mychoice loyalty program.
Food, beverage, hotel and other revenues for the three and nine months ended
September 30, 2021 increased $119.5 million and $293.2 million , respectively,
compared to the prior year corresponding periods, primarily due to strong
visitation levels, increased length of play, lifting of capacity and operational
restrictions previously in place in response to the COVID-19 pandemic, as well
as the inclusion of the operating results from our two new properties discussed
above. Additionally, other revenues include a gross-up of gaming tax
reimbursement amounts derived from arrangements which allow our third party
partners to operate online casinos and online sportsbooks under our gaming
licenses of $44.0 million and $129.5 million for the three and nine months ended
September 30, 2021 , respectively.
During the prior year periods, food, beverage, hotel and other revenues were
negatively impacted by temporary closures for a portion of the year at all of
our properties due to the COVID-19 pandemic. Additionally, upon reopening
occurring mainly in 2020, our properties were subject to the implementation of
social distancing and health and safety protocols, reduced hotel capacity and
limitations on the number of food and beverage offerings.
See "Segment comparison of the three and nine months ended September 30, 2021
and 2020" below for more detailed explanations of the fluctuations in
revenues.
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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) 2021 2020 $ % 2021 2020 $ %
Operating expenses
Gaming $ 652.4 $ 458.1 $ 194.3 42.4 % $ 1,801.1 $ 1,101.0 $ 700.1 63.6 %
Food, beverage, hotel and other 160.1 70.1 90.0 128.4 % 431.8 260.0 171.8 66.1 %
General and administrative 376.5 317.6 58.9 18.5 % 1,019.2 828.7 190.5 23.0 %
Depreciation and amortization 83.7 87.7 (4.0) (4.6) % 246.9 275.3 (28.4) (10.3) %
Impairment losses - - - - % - 616.1 (616.1) (100.0) %
Total operating expenses $ 1,272.7 $ 933.5 $ 339.2 36.3 % $ 3,499.0 $ 3,081.1 $ 417.9 13.6 %
Gaming expenses consist primarily of payroll expenses associated with our gaming
operations and gaming taxes. Gaming expenses for the three and nine months ended
September 30, 2021 increased $194.3 million and $700.1 million , respectively,
compared to the prior year corresponding periods, primarily due to an increase
in gaming taxes resulting from the increase in gaming revenues, as discussed
above, as well as increases in payroll and marketing expenses due to increased
volumes. Additionally, during the three and nine months ended September 30,
2020 , all of our properties were subject to temporary closures for a portion of
the year due to the COVID-19 pandemic, and upon reopening, operated under
restricted gaming patron capacity.
Food, beverage, hotel and other expenses consist primarily of payroll expenses
and costs of goods sold associated with our food, beverage, hotel, retail,
racing, and other operations. Also included in other expenses are gaming taxes
of $44.0 million and $129.5 million for the three and nine months ended
September 30, 2021 , respectively, on revenues derived from arrangements which
allow for third party partners to operate online casinos and online sportsbooks
under our gaming licenses for which we collect and remit applicable gaming
taxes. Food, beverage, hotel and other expenses for the three and nine months
ended September 30, 2021 increased $90.0 million and $171.8 million ,
respectively, compared to the prior year corresponding periods, primarily due to
the inclusion of the gaming taxes in the current year periods, discussed above,
and increases in cost of sales and payroll expenses due to increased volumes
experienced subsequent to reopening. The prior year periods were impacted by
temporary closures for a portion of the year at all of our properties due to the
COVID-19 pandemic and upon reopening occurring mainly in 2020 our properties
operated within locally restricted capacity and limited food and beverage and
other amenities offerings.
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; 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);
restructuring costs (primarily severance) associated with a company-wide
initiative triggered by the COVID-19 pandemic; and rent expense associated with
our triple net operating leases.
For the three months ended September 30, 2021 , general and administrative
expenses increased period over period primarily due to increased payroll costs
of $29.9 million and increased facility costs of $21.9 million , both related to
increased property volumes. In addition, general and administrative expenses
include legal and other professional costs associated with acquisitions,
primarily related to the acquisition of theScore, and a $12.5 million political
contribution related to the California sports betting initiative, offset by a
decrease in the Company's cash-settled stock-based awards expense of $34.3
million , which is primarily driven by the Company's stock price.
For the nine months ended September 30, 2021 , general and administrative
expenses increased period over period primarily due to an increase of $79.7
million in payroll expenses with lower payroll costs incurred as a result of
property closures and limited capacity upon reopening during the nine months
ended September 30, 2020 , a $46.1 million increase in general facility costs
related to increased property volumes, and a $32.6 million increase in rent
expenses associated with our triple net operating leases, principally related to
the Tropicana Lease. Furthermore, we incurred legal and other professional costs
of $14.7 million associated with acquisitions, primarily related to theScore,
and we contributed $12.5 million to the California sports betting initiative as
discussed above. The increases were offset by a decrease in the Company's
cash-settled
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stock-based awards expense of $32.4 million , which is primarily driven by the
Company's stock price. Additionally, the general and administrative balance for
nine months ended September 30, 2020 , reflects a $28.5 million gain from the
sale of our Tropicana property in April 2020 .
Depreciation and amortization for the three and nine months ended September 30,
2021 decreased period over period primarily due to fixed assets and intangible
assets becoming fully depreciated and amortized, and the sale of the real estate
assets of Tropicana in April 2020 .
Impairment losses for the nine months ended September 30, 2020 primarily relates
to impairments taken on our goodwill and other intangible assets of $113.0
million and $498.5 million , respectively, as a result of an interim impairment
assessment during the first quarter of 2020. During the first quarter of 2020,
we identified an indicator of impairment triggered by the COVID-19 pandemic,
which caused all of our gaming properties to temporarily close. There were no
impairment losses during the three and nine months ended September 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) 2021 2020 $ % 2021 2020 $ %
Other income (expenses)
Interest expense, net $ (144.9) $ (142.3) $ (2.6) 1.8 % $ (418.6) $ (407.1) $ (11.5) 2.8 %
Income from unconsolidated
affiliates $ 9.1 $ 5.0 $ 4.1 82.0 % $ 27.8 $ 7.4 $ 20.4 275.7 %
Other $ 19.2 $ 68.0 $ (48.8) (71.8) % $ 43.1 $ 75.5 $ (32.4) (42.9) %
Income tax benefit (expense) $ (36.4) $ 14.3 $ (50.7) N/M $ (110.1) $ 172.2 $ (282.3) N/M
N/M - Not meaningful
Interest expense, net increased for the nine months ended September 30, 2021 as
compared to the prior year period, due to interest expenses related to our Other
long-term obligations.
Income from unconsolidated affiliates relates principally to Barstool Sports ,
and our Kansas Entertainment and Freehold Raceway joint ventures. The increase
for the three and nine months ended September 30, 2021 , compared to the prior
year corresponding periods, was due to ongoing positive results in the
operations at Hollywood Casino at Kansas Speedway , which was closed for a period
in the prior year, and upon reopening in 2020, operated under capacity
restrictions, and income earned from our Barstool Sports investment, which we
completed in February, 2020. We record our proportionate share of Barstool
Sports' net income or loss one quarter in arrears.
Other includes miscellaneous income and expense items and primarily relates to
realized and unrealized gains and losses on equity securities (including
warrants), held by Penn Interactive and unrealized gains and losses related to
certain Barstool Sports shares. Equity securities were provided to the Company
in conjunction with entering into multi-year agreements with sports betting
operators for online sports betting and related iGaming market access across our
portfolio. For the three months ended September 30, 2021 , other income primarily
consisted of a 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 in Sam Houston and Valley Race Parks prior to the acquisition
of the remaining 50% on August 1, 2021 . For the nine months ended September 30,
2021 , other income primarily consisted of a 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 in Sam Houston and Valley Race Parks as previously described. For
the three and nine months ended September 30, 2020 , other income was comprised
primarily of holding gains of $67.9 million and $75.6 million , respectively.
Income tax benefit (expense) was a $36.4 million and $110.1 million expense for
the three and nine months ended September 30, 2021 , respectively, as compared to
a $14.3 million and $172.2 million benefit for the three and nine months ended
September 30, 2020 , respectively. Our effective tax rate (income taxes as a
percentage of income or loss from operations before income taxes) including
discrete items was 29.7% and 22.7% for the three and nine months ended
September 30, 2021 respectively, as compared to (11.3)% and 20.2% for the three
and nine months ended September 30, 2020 , respectively. The change in the
effective rate for the nine months ended September 30, 2021 as compared to the
prior year period was primarily due to an increase of pre-tax income.
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
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factors, including our history and projections of pre-tax earnings, are
considered in assessing our ability to realize our net deferred tax assets.
Segment comparison of the three and nine months ended September 30, 2021 and
2020
Northeast Segment
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 616.2 $ 508.0 $ 108.2 21.3 % $ 1,745.7 $ 1,060.8 $ 684.9 64.6 %
Food, beverage, hotel
and other 56.2 37.1 19.1 51.5 % 150.1 107.7 42.4 39.4 %
Total revenues $ 672.4 $ 545.1 $ 127.3 23.4 % $ 1,895.8 $ 1,168.5 $ 727.3 62.2 %
Adjusted EBITDAR $ 221.1 $ 204.8 $ 16.3 8.0 % $ 645.9 $ 325.7 $ 320.2 98.3 %
Adjusted EBITDAR
margin 32.9 % 37.6 % -470 bps 34.1 % 27.9 % 620 bps
The Northeast segment's revenues for the three and nine months ended
September 30, 2021 increased by $127.3 million and $727.3 million , respectively,
over the prior year corresponding periods, primarily due to easing of capacity
restrictions, strong visitation levels, and increased length of play. In
addition, the Northeast segment includes operating results from our two new
properties, Hollywood Casino Perryville , which was acquired on July 1, 2021 , and
Hollywood Casino York , which opened on August 12, 2021 . During the three and
nine months ended September 30, 2020 , our Northeast segment's operating results
were negatively impacted by temporary closures for a portion of the year at all
of our properties due to the COVID-19 pandemic. Additionally, upon reopening, in
2020 (and in the case of our Pennsylvania properties upon a second reopening in
January 2021 stemming from a mandated second temporary closure commencing in the
fourth quarter of 2020), our properties operated within locally restricted
gaming capacity and limited food and beverage and other amenities offerings.
For the three months ended September 30, 2021 , the Northeast segment's Adjusted
EBITDAR increased $16.3 million primarily due to increases in gaming and non
gaming revenues. As operating restrictions eased, our proportionate share of non
gaming activity increased as compared to the prior year quarter and resulted in
increased payroll, cost of sales and marketing expenses, which decreased
Adjusted EBITDAR margin by 470 basis points to 32.9%.
For the nine months ended September 30, 2021 , the Northeast segment's Adjusted
EBITDAR increased by $320.2 million primarily due the temporary property
closures for a portion of the prior year period while the current year period
benefited from an increase in gaming revenues, as discussed above. Adjusted
EBITDAR margin increased 620 basis points to 34.1% primarily due to a higher
proportionate share of gaming activity in the current year period, yielding a
higher overall Adjusted EBITDAR margin.
South Segment
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 253.0 $ 208.0 $ 45.0 21.6 % $ 802.8 $ 480.3 $ 322.5 67.1 %
Food, beverage, hotel
and other 65.2 47.6 17.6 37.0 % 179.5 120.1 59.4 49.5 %
Total revenues $ 318.2 $ 255.6 $ 62.6 24.5 % $ 982.3 $ 600.4 $ 381.9 63.6 %
Adjusted EBITDAR $ 137.0 $ 120.3 $ 16.7 13.9 % $ 448.0 $ 217.3 $ 230.7 106.2 %
Adjusted EBITDAR
margin 43.1 % 47.1 % -400 bps 45.6 % 36.2 % 940 bps
The South segment's revenues for the three and nine months ended September 30,
2021 increased by $62.6 million and $381.9 million , respectively, over the prior
year corresponding periods, primarily due to easing of capacity restrictions,
strong visitation levels, and increased length of play. The South segment
revenues were impacted by temporary closures during the hurricane season in both
the three months ended September 30, 2021 and 2020. During the nine months ended
September 30, 2020 , our South segment's operating results were negatively
impacted by temporary closures for a portion of the year at all of
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our properties due to the COVID-19 pandemic. Additionally, upon reopening our
properties operated within locally restricted gaming capacity and limited food
and beverage and other amenities offerings.
For the three months ended September 30, 2021 , the South segment's Adjusted
EBITDAR increased $16.7 million due to the increases in gaming and non gaming
revenues. As operating restrictions eased, our proportionate share of non gaming
activity increased as compared to the prior year quarter and resulted in
increased payroll, cost of sales and marketing expenses, which decreased
Adjusted EBITDAR margin by 400 basis points to 43.1%.
For the nine months ended September 30, 2021 , the South segment's Adjusted
EBITDAR increased by $230.7 million primarily due the temporary property
closures for a portion of the prior year period while the current year period
benefited from an increase in gaming revenues, as discussed above. Adjusted
EBITDAR margin increased 940 basis points to 45.6% primarily due to a higher
proportionate share of gaming activity in the current year period yielding a
higher overall Adjusted EBITDAR margin.
West Segment
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 96.7 $ 54.0 $ 42.7 79.1 % $ 262.5 $ 138.7 $ 123.8 89.3 %
Food, beverage, hotel
and other 49.0 24.7 24.3 98.4 % 120.2 84.3 35.9 42.6 %
Total revenues $ 145.7 $ 78.7 $ 67.0 85.1 % $ 382.7 $ 223.0 $ 159.7 71.6 %
Adjusted EBITDAR $ 54.5 $ 33.6 $ 20.9 62.2 % $ 151.1 $ 55.2 $ 95.9 173.7 %
Adjusted EBITDAR
margin 37.4 % 42.7 % -530 bps 39.5 % 24.8 % 1,470 bps
The West segment's revenues for the three and nine months ended September 30,
2021 increased by $67.0 million and $159.7 million , respectively, over the prior
year corresponding periods, primarily due to easing of capacity restrictions,
strong visitation levels, and increased length of play. During the three and
nine months ended September 30, 2020 , our West segment's operating results were
negatively impacted by temporary closures for a portion of the year at all of
our properties due to the COVID-19 pandemic, with our Zia Park property
remaining temporarily closed during the entire quarter ended September 30, 2020 ,
and our Tropicana Las Vegas Hotel and Casino property reopening on September 17,
2020 . Additionally, upon reopening our properties operated within locally
restricted gaming and hotel (if applicable) capacity and limited food and
beverage and other amenities offerings.
For the three months ended September 30, 2021 , the West segment's Adjusted
EBITDAR increased $20.9 million primarily due to increases in gaming and non
gaming revenues. Adjusted EBITDAR margin decreased by 530 basis points to 37.4%
primarily due to an increase in gaming taxes and an increase in payroll and cost
of sales expenses driven by an increase in our proportionate share of non gaming
activity as compared to the prior year quarter.
For the nine months ended September 30, 2021 , the West segment's Adjusted
EBITDAR increased by $95.9 million primarily due the temporary property closures
for a portion of the prior year period while the current year period benefited
from an increase in gaming revenues, as discussed above. Adjusted EBITDAR margin
increased 1,470 basis points to 39.5%, primarily due to a higher proportionate
share of gaming activity in the current year period, yielding a higher overall
Adjusted EBITDAR margin.
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Midwest Segment
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 259.3 $ 212.7 $ 46.6 21.9 % $ 748.3 $ 442.4 $ 305.9 69.1 %
Food, beverage, hotel
and other 26.4 16.4 10.0 61.0 % 66.9 50.8 16.1 31.7 %
Total revenues $ 285.7 $ 229.1 $ 56.6 24.7 % $ 815.2 $ 493.2 $ 322.0 65.3 %
Adjusted EBITDAR $ 125.8 $ 108.5 $ 17.3 15.9 % $ 374.0 $ 173.4 $ 200.6 115.7 %
Adjusted EBITDAR
margin 44.0 % 47.4 % -340 bps 45.9 % 35.2 % 1,070 bps
The Midwest segment's revenues for the three and nine months ended September 30,
2021 increased by $56.6 million and $322.0 million , respectively, primarily due
to strong visitation levels, and increased length of play. During the nine
months ended September 30, 2020 , our Midwest segment's operating results were
negatively impacted by temporary closures for a portion of the year at all of
our properties due to the COVID-19 pandemic. Additionally, upon reopening in
2020 (and in the case of our Illinois properties upon a second reopening in
January 2021 stemming from a mandated second temporary closure commencing in the
fourth quarter of 2020) our properties operated within locally restricted gaming
capacity and limited food and beverage and other amenities offerings.
For the three months ended September 30, 2021 , the Midwest segment's Adjusted
EBITDAR increased $17.3 million primarily due to increases in gaming and non
gaming revenues. Adjusted EBITDAR margin decreased by 340 basis points to 44.0%
primarily due to an increase in gaming taxes and an increase in payroll ,
marketing, and cost of sales expenses driven by an increase in our proportionate
share of non gaming activity as compared to the prior year quarter.
For the nine months ended September 30, 2021 , the Midwest segment's Adjusted
EBITDAR increased by $200.6 million primarily due the temporary property
closures for a portion of the prior year period while the current year period
benefited from an increase in gaming revenues, as discussed above. Adjusted
EBITDAR margin increased 1,070 basis points to 45.9% primarily due to a higher
proportionate share of gaming activity in the current year period, yielding a
higher overall Adjusted EBITDAR margin.
Other
For the three months ended For the nine months ended
September 30, Change September 30, Change
(dollars in millions) 2021 2020 $ % 2021 2020 $ %
Revenues
Gaming $ 31.0 $ 11.0 $ 20.0 181.8 % $ 84.4 $ 33.7 $ 50.7 150.4 %
Food, beverage, and other 65.5 12.7 52.8 415.7 % 197.7 37.9 159.8 421.6 %
Total revenues $ 96.5 $ 23.7 $ 72.8 307.2 % $ 282.1 $ 71.6 $ 210.5 294.0 %
Adjusted EBITDAR $ (58.1) $ (14.6) $ (43.5) 297.9 % $ (105.1) $ (42.2) $ (62.9) 149.1 %
Total revenues for the Other category increased for the three and nine months
ended September 30, 2021 , as compared to the prior year corresponding periods,
primarily as a result of the activities at Penn Interactive. The three and nine
months ended September 30, 2021 include a gross-up of gaming tax reimbursement
amounts derived from arrangements which allow for our third party partners to
operate online casinos and online sportsbooks under our gaming licenses of
$44.0 million and $129.5 million , respectively. Penn Interactive's operations
continue to build with the launch of the online Barstool Sportsbook in eight new
states in 2021, and with ongoing increases in online social and real-money
gaming revenue.
Adjusted EBITDAR decreased by $43.5 million and $62.9 million for the three and
nine months ended September 30, 2021 , respectively, as compared to the prior
year corresponding periods, primarily due to increased expenses related to the
ramp up of the Penn Interactive online sportsbook and casino operations and
increases in corporate overhead costs as operations returned to pre-pandemic
levels. Additionally, included in the three and nine months ended September 30,
2021 was a $12.5 million political contribution related to the California sports
betting initiative. For the three and nine months ended
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September 30, 2021 , corporate overhead costs were $27.8 million and
$77.9 million , as compared to $20.1 million and $61.0 million for the three and
nine months ended September 30, 2020 .
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; 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 for Barstool Sports and our Kansas
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 dated November 1, 2013 with GLPI
and the triple net master lease assumed in connection with our acquisition of
Pinnacle Entertainment, Inc. (primarily land), our individual triple net leases
with GLPI for the real estate assets used in the operation of Tropicana Las
Vegas Hotel and Casino, Inc. and Hollywood Casino at Meadows Racetrack, and our
individual triple net leases with VICI for the real estate assets used in the
operations of Margaritaville Casino Resort and Greektown Casino-Hotel). 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 nonoperational 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 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.
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
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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 (loss), 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) 2021 2020 2021 2020
Net income (loss) $ 86.1 $ 141.2 $ 375.7 $ (681.8)
Income tax expense (benefit) 36.4 (14.3) 110.1 (172.2)
Income from unconsolidated affiliates (9.1) (5.0) (27.8) (7.4)
Interest expense, net 144.9 142.3 418.6 407.1
Other income (19.2) (68.0) (43.1) (75.5)
Operating income (loss) 239.1 196.2 833.5 (529.8)
Stock-based compensation (1) 8.5 2.8 21.9 11.7
Cash-settled stock-based award variance (1)(2) 5.2 39.5 14.3 46.7
Loss (gain) on disposal of assets (1) 0.3 (6.0) 0.1 (33.9)
Contingent purchase price (1) 0.6 - 1.9 (1.4)
Pre-opening expenses (1)(3) 1.6 4.8 2.8 11.5
Depreciation and amortization 83.7 87.7 246.9 275.3
Impairment losses - - - 616.1
Insurance recoveries, net of deductible charges (1) - - - (0.1)
Income from unconsolidated affiliates 9.1 5.0 27.8 7.4
Non-operating items of equity method investments (4) 3.0
1.2 6.0 3.2
Other expenses (1)(3)(5) 13.2 12.4 15.8 12.4
Adjusted EBITDA 364.3 343.6 1,171.0 419.1
Rent expense associated with triple net operating
leases (1) 116.0 109.0 342.9 310.3
Adjusted EBITDAR $ 480.3 $ 452.6 $ 1,513.9 $ 729.4
Net income (loss) margin 5.7 % 12.5 % 8.7 % (26.7) %
Adjusted EBITDA margin 24.1 % 30.4 % 27.0 % 16.4 %
Adjusted EBITDAR margin 31.8 % 40.1 % 34.9 % 28.6 %
(1) These items are included in "General and administrative" within the
Company's unaudited Consolidated Statements of Operations and Comprehensive
Income (Loss).
(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. During the three and nine months ended September 30, 2021 ,
the fluctuations in the price of the Company's common stock resulted in losses.
(3) During 2020 and during the first quarter of 2021, acquisition costs were
included within pre-opening and acquisition costs. Beginning with the quarter
ended June 30, 2021 , acquisition costs are presented as part of other expenses.
(4) Consists principally of interest expense, net; income taxes; depreciation
and amortization; and stock-based compensation expense associated with Barstool
Sports and our Kansas Entertainment joint venture. We record our portion of
Barstool Sports, Inc.'s net income or loss, including adjustments to arrive at
Adjusted EBITDAR, one quarter in arrears.
(5) Consists of non-recurring acquisition and transaction costs, finance
transformation costs associated with the implementation of our new Enterprise
Resource Management system and non-recurring restructuring charges (primarily
severance) associated with a company-wide initiative, triggered by the COVID-19
pandemic, designed to (i) improve the operational effectiveness across our
property portfolio; (ii) improve the effectiveness and efficiency of our
Corporate functional support area.
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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) 2021 2020 $ %
Net cash provided by operating activities $ 779.0 $ 220.8 $ 558.2 252.8%
Net cash used in investing activities $ (269.5) $ (235.9) $ (33.6) 14.2%
Net cash provided by financing activities $ 375.2 $ 1,445.5 $ (1,070.3) (74.0)%
Operating Cash Flow
Net cash provided by operating activities increased by $558.2 million for the
nine months ended September 30, 2021 , primarily due to increased gaming revenues
as operations at our properties benefited from strong visitation levels,
increased length of play, and higher overall Adjusted EBITDAR margins. Operating
cash flows in the prior year were negatively impacted by the temporary closures
of all of our properties due to the COVID-19 pandemic, which significantly
decreased cash receipts from customers, offset by the utilization of rent
credits resulting from the sale of our Tropicana property.
Investing Cash Flow
Cash used in investing activities for the nine months ended September 30, 2021
of $269.5 million is primarily due to the acquisitions of HitPoint, Perryville ,
and the remaining 50% interest of Sam Houston , purchases of gaming licenses, and
capital expenditures. For the nine months ended September 30, 2020 , cash used in
investing activities was primarily the completion of our investment in Barstool
Sports in February of 2020 and capital expenditures.
Capital Expenditures
Capital expenditures are accounted for as either project capital (new facilities
or expansions) or maintenance (replacement) capital expenditures. Cash provided
by operating activities as well as cash available under our Revolving Credit
Facility was available to fund our capital expenditures for nine months ended
September 30, 2021 and 2020.
Capital expenditures for the nine months ended September 30, 2021 and 2020 were
$137.8 million and $97.6 million , respectively. Capital expenditures related to
our York and Morgantown development project were $46.6 million for the nine
months ended September 30, 2021 . Capital expenditures have increased for the
nine months ended September 30, 2021 , as compared to the prior year period, due
to the spending on our development projects as the properties prepared or
continue to prepare for opening. We expect that as operations continue to
recover, capital expenditures will increase.
Financing Cash Flow
For the nine months ended September 30, 2021 , net cash provided by financing
activities totaled $375.2 million compared to $1.4 billion in net cash provided
in the prior year period. During the nine months ended September 30, 2021 , we
had net cash proceeds of $400.0 million related to the issuance of our 4.125%
Notes due 2029. During the nine months ended September 30, 2020 , we had net cash
proceeds of $331.2 million and $957.6 million related to the issuance of the
Company's common equity in May 2020 and September 2020 , respectively, and
$322.2 million of net proceeds related to the issuance of our Convertible Notes
due 2026, with net repayments under our Senior Secured Credit Facilities of
$175.0 million , which primarily resulted in a decrease of $1.1 billion as
compared to the current year period.
Debt Issuances, Redemptions and Other Long-term Obligations
On April 14, 2020 , the Company entered into a second amendment to its Credit
Agreement with its various lenders (the "Second Amendment") to provide for
certain modifications to financial covenants and interest rates during, and
subsequent to a Covenant Relief Period, which concluded on May 7, 2021 .
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In May 2020 , the Company completed an offering of $330.5 million aggregate
principal amount of 2.75% unsecured convertible notes that mature, unless
earlier converted, redeemed or repurchased, on May 15, 2026 (the "Convertible
Notes") at a price of par. After lender fees and discounts, net proceeds
received by the Company were $322.2 million . Interest on the Convertible Notes
is payable on May 15th and November 15th of each year, commencing November 15,
2020 .
In February 2021 , the Company entered into a financing arrangement providing the
Company with upfront cash proceeds while permitting us to participate in future
proceeds on certain claims. The financing obligation has been classified as a
non-current liability, which is expected to be settled in a future period of
which the principal is contingent and predicated on other events. Consistent
with an obligor's accounting under a debt instrument, period interest will be
accreted using an effective interest rate of 27.0% and until such time that the
claims and related obligation is settled. The amount included in interest
expense related to this obligation was $6.9 million and $12.1 million for the
three and nine months ended September 30, 2021 , respectively.
On July 1, 2021 , the Company completed an offering of $400.0 million aggregate
principal amount of 4.125% Senior Unsecured Notes that mature on July 1, 2029
(the "4.125% Notes"). The 4.125% Notes were issued at par and interest is
payable semi-annually on January 1st and July 1st of each year. The Company
intends to use the proceeds from the 4.125% Notes for general corporate
purposes.
At September 30, 2021 , we had $2.9 billion in aggregate principal amount of
indebtedness, including $1.6 billion outstanding under our Senior Secured 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 Convertible Notes, and $148.8 million
outstanding in other long-term obligations. No amounts were drawn on our
Revolving Credit Facility. We have no debt maturing prior to 2023. As of
September 30, 2021 we had conditional obligations under letters of credit issued
pursuant to the Senior Secured Credit Facilities with face amounts aggregating
to $26.4 million resulting in $673.6 million available borrowing capacity under
our Revolving Credit Facility.
Covenants
Our Senior Secured 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 Senior Secured 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" of 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 ofSeptember 30, 2021 , the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with theSEC . 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. Common Stock Offering OnMay 14, 2020 , the Company completed a public offering of 16,666,667 shares of Penn Common Stock and onMay 19, 2020 , the underwriters exercised their right to purchase an additional 2,500,000 shares of Penn Common Stock, resulting in an aggregate public offering of 19,166,667 shares of Penn Common Stock. All of the shares were issued at a public offering price of$18.00 per share, resulting in gross proceeds of$345.0 million , and net proceeds of$331.2 million after underwriter fees and discounts of$13.8 million . OnSeptember 24, 2020 , the Company completed a public offering of 14,000,000 shares of Penn Common Stock and onSeptember 25, 2020 , the underwriters exercised their right to purchase an additional 2,100,000 shares of Penn Common Stock, resulting in an aggregate public offering of 16,100,000 shares of Penn Common Stock. All of the shares were issued at a public offering price of$61.00 per share, resulting in gross proceeds of$982.1 million , and net proceeds of$957.6 million after underwriter fees and discounts of$24.5 million . 48 -------------------------------------------------------------------------------- Table of ContentsScore Media and Gaming Inc. OnOctober 19, 2021 , we completed the previously announced 100% acquisition of theScore Media and Gaming Inc. , aBritish Columbia corporation ("theScore") for a purchase price of approximately$1.9 billion . Under the terms of the agreement, 1317774B.C. Ltd. (the "Purchaser"), an indirectly wholly owned subsidiary of Penn National, acquired each of the issued and outstanding theScore shares (other than those held by Penn National and its subsidiaries) forUS$17.00 per share in cash consideration, totaling$0.9 billion , and either 0.2398 of a share of common stock, par value$0.01 of Penn Common Stock or, if validly elected, 0.2398 of an exchangeable share in the capital of the Purchaser (each whole share, an "Exchangeable Share"), totaling 12,319,340 shares of Penn Common Stock and 697,539 Exchangeable Shares, or approximately$1.0 billion . Each Exchangeable Share will be exchangeable into 1 share of Penn Common Stock at the option of the holder, subject to certain adjustments. In addition, Purchaser may redeem all outstanding Exchangeable Shares in exchange for shares of Penn Common Stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances. Due to the timing of the acquisition and its proximity to the date of this report, the preliminary purchase price allocation has not been completed as the Company is currently in the process of determining the purchase price allocation to tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition provides us with the technology, resources and audience reach to accelerate our media and sports betting strategy acrossNorth America . 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 . The Company's Master Leases are accounted for as either operating leases, finance leases, or financing obligations. 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 and the Morgantown Lease, collectively, as our Triple Net Leases. 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. As a result of the annual escalator effectiveNovember 1, 2021 , for the lease year endedOctober 31, 2021 , the fixed component of rent under the Penn Master Lease increased by$5.6 million . 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) 2021 2020 2021 2020
Penn Master Lease (1) $ 118.4 $ 120.3 $ 357.1 $ 343.4
Pinnacle Master Lease (1) 82.4 81.3 245.8 245.6
Perryville Lease 1.9 - 1.9 -
Meadows Lease (1) 6.2 6.7 18.6 20.2
Margaritaville Lease 5.9 5.9 17.6 17.6
Greektown Lease 12.9 13.9 40.3 41.7
Morgantown Lease 0.8 - 2.3 -
Total (2) $ 228.5 $ 228.1 $ 683.6 $ 668.5
(1)During the three and nine months ended September 30, 2020 , we utilized rent
credits to pay $83.0 million , $54.2 million and $4.5 million and $155.1 million ,
$108.4 million and $9.0 million of rent under the Penn Master Lease, Pinnacle
Master Lease and Meadows Lease, respectively.
(2)Rent payable under the Tropicana Lease is nominal. Therefore, this lease has
been excluded from the table above.
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Table of Contents
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 Senior
Secured 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, including the ongoing impact of the COVID-19 pandemic. We cannot be
certain: (i) of the impact of any continuing operating restrictions to
accommodate social distancing and health and safety guidelines on our properties
and financial results, including the cash generated from operations; (ii) of the
magnitude and duration of the impact of the COVID-19 pandemic (including
reoccurrences) on general economic conditions, capital markets, unemployment and
our liquidity, operations, supply chain and personnel, including the potential
that some or all of our properties may again be forced to close or cease
operations for a certain period of time; (iii) that the U.S. economy and our
business will maintain its recovery from the impacts of the COVID-19 pandemic;
(iv) that our anticipated earnings projections will be realized; (v) that we
will achieve the expected synergies from our acquisitions; and (vi) that future
borrowings will be available under our Senior Secured 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 reopened 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; and
jurisdictional expansions and property expansion in under-penetrated markets;
there can be no assurance that this will be the case given the uncertainty
arising from the COVID-19 pandemic. 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 II, Item 1A. Risk Factors" of this Form 10-Q and Part I, Item 1A.
"Risk Factors" of the Company's Form 10-K for the year ended December 31, 2020
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.
CRITICAL ACCOUNTING ESTIMATES
A complete discussion of our critical accounting estimates is included in our
Form 10-K for the year ended December 31, 2020 . There have been no significant
changes in our critical accounting estimates during the nine months ended
September 30, 2021 .
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 includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements can be identified
by the use of 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: COVID-19; continued demand for the gaming
properties that have reopened and the possibility that the Company's gaming
properties may be required to close again in the future due to COVID-19; the
impact of COVID-19 on general economic conditions, capital markets,
unemployment, and the Company's liquidity, operations, supply chain and
personnel; the potential benefits of the Company's recently completed
acquisition of theScore; the Company's estimated cash burn and future liquidity,
future revenue and Adjusted EBITDAR, including from the Company's investment in
Barstool sports and its ongoing launch of its iGaming products and online sports
betting products, including the Barstool Sportsbook mobile app; the Company's
expectations of future results of operations and financial condition, including
margins; the Company's expectations for its properties; the Company's
development projects; the timing, cost and expected impact of planned capital
expenditures on the Company's results of operations; the anticipated opening
dates of the Company's retail sportsbooks in future states; the Company's
expectations with regard to acquisitions, potential divestitures and development
opportunities, as
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well as the integration of and synergies related to any companies the Company have acquired or may acquire; the outcome and financial impact of the litigation in which the Company is or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; the Company's ability to maintain regulatory approvals for its existing businesses and to receive regulatory approvals for its new business partners; the Company's expectations with regard to the impact of competition in online sports betting, iGaming and retail/mobile sportsbooks as well as the potential impact of this business line on the Company's existing businesses; and the performance of the Company's partners in online sports betting, iGaming and retail/mobile sportsbooks, including the risks associated with any new business, the actions of regulatory, legislative, executive or judicial decisions with regard to online sports betting, iGaming and retail/mobile sportsbooks and the impact of any such actions. 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, but are not limited to: (a) the magnitude and duration of the impact of the COVID-19 pandemic on general economic conditions, capital markets, unemployment, consumer spending and the Company's liquidity, financial condition, supply chain, operations and personnel; (b) industry, market, economic, political, regulatory and health conditions; (c) disruptions in operations from data protection breaches, cyberattacks, extreme weather conditions, medical epidemics or pandemics such as the COVID-19, and other natural or man-made disasters or catastrophic events; (d) the Company's ability to access additional capital on favorable terms or at all; (e) the Company's ability to remain in compliance with the financial covenants of its debt obligations; (f) actions to reduce costs and improve efficiencies to mitigate losses as a result of the COVID-19 pandemic that could negatively impact guest loyalty and the Company's ability to attract and retain employees; (g) the outcome of any legal proceedings that may be instituted against the Company or its directors, officers or employees; (h) the impact of new or changes in current laws, regulations, rules or other industry standards; (i) the ability of the Company's operating teams to drive revenue and margins; (j) the impact of significant competition from other gaming and entertainment operations; (k) the Company's ability to obtain timely regulatory approvals required to own, develop and/or operate its properties, or other delays, approvals or impediments to completing its planned acquisitions or projects, construction factors, including delays, and increased costs; (l) the passage of state, federal or local legislation that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which the Company does or seek to do business; (m) the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; (n) our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners and municipalities for such transactions; (o) the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; (p) the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data (particularly as our iGaming division grows); (q) with respect to new casinos, risks relating to construction, and its ability to achieve its expected budgets, timelines and investment returns; (r) the Company may not be able to achieve the anticipated financial returns from the acquisition of "theScore", including due to fees, costs and taxes in connection with the integration of theScore and expansion of its betting and content platform; (s) there is significant competition in the interactive gaming market; (t) potential adverse reactions or changes to business or regulatory relationships resulting from the acquisition of theScore; (u) the ability of the Company to retain and hire key personnel; and (v) other factors as discussed in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , 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.
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