ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Operations
We are a leading, diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations. In addition, over the last six quarters, we have implemented our interactive gaming strategy through our subsidiary, Penn Interative Ventures and recently expanded our social gaming offerings with the acquisition of Rocket Speed, a leading developer of social casino games, while also expanding our video gaming terminal operations through our Prairie State Gaming subsidiary. As of March 31, 2017, we owned, managed, or had ownership interests in twenty-seven facilities in the following seventeen jurisdictions: California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario, Canada. We believe that our portfolio of assets provides us the benefit of geographically diversified cash flow from operations.
The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 87% and 86% of our gaming revenue in 2016 and 2015, respectively) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fees from Casino Rama and Hollywood Casino Jamul – San Diego, our hotels, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities.
Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 14% to 26% of table game drop. Slot handle is the gross amount wagered for the period cited. 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. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. Given the stability in our slot hold percentages, we have not experienced significant impacts to earnings from changes in these percentages.
For table games, customers usually purchase cash 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 win is the amount of drop that is retained and recorded as casino 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 win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.
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 operating cash to satisfy our obligations under the Master Lease, repay debt, fund maintenance capital expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.
We continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and the development of new gaming properties, particularly in attractive regional markets. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.
Segment Information
The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker, as that term is defined in ASC 280, measures and assesses the Company’s business performance based on regional operations of
various properties grouped together based primarily on their geographic locations. During the second quarter of 2016, the Company changed its three reportable segments from East/Midwest, West and Southern Plains to Northeast, South/West, and Midwest in connection with the addition of a new regional vice president and a realignment of responsibilities within our segments. This realignment changed the manner in which information is provided to the CODM and therefore how performance is assessed and resources are allocated to the business. Segment information for prior periods has been restated for comparability.
The Northeast reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino. It also includes the Company’s Casino Rama management service contract.
The South/West reportable segment consists of the following properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, M Resort, and Tropicana Las Vegas, as well as our management contract with Hollywood Casino Jamul-San Diego, which opened on October 10, 2016. It will also include the results of Tunica Resorts and Tunica Bally’s following the closing of the acquisition of both entities.
The Midwest reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg, Hollywood Casino St. Louis, and Prairie State Gaming, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.
The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, which was sold on July 31, 2016, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280. Additionally, the Other category includes Penn Interactive Ventures, the Company’s wholly-owned subsidiary that represents its social online gaming initiatives, including the recently acquired Rocket Speed. Penn Interactive Ventures meets the definition of an operating segment under ASC 280, but is quantitatively not significant to the Company’s operations as it represents 1.5% of net revenues and $(1.4) million impact to to income from operations for the three months ended March 31, 2017, and its total assets represent 2.2% of the Company’s total assets at March 31, 2017.
In addition to GAAP financial measures, management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel and believes it is especially relevant in evaluating large, long lived casino projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. The Company defines adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with the Company’s share of non-operating items (such as depreciation and amortization) added back for its joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction is accounted for as a financing obligation. Adjusted EBITDA should not be construed as an alternative to income from operations, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA.
Executive Summary
As reported by most jurisdictions, regional gaming industry trends have shown little revenue growth in recent years as numerous jurisdictions now permit gaming or have expanded their gaming offerings. The proliferation of new gaming facilities continues to impact the overall domestic gaming industry as well as our operating results in certain markets. Our ability to succeed in this environment will be predicated on operating our existing facilities efficiently and offering our customers additional gaming experiences through our multi-channel distribution strategy. We will also seek to continue to expand our customer database through accretive acquisitions and capitalize on organic growth opportunities from our recent facility openings and new business lines.
We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities supported by a flexible and attractively priced capital structure. We have also made investments in joint ventures that we believe may 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.
Historically, the Company has been reliant on certain key regional gaming markets (for example, its results from Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Over the past several years, the Company has diversified its operations via development of new facilities and acquisitions and anticipates further diversifying its reliance on specific properties as we continue to expand our VGT and Penn Interactive Ventures operations. For example, we expect our facility in Plainville, Massachusetts and our expansion into the social gaming business and retail gaming market in Illinois, to generate significant cash flow since these operations are not part of the Master Lease and as such do not have any associated lease payments.
Financial Highlights:
We reported net revenues and income from operations of $776.2 million and $140.3 million, respectively, for the three months ended March 31, 2017, compared to $756.5 million and $140.5 million, respectively, for the corresponding period in the prior year. The major factors affecting our results for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, were:
|
·
|
|
The acquisition of Rocket Speed on August 1, 2016 in our Other segment, which generated net revenues of $8.8 million for the three months ended March 31, 2017.
|
|
·
|
|
A $25.1 million loss on the early extinguishment of debt and finance charges related to the January 2017 refinancing of our senior secured credit facility, redemption of the $300 million 5.875% senior unsecured notes and issuance of new $400 million 5.625% senior unsecured notes
.
|
|
·
|
|
Net income decreased by $18.6 million for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to a loss on the early extinguishment of debt and finance charges, partially offset by lower interest expense, as well as lower income tax provision.
|
Segment Developments:
The following are recent developments that have had or will have an impact on us by segment:
Northeast
|
·
|
|
Hollywood Casino at Charles Town Races faced increased competition from the Baltimore, Maryland market, which includes Maryland Live! and Horseshoe Casino Baltimore and MGM National Harbor, which opened in December 2016.
|
|
·
|
|
Construction of a tribal casino in Taunton, Massachusetts, which was expected to open in 2017, is currently on hold following a recent judicial opinion. MGM Springfield in Western Massachusetts is expected to be completed in late
|
2018 and Wynn Everett in Eastern Massachusetts is scheduled to open in mid-2019. The increased competition in Massachusetts will have a negative impact on the operations of Plainridge Park Casino.
|
South/West
|
·
|
|
On October 10, 2016, we opened and began to manage Hollywood Casino Jamul – San Diego on the Jamul Tribe’s trust land in San Diego County, California. The facility is a state of the art development project which includes a three-story gaming and entertainment facility of approximately 200,000 square feet featuring 1,731 slot machines, 40 live table games, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. We currently provide a portion of the financing to the Jamul Tribe in connection with the development of the project and, following the opening, we manage and provide branding for the casino in exchange for a management fee equal to 30% of the casino’s pretax income, a licensing fee of 2% of gross revenues for the Hollywood Casino brand, as well as interest on loans provided by the Company in connection with the project.
|
|
·
|
|
In August 2015 we completed the acquisition of Tropicana Las Vegas Hotel and Casino for $360 million. The Tropicana Las Vegas Hotel and Casino is situated on 35 acres of land located on the Las Vegas Strip with 1,470 remodeled guest rooms and suites, a 50,000 square foot casino gaming floor featuring 617 slot and video poker machines and 35 table games including blackjack, mini‑baccarat, craps and roulette, three full‑service restaurants, a 1,200 seat performance theater, a 300 seat comedy club, a nightclub, beach club and 2,095 parking spaces. During the second quarter of 2016, we refreshed the gaming floor with new slot machines and launched our Marquee Rewards player loyalty program at the Tropicana Las Vegas. Additionally, we continue to evaluate additional improvements at the property which may include additional food, beverage, retail and entertainment and other non-gaming amenities and enhancements, including celebrity chef Robert Irvine’s first signature Las Vegas restaurant, the Robert Irvine Public House announced last year which will open this summer
.
|
Midwest
|
·
|
|
On September 1, 2015, we acquired a leading Illinois video gaming terminal (“VGT”) operator, Prairie State Gaming (“PSG”). As one of the largest and most respected VGT route operators in Illinois, PSG’s operations include more than 1,493 terminals across a network of 333 bars and retail gaming establishments throughout Illinois. During the fourth quarter of 2016, we acquired two small video gaming terminal route operators in Illinois. In addition, during the first quarter of 2017, we acquired another small video gaming terminal route operator in Illinois.
|
Other
|
·
|
|
On August 1, 2016, we completed our acquisition of Rocket Speed, a leading developer of social casino games.
|
Critical Accounting Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long-lived assets, goodwill and other intangible assets, income taxes and contingent purchase price obligations as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.
For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. There has been no material change to these estimates for the three months ended March 31, 2017.
Results of Operations
The following are the most important factors and trends that contribute to our operating performance:
|
·
|
|
Most of our properties operate in mature competitive markets. As a result, we expect a significant amount of our future growth to come from prudent acquisitions of gaming properties (such as our August 2015 acquisition of Tropicana Las Vegas Hotel and Casino), jurisdictional expansions (such as our June 2015 opening of a slots‑only gaming facility in Massachusetts, our October 2016 opening of a Hollywood Casino branded gaming facility on the Jamul Indian Village land in trust which we now manage, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course and the August 2014 opening of Hollywood Gaming at Dayton Raceway), expansions of gaming in existing jurisdictions (such as the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, and at Hollywood Casino Bangor in March 2012), expansions/improvements of existing properties (such as Tropicana Las Vegas) and new growth opportunities (such as our acquisition of Prairie State Gaming, a leading video gaming terminal operator in Illinois, and our entry into the interactive and social gaming space through Penn Interactive Ventures, including our recent acquisition of Rocket Speed
).
|
|
·
|
|
A number of states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for example, in Massachusetts, where we opened a slots‑only gaming facility on June 24, 2015, in Kansas, where we opened a casino through a joint venture in February 2012, and in Ohio, where we opened casinos in Toledo and Columbus in May 2012 and October 2012, respectively, and opened video lottery terminal facilities at two racetracks in Ohio in the third quarter of 2014) and increased competitive threats to business at our existing properties (such as the introduction/expansion of commercial casinos in Kansas, Maryland, Ohio, and potentially Kentucky and Nebraska, and the introduction of tavern licenses in several states, most significantly in Illinois
).
|
|
·
|
|
T
he actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or via an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans
).
|
|
·
|
|
The continued demand for, and our emphasis on, slot wagering entertainment at our properties
.
|
|
·
|
|
The successful execution of our development and construction activities, as well as the risks associated with the costs, regulatory approval and the timing of these activities
.
|
|
·
|
|
The risks related to economic conditions and the effect of prolonged sluggish conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms
.
|
The consolidated results of operations for the three months ended March 31, 2017 and 2016 are summarized below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
661,256
|
|
$
|
656,701
|
|
Food, beverage, hotel and other
|
|
|
147,741
|
|
|
137,848
|
|
Management service and licensing fees
|
|
|
2,327
|
|
|
2,473
|
|
Reimbursable management costs
|
|
|
6,758
|
|
|
—
|
|
Revenues
|
|
|
818,082
|
|
|
797,022
|
|
Less promotional allowances
|
|
|
(41,858)
|
|
|
(40,571)
|
|
Net revenues
|
|
|
776,224
|
|
|
756,451
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Gaming
|
|
|
332,053
|
|
|
335,317
|
|
Food, beverage, hotel and other
|
|
|
101,075
|
|
|
98,079
|
|
General and administrative
|
|
|
125,815
|
|
|
116,504
|
|
Reimbursable management costs
|
|
|
6,758
|
|
|
—
|
|
Depreciation and amortization
|
|
|
70,236
|
|
|
66,020
|
|
Total operating expenses
|
|
|
635,937
|
|
|
615,920
|
|
Income from operations
|
|
$
|
140,287
|
|
$
|
140,531
|
|
Certain information regarding our results of operations by segment for the three months ended March 31, 2017 and 2016 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
393,465
|
|
$
|
393,205
|
|
$
|
102,633
|
|
$
|
100,921
|
|
South/West
|
|
|
139,820
|
|
|
135,968
|
|
|
27,118
|
|
|
25,985
|
|
Midwest
|
|
|
228,338
|
|
|
221,078
|
|
|
61,529
|
|
|
58,225
|
|
Other
|
|
|
14,601
|
|
|
6,200
|
|
|
(50,993)
|
|
|
(44,600)
|
|
Total
|
|
$
|
776,224
|
|
$
|
756,451
|
|
$
|
140,287
|
|
$
|
140,531
|
|
Revenues
Revenues for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
661,256
|
|
$
|
656,701
|
|
$
|
4,555
|
|
0.7
|
%
|
|
Food, beverage, hotel and other
|
|
|
147,741
|
|
|
137,848
|
|
|
9,893
|
|
7.2
|
%
|
|
Management service and licensing fees
|
|
|
2,327
|
|
|
2,473
|
|
|
(146)
|
|
(5.9)
|
%
|
|
Reimbursable management costs
|
|
|
6,758
|
|
|
—
|
|
|
6,758
|
|
N/A
|
|
|
Revenues
|
|
|
818,082
|
|
|
797,022
|
|
|
21,060
|
|
2.6
|
%
|
|
Less promotional allowances
|
|
|
(41,858)
|
|
|
(40,571)
|
|
|
(1,287)
|
|
3.2
|
%
|
|
Net revenues
|
|
$
|
776,224
|
|
$
|
756,451
|
|
$
|
19,773
|
|
2.6
|
%
|
|
In our business, revenue is driven by discretionary consumer spending. The proliferation of new gaming facilities has increased competition in many regional markets (including at some of our key facilities). As reported by most jurisdictions, regional gaming industry trends have shown little revenue growth in recent years as numerous jurisdictions now permit gaming or have expanded their gaming offerings.
We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period to period and as such cannot 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 were likely to account for such changes. In instances where we believe one factor may have had a significantly greater impact than the other factors, we have noted that as well. However, in all instances, such insights are based only on our reasonable judgment and professional experience, and no assurance can be given as to the accuracy of our judgments.
The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as “promotional allowances.” Our promotional allowance levels are determined based on various factors such as our marketing plans, competitive factors, economic conditions, and regulations.
Gaming revenue
Gaming revenue increased by $4.6 million, or 0.7%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the variances explained below.
Gaming revenue for our Midwest segment increased by $7.0 million, or 3.4%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to increased gaming revenue at Hollywood Casino Aurora and Prairie State Gaming resulting from the acquisition of three small VGT route operators in Illinois since the fourth quarter 2016, partially offset by decreased gaming revenue at Hollywood Casino Lawrenceburg, primarily due to continued impact of competition in Ohio.
Gaming revenue for our South/West segment decreased by $2.5 million, or 2.6%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to decreased gaming revenue at Hollywood Casino Tunica, Zia Park Casino, as ongoing softness in oil prices has continued to affect the economy in this area, and new competition impacting Boomtown Biloxi and Hollywood Casino Gulf Coast, partially offset by increased gaming revenue at Tropicana Las Vegas.
Gaming revenue for our Northeast segment increased by $0.1 million for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to increased gaming revenue at Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley and Hollywood Casino at Penn National Race Course, partially offset by decreased gaming revenue at Hollywood Casino Toledo and Hollywood Casino Charles Town due to increased competition from the Baltimore, Maryland market, which includes Maryland Live!, Horseshoe Casino Baltimore and MGM National Harbor, which opened in December 2016.
Food, beverage, hotel and other revenue
Food, beverage, hotel and other revenue increased by $9.9 million, or 7.2%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the variances explained below.
Food, beverage, hotel and other revenue for our Other segment increased by $8.4 million, or 134.2%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016, partially offset by the sale of Rosecroft Raceway on July 31, 2016.
Promotional allowances
Promotional allowances increased by $1.3 million, or 3.2%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to increases at Tropicana Las Vegas due to increased marketing efforts.
Operating Expenses
Operating expenses for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
332,053
|
|
$
|
335,317
|
|
$
|
(3,264)
|
|
(1.0)
|
%
|
Food, beverage, hotel and other
|
|
|
101,075
|
|
|
98,079
|
|
|
2,996
|
|
3.1
|
%
|
General and administrative
|
|
|
125,815
|
|
|
116,504
|
|
|
9,311
|
|
8.0
|
%
|
Reimbursable management costs
|
|
|
6,758
|
|
|
—
|
|
|
6,758
|
|
N/A
|
|
Depreciation and amortization
|
|
|
70,236
|
|
|
66,020
|
|
|
4,216
|
|
6.4
|
%
|
Total operating expenses
|
|
$
|
635,937
|
|
$
|
615,920
|
|
$
|
20,017
|
|
3.2
|
%
|
Gaming expense
Gaming expense decreased by $3.3 million, or 1.0%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the variances explained below.
Gaming expense for our Midwest segment increased by $4.2 million, or 4.2%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to increased gaming taxes resulting from increased taxable gaming revenue mentioned above at Hollywood Casino Aurora and Prairie State Gaming resulting from the acquisition of three small VGT route operators in Illinois since the fourth quarter 2016, partially offset by decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Lawrenceburg, primarily due to continued impact of competition in Ohio.
Gaming expense for our Northeast segment decreased by $4.0 million, or 2.0%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Toledo and Hollywood Casino Charles Town, primarily due to the continued impact of competition in the region, namely Maryland Live!, Horseshoe Casino Baltimore and MGM National Harbor, which opened in December 2016, partially offset by increased gaming taxes resulting from increased taxable gaming revenue mentioned above at Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley and Hollywood Casino at Penn National Race Course.
Gaming expense for our South/West segment decreased by $3.5 million, or 9.6%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Tunica, Zia Park Casino, as ongoing softness in oil prices has continued to affect the economy in this area, and new competition impacting Boomtown Biloxi and Hollywood Casino Gulf Coast, as well as decreased gaming expense at M Resort, primarily due to decreased marketing spend.
Food, beverage, hotel and other expenses
Food, beverage, hotel and other expenses increased by $3.0 million, or 3.1%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the variances explained below.
Food, beverage, hotel and other expenses for our Other segment increased by $2.9 million, or 96.6%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016, partially offset by the sale of Rosecroft Raceway on July 31, 2016.
General and administrative expenses
General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, 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 lobbying expenses.
General and administrative expenses increased by $9.3 million, or 8.0%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the variances explained below.
General and administrative expenses for Other increased by $8.2 million, or 36.5%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to increased corporate overhead costs of $4.1 million for the three months ended March 31, 2017, primarily due to increased cash-settled stock-based compensation charges mainly due to the changes in stock price for Penn common stock during 2017 compared to 2016, as well as the acquistion of Rocket Speed on August 1, 2016.
General and administrative expenses for our Northeast segment increased by $2.2 million, or 5.8%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to an increase of $0.9 million in the estimated fair value of the contingent purchase price obligation for Plainridge Racecourse for the three months ended March 31, 2017, compared to a decrease of $1.2 million for the three months ended March 31, 2016.
Depreciation and amortization expense
Depreciation and amortization expense increased by $4.2 million or 6.4%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016.
Other income (expenses)
Other income (expenses) for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(114,996)
|
|
$
|
(116,512)
|
|
$
|
1,516
|
|
(1.3)
|
%
|
Interest income
|
|
|
2,646
|
|
|
5,240
|
|
|
(2,594)
|
|
(49.5)
|
%
|
Income from unconsolidated affiliates
|
|
|
4,548
|
|
|
4,609
|
|
|
(61)
|
|
(1.3)
|
%
|
Loss on early extinguishment of debt
|
|
|
(23,390)
|
|
|
—
|
|
|
(23,390)
|
|
NA
|
|
Other
|
|
|
(1,793)
|
|
|
(2,426)
|
|
|
633
|
|
(26.1)
|
%
|
Total other expenses
|
|
$
|
(132,985)
|
|
$
|
(109,089)
|
|
$
|
(23,896)
|
|
21.9
|
%
|
Interest expense
Interest expense decreased by $1.5 million, or 1.3%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to $1.6 million from lower borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility and $1.1 million from lower interest paid on the financing obligation to GLPI, partially offset by $1.4 million from higher borrowing levels on the senior unsecured notes.
Interest income
Interest income decreased by $2.6 million or 49.5% for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to lower interest accrued on advances to the Jamul Tribe due to their refinancing (see Note 2 to the condensed consolidated financial statements for further details).
Other
Other increased by $0.6 million, or 26.1% and for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to lower foreign currency translation losses, partially offset by
financing charges on the debt refinancing for the three months ended March 31, 2017, as compared to the corresponding periods in the prior year.
Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate (“ETR”) to the full year projected pretax book income or loss excluding certain discrete items. The Company’s ETR (income taxes as a percentage of income from operations before income taxes) including discrete items was 30.10% for the three months ended March 31, 2017, as compared to 24.60% for the three months ended March 31, 2016, primarily due to significantly lower earnings before income taxes.
As of March 31, 2017, 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 some 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. Although the exact timing and valuation reversal amount are unknown at this time, the Company believes that it is possible that a significant portion of the valuation allowance may be released within the coming year which is contingent upon the earnings level we achieve in 2017 as well as our projected income levels in future periods.
The Company’s effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and the level of our tax credits. Additionally, our effective tax rate is significantly impacted by non deductible impairment charges and changes in our deferred tax assets that result from principal reductions in our GLPI financing obligation since the Company has recorded a valuation allowance on its deferred tax assets. Certain of these and other factors, including our history and projections of pre tax earnings, are taken into account in assessing our ability to realize our net deferred tax assets.
Adjusted EBITDA
In addition to GAAP financial measures, adjusted EBITDA is used by management as an important measure of the Company’s operating performance. We define adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction was accounted for as a financing obligation. 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 projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also 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, 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 addition, gaming companies have historically reported adjusted EBITDA as a supplement to financial measures in accordance with GAAP. 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 widely used measure of performance in the gaming industry, is used in the valuation of gaming companies, and that it is considered by many to be a key indicator of the Company’s operating results. Management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel. Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to net income or cash flows from operating activities, as a measure of liquidity, or as any other measures of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal
repayments, which are not reflected in adjusted EBITDA. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner than the Company and therefore, comparability may be limited.
Adjusted EBITDA after Master Lease payments is a measure we believe provides useful information to investors because it is an indicator of the performance of ongoing business operations after incorporating the cash flow impact of Master Lease payments to GLPI. Finally, adjusted EBITDA after Master Lease payments is the metric that our executive management team is measured against for incentive based compensation purposes.
A reconciliation of the Company’s net income (loss) per GAAP to adjusted EBITDA, as well as the Company’s income (loss) from operations per GAAP to adjusted EBITDA, is included above. Additionally, a reconciliation of each segment’s income (loss) from operations to adjusted EBITDA is also included above. On a segment level, income (loss) from operations per GAAP, rather than net income (loss) per GAAP is reconciled to adjusted EBITDA due to, among other things, the impracticability of allocating interest expense, interest income, income taxes and certain other items to the Company’s segments on a segment by segment basis. Management believes that this presentation is more meaningful to investors in evaluating the performance of the Company’s segments and is consistent with the reporting of other gaming companies.
The following table presents a reconciliation of the Company’s most directly comparable GAAP financial measures to adjusted EBITDA, for the three months ended March 31, 2017 and 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
Net income
|
|
$
|
5,104
|
|
$
|
23,708
|
Income tax provision
|
|
|
2,198
|
|
|
7,734
|
Other
|
|
|
25,183
|
|
|
2,426
|
Income from unconsolidated affiliates
|
|
|
(4,548)
|
|
|
(4,609)
|
Interest income
|
|
|
(2,646)
|
|
|
(5,240)
|
Interest expense
|
|
|
114,996
|
|
|
116,512
|
Income from operations
|
|
$
|
140,287
|
|
$
|
140,531
|
Gain on disposal of assets
|
|
|
(45)
|
|
|
(1,101)
|
Charge for stock compensation
|
|
|
2,173
|
|
|
1,455
|
Contingent purchase price
|
|
|
2,560
|
|
|
(1,201)
|
Depreciation and amortization
|
|
|
70,236
|
|
|
66,020
|
Income from unconsolidated affiliates
|
|
|
4,548
|
|
|
4,609
|
Non-operating items for Kansas JV
|
|
|
1,951
|
|
|
2,570
|
Adjusted EBITDA
|
|
$
|
221,710
|
|
$
|
212,883
|
Master Lease payments
|
|
|
(112,450)
|
|
|
(111,396)
|
Adjusted EBITDA, after Master Lease payments
|
|
$
|
109,260
|
|
$
|
101,487
|
The reconciliation of each segment’s income (loss) from operations to adjusted EBITDA for the three months ended March 31, 2017 and 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
102,633
|
|
$
|
27,118
|
|
$
|
61,529
|
|
$
|
(50,993)
|
|
$
|
140,287
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,173
|
|
|
2,173
|
|
Depreciation and amortization
|
|
|
23,023
|
|
|
9,218
|
|
|
9,671
|
|
|
28,324
|
|
|
70,236
|
|
Contingent purchase price
|
|
|
904
|
|
|
—
|
|
|
9
|
|
|
1,647
|
|
|
2,560
|
|
(Gain) loss on disposal of assets
|
|
|
14
|
|
|
5
|
|
|
(58)
|
|
|
(6)
|
|
|
(45)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
5,004
|
|
|
(456)
|
|
|
4,548
|
|
Non
‑
operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
1,951
|
|
|
—
|
|
|
1,951
|
|
Adjusted EBITDA
|
|
$
|
126,574
|
|
$
|
36,341
|
|
$
|
78,106
|
|
$
|
(19,311)
|
|
$
|
221,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
100,921
|
|
$
|
25,985
|
|
$
|
58,225
|
|
$
|
(44,600)
|
|
$
|
140,531
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,455
|
|
|
1,455
|
|
Depreciation and amortization
|
|
|
22,994
|
|
|
8,764
|
|
|
9,568
|
|
|
24,694
|
|
|
66,020
|
|
Contingent purchase price
|
|
|
(1,201)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,201)
|
|
(Gain) loss on disposal of assets
|
|
|
21
|
|
|
(24)
|
|
|
6
|
|
|
(1,104)
|
|
|
(1,101)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
4,718
|
|
|
(109)
|
|
|
4,609
|
|
Non
‑
operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
2,570
|
|
|
—
|
|
|
2,570
|
|
Adjusted EBITDA
|
|
$
|
122,735
|
|
$
|
34,725
|
|
$
|
75,087
|
|
$
|
(19,664)
|
|
$
|
212,883
|
|
|
(1)
|
|
Adjusted EBITDA excludes our share of the impact of non-operating items (such as depreciation and amortization expense) from our joint venture in Kansas Entertainment.
|
Adjusted EBITDA for our Northeast segment increased by $3.8 million, or 3.1%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to improved results at Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley and Hollywood Casino at Penn National Race Course, partially offset by decreased results at Hollywood Casino Charles Town due to increased competition from the Baltimore, Maryland market, which includes Maryland Live!, Horseshoe Casino Baltimore and MGM National Harbor, which opened in December 2016.
Adjusted EBITDA for our Midwest segment increased by $3.0 million, or 4.0%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to improved results at Hollywood Casino Lawrenceburg, primarily due to cost containment measures and Prairie State Gaming resulting from the acquisition of three small VGT route operators in Illinois since the fourth quarter 2016.
Adjusted EBITDA for our South/West segment increased by $1.6 million, or 4.7%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to improved results at M Resort and Tropicana Las Vegas, partially offset by decreased adjusted EBITDA at Zia Park, as ongoing softness in oil prices have continued to affect the economy in this area.
Adjusted EBITDA for Other improved by $0.4 million, or 1.8%, for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016, partially offset by increased corporate overhead costs of $3.4 million primarily due to increased cash-settled stock-based compensation charges mainly due to changes in stock prices for Penn and GLPI common stock during 2017 compared to 2016.
Liquidity and Capital Resources
Historically and prospectively, our primary sources of liquidity and capital resources have been and will be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.
Net cash provided by operating activities totaled $66.8 million and $72.0 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash provided by operating activities of $5.2 million for three months ended March 31, 2017, compared to the corresponding period in the prior year, was comprised primarily of cash payments for the early extinguishment of debt of $18.0 million, an increase in cash paid to suppliers and vendors of $5.7 million, primarily due to the acquisition of Rocket Speed on August 1, 2016, a decrease in cash paid for taxes of $3.2 million due to less refunds received in the first quarter 2017 compared to 2016, and a $2.1 million decrease in cash paid to employees, partially offset by an increase in cash receipts from customers of $23.4 million, primarily due to the acquisition of Rocket Speed on August 1, 2016.
Net cash used in investing activities totaled $23.3 million and $71.2 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash used in investing activities of $47.9 million for the three months ended March 31, 2017, compared to the corresponding period in the prior year, was primarily due to a $51.8 million decrease in advances to the Jamul Tribe and a decrease in maintenance capital expenditures of $3.9 million, partially offset by an increase of $4.4 million in cash escrow for the acquisition of Bally’s Casino Tunica and Resorts Casino Tunica and higher business acquisition costs of $2.3 million related to a small acquisition by PSG.
Net cash used in financing activities totaled $13.5 million and $23.6 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in net cash used in financing activities of $10.1 million for the three months ended March 31, 2017, compared to the corresponding period in the prior year, was primarily due to higher proceeds from our long-term debt of $1,347.5 million, due to the refinancing of corporate debt, partially offset by higher principal payments on long-term debt of $1,307.3 million, due to the previously mentioned refinancing, increased payments on other long-term obligations of $21.1 million for the payoff of the corporate airplane loan, higher payments of $5.8 million relating the repurchase of common stock, increased payments on our financing obligation with GLPI of $2.1 million, and lower proceeds from the exercise of stock options of $1.1 million.
Capital Expenditures
Capital expenditures are accounted for as either project or maintenance (replacement) capital expenditures. Project capital expenditures are for fixed asset additions that expand an existing facility or create a new facility. Maintenance capital expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.
The following table summarizes our expected project capital expenditures by segment for the fiscal year ending December 31, 2017, and actual expenditures for the three months ended March 31, 2017 (excluding licensing fees and net of reimbursements). The table below should not be utilized to predict future expected project capital expenditures subsequent to 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected for Year
|
|
Expenditure for
|
|
|
|
|
|
Ending December 31,
|
|
Three Months Ended
|
|
Balance to Expend
|
|
Property
|
|
2017
|
|
March 31, 2017
|
|
in 2017
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
0.2
|
|
$
|
0.2
|
|
$
|
—
|
|
South/West
|
|
|
29.1
|
|
|
6.0
|
|
|
23.1
|
|
Midwest
|
|
|
5.9
|
|
|
0.2
|
|
|
5.7
|
|
Total
|
|
$
|
35.2
|
|
$
|
6.4
|
|
$
|
28.8
|
|
Tropicana Las Vegas was acquired on August 25, 2015 for $360 million. During 2016, we reconfigured the gaming floor with updated slot machines, altered game placements and refined, table game mix and integrated the property into our Marquee Rewards player loyalty program which enables our regional gaming customers to redeem
their loyalty reward points at the facility. During the coming months, we will be making further enhancements to the facility with a focus on improving the food and beverage offerings.
During the three months ended March 31, 2017, we spent $10.7 million for maintenance capital expenditures, with $3.8 million at our Northeast segment, $2.6 million at our South/West segment, $4.1 million at our Midwest segment, and $0.2 million for other. The majority of the maintenance capital expenditures were for slot machines, slot machine equipment and food and beverage enhancements.
Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our project and maintenance capital expenditures in 2017 to date.
Jamul Tribe
Advances to the Jamul Tribe, which totaled $92.3 million and $92.1 million at March 31, 2017 and December 31, 2016, are accounted for as a loan on the consolidated balance sheet and as such is not included in the capital expenditures table presented above. At this time, we do not expect to record any fees during 2017 from this facility.
Senior Secured Credit Facility
On January 19, 2017, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $700 million revolver, a five year $300 million Term Loan A facility, and a seven year $500 million Term Loan B facility (the “Amended Credit Facilities”). The Term Loan A facility was priced at LIBOR plus a spread (ranging from 3.00% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. At March 31, 2017, the Company’s senior secured credit facility had a gross outstanding balance of $931.0 million, consisting of a $300.0 million Term Loan A facility, a $500.0 million Term Loan B facility, and $131.0 million outstanding on the revolving credit facility. Additionally, at March 31, 2017, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.1 million, resulting in $546.9 million of available borrowing capacity as of March 31, 2017 under the revolving credit facility. In connection with the repayment of the previous senior secured credit facility, the Company recorded $1.7 million in refinancing costs and a $2.3 million loss on the early extinguishment of debt for the quarter ended March 31, 2017 related to the write-off of deferred debt issuance costs and the write off of the discount on the Term Loan B facility of the previous senior secured credit facility.
Redemption of 5.875% Senior Subordinated Notes
In the first quarter of 2017, the Company redeemed all of its $300 million 5.875% senior subordinated notes, which were due in 2021 (“5.875% Notes”). In connection with this redemption, the Company recorded a $21.1 million loss on the early extinguishment of debt for the quarter ended March 31, 2017 related to the difference between the reacquisition price of the 5.875% Notes compared to its carrying value.
5.625% Senior Unsecured Notes
On January 19, 2017, the Company completed an offering of $400 million 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 15
th
and July 15
th
of each year. The 5.625% Notes are senior unsecured obligations of the Company. The 5.625% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary‑guaranteed debt securities. The Company may redeem the 5.625% Notes at any time on or after January 15, 2022, at the declining redemption premiums set forth in the indenture governing the 5.625% Notes, and, prior to January 15, 2022, at a “make-whole” redemption premium set forth in the indenture governing the 5.625% Notes. In addition, prior to January 15, 2020, the Company may redeem the 5.625% Notes with an amount equal to the net proceeds from one or more equity offerings, at a redemption price equal to 105.625% of the principal amount of the 5.625% Notes redeemed, together with accrued and unpaid interest to, but not including, the redemption date, so long as
at least 60% of the aggregate principal amount of the notes originally issued under the indenture remains outstanding and such redemption occurs within 180 days of closing of the related equity offering.
The Company used a portion of the proceeds from the issuance of the 5.625% Notes to retire its existing 5.875% Notes and to fund related transaction fees and expenses.
The Company used loans funded under the Amended Credit Facilities and a portion of the proceeds of the 5.625% Notes to repay amounts outstanding under its existing Credit Agreement and to fund related transaction fees and expenses and for general corporate purposes.
Master Lease Financing Obligation with GLPI
As discussed in Note 6 to the condensed consolidated financial statements, the Company makes significant payments to GLPI under the Master Lease. As of March 31, 2017, the Company financed with GLPI real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.
Covenants
The Company’s senior secured credit facility and $400 million 5.625% Notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $400 million 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.
At March 31, 2017, the Company was in compliance with all required financial covenants.
Outlook
Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our senior secured credit facility, will be adequate to meet our financing obligation, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings projections will be realized, or that future borrowings will be available under our senior secured credit facility or otherwise will be available to enable us to service our indebtedness, including the senior secured credit facility and the $400 million 5.625% Notes, to retire or redeem the $400 million 5.625% Notes when required or to make anticipated capital expenditures. In addition, we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions and property expansion in under-penetrated markets. 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. See “Risk Factors—Risks Related to Our Capital Structure” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the risk related to our 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 expect to meet our debt obligations as they come due through internally generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity.