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 Condensed Consolidated
Financial Statements and the notes thereto included in this Quarterly Report on
Form 10-Q ("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 ("Form 10-K")
for the year ended December 31, 2019 .
EXECUTIVE OVERVIEW
Our Business
Penn National Gaming, Inc. , together with its subsidiaries ("Penn National," the
"Company," "we," "our," or "us"), is a leading, diversified,
multi-jurisdictional owner and manager of gaming and racing properties, sports
betting operations, and video gaming terminal ("VGT") operations. In addition,
we hold a 36% equity interest in Barstool Sports, Inc. ("Barstool Sports "), a
leading digital sports, entertainment and media platform. We also operate an
interactive gaming ("iGaming") division through our subsidiary, Penn Interactive
Ventures, LLC ("Penn Interactive"), which launched an online casino ("iCasino")
through our HollywoodCasino.com gaming platform in the third quarter of 2019 and
is scheduled to launch an online sports betting app called Barstool Sports in
the third quarter of 2020. Our MYCHOICE® customer loyalty program currently has
over 20 million members and provides our members with various benefits,
including complimentary goods and/or services. We believe our continued
evolution into the best-in-class omni-channel provider of retail and online
gaming and sports betting entertainment will be a catalyst for our core
land-based business, while also providing a platform for significant long-term
shareholder value.
As of June 30, 2020 , we owned, managed, or had ownership interests in 41 gaming
and racing properties in 19 states and were licensed to offer live sports
betting at our properties in Indiana , Iowa , Michigan , Mississippi , Nevada ,
Pennsylvania and West Virginia . 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").
Impact of COVID-19 Pandemic and Company Response
On March 11, 2020 , the World Health Organization declared the novel coronavirus
(known as "COVID-19") outbreak to be a global pandemic. We began temporary
suspension of the operations of all of our 41 properties starting between March
13, 2020 and March 19, 2020 pursuant to various orders from state gaming
regulatory bodies or governmental authorities to combat the rapid spread of
COVID-19. We began reopening our properties on May 18, 2020 with reduced gaming
and hotel capacity and limited food and beverage offerings in order to
accommodate comprehensive social distancing and health and safety protocols
developed in close consultation with state regulators and local and state public
health officials. As of June 30, 2020 , we reopened 31 of our properties and as
of the date of filing this Form 10-Q with the U.S. Securities and Exchange
Commission (the "SEC"), all of our properties, with the exception of Tropicana
Las Vegas ("Tropicana"), which is scheduled to reopen on September 1, 2020 ;
Valley Race Park ; and Zia Park Casino ; have reopened. For a thorough discussion
of the operating performance of our properties since reopening, see "Results
of Operations" below.
During the first quarter of 2020, the Company took various actions to reduce its
cost structure during the property closures to help mitigate the operating and
financial impact of the COVID-19 pandemic, which included: (i) furloughing
approximately 26,000 employees and operating with a minimum staffing of less
than 850 employees company-wide during the closures; (ii) enacting meaningful
compensation reductions to its remaining property and corporate leadership teams
effective April 1, 2020 until such time as the Company determines that its
properties have substantially returned to normal operations; and (iii) executing
substantial reductions in operating expenses, capital expenditures, including
temporarily suspending construction of its two planned Category 4 development
projects in Pennsylvania , and overall costs. In addition, the Company's Board of
Directors elected to forgo their cash compensation effective April 1, 2020 until
such time as the Company determines that its properties have substantially
returned to normal operations. As of June 30, 2020 , approximately 13,000
employees have returned to work.
Between March 13, 2020 and May 19, 2020 , the Company entered into a series of
transactions to improve its financial position and liquidity in light of the
COVID-19 pandemic, including: (i) borrowing the remaining available amount of
$430.0 million under its Revolving Credit Facility; (ii) entering into a binding
term sheet with GLPI (the "Term Sheet") whereby GLPI agreed to (a) purchase the
real estate assets associated with the Company's Tropicana property in exchange
for rent credits of
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$307.5 million , which closed on April 14, 2020 , and (b) purchase the land
underlying the Company's Hollywood Casino Morgantown ("Morgantown") development
project in Morgantown, Pennsylvania , in exchange for rent credits of $30.0
million , which is expected to close in the fourth quarter of 2020 (the land will
be immediately leased back from GLPI); (iii) completing an offering of $330.5
million aggregate principal amount of 2.75% Convertible Notes; and (iv)
completing a public offering of 19,166,667 aggregate shares of common stock, par
value of $0.01 per share, of the Company ("Penn Common Stock") for gross
proceeds of $345.0 million . In addition, on April 14, 2020 , the Company entered
into an amendment to its Credit Agreement, which, among other things, provides
it with relief from its financial covenants for a period of up to one year. The
terms "Revolving Credit Facility," "Convertible Notes" and "Credit Agreement"
are defined in "Liquidity and Capital Resources."
The COVID-19 pandemic caused significant disruptions to our business and a
material adverse impact on our financial condition, results of operations, and
cash flows, the magnitude of which continues to develop based on (i) the timing
and extent of any recovery in visitation and consumer spending at our
properties; (ii) the continued impact of implementing social distancing and
health and safety guidelines at our properties, including reductions in gaming
and hotel capacity and limiting the number of food and beverage options; and
(iii) whether any of our properties will be required to again temporarily
suspend operations in the event that the pandemic worsens. We are currently
unable to determine whether, when or how the conditions surrounding the COVID-19
pandemic will change or whether any recovery in visitation and consumer spending
is sustainable. In the event that the COVID-19 pandemic worsens and/or we are
required to again temporarily suspend our operations, we may need to take
additional actions to reduce costs, preserve liquidity and remain in compliance
with our financial covenants.
On March 27, 2020 , the President of the United States signed into law the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which
provides emergency economic assistance for American workers, families and
businesses affected by the COVID-19 pandemic. The economic relief package
includes government loan enhancement programs and various tax provisions to help
improve liquidity for American businesses. Based on our evaluation of the CARES
Act, we qualify for certain employer refundable payroll credits, deferral of
applicable payroll taxes, net operating loss carryback and immediate expensing
for eligible qualified improvement property. We intend to continue to review and
consider any available potential benefits under the CARES Act for which we
qualify, including those described above.
The Penn National Gaming Foundation established a COVID-19 emergency relief fund
to assist our team members and local relief organizations affected by the
COVID-19 pandemic. More than $1.7 million has been raised through personal
donations from our Chief Executive Officer, senior management team, Board of
Directors and property general managers, in addition to contributions from the
Company and property employee assistance funds. We also extended medical
benefits of furloughed employees through August 31, 2020 .
The Company continues to evaluate the nature and extent of the impact of the
COVID-19 pandemic on its business. We are currently unable to determine the
length and severity of the pandemic. The continuation of the outbreak may again
cause state gaming and health authorities to require temporary suspension of
operations at our properties; enforce further limits on the number of customers
in casinos; or continue or increase prohibitions of large gatherings, such as
concerts and conventions. The COVID-19 pandemic may further influence changes in
customer behavior or a potential reduction in consumer discretionary spending.
The COVID-19 pandemic had a material adverse impact on our business, financial
condition, results of operations and cash flows for the first quarter and second
quarter of 2020. Due to the ongoing situation, our business, financial
condition, results of operations and cash flows for the third and fourth quarter
2020 could be impacted in ways we are not able to fully predict today. Even with
most of our properties reopened, there can be no assurance that our business,
financial condition, results of operations and cash flows will return to levels
that existed prior to the COVID-19 pandemic.
Recent Acquisitions, Development Projects and Other
In February 2020 , we closed on our investment in Barstool Sports pursuant to a
stock purchase agreement with Barstool Sports and certain stockholders of
Barstool Sports , in which we purchased 36% (inclusive of 1% on a delayed basis)
of the common stock of Barstool Sports for a purchase price of $161.2 million .
Furthermore, three years after the closing of the transaction (or earlier at our
election), we will increase our ownership in Barstool Sports to approximately
50% by purchasing approximately $62 million worth of additional shares of
Barstool Sports common stock, consistent with the implied valuation at the time
of the initial investment, which was $450.0 million . With respect to the
remaining Barstool Sports shares, we have immediately exercisable call rights,
and the existing Barstool Sports stockholders have put rights exercisable
beginning three years after closing, all based on a fair market value
calculation at the time of exercise (subject to a cap of $650.0 million and a
floor of 2.25 times the annualized revenue of Barstool Sports , all subject to
various adjustments). We also have the option to bring in another partner who
would acquire a portion of our share of Barstool Sports . Upon closing, we became
Barstool 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 iCasino products.
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As noted above, Penn Interactive is scheduled to launch the Barstool Sports
online sports betting app in the third quarter of 2020, with the first planned
launch in Pennsylvania . We expect the Barstool Sports app to operate in
additional states by the end of the fourth quarter of 2020. In addition, we
expect to use the Barstool Sports brand in the operation of our retail
sportsbooks later in 2020.
In May 2019 , we acquired Greektown Casino-Hotel ("Greektown"), in Detroit,
Michigan , subject to a triple net lease with VICI Properties Inc. (NYSE: VICI)
("VICI" and collectively with GLPI, our "REIT Landlords") (the "Greektown
Lease") and in January 2019 , we acquired Margaritaville Casino Resort
("Margaritaville") in Bossier City, Louisiana , subject to a triple net lease
with VICI (the "Margaritaville Lease"). In March 2020 , in light of the COVID-19
pandemic, we temporarily suspended construction of our development of two
Category 4 satellite gaming casinos in Pennsylvania : Hollywood Casino York
("York") and Morgantown .
The Term Sheet discussed above also provides that the Company and GLPI will
enter into an option agreement whereby GLPI will grant the Company the exclusive
right until December 31, 2020 to purchase the operations of Hollywood Casino
Perryville for $31.1 million , with the closing of such purchase to occur on a
date selected by the Company during 2021. If the option is exercised and the
transaction is completed, we would lease the real estate assets associated with
Hollywood Casino Perryville from GLPI with initial rent of $7.8 million per year
subject to escalation. The option agreement is expected to be formalized in the
third quarter of 2020 and we currently expect to exercise the option by the end
of 2020.
Additionally, pursuant to the Term Sheet, we agreed that, in the future, we
would exercise the next scheduled five-year renewal under the Penn Master Lease
as well as the Pinnacle Master Lease , and GLPI agreed they would grant us the
option to exercise an additional five-year renewal term at the end of the lease
term on the Penn Master Lease and the Pinnacle Master Lease , subject to certain
conditions. In the future, upon exercising each of these renewal options, the
term of the Penn Master Lease would extend to November 30, 2033 and the term of
the Pinnacle Master Lease would extend to April 30, 2031 ; and if all renewal
options contained within the Penn Master Lease and the Pinnacle Master Lease
were exercised, inclusive of the these renewal options, the term of the Penn
Master Lease would extend to November 30, 2053 and the term of the Pinnacle
Master Lease would extend to April 30, 2056 .
Operating and Competitive Environment
Most of our properties operate in mature, competitive markets. While the full
impact of the COVID-19 pandemic on our business cannot be reasonably estimated
at this time, we continue to 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 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 reported by most jurisdictions, regional gaming industry trends have shown
little revenue growth the last several years as numerous jurisdictions now
permit gaming or have expanded their gaming offerings. In recent years, the
proliferation of new gaming properties has impacted the overall domestic gaming
industry as well as our results of operations in certain markets. Prior to the
COVID-19 pandemic, the economic environment, specifically historically low
levels of unemployment, strength in residential real estate prices, and high
levels of consumer confidence, had resulted in a stable operating environment in
recent years. The COVID-19 pandemic has significantly increased the level of
unemployment and decreased the level of consumer confidence. Our ability to
succeed in this new environment will be predicated on our ability to adjust
operations and cost structures at our reopened properties to reflect the new
economic and health and safety conditions, operating our properties efficiently,
realizing 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 through accretive
acquisitions or investments, such as Barstool Sports , 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, 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 the U.S. More specifically, due to recent legislation
to expand gaming in and around Illinois , Indiana , Massachusetts and
Pennsylvania , several of our properties within our Northeast segment and some
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of our properties within our Midwest segment have been and will continue to be
negatively impacted by new or increased competition.
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, and high fuel or other transportation costs. 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. We believe that the COVID-19
pandemic will lead to meaningful decreases in discretionary consumer spending
and will continue to negatively impact visitation and the volume of play for the
foreseeable future. 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
92% of our gaming revenue in both 2019 and 2018) and, to a lesser extent, table
games and sports betting. Aside from gaming revenue, our revenues are 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 9%
of slot handle, and our typical table game hold percentage is in the range of
approximately 16% to 25% 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 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 in Jackpot, 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 Condensed 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 June For the six months ended
30, June 30,
(dollars in millions) 2020 2019 2020 2019
Revenues:
Northeast segment $ 102.7 $ 599.1 $ 623.4 $ 1,149.7
South segment 121.5 282.2 344.8 574.1
West segment 17.7 164.2 144.3 322.9
Midwest segment 36.0 268.2 264.1 539.5
Other (1) 27.6 9.4 47.9 19.5
Intersegment eliminations (2) - - (2.9) -
Total $ 305.5 $ 1,323.1 $ 1,421.6 $ 2,605.7
Net income (loss) $ (214.4) $ 51.4 $ (823.0) $ 92.3
Adjusted EBITDAR:
Northeast segment $ (3.6) $ 186.2 $ 120.9 $ 351.0
South segment 44.4 92.8 97.0 190.6
West segment (3.0) 50.5 21.6 100.4
Midwest segment (4.6) 97.8 64.9 197.0
Other (1) (8.7) (20.8) (27.6) (41.1)
Total (3) 24.5 406.5 276.8 797.9
Rent expense associated with triple net operating
leases (4) (103.8) (90.0) (201.3) (174.7)
Adjusted EBITDA (5) $ (79.3) $ 316.5 $ 75.5 $ 623.2
Net income (loss) margin (70.2) % 3.9 % (57.9) % 3.5 %
Adjusted EBITDAR margin (6) 8.0 % 30.7 % 19.5 % 30.6 %
Adjusted EBITDA margin (7) (26.0) % 23.9 % 5.3 % 23.9 %
(1)The Other category consists of the Company's stand-alone racing operations,
namely Sanford-Orlando Kennel Club and the Company's joint venture interests in
Sam Houston Race Park , Valley Race Park , and Freehold Raceway . The Other
category also includes Penn Interactive, which operates social gaming, our
internally-branded retail sportsbooks, and iGaming; our management contract for
Retama Park Racetrack ; and our live and televised poker tournament series that
operates under the trademark Heartland Poker Tour ("HPT"). 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. 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)Represents the elimination of intersegment revenues associated with Penn
Interactive and HPT.
(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 is presented on a consolidated basis outside
the financial statements solely as a valuation metric. Adjusted EBITDAR
decreased for the three and six months ended June 30, 2020 , as compared to the
prior year periods, due to the temporary closures of our properties as a result
of the COVID-19 pandemic.
(4)Solely comprised of rent expense associated with the operating lease
components contained within the Master Leases (primarily land), the Tropicana
Lease, the Meadows Lease (as defined in "Liquidity and Capital Resources" ),
the Margaritaville Lease and the Greektown Lease (referred to collectively as
our "triple net operating leases"). The finance lease components contained
within the Master Leases (primarily buildings) result in interest expense, as
opposed to rent expense.
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(5)Adjusted EBITDA decreased for the three and six months ended June 30, 2020 ,
as compared to the prior year periods, due to the temporary closures of our
properties as a result of the COVID-19 pandemic. As rent expense is a normal,
recurring cash operating expense, it is included within the calculation of
Adjusted EBITDA.
(6)As noted within "Non-GAAP Financial Measures" below, Adjusted EBITDAR margin
is presented on a consolidated basis outside the financial statements solely as
a valuation metric.
(7)Adjusted EBITDA margin decreased for the three and six months ended June 30,
2020 , as compared to the prior year periods, due to the temporary closures of
our properties as a result of the COVID-19 pandemic.
Consolidated comparison of the three and six months ended June 30, 2020 and 2019
Revenues
The following table presents our consolidated revenues:
For the three months ended June
30, Change For the six months ended June 30, Change
(dollars in millions) 2020 2019 $ % 2020 2019 $ %
Revenues
Gaming $ 259.2 $ 1,062.1 $ (802.9) (75.6) % $ 1,162.1 $ 2,096.7 $ (934.6) (44.6) %
Food, beverage, hotel and
other 46.3 261.0 (214.7) (82.3) % 259.5 509.0 (249.5) (49.0) %
Total revenues $ 305.5 $ 1,323.1 $ (1,017.6) (76.9) % $ 1,421.6 $ 2,605.7 $ (1,184.1) (45.4) %
Consolidated revenues decreased for the three and six months ended June 30, 2020
as a result of the temporary closures of all of our properties due to the
COVID-19 pandemic. We began temporarily closing our properties on March 13, 2020
and began reopening our properties on May 18, 2020 , resulting in all of our
properties being closed for at least two months. As of June 30, 2020 , 31 of our
41 properties were reopened. Our properties are subject to restrictions on
gaming capacity; depending on the jurisdiction, generally 50% less gaming
devices. Furthermore, due primarily to the implementation of social distancing
and health and safety protocols, our properties are subject to reduced hotel
capacity and limitations on the number of food and beverage offerings. As a
result, upon reopening our properties, gaming revenue now represents a larger
portion of our total revenues, which we expect to continue until at least such
time that social distancing and safety and health protocols are relaxed or no
longer necessary.
Upon reopening, our properties generally experienced reduced visitation and
higher spend per trip, as compared to pre-closure levels. We largely attribute
the higher spend per trip to pent-up demand, visitation from our higher worth
customers, and customers' propensity to spend after a prolonged period of
limited domestic commerce and upon receipt of government stimulus payments. In
addition, in many of the states in which we operate, leisure alternatives remain
partially limited (e.g., bars, concerts, entertainment events, etc.), which may
have impacted our operating results upon reopening our properties. See
"Segment comparison of the three and six months ended June 30,
2020 and 2019 " below for more detailed explanations of the
fluctuations in revenues.
Operating expenses
The following table presents our consolidated operating expenses:
For the three months ended June
30, Change For the six months ended June 30 , Change
(dollars in millions) 2020 2019 $ % 2020 2019 $ %
Operating expenses
Gaming $ 142.0 $ 564.1 $ (422.1) (74.8) % $ 642.9 $ 1,111.6 $ (468.7) (42.2) %
Food, beverage, hotel and other 32.9 167.6 (134.7) (80.4) % 189.9 329.3 (139.4) (42.3) %
General and administrative 204.1 287.0 (82.9) (28.9) % 511.1 573.9 (62.8) (10.9) %
Depreciation and amortization 91.9 106.0 (14.1) (13.3) % 187.6 210.1 (22.5) (10.7) %
Impairment losses - - - N/M 616.1 - 616.1 N/M
Total operating expenses $ 470.9 $ 1,124.7 $ (653.8) (58.1) % $ 2,147.6 $ 2,224.9 $ (77.3) (3.5) %
N/M - Not meaningful
Gaming expenses consist primarily of salaries and wages associated with our
gaming operations and gaming taxes. Food, beverage, hotel and other expenses
consist principally of salaries and wages and costs of goods sold associated
with our food, beverage, hotel, retail, racing, and other operations. Gaming,
food, beverage, hotel and other expenses for the three and six
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months ended June 30, 2020 decreased year over year primarily as a result of the
temporary closures of all of our properties due to the COVID-19 pandemic, which
reduced our salaries and wages, gaming taxes, costs of goods sold, and other
expenses. As discussed above, our reopened properties are operating with reduced
gaming and hotel capacity and limited food and beverage options. As such, our
properties are operating with a reduced workforce, which reduces our salaries
and wages. In addition, our properties have reduced marketing costs, which
reduces gaming expenses.
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 and acquisition 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) and rent expense
associated with our triple net operating leases.
General and administrative expenses for the three and six months ended June 30,
2020 decreased year over year primarily as a result of the actions taken to
reduce our cost structure while our properties were temporarily closed, which
are discussed above and were mostly effective April 1, 2020 . In addition, during
the three and six months ended June 30, 2020 , we recognized a gain on disposal
of assets of $28.5 million as well as $21.8 million in payroll credits under the
CARES Act, both of which reduced general and administrative expenses. Offsetting
these decreases for the three and six months ended June 30, 2020 , as compared to
the prior year periods, were increases in rent expense associated with our
triple net operating leases of $13.8 million and $26.6 million , respectively,
which principally relate to the Tropicana Lease and the Greektown Lease, and
increases in expense associated with the Company's cash-settled stock-based
awards of $19.5 million and $10.2 million , respectively, which are largely
driven by the increase in the Company's stock price. Furthermore, the expense
associated with the Company's contingent purchase price obligations decreased by
$7.2 million for the six months ended June 30, 2020 , as compared to the prior
year period.
Depreciation and amortization for the three and six months ended June 30, 2020
decreased year over year primarily due to fixed assets becoming fully
depreciated since June 30, 2019 , the sale of the real estate assets of Tropicana
in April 2020 , and decreases of $0.3 million and $0.9 million , respectively, in
amortization expense at Penn Interactive, offset by increases of $1.3 million
and $4.8 million , respectively, at Greektown, which was acquired in May 2019 .
Impairment losses for the six months ended June 30, 2020 primarily relate 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. At the time of
the interim impairment assessment, we revised our cash flow projections to
reflect the current economic environment, including the uncertainty of the
nature, timing and extent of reopening our gaming properties.
Other income (expenses)
The following table presents our consolidated other income (expenses):
For the three months ended June
30, Change For the six months ended June 30, Change
(dollars in millions) 2020 2019 $ % 2020 2019 $ %
Other income (expenses)
Interest expense, net $ (135.0) $ (134.7) $ (0.3) 0.2 % $ (264.8) $ (267.0) $ 2.2 (0.8) %
Income (loss) from unconsolidated
affiliates $ (1.7) $ 6.2 $ (7.9) N/M $ 2.4 $ 11.9 $ (9.5) (79.8) %
Income tax benefit (expense) $ 58.4 $ (18.5) $ 76.9 N/M $ 157.9 $ (33.4) $ 191.3 N/M
Other $ 29.3 $ - $ 29.3 N/M $ 7.5 $ - $ 7.5 N/M
N/M - Not meaningful
Interest expense, net increased for the three months ended June 30, 2020 , as
compared to the prior year period, due to increases in interest expense relating
to our Master Leases of $0.7 million and interest expense relating to our
long-term debt of $0.1 million . Interest expense relating to our long-term debt
increased due to the issuance of the 2.75% Convertible Notes, which offset the
reduction in interest expense incurred on the Senior Secured Credit Facilities
(as defined in "Liquidity and Capital Resources" ) from a decrease in the
London Interbank Offered Rate (referred to as "LIBOR") during the corresponding
periods.
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Interest expense, net decreased for the six months June 30, 2020 , as compared to
the prior year period, primarily due to a decrease in interest expense relating
to our long-term debt of $1.7 million and an increase in capitalized interest of
$0.9 million , offset by an increase in interest expense relating to our Master
Leases of $0.4 million . The decrease in interest expense relating to long-term
debt is due to the decrease in LIBOR during the corresponding periods despite
incremental borrowings under our Revolving Credit Facility in light of the
COVID-19 pandemic and the issuance of the Convertible Notes.
Income (loss) from unconsolidated affiliates relates principally to Barstool
Sports and our Kansas Entertainment joint venture. The decrease for the three
and six months ended June 30, 2020 , as compared to the prior year periods, was
due to a decrease in the results of operations of Hollywood Casino at Kansas
Speedway , which was temporarily closed between March 18, 2020 and May 25, 2020 .
Income tax benefit (expense) was $58.4 million and $157.9 million for the three
and six months ended June 30, 2020 , respectively, as compared to $(18.5) million
and $(33.4) million for the three and six months ended June 30, 2019 ,
respectively. Our effective tax rate (income taxes as a percentage of income or
loss from operations before income taxes) including discrete items was 21.4% and
16.1% for the three and six months ended June 30, 2020 , as compared to 26.5% for
both the three and six months ended June 30, 2019 , primarily due to a reduction
of pre-tax income.
The CARES Act temporarily removes certain restrictions originally imposed by the
Tax Cuts and Jobs Act of 2017. Corporate taxpayers are now permitted to
carryback up to five years of federal net operating losses ("NOLs") originating
in tax years 2018, 2019, and 2020 and offset 100% of taxable income with
available NOLs. The CARES Act also temporarily (i) increases the interest
deductibility threshold from 30% to 50% of adjusted taxable income for tax years
beginning in 2019 and 2020, (ii) allows a refund of alternative minimum tax
credits, (iii) increases the corporate charitable deduction limit to 25% and
(iv) makes eligible qualified improvement property available for immediate
expensing. The enactment of the CARES Act did not have a significant impact on
our effective tax rate for the three months ended June 30, 2020 ; however, we are
estimating an income tax refund between approximately $40 million and $50
million primarily attributable to the carryback of NOLs. We will continue to
monitor any impact and revise our preliminary near-term liquidity benefit as a
result of this new law.
As of June 30, 2020 , we have a valuation allowance on the portion of the
deferred tax assets that is not more likely than not to be realized as a result
of the negative objective evidence of being in a three-year cumulative loss and
we intend to continue maintaining a valuation allowance on our deferred tax
assets until there is sufficient positive evidence to support the reversal of
all or a portion of these allowances. A reduction in the valuation allowance
would result in a significant decrease to income tax expense in the period the
release is recorded. However, the exact timing and reversal amount in our
valuation allowance are currently unknown.
Our effective income tax rate can vary from period to 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.
Other includes miscellaneous income and expense items. The amount for the three
and six months ended June 30, 2020 relates to unrealized holding gains of $29.5
million and $7.7 million , respectively, on equity securities (including
warrants), which were acquired during the third quarter of 2019 in connection
with Penn Interactive entering into multi-year agreements with sports betting
operators for online sports betting and related iGaming market access across our
portfolio.
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Segment comparison of the three and six months ended
For the three months ended June
30, Change For the six months ended June 30, Change
(dollars in millions) 2020 2019 $ % 2020 2019 $ %
Revenues
Gaming $ 94.1 $ 528.9 $ (434.8) (82.2) % $ 552.8 $ 1,016.7 $ (463.9) (45.6) %
Food, beverage, hotel
and other 8.6 70.2 (61.6) (87.7) % 70.6 133.0 (62.4) (46.9) %
Total revenues $ 102.7 $ 599.1 $ (496.4) (82.9) %
(45.8) % Adjusted EBITDAR$ (3.6) $ 186.2 $ (189.8) N/M$ 120.9 $ 351.0 $ (230.1) (65.6) % Adjusted EBITDAR margin (3.5) % 31.1 % (3460) bps 19.4 % 30.5 % (1110) bps N/M - Not meaningful The Northeast segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three and six months endedJune 30, 2020 , as compared to the prior year periods, due to the temporary closures of our gaming properties within the Northeast segment beginning betweenMarch 13, 2020 andMarch 19, 2020 as a result of the COVID-19 pandemic. We reopenedHollywood Casino at Charles Town Races onJune 5, 2020 , Meadows Racetrack and Casino onJune 9, 2020 , andHollywood Casino at Penn National Race Course onJune 19, 2020 . Furthermore, ourIndiana properties and ourOhio properties reopened onJune 15, 2020 andJune 19, 2020 , respectively.Plainridge Park Casino ,Hollywood Casino Bangor , and Greektown, reopened onJuly 8, 2020 ,July 10, 2020 , andAugust 5, 2020 , respectively. All of our properties within the Northeast segment reopened with reduced gaming and hotel (if applicable) capacity and limited food and beverage offerings. In the periods between reopening andJune 30, 2020 , the majority of our reopened properties in the Northeast segment experienced total revenues and Adjusted EBITDAR growth as compared to the prior year, withHollywood Casino Toledo particularly benefiting from the fact that casinos inDetroit, Michigan had not yet reopened as ofJune 30, 2020 . In addition toHollywood Casino Toledo ,Ameristar East Chicago ,Hollywood Casino Lawrenceburg , and Hollywood Gaming atDayton Raceway experienced strong reopenings.Hollywood Casino atCharles Town Races initially benefited after reopening due to the fact that one of its principal competitors located inMaryland reopened approximately 4 weeks after our property reopened. Meadows Racetrack and Casino andHollywood Casino at Penn National Race Course continue to be negatively impacted by recent increases in competition in and around thePennsylvania market. In the periods between reopening andJune 30, 2020 , Adjusted EBITDAR margins of reopened properties were higher than the prior year due to operating with a reduced workforce, focusing on higher margin gaming offerings, reducing marketing costs, and limiting certain lower margin food and beverage offerings, such as buffets. South Segment For the three months ended June 30, Change For the six months ended June 30, Change (dollars in millions) 2020 2019 $ % 2020 2019 $ % Revenues Gaming$ 103.7 $ 206.8 $ (103.1) (49.9) %$ 272.3 $ 426.9 $ (154.6) (36.2) % Food, beverage, hotel and other 17.8 75.4 (57.6) (76.4) % 72.5 147.2 (74.7) (50.7) % Total revenues$ 121.5 $ 282.2 $ (160.7) (56.9) %$ 344.8 $ 574.1 $ (229.3) (39.9) % Adjusted EBITDAR$ 44.4 $ 92.8 $ (48.4) (52.2) %$ 97.0 $ 190.6 $ (93.6) (49.1) % Adjusted EBITDAR margin 36.5 % 32.9 % 360 bps 28.1 % 33.2 %
(510) bps
The South segment's total revenues and Adjusted EBITDAR decreased for the three and six months endedJune 30, 2020 , as compared to the prior year periods, and Adjusted EBITDAR margin decreased for the six months endedJune 30, 2020 due to the temporary closures of our gaming properties within the South segment onMarch 17, 2020 as a result of the COVID-19 pandemic. We reopened ourLouisiana properties and ourMississippi properties betweenMay 18, 2020 andMay 21, 2020 , all with reduced gaming and hotel (if applicable) capacity and limited food and beverage offerings. Despite the temporary closures, Adjusted EBITDAR margin increased for the three months endedJune 30, 2020 due to operating with a reduced workforce, 42 -------------------------------------------------------------------------------- Table of Contents focusing on higher margin gaming offerings, reducing marketing costs, and limiting certain lower margin food and beverage offerings, such as buffets. In the periods between reopening andJune 30, 2020 , as compared to the prior year, with the exception of Ameristar Vicksburg, all of our reopened properties in the South segment experienced Adjusted EBITDAR growth with 1stJackpot Casino ,Boomtown New Orleans , and Margaritaville also experiencing growth in total revenues. In addition, the favorable year-over-year comparisons at the majority of our South segment properties accelerated throughout the reopened period.Boomtown New Orleans initially benefited after reopening due to the fact that one of its principal competitors reopened approximately 3-4 weeks after our property reopened. West Segment For the three months ended June 30, Change For the six months ended June 30, Change (dollars in millions) 2020 2019 $ % 2020 2019 $ % Revenues Gaming$ 12.8 $ 96.5 $ (83.7) (86.7) %$ 84.7 $ 189.3 $ (104.6) (55.3) % Food, beverage, hotel and other 4.9 67.7 (62.8) (92.8) % 59.6 133.6 (74.0) (55.4) % Total revenues$ 17.7 $ 164.2 $ (146.5) (89.2) %$ 144.3 $ 322.9 $ (178.6) (55.3) % Adjusted EBITDAR$ (3.0) $ 50.5 $ (53.5) N/M$ 21.6 $ 100.4 $ (78.8) (78.5) % Adjusted EBITDAR margin (16.9) % 30.8 % (4770) bps 15.0 % 31.1 % (1610) bps N/M - Not meaningful The West segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three and six months endedJune 30, 2020 , as compared to the prior year periods, due to the temporary closures of our gaming properties within the West segment beginning betweenMarch 16, 2020 andMarch 19, 2020 as a result of the COVID-19 pandemic. Cactus Petes,Horseshu and M Resort reopened onJune 4, 2020 ; and Ameristar Black Hawk reopened onJune 17, 2020 ; all with reduced gaming and hotel (if applicable) capacity and limited food and beverage offerings. Tropicana is scheduled to reopen onSeptember 1, 2020 andZia Park Casino has not yet reopened. In the period between reopening andJune 30, 2020 , Cactus Petes and Horseshu experienced growth in total revenues as well as Adjusted EBITDAR as compared to the prior year. The reopening results of Ameristar Black Hawk were negatively impacted by the fact that the property has not yet been permitted to reopen table games. In addition, the reopening results ofM Resort were negatively impacted by general weakness in the economic environment inLas Vegas , which is a destination market. In the periods between reopening andJune 30, 2020 , Adjusted EBITDAR margins of reopened properties were higher than the prior year due to operating with a reduced workforce, focusing on higher margin gaming offerings, reducing marketing costs, and limiting certain lower margin food and beverage offerings, such as buffets. Midwest Segment For the three months ended June 30, Change For the six months ended June 30, Change (dollars in millions) 2020 2019 $ % 2020 2019 $ % Revenues Gaming$ 33.5 $ 229.9 $ (196.4) (85.4) %$ 229.7 $ 463.7 $ (234.0) (50.5) % Food, beverage, hotel and other 2.5 38.3 (35.8) (93.5) % 34.4 75.8 (41.4) (54.6) % Total revenues$ 36.0 $ 268.2 $ (232.2) (86.6) %$ 264.1 $ 539.5 $ (275.4) (51.0) % Adjusted EBITDAR$ (4.6) $ 97.8 $ (102.4) N/M$ 64.9 $ 197.0 $ (132.1) (67.1) % Adjusted EBITDAR margin (12.8) % 36.5 % (4930) bps 24.6 % 36.5 %
(1190) bps
N/M - Not meaningful The Midwest segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three and six months endedJune 30, 2020 , as compared to the prior year periods, due to the temporary closures of our gaming properties within the Midwest segment beginning betweenMarch 16, 2020 andMarch 18, 2020 as a result of the COVID-19 pandemic. 43 -------------------------------------------------------------------------------- Table of Contents We reopenedHollywood Casino at Kansas Speedway onMay 25, 2020 ,Ameristar Council Bluffs andArgosy Casino Riverside onJune 1, 2020 , andHollywood Casino St. Louis and River City Casino onJune 16, 2020 . OurIllinois properties and Prairie State Gaming reopened onJuly 1, 2020 . All of our gaming properties reopened with reduced gaming and hotel (if applicable) capacity and limited food and beverage offerings. In the periods between reopening andJune 30, 2020 , all of our reopened properties within the Midwest segment experienced a decline in total revenues as compared to the prior year. However, in the periods between reopening andJune 30, 2020 , Ameristar Council Bluffs,Argosy Casino Riverside and River City Casino grew Adjusted EBITDAR as compared to the prior year. The operating performance ofHollywood Casino at Kansas Speedway upon reopening was negatively impacted by more lenient social distancing protocols and regulatory restrictions at nearby competitors located inMissouri . In the periods between reopening andJune 30, 2020 , Adjusted EBITDAR margins of reopened properties were higher than the prior year due to operating with a reduced workforce, focusing on higher margin gaming offerings, reducing marketing costs, and limiting certain lower margin food and beverage offerings, such as buffets. Other For the three months ended June 30, Change For the six months ended June 30, Change (dollars in millions) 2020 2019 $ % 2020 2019 $ % Revenues Gaming$ 15.1 $ -$ 15.1 N/M$ 22.7 $ 0.1 $ 22.6 N/M Food, beverage, and other 12.5 9.4 3.1 33.0 % 25.2 19.4 5.8 29.9 % Total revenues$ 27.6 $ 9.4 $ 18.2 193.6 %$ 47.9 $ 19.5 $ 28.4 145.6 % Adjusted EBITDAR$ (8.7) $ (20.8) $ 12.1 (58.2) %$ (27.6) $ (41.1) $ 13.5 (32.8) % N/M - Not meaningful Total revenues and Adjusted EBITDAR of the Other category increased for the three and six months endedJune 30, 2020 , as compared to the prior year periods, principally as a result of Penn Interactive, specifically the launch of iGaming inPennsylvania during the third quarter of 2019 and growth in operating live sports betting at retail sportsbooks within the Company's properties. As noted above, Penn Interactive is scheduled to launch theBarstool Sports online sports betting app in the third quarter of 2020, with the first planned launch inPennsylvania . We expect theBarstool Sports app to operate in additional states by end of the fourth quarter of 2020. In addition, we expect to use the Barstool Sports brand in the operation of our retail sportsbooks later in 2020. In addition to Penn Interactive, the increases in Adjusted EBITDAR are driven by decreases in corporate overhead costs of$6.9 million and$5.8 million for the three and six months endedJune 30, 2020 , respectively, which are principally due to employee furloughs upon property closures and compensation reductions effectiveApril 1, 2020 . 44
-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures Use and Definitions In addition to GAAP financial measures, management uses Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDAR 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 and 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 and acquisition costs; and other income or expenses. 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 and ourKansas Entertainment joint venture. Adjusted EBITDA is inclusive of rent expense associated with our triple net operating leases. 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 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 valuation metric. We further define Adjusted EBITDAR margin by reportable segment as Adjusted EBITDAR for each segment divided by segment revenues. 45 -------------------------------------------------------------------------------- Table of Contents 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 June For the six months ended 30, June 30, (dollars in millions) 2020 2019 2020 2019 Net income (loss)$ (214.4) $ 51.4 $ (823.0) $ 92.3 Income tax expense (benefit) (58.4) 18.5 (157.9) 33.4 Loss (income) from unconsolidated affiliates 1.7 (6.2) (2.4) (11.9) Interest expense, net 135.0 134.7 264.8 267.0 Other income (29.3) - (7.5) - Operating income (loss) (165.4) 198.4 (726.0) 380.8 Stock-based compensation (1) 2.9 3.3 8.9 6.7 Cash-settled stock-based award variance (1)(2) 16.1 (3.4) 7.2 (3.0) Loss (gain) on disposal of assets (1) (28.5) 0.4 (27.9) 0.9 Contingent purchase price (1) 0.8 1.0 (1.4) 5.8 Pre-opening and acquisition costs (1) 3.5 3.7 6.7 8.1 Depreciation and amortization 91.9 106.0 187.6 210.1 Impairment losses - - 616.1 - Insurance recoveries, net of deductible charges (1) - - (0.1) - Income (loss) from unconsolidated affiliates (1.7) 6.2 2.4 11.9
Non-operating items of equity method investments (3) 1.1
0.9 2.0 1.9
Adjusted EBITDA (79.3) 316.5 75.5 623.2
Rent expense associated with triple net operating
leases (1) 103.8 90.0 201.3 174.7
Adjusted EBITDAR $ 24.5 $ 406.5 $ 276.8 $ 797.9
Net income (loss) margin (70.2) % 3.9 % (57.9) % 3.5 %
Adjusted EBITDA margin (26.0) % 23.9 % 5.3 % 23.9 %
Adjusted EBITDAR margin 8.0 % 30.7 % 19.5 % 30.6 %
(1) These items are included in "General and administrative" within the
Company's unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss).
(2) The Company's 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 six months ended June 30,
2020 , the price of the Company's common stock increased significantly, which
resulted in unfavorable variances to budget, while the price of the Company's
common stock did not vary significantly during the three and six months ended
June 30, 2019 , which resulted in minimal favorable variance to budget.
(3) 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.
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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 cash flow from operations; access to
debt and equity capital markets; available cash resources; acquisitions and
dispositions; funding of construction of development projects; and our
compliance with covenants contained under our debt agreements.
Between March 13, 2020 and May 19, 2020 , the Company entered into a series of
transactions to improve its financial position and liquidity in light of the
COVID-19 pandemic, including: (i) borrowing the remaining available amount of
$430.0 million under our Revolving Credit Facility; (ii) entering into the Term
Sheet with GLPI whereby GLPI agreed to (a) purchase the real estate assets
associated with Tropicana in exchange for rent credits of $307.5 million , which
closed on April 14, 2020 , and (b) purchase the land underlying the Company's
Morgantown development project in exchange for rent credits of $30.0 million ,
which is expected to close in the fourth quarter of 2020 (the land will be
immediately leased back from GLPI); (iii) completing an offering of $330.5
million aggregate principal amount of Convertible Notes; and (iv) completing a
public offering of 19,166,667 aggregate shares of Penn Common Stock for gross
proceeds of $345.0 million . In addition, on April 14, 2020 , the Company entered
into an amendment to its Credit Agreement, which, among other things, provides
the Company with relief from its financial covenants for a period of up to one
year.
For the six months ended June
30, Change
(dollars in millions) 2020 2019 $ %
Net cash provided by (used in) operating
activities $ (130.9) $ 315.2 $ (446.1) N/M
Net cash used in investing activities $ (218.5) $ (494.6) $ 276.1 (55.8) %
Net cash provided by financing activities $ 1,155.1 $ 86.9 $ 1,068.2 1,229.2 %
N/M - Not meaningful
Operating Cash Flow
The decrease in net cash provided by (used in) operating activities of $446.1
million for the six months ended June 30, 2020 , compared to the prior year
period, is due to the temporary closures of our properties due to the COVID-19
pandemic, which significantly decreased cash receipts from customers. Offsetting
this decrease was a $105.2 million decrease in cash paid for rent and interest
payments, in total, under our Triple Net Leases, which is due to the fact that
we utilized rent credits to pay the May and June 2020 rent due under the Master
Leases and the Meadows Lease (offset by the increase in payments under the
Greektown Lease due to the timing of the acquisition).
Investing Cash Flow
The decrease in net cash used in investing activities of $276.1 million for the
six months ended June 30, 2020 , compared to the prior year period, is primarily
due to the acquisitions of the operations of Margaritaville and Greektown for
$109.1 million and $289.2 million , respectively, both net of cash acquired,
during the six months ended June 30, 2019 . As a part of the acquisitions of
Margaritaville and Greektown, the Company entered into sale-leaseback
transactions with VICI in the amounts of $261.1 million and $700.0 million ,
respectively, which had no net impact on the determination of net cash used in
investing activities for the six months ended June 30, 2019 . In addition,
capital expenditures decreased by $21.3 million for the six months ended
June 30, 2020 , as compared to the prior year period (see below). These decreases
were partially offset by our investment in Barstool Sports made during the first
quarter of 2020.
Capital Expenditures
In March 2020 , in order to preserve liquidity given the uncertainty surrounding
the COVID-19 pandemic and its impact on our business, we temporarily suspended
construction of our two planned Category 4 satellite casinos in York and
Morgantown, Pennsylvania , respectively, which represented overall capital
investments of approximately $120 million and $111 million inclusive of each of
the gaming licenses acquired in a prior year, respectively. We previously
expected both of these projects to be complete by the end of 2020. Furthermore,
in light of the COVID-19 pandemic, we do not expect that we will spend as much
as previously budgeted for in 2020 and disclosed in our Form 10-K for the year
ended December 31, 2019 on capital expenditures.
Capital expenditures for the six months ended June 30, 2020 and 2019 were $73.7
million and $95.0 million , respectively, of which $29.5 million and $12.0
million , respectively, pertained to our York and Morgantown development
projects. Capital
47
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expenditures decreased for the six months ended June 30, 2020 , as compared to
the prior year period, due to a decrease in spending in advance of and upon
temporarily closing our properties, offset by an increase in spending pertaining
to our York and Morgantown development projects. Capital expenditures for six
months ended June 30, 2020 and 2019 were principally funded by cash provided by
operating activities as well as borrowings under our Revolving Credit Facility.
We expect that as operations continue to recover, capital expenditures will
begin to increase.
Financing Cash Flow
The increase in net cash provided by financing activities of $1,068.2 million
for the six months ended June 30, 2020 , as compared to the prior year period, is
primarily due to an increase in net borrowings under our Senior Secured Credit
Facilities of $362.1 million , $322.2 million of net proceeds from the issuance
of the Convertible Notes, and $331.2 million of net proceeds from the offering
of shares of Penn Common Stock.
Senior Secured Credit Facilities
As of June 30, 2020 , the Company's Senior Secured Credit Facilities had a gross
outstanding balance of $2,436.4 million , consisting of a $654.6 million Term
Loan A Facility and a $1,111.8 million Term Loan B-1 Facility (as such terms are
defined below), and a Revolving Credit Facility, which had $670.0 million drawn
as of June 30, 2020 . Additionally, as of June 30, 2020 , the Company had
conditional obligations under letters of credit issued pursuant to the Senior
Secured Credit Facilities with face amounts aggregating $29.4 million .
On March 13, 2020 , we borrowed the remaining available amount of $430.0 million
under our Revolving Credit Facility, resulting in $0.6 million available
borrowing capacity as of June 30, 2020 . The Company elected to draw down the
remaining available funds from its Revolving Credit Facility in order to
maintain maximum financial flexibility in light of the COVID-19 pandemic.
In January 2017 , the Company entered into an agreement to amend and restate its
previous credit agreement, dated October 30, 2013 , as amended (the "Credit
Agreement"), which provided for: (i) a five-year $700.0 million revolving credit
facility (the "Revolving Credit Facility"), (ii) a five-year $300.0 million term
loan A facility (the "Term Loan A Facility"), and (iii) a seven-year $500.0
million term loan B facility (the "Term Loan B Facility"). The Term Loan B
Facility was fully repaid and terminated prior to 2019.
In October 2018 , in connection with the acquisition of Pinnacle Entertainment,
Inc. , (the "Pinnacle Acquisition"), the Company entered into an incremental
joinder agreement (the "Incremental Joinder"), which amended the Credit
Agreement. The Incremental Joinder provided for an additional $430.2 million of
incremental loans having the same terms as the existing Term Loan A Facility,
with the exception of extending the maturity date, and an additional $1,128.8
million of loans as a new tranche having new terms (the "Term Loan B-1 Facility"
and collectively with the Revolving Credit Facility and the Term Loan A
Facility, the "Senior Secured Credit Facilities"). With the exception of
extending the maturity date, the Incremental Joinder did not impact the
Revolving Credit Facility.
On April 14, 2020 , the Company entered into a second amendment to its Credit
Agreement with its various lenders (the "Amendment Agreement") to provide for
certain modifications. During the period beginning on April 14, 2020 and ending
on the earlier of (x) the date that is two business days after the date on which
the Company delivers a covenant relief period termination notice to the
administrative agent and (y) the date on which the administrative agent receives
a compliance certificate for the quarter ending March 31, 2021 (the "Covenant
Relief Period"), the Company will not have to comply with any Maximum Leverage
Ratio or Minimum Interest Coverage Ratio (as such terms are defined in the
Credit Agreement). During the Covenant Relief Period, the Company will be
subject to a minimum liquidity covenant that requires cash and cash equivalents
and availability under its Revolving Credit Facility to be (i) at least $400.0
million through April 30, 2020 ; (ii) $350.0 million during the period from May
1, 2020 through May 31, 2020 ; (iii) $300.0 million during the period from June
1, 2020 through June 30, 2020 ; and (iv) $225.0 million during the period from
July 1, 2020 through March 31, 2021 .
The Amendment Agreement also amended the financial covenants that are applicable
after the Covenant Relief Period to permit the Company to (i) maintain a maximum
consolidated total net leverage ratio of up to a ratio that varies by quarter,
ranging between 5.50:1.00 and 4.50:1.00 in 2021 and 4.25:1.00 thereafter, tested
quarterly on a pro forma trailing twelve month ("PF TTM") basis; (ii) maintain a
maximum senior secured net leverage ratio of up to a ratio that varies by
quarter, ranging between 4.50:1.00 and 3.50:1.00 in 2021 and 3.00:1.00
thereafter, tested quarterly on a PF TTM basis; and (iii) maintain an interest
coverage ratio of 2.50:1.00, tested quarterly on a PF TTM basis.
In addition, the Amendment Agreement (i) provides that, during the Covenant
Relief Period, loans under the Revolving Credit Facility and the Term Loan A
Facility shall bear interest at either a base rate or an adjusted LIBOR rate, in
each case,
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plus an applicable margin, in the case of base rate loans, of 2.00%, and in the
case of adjusted LIBOR rate loans, of 3.00%; (ii) provides that, during the
Covenant Relief Period, the Company shall pay a commitment fee on the unused
portion of the commitments under the Revolving Credit Facility at a rate of
0.50% per annum; (iii) provides for a 0.75% LIBOR floor applicable to all LIBOR
loans under the Senior Secured Credit Facilities; (iv) carves out COVID-19
related effects from certain terms of the Senior Secured Credit Facilities
during the Covenant Relief Period; and (v) makes certain other changes to the
covenants and other provisions of the Credit Agreement.
The payment and performance of obligations under the Senior Secured Credit
Facilities are guaranteed by a lien on and security interest in substantially
all of the assets (other than excluded property such as gaming licenses) of the
Company and its subsidiaries.
5.625% Senior Unsecured Notes
In January 2017 , the Company completed an offering of $400.0 million aggregate
principal amount of 5.625% senior unsecured notes that mature on January 15,
2027 (the "5.625% Notes") at a price of par. Interest on the 5.625% Notes is
payable on January 15th and July 15th of each year.
2.75% Unsecured Convertible Notes
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, beginning on November 15,
2020 .
The Convertible Notes are convertible into shares of the Company's common stock
at an initial conversion price of $23.40 per share, or 42.7350 shares, per
$1,000 principal amount of notes, subject to adjustment if certain corporate
events occur. However, in no event will the conversion exceed 55.5555 shares of
common stock per $1,000 principal amount of notes. As of June 30, 2020 , based on
the initial conversion price, the maximum number of shares that could be issued
to satisfy the conversion feature of the Convertible Notes is 18,360,815.
Prior to February 15, 2026 , at their election, holders of the Convertible Notes
may convert outstanding notes starting in the fourth quarter of 2020 if the
trading price of the Company's common stock exceeds 130% of the initial
conversion price or, starting shortly after the issuance of the Convertible
Notes, if the trading price per $1,000 principal amount of notes is less than
98% of the product of the trading price of the Company's common stock and the
conversion rate then in effect. The Convertible Notes may, at the Company's
election, be settled in cash, shares of common stock of the Company, or a
combination thereof. The Company has the option to redeem the Convertible Notes,
in whole or in part, beginning November 20, 2023 .
In addition, the Convertible Notes convert into shares of the Company's common
stock upon the occurrence of certain corporate events that constitute a
fundamental change under the indenture governing the Convertible Notes at a
purchase price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest to, but excluding, the date of repurchase. In connection with
certain corporate events or if the Company issues a notice of redemption, it
will, under certain circumstances, increase the conversion rate for holders who
elect to convert their Convertible Notes in connection with such corporate
events or during the relevant redemption period for such Convertible Notes.
Covenants
Our Credit Agreement and the indenture governing our 5.625% Notes require us,
among other obligations, to maintain specified financial ratios and to satisfy
certain financial tests. In addition, the Company's Credit Agreement and the
indenture governing our 5.625% Notes restrict, among other things, its 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 , 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 June 30, 2020 , 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 Form 10-Q with the SEC .
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Common Stock Offering
On May 14, 2020 , the Company completed a public offering of 16,666,667 shares of
Penn Common Stock and on May 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 .
Triple Net Leases
The majority of the gaming facilities 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 Pinnacle Master Lease . The Company's Master Leases are
accounted for as either operating leases, finance leases, or financing
obligations. In addition, four of the Company's gaming facilities, Meadows,
Margaritaville, Greektown and Tropicana, are subject to individual triple net
leases. As previously mentioned, we refer to the Penn Master Lease, the Pinnacle
Master Lease , the Meadows Lease, the Margaritaville Lease, the Greektown Lease,
and the Tropicana Lease, collectively as our "Triple Net Leases." See "Payments
to our REIT Landlords under Triple Net Leases" below for tabular information on
the payments made during the three and six months ended June 30, 2020 and 2019
pertaining to our Triple Net Leases, inclusive of rent credits utilized.
Penn Master Lease
Pursuant to a triple net master lease with GLPI (the "Penn Master Lease"), which
became effective November 1, 2013 , the Company leases real estate assets
associated with 19 of the gaming facilities used in its operations. The Penn
Master Lease has an initial term of 15 years with four subsequent, five-year
renewal periods on the same terms and conditions, exercisable at the Company's
option.
The payment structure under the Penn Master Lease includes a fixed component, a
portion of which is subject to an annual escalator of up to 2%, depending on the
Adjusted Revenue to Rent Ratio (as defined in the Penn Master Lease) of 1.8:1,
and a component that is based on performance, which is prospectively adjusted
(i) every five years by an amount equal to 4% of the average change in net
revenues of all properties under the Penn Master Lease (other than Hollywood
Casino Columbus and Hollywood Casino Toledo ("Columbus and Toledo ")) compared to
a contractual baseline during the preceding five years ("Penn Percentage Rent")
and (ii) monthly by an amount equal to 20% of the net revenues of Columbus and
Toledo in excess of a contractual baseline and subject to a rent floor specific
to Hollywood Casino Toledo . The next annual escalator test date is scheduled to
occur effective November 1, 2020 and the next Penn Percentage Rent reset is
scheduled to occur on November 1, 2023 .
Pinnacle Master Lease
In connection with the Pinnacle Acquisition, the Company assumed a triple net
master lease with GLPI (the "Pinnacle Master Lease "), originally effective April
28, 2016 , pursuant to which the Company leases real estate assets associated
with 12 of the gaming facilities used in its operations. Upon assumption of the
Pinnacle Master Lease , as amended, there were 7.5 years remaining of the initial
ten-year term, with five subsequent, five-year renewal periods exercisable at
the Company's option.
The payment structure under the Pinnacle Master Lease includes a fixed
component, a portion of which is subject to an annual escalator of up to 2%,
depending on the Adjusted Revenue to Rent Ratio (as defined in the Pinnacle
Master Lease ) of 1.8:1, and a component that is based on performance, which is
prospectively adjusted every two years by an amount equal to 4% of the average
change in net revenues of all properties under the Pinnacle Master Lease
compared to a contractual baseline during the preceding two years ("Pinnacle
Percentage Rent"). Effective May 1, 2020 , the Pinnacle Percentage Rent resulted
in an annual rent reduction of $5.0 million , which will be in effect until the
next Pinnacle Percentage Rent reset, scheduled to occur on May 1, 2022 . We did
not incur an annual escalator for the lease year ended April 30, 2020 . The next
annual escalator test date is scheduled to occur on May 1, 2021 .
Tropicana Lease, Meadows Lease, Margaritaville Lease and Greektown Lease
On April 16, 2020 , we entered into a triple net lease with a subsidiary of GLPI
for the real estate assets used in the operations of Tropicana for nominal rent
(the "Tropicana Lease") and will continue to operate the Tropicana for two years
(subject to three one-year extensions at GLPI's option) or until the real estate
assets and the operations of the Tropicana are earlier sold, as discussed above.
In the event that GLPI sells the real estate assets used in the operations of
Tropicana, the Tropicana Lease will automatically terminate.
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In connection with the Pinnacle Acquisition, we assumed a triple net lease of
the real estate assets used in the operations of Meadows (the "Meadows Lease"),
originally effective September 9, 2016 , with GLPI as the landlord. Upon
assumption of the Meadows Lease, there were eight years remaining of the initial
ten-year term, with three subsequent, five-year renewal options followed by one
four-year renewal option on the same terms and conditions, exercisable at the
Company's option. The payment structure under the Meadows Lease includes a fixed
component ("Meadows Base Rent"), which is subject to an annual escalator of up
to 5% for the initial term or until the lease year in which Meadows Base Rent
plus Meadows Percentage Rent (as defined below) is a total of $31.0 million ,
subject to certain adjustments, and up to 2% thereafter, subject to an Adjusted
Revenue to Rent Ratio (as defined in the Meadows Lease) of 2.0:1. The "Meadows
Percentage Rent" is based on performance, which is prospectively adjusted for
the next two-year period equal to 4% of the average annual net revenues of the
property during the trailing two-year period. The next scheduled annual
escalator test date and the next Meadows Percentage Rent reset are scheduled to
occur on October 1, 2020 .
In connection with the acquisition of Margaritaville, we entered into the
Margaritaville Lease with VICI for the real estate assets used in the operations
of Margaritaville. The Margaritaville Lease has an initial term of 15 years,
with four subsequent five-year renewal options on the same terms and conditions,
exercisable at the Company's option. The payment structure under the
Margaritaville Lease includes a fixed component, a portion of which is subject
to an annual escalator of up to 2%, and a component that is based on
performance, which is prospectively adjusted every two years by an amount equal
to 4% of the average change in net revenues of the property compared to a
contractual baseline during the preceding two years ("Margaritaville Percentage
Rent").
On February 1, 2020 , the Margaritaville Lease was amended to provide for a
change in the measurement of the annual escalator from an Adjusted Revenue to
Rent Ratio (as defined in the Margaritaville Lease) of 1.9:1 to a minimum ratio
of net revenue to rent of 6.1:1. As a result of the annual escalator, effective
February 1, 2020 , rent under the Margaritaville Lease increased by $0.3 million .
The next scheduled annual escalator test date and the first Margaritaville
Percentage Rent reset are scheduled to occur on February 1, 2021 .
In connection with the acquisition of Greektown, we entered into the Greektown
Lease with VICI for the real estate assets used in the operations of Greektown.
The Greektown Lease has an initial term of 15 years, with four subsequent
five-year renewal options on the same terms and conditions, exercisable at the
Company's option. The payment structure under the Greektown Lease includes a
fixed component, a portion of which is subject to an annual escalator of up to
2% subject to an Adjusted Revenue to Rent Ratio (as defined in the Greektown
Lease) of 1.85:1, and a component that is based on performance, which is
prospectively adjusted every two years by an amount equal to 4% of the average
change in net revenues of the facility compared to a contractual baseline during
the preceding two years ("Greektown Percentage Rent"). We did not incur an
annual escalator for the lease year ended May 31, 2020 . The next scheduled
annual escalator test date and the first Greektown Percentage Rent reset are
scheduled to occur on June 1, 2021 .
Payments to our REIT Landlords under Triple Net Leases
Total payments made to our REIT Landlords, GLPI and VICI, inclusive of rent
credits utilized, were as follows:
For the three months ended June For the six months ended
30, June 30,
(in millions) 2020 2019 2020 2019
Penn Master Lease (1) $ 108.3 $ 114.5 $ 223.1 $ 228.9
Pinnacle Master Lease (1) 81.8 82.0 164.3 163.3
Meadows Lease (1) 6.7 6.6 13.5 13.1
Margaritaville Lease 5.9 5.8 11.7 11.5
Greektown Lease 13.9 6.0 27.8 6.0
Total (2) $ 216.6 $ 214.9 $ 440.4 $ 422.8
(1)During the three months ended June 30, 2020 , we utilized rent credits to pay
$72.1 million , $54.2 million and $4.5 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, it has been
excluded from the table above.
Other Long-Term Obligations
Relocation Fees
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As of June 30, 2020 and December 31, 2019 , other long-term obligations included
$68.8 million and $76.4 million , respectively, related to the relocation fees
for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley
Race Course , which opened in August 2014 and September 2014 , respectively. The
relocation fee for each property is payable as follows: $7.5 million upon the
opening of the property and eighteen semi-annual payments of $4.8 million
beginning one year after the commencement of operations.
Outlook
We began temporary suspension of the operations of all of our 41 properties
starting between March 13, 2020 and March 19, 2020 pursuant to various orders
from state gaming regulatory bodies or governmental authorities to combat the
rapid spread of COVID-19. We began reopening our properties on May 18, 2020 with
reduced gaming and hotel capacity and limited food and beverage offerings in
order to accommodate comprehensive social distancing and health and safety
protocols. As of June 30, 2020 , we reopened 31 of our properties and as of the
date of filing this Form 10-Q with the SEC , we reopened all of our properties,
with the exception of Tropicana, Valley Race Park , and Zia Park Casino .
Though virtually all of our properties have reopened, we cannot be certain
whether 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 in the future,
particularly in the event that the COVID-19 pandemic worsens. 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 impact of the COVID-19 pandemic. We cannot be certain:
(i) of the impact of the operating restrictions to accommodate social distancing
and health guidelines will be on our properties; (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 properties may be forced to close or cease operations for a certain period of
time; (iii) that our business will generate sufficient cash flow from
operations; (iv) that the U.S. economy and our business will recover to levels
that existed prior to the COVID-19 pandemic and on what time frame; (v) that we
will fully achieve the synergies in connection with the Pinnacle Acquisition;
(vi) that we will be able to maintain the minimum liquidity required under our
Senior Secured Credit Facilities; or (vii) that future borrowings will be
available under our Senior Secured Credit Facilities or capital will be
available in the credit or equity markets on favorable terms to enable us to
service our indebtedness, to make capital expenditures or to maintain working
capital. We caution you that the trends seen at our reopened properties may not
continue and that these trends may not recur at our other properties as they
reopen. 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. While we
do not anticipate pursuing material acquisition opportunities in the near term,
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. Our future operating performance
and our ability to service or refinance our debt will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond our control, including without limitation the lasting impacts of the
COVID-19 pandemic. See Part II, Item 1A. "Risk Factors" of this Form 10-Q.
See also "Risks Related to Our Capital Structure" in Part I, Item 1A. "Risk
Factors" of the Company's Form 10-K for the year ended December 31, 2019 and
Part II, Item 1A. "Risk Factors" of the Company's Form 10-Q for the quarterly
period ended March 31, 2020 for a discussion of the risks related to the
Company's capital structure.
We have historically maintained a capital structure comprising a mix of equity
and debt financing. We vary our leverage to pursue opportunities in the
marketplace and in an effort to maximize our enterprise value for our
shareholders. We have in the past met our debt obligations as they have come due
through internally generated funds from operations or refinancing them through
the debt or equity markets prior to their maturity, although there can be no
assurance that we will continue to be able to do so or be able to do so at
favorable rates or on favorable terms in the future in light of the COVID-19
pandemic and other factors.
CRITICAL ACCOUNTING ESTIMATES
A complete discussion of our critical accounting estimates is included in our
Form 10-K for the year ended December 31, 2019 . There have been no significant
changes in our critical accounting estimates during the three months ended
June 30, 2020 .
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For information with respect to new accounting pronouncements and the impact of
these pronouncements on our unaudited Condensed Consolidated Financial
Statements, see Note 3, "New Accounting Pronouncements," in the notes to our
unaudited Condensed 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," "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; the continued impact of the property closures on
our business and our stakeholders; demand for gaming following the reopening of
our properties, as well as the impact of post-opening restrictions; the
possibility of additional government-mandated temporary suspensions of
operations at our properties due to COVID-19; the impact of COVID-19 on general
economic conditions, capital markets, unemployment and our liquidity,
operations, supply chain and personnel; the potential benefits and expected
timing of the Morgantown and Perryville transactions with GLPI; availability of
potential benefits to us under the CARES Act or other legislation that may be
enacted in response to the COVID-19 pandemic; the expected benefits and
potential challenges of the investment in Barstool Sports , including the
benefits for our online and retail sports betting and iCasino products; the
impact of shortened or cancelled sports seasons on our results; the expected
financial returns from the transaction with Barstool Sports ; the expected launch
of the Barstool-branded mobile sports betting product and its future revenue and
profit contributions; growth opportunities and potential synergies related to
the Pinnacle Acquisition; our ability and the ability of our partners to obtain
third-party approvals, including regulatory approvals; our expectations of
future results of operations and financial condition; our expectations for our
properties, our development projects or our iGaming initiatives; the timing,
cost and expected impact of planned capital expenditures on our results of
operations; our expectations with regard to the impact of competition; our
expectations with regard to acquisitions, potential divestitures and development
opportunities, as well as the integration of and synergies related to any
companies we have acquired or may acquire; the outcome and financial impact of
the litigation in which we are 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;
our ability to maintain regulatory approvals for our existing businesses and to
receive regulatory approvals for our new business partners; our 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 our existing businesses; the performance of our 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 at the federal, state or local level with regard to online
sports betting, iGaming and retail/mobile sportsbooks and the impact of any such
actions; and our expectations regarding economic and consumer conditions. 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 market conditions, capital markets, unemployment
and our liquidity, operations, supply chain and personnel; (b) industry, market,
economic, political, regulatory and health conditions; (c) disruptions in
operations from data protection breaches, cyberattacks, extreme weather
conditions, civil unrest, medical epidemics or pandemics such as COVID-19
(including reoccurrences), and other natural or man-made disasters or
catastrophic events; (d) our reopened properties are subject to various
operational restrictions to accommodate social distancing and health guidelines;
(e) our ability to access additional capital on favorable terms or at all; (f)
our ability to remain in compliance with the financial covenants of our debt
obligations; (g) the consummation of the proposed Morgantown and Perryville
transactions with GLPI are subject to various conditions, including third-party
agreements and approvals, and accordingly may be delayed or may not occur at
all; (h) actions to reduce costs and improve efficiencies to mitigate losses as
a result of the COVID-19 pandemic could negatively impact guest loyalty and our
ability to attract and retain employees; (i) the outcome of any legal
proceedings that may be instituted against us or our directors, officers or
employees; (j) the impact of new or changes in current laws, regulations, rules
or other industry standards; (k) the ability of our operating teams to drive
revenue and margins; (l) the impact of significant competition from other gaming
and entertainment operations; (m) our ability (and the ability of our business
partners) to obtain timely regulatory approvals required to own, develop and/or
operate our properties, or other delays, approvals or impediments to completing
our planned acquisitions or projects, construction factors, including delays,
and increased costs; (n) the passage of state, federal or local legislation
(including referenda) that would expand, restrict, further tax, prevent or
negatively impact operations in or adjacent to the jurisdictions in which we do
or seek to do business (such as a smoking ban at any of our properties or the
award of additional gaming licenses
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proximate to our properties, as recently occurred withIllinois andPennsylvania legislation); (o) 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; (p) the activities of our competitors (commercial and tribal) and the emergence of new competitors (traditional, internet, social, sweepstakes based VGTs in bars and truck stops, as well as emerging Native American gaming tribes, historic racing and state-sponsored i-lottery products in or adjacent to states in which we operate); (q) increases in the effective rate of taxation for any of our operations or at the corporate level; (r) 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/municipalities for such transactions; (s) 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; (t) our expectations for the continued availability and cost of capital; (u) the impact of weather, including flooding, hurricanes and tornadoes; (v) changes in accounting standards; (w) 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); (x) with respect to our iGaming and sports betting endeavors, the impact of significant competition from other companies for online sports betting, iGaming and sportsbooks, our ability to achieve the expected financial returns related to our investment inBarstool Sports , our ability (and the ability of our business partners) to obtain timely regulatory approvals required to own, develop and/or operate sportsbooks may be delayed and there may be impediments and increased costs to launching the online betting, iGaming and sportsbooks, including delays, and increased costs, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative products that attract and retain a significant number of players in order to grow our revenues and earnings, our ability to establish key partnerships, our ability to generate meaningful returns and the risks inherent in any new business; (y) with respect to our proposed Pennsylvania Category 4 casinos inYork andBerks counties, risks relating to construction, and our ability to achieve our expected budgets, timelines and investment returns, including the ultimate location of other gaming properties in theCommonwealth of Pennsylvania ; and (z) other factors as discussed in the Company's Form 10-K for the year endedDecember 31, 2019 ; the Company's Form 10-Q for the quarterly period endedMarch 31, 2020 , this Form 10-Q for the quarterly period endedJune 30, 2020 , and subsequent Form 10-Qs; 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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