NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Organization and Basis of Presentation
Organization: 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 (the “mychoice program”) provides our members with various benefits, including complimentary goods and/or services.
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 Note 10, “Leases,” 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 the 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 Quarterly Report on 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.
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 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 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 Note 9, “Long-term Debt.”
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 Company could experience other potential adverse impacts as a result of the COVID-19 pandemic, including, but not limited to, further charges from adjustments to the carrying amount of goodwill and other intangible assets, long-lived asset impairment charges, or impairments of investments in joint ventures. In addition, the negative impacts of the COVID-19 pandemic may result in further changes in the amount of valuation allowance required. Actual results may differ materially from the Company’s current estimates as the scope of the COVID-19 pandemic evolves, depending largely, though not exclusively, on the impact of required capacity reductions, social distancing and health guidelines, and the sustainability of current trends in recovery at our reopened properties.
Basis of Presentation: The unaudited Condensed Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the SEC. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Note 2—Significant Accounting Policies
Principles of Consolidation: The unaudited Condensed Consolidated Financial Statements include the accounts of Penn National Gaming, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest entities or variable interest entities (“VIEs”) are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Segment Information: 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. See Note 17, “Segment Information,” for further information. For financial reporting purposes, we aggregate our operating segments into the following four reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Real Estate Assets Lease or Ownership Structure
|
Northeast segment
|
|
|
|
Ameristar East Chicago
|
East Chicago, Indiana
|
|
Pinnacle Master Lease
|
Greektown Casino-Hotel
|
Detroit, Michigan
|
|
Greektown Lease
|
Hollywood Casino Bangor
|
Bangor, Maine
|
|
Penn Master Lease
|
Hollywood Casino at Charles Town Races
|
Charles Town, West Virginia
|
|
Penn Master Lease
|
Hollywood Casino Columbus
|
Columbus, Ohio
|
|
Penn Master Lease
|
Hollywood Casino Lawrenceburg
|
Lawrenceburg, Indiana
|
|
Penn Master Lease
|
Hollywood Casino at Penn National Race Course
|
Grantville, Pennsylvania
|
|
Penn Master Lease
|
Hollywood Casino Toledo
|
Toledo, Ohio
|
|
Penn Master Lease
|
Hollywood Gaming at Dayton Raceway
|
Dayton, Ohio
|
|
Penn Master Lease
|
Hollywood Gaming at Mahoning Valley Race Course
|
Youngstown, Ohio
|
|
Penn Master Lease
|
Marquee by Penn (1)
|
Pennsylvania
|
|
N/A
|
Meadows Racetrack and Casino
|
Washington, Pennsylvania
|
|
Meadows Lease
|
Plainridge Park Casino
|
Plainville, Massachusetts
|
|
Pinnacle Master Lease
|
|
|
|
|
South segment (2)
|
|
|
|
1st Jackpot Casino
|
Tunica, Mississippi
|
|
Penn Master Lease
|
Ameristar Vicksburg
|
Vicksburg, Mississippi
|
|
Pinnacle Master Lease
|
Boomtown Biloxi
|
Biloxi, Mississippi
|
|
Penn Master Lease
|
Boomtown Bossier City
|
Bossier City, Louisiana
|
|
Pinnacle Master Lease
|
Boomtown New Orleans
|
New Orleans, Louisiana
|
|
Pinnacle Master Lease
|
Hollywood Casino Gulf Coast
|
Bay St. Louis, Mississippi
|
|
Penn Master Lease
|
Hollywood Casino Tunica
|
Tunica, Mississippi
|
|
Penn Master Lease
|
L’Auberge Baton Rouge
|
Baton Rouge, Louisiana
|
|
Pinnacle Master Lease
|
L’Auberge Lake Charles
|
Lake Charles, Louisiana
|
|
Pinnacle Master Lease
|
Margaritaville Resort Casino
|
Bossier City, Louisiana
|
|
Margaritaville Lease
|
|
|
|
|
West segment
|
|
|
|
Ameristar Black Hawk
|
Black Hawk, Colorado
|
|
Pinnacle Master Lease
|
Cactus Petes and Horseshu
|
Jackpot, Nevada
|
|
Pinnacle Master Lease
|
M Resort
|
Henderson, Nevada
|
|
Penn Master Lease
|
Tropicana Las Vegas
|
Las Vegas, Nevada
|
|
Tropicana Lease
|
Zia Park Casino
|
Hobbs, New Mexico
|
|
Penn Master Lease
|
|
|
|
|
Midwest segment
|
|
|
|
Ameristar Council Bluffs
|
Council Bluffs, Iowa
|
|
Pinnacle Master Lease
|
Argosy Casino Alton (3)
|
Alton, Illinois
|
|
Penn Master Lease
|
Argosy Casino Riverside
|
Riverside, Missouri
|
|
Penn Master Lease
|
Hollywood Casino Aurora
|
Aurora, Illinois
|
|
Penn Master Lease
|
Hollywood Casino Joliet
|
Joliet, Illinois
|
|
Penn Master Lease
|
Hollywood Casino at Kansas Speedway (4)
|
Kansas City, Kansas
|
|
Owned - JV
|
Hollywood Casino St. Louis
|
Maryland Heights, Missouri
|
|
Penn Master Lease
|
Prairie State Gaming (1)
|
Illinois
|
|
N/A
|
River City Casino
|
St. Louis, Missouri
|
|
Pinnacle Master Lease
|
(1)VGT route operations
(2)Resorts Casino Tunica ceased operations on June 30, 2019, but remains subject to the Penn Master Lease.
(3)The riverboat is owned by us and not subject to the Penn Master Lease.
(4)Pursuant to a joint venture (“JV”) with International Speedway Corporation (“International Speedway”) and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns Hollywood Casino at Kansas Speedway.
Revenue Recognition: Our revenue from contracts with customers consists primarily of gaming wagers, food and beverage transactions, retail transactions, hotel room sales, racing wagers, and sports betting wagers. See Note 4, “Revenue Disaggregation,” for information on our revenue by type and geographic location.
Complimentaries associated with Gaming Contracts
Food and beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food, beverage, hotel and other revenues, at their estimated standalone selling prices with an offset recorded as a reduction to gaming revenues. The cost of providing complimentary goods and services to patrons as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food, beverage, hotel and other expenses. Revenues recorded to food, beverage, hotel and other and offset to gaming revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Food and beverage
|
$
|
7.3
|
|
|
$
|
64.1
|
|
|
$
|
61.3
|
|
|
$
|
128.6
|
|
Hotel
|
5.8
|
|
|
40.8
|
|
|
36.7
|
|
|
77.4
|
|
Other
|
0.3
|
|
|
4.5
|
|
|
3.5
|
|
|
8.8
|
|
Total complimentaries associated with gaming contracts
|
$
|
13.4
|
|
|
$
|
109.4
|
|
|
$
|
101.5
|
|
|
$
|
214.8
|
|
Customer-related Liabilities
The Company has three general types of liabilities related to contracts with customers: (i) the obligation associated with its mychoice program (loyalty points and tier status benefits), (ii) advance payments on goods and services yet to be provided and for unpaid wagers, and (iii) deferred revenue associated with third-party sports betting operators for online sports betting and related iGaming market access.
Our mychoice program allows members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores across the vast majority of our properties. In addition, members of the mychoice program earn credit toward tier status, which entitles them to receive certain other benefits, such as gifts. The obligation associated with our mychoice program, which is included in “Accrued expenses and other current liabilities” within our unaudited Condensed Consolidated Balance Sheets, was $40.5 million and $36.2 million as of June 30, 2020 and December 31, 2019, respectively, and consisted principally of the obligation associated with the loyalty points. Our loyalty point obligations are generally settled within six months of issuance; however, as a result of the COVID-19 pandemic and resulting temporary closures, loyalty point obligations may take longer to settle. Changes between the opening and closing balances primarily relate to the timing of our customers’ election to redeem loyalty points as well as the timing of when our customers receive their earned tier status benefits.
The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visit (referred to as “safekeeping” or “front money”), (iii) outstanding tickets generated by slot machine play or pari-mutuel wagering, (iv) outstanding chip liabilities, (v) unclaimed jackpots, and (vi) gift cards redeemable at our properties. Unpaid wagers primarily relate to the Company’s obligation to settle outstanding slot tickets, pari-mutuel racing tickets and gaming chips with customers and generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The Company’s advance payments on goods and services yet to be provided and for unpaid wagers were $31.8 million and $42.2 million as of June 30, 2020 and December 31, 2019, respectively, of which $0.6 million were classified as long-term in both periods. The current portion and long-term portion of our advance payments on goods and services yet to be provided and for unpaid wagers are included in “Accrued expenses and other current liabilities” and “Other long-term liabilities” within our unaudited Condensed Consolidated Balance Sheets, respectively.
During the third quarter of 2019, Penn Interactive entered into multi-year agreements with sports betting operators for online sports betting and related iGaming market access across our portfolio of properties, of which we received cash and equity securities, including ordinary shares and warrants, specific to two operator agreements. Deferred revenue associated with third-party sports betting operators for online sports betting and related iGaming market access, which is included in “Other long-term liabilities” within our unaudited Condensed Consolidated Balance Sheets, was $46.3 million and $43.6 million as of June 30, 2020 and December 31, 2019, respectively.
Gaming and Racing Taxes: We are subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which we operate. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. For the three and six months ended June 30, 2020, these expenses, which were recorded primarily in gaming expense within the unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss), were $97.6 million and $433.9 million, respectively, as compared to $399.8 million and $786.3 million, respectively, for the three and six months ended June 30, 2019.
Convertible Debt: Under Accounting Standards Codification (“ASC”) 470-20, “Debt with Conversion and Other Options” (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest. The effect of ASC 470-20 on the accounting for our Convertible Notes is that the equity component is required to be included in “Additional paid-in capital” within our unaudited Condensed Consolidated Balance Sheets at the issuance date and the value of the equity component is treated as a debt discount. See Note 9, “Long-term Debt,” for more information.
Earnings Per Share: Basic earnings per share (“EPS”) is computed by dividing net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution, if any, for all potentially-dilutive securities such as stock options, unvested restricted stock awards (“RSAs”), and outstanding convertible preferred stock and convertible debt.
Holders of the Company’s Series D Preferred Stock (as defined in Note 11, “Investments in and Advances to Unconsolidated Affiliates”) are entitled to participate equally and ratably in all dividends and distributions paid to holders of Penn Common Stock irrespective of any vesting requirement. Accordingly, the Series D Preferred Stock shares are considered a participating security and the Company is required to apply the two-class method to consider the impact of the preferred shares on the calculation of basic and diluted EPS. Since the Company is currently in a net loss position and the holders of the Company’s Series D Preferred Stock are not obligated to absorb losses, the Company is not required to present the two-class method. However, in the event the Company is in a net income position, the two-class method must be applied by allocating all earnings during the period to common shares and preferred shares. See Note 15, “Earnings (Loss) per Share,” for more information.
Note 3—New Accounting Pronouncements
Accounting Pronouncements Implemented in 2020
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”), which sets forth a “current expected credit loss” (referred to as “CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. We adopted ASU 2016-13 during the first quarter of 2020 using a modified retrospective approach, which resulted in a cumulative-effect adjustment to retained earnings as of January 1, 2020 of $0.6 million.
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Cost Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). Under the new guidance, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. This will result in certain implementation costs being capitalized; the associated amortization charge will, however, be recorded as an operating expense. Under the previous guidance, costs incurred when implementing a cloud computing arrangement deemed to be a service contract were recorded as an operating expense when incurred. We adopted ASU 2018-15 during the first quarter of 2020 using a prospective approach, which did not have a material impact on our unaudited Condensed Consolidated Financial Statements.
Accounting Pronouncements to be Implemented
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which intends to simplify the guidance by removing certain exceptions to the general principles and clarifying or amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, “Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”), which made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a
similar investment of the same issuer. Among other topics, ASU 2020-01 clarifies that an entity should consider observable transactions that requires it to either apply or discontinue the equity method of accounting. For public business entities, ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2020-01 on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate (referred to as “LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 also provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. ASU 2020-04 can be adopted no later than December 1, 2022 with early adoption permitted. The interest rates associated with the Company’s borrowings under its Senior Secured Credit Facilities (as defined in Note 9, “Long-term Debt”) are tied to LIBOR. The Company is currently evaluating the impact of the adoption of ASU 2020-04 on its consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.
Note 4—Revenue Disaggregation
We generate revenues at our owned, managed or operated properties principally by providing the following types of services: (i) gaming, including iCasino; (ii) food and beverage; (iii) hotel; and (iv) other. Other revenues are principally comprised of ancillary gaming-related activities, such as commissions received on ATM transactions, racing, and Penn Interactive’s social gaming. In addition, we assess our revenues based on geographic location of the related properties, which is consistent with our reportable segments (see Note 17, “Segment Information,” for further information). Our revenue disaggregation by type of revenue and geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Intersegment Eliminations (1)
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
94.1
|
|
|
$
|
103.7
|
|
|
$
|
12.8
|
|
|
$
|
33.5
|
|
|
$
|
15.1
|
|
|
$
|
—
|
|
|
$
|
259.2
|
|
Food and beverage
|
2.2
|
|
|
7.6
|
|
|
2.2
|
|
|
1.0
|
|
|
0.1
|
|
|
—
|
|
|
13.1
|
|
Hotel
|
0.2
|
|
|
6.8
|
|
|
1.5
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
9.1
|
|
Other
|
6.2
|
|
|
3.4
|
|
|
1.2
|
|
|
0.9
|
|
|
12.4
|
|
|
—
|
|
|
24.1
|
|
Total revenues
|
$
|
102.7
|
|
|
$
|
121.5
|
|
|
$
|
17.7
|
|
|
$
|
36.0
|
|
|
$
|
27.6
|
|
|
$
|
—
|
|
|
$
|
305.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Intersegment Eliminations (1)
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
528.9
|
|
|
$
|
206.8
|
|
|
$
|
96.5
|
|
|
$
|
229.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,062.1
|
|
Food and beverage
|
37.6
|
|
|
39.6
|
|
|
29.5
|
|
|
19.6
|
|
|
0.4
|
|
|
—
|
|
|
126.7
|
|
Hotel
|
10.5
|
|
|
26.5
|
|
|
31.6
|
|
|
11.6
|
|
|
—
|
|
|
—
|
|
|
80.2
|
|
Other
|
22.1
|
|
|
9.3
|
|
|
6.6
|
|
|
7.1
|
|
|
9.0
|
|
|
—
|
|
|
54.1
|
|
Total revenues
|
$
|
599.1
|
|
|
$
|
282.2
|
|
|
$
|
164.2
|
|
|
$
|
268.2
|
|
|
$
|
9.4
|
|
|
$
|
—
|
|
|
$
|
1,323.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Intersegment Eliminations (1)
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
552.8
|
|
|
$
|
272.3
|
|
|
$
|
84.7
|
|
|
$
|
229.7
|
|
|
$
|
22.7
|
|
|
$
|
(0.1)
|
|
|
$
|
1,162.1
|
|
Food and beverage
|
36.1
|
|
|
37.3
|
|
|
25.7
|
|
|
18.8
|
|
|
0.3
|
|
|
—
|
|
|
118.2
|
|
Hotel
|
9.0
|
|
|
24.6
|
|
|
27.3
|
|
|
8.8
|
|
|
—
|
|
|
—
|
|
|
69.7
|
|
Other
|
25.5
|
|
|
10.6
|
|
|
6.6
|
|
|
6.8
|
|
|
24.9
|
|
|
(2.8)
|
|
|
71.6
|
|
Total revenues
|
$
|
623.4
|
|
|
$
|
344.8
|
|
|
$
|
144.3
|
|
|
$
|
264.1
|
|
|
$
|
47.9
|
|
|
$
|
(2.9)
|
|
|
$
|
1,421.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Intersegment Eliminations (1)
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
1,016.7
|
|
|
$
|
426.9
|
|
|
$
|
189.3
|
|
|
$
|
463.7
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
2,096.7
|
|
Food and beverage
|
73.4
|
|
|
79.7
|
|
|
57.4
|
|
|
40.7
|
|
|
0.7
|
|
|
—
|
|
|
251.9
|
|
Hotel
|
17.6
|
|
|
49.5
|
|
|
63.3
|
|
|
21.2
|
|
|
—
|
|
|
—
|
|
|
151.6
|
|
Other
|
42.0
|
|
|
18.0
|
|
|
12.9
|
|
|
13.9
|
|
|
18.7
|
|
|
—
|
|
|
105.5
|
|
Total revenues
|
$
|
1,149.7
|
|
|
$
|
574.1
|
|
|
$
|
322.9
|
|
|
$
|
539.5
|
|
|
$
|
19.5
|
|
|
$
|
—
|
|
|
$
|
2,605.7
|
|
(1) Represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by Penn Interactive, and our live and televised poker tournament series that operates under the trademark, Heartland Poker Tour (“HPT”).
Note 5—Acquisitions and Dispositions
Greektown Casino-Hotel
On May 23, 2019, the Company acquired all of the membership interests of Greektown Holdings, L.L.C., for a net purchase price of $320.3 million, after working capital and other adjustments, pursuant to a transaction agreement among the Company, VICI Properties L.P., a wholly-owned subsidiary of VICI, and Greektown Mothership LLC. In connection with the acquisition, the real estate assets relating to Greektown Casino-Hotel (“Greektown”) were acquired by a subsidiary of VICI for an aggregate sales price of $700.0 million, and the Company entered into the Greektown Lease, which has an initial annual rent of $55.6 million and an initial term of 15 years, with four five-year renewal options. The acquisition of the operations was financed through a combination of cash on hand and incremental borrowings under the Company’s Revolving Credit Facility.
During the first quarter of 2020, the Company finalized the allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill, as follows:
|
|
|
|
|
|
(in millions)
|
Fair value
|
Cash and cash equivalents
|
$
|
31.1
|
|
Receivables, prepaid expenses, and other current assets
|
14.5
|
|
Property and equipment
|
28.4
|
|
Goodwill (1)
|
67.4
|
|
Other intangible assets
|
|
Gaming license
|
166.4
|
|
Trademark
|
24.4
|
|
Customer relationships
|
3.3
|
|
Operating lease right-of-use assets
|
516.1
|
|
Finance lease right-of-use assets
|
4.1
|
|
|
|
Total assets
|
$
|
855.7
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
$
|
15.2
|
|
Operating lease liabilities
|
516.1
|
|
Finance lease liabilities
|
4.1
|
|
Total liabilities
|
535.4
|
|
Net assets acquired
|
$
|
320.3
|
|
(1)The goodwill has been assigned to our Northeast segment. The entire $67.4 million goodwill amount is deductible for tax purposes.
The Company used the income, market, or cost approach (or a combination thereof) for the valuation, as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability. Property and equipment acquired consists of non-REIT assets (e.g., equipment for use in gaming operations, furniture and other equipment). We determined that the land and buildings subject to the Greektown Lease, which was entered into at the time of the acquisition, represented operating lease right-of-use (“ROU”) assets with a corresponding operating lease liability calculated based on the present value of the future lease payments at the acquisition date in accordance with GAAP. Management determined the fair value of its office equipment, computer equipment and slot machine gaming devices based on the market approach and other personal property based on the cost approach, supported where available by observable market data, which includes consideration of obsolescence.
Acquired identifiable intangible assets consist of a gaming license and a trademark, which are both indefinite-lived intangible assets, and customer relationships, which is an amortizing intangible asset with an assigned useful life of 2 years. Management valued (i) the gaming license using the Greenfield Method under the income approach; (ii) the trademark using the relief-from-royalty method under the income approach; and (iii) customer relationships (rated player databases) using the with-and-without method of the income approach. All valuation methods are forms of the income approach supported by observable market data for peer casino operator companies.
Margaritaville Resort Casino
On January 1, 2019, the Company acquired the operations of Margaritaville for a net purchase price of $122.9 million, after working capital and other adjustments (of which $3.0 million was paid during the first quarter of 2020), pursuant to (i) an agreement and plan of merger (the “Margaritaville Merger Agreement”) among the Company, VICI, Bossier Casino Venture (HoldCo), Inc. (“Holdco”), and Silver Slipper Gaming, LLC, and (ii) a membership interest purchase agreement (the “MIPA”) among VICI and the Company.
Pursuant to the Margaritaville Merger Agreement, a subsidiary of VICI merged with and into Holdco with Holdco surviving the merger as a wholly-owned subsidiary of VICI (the “Merger”) and owner of the real estate assets relating to Margaritaville. Pursuant to the MIPA, immediately following the consummation of the Merger, HoldCo sold its interests in its sole direct subsidiary and owner of the Margaritaville operating assets, to the Company. In connection with the acquisition, the real estate assets used in the operations of Margaritaville were acquired by VICI for $261.1 million and the Company entered into the Margaritaville Lease (as defined in Note 10, “Leases”).
Hollywood Casino Perryville Purchase Option
The Term Sheet discussed in Note 1, “Organization and Basis of Presentation” 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.
Tropicana Las Vegas
On April 16, 2020, we closed on a purchase agreement with GLPI pursuant to which GLPI acquired the real estate assets associated with our Tropicana property in exchange for rent credits of $307.5 million that we began utilizing to pay rent under our existing Master Leases and the Meadows Lease in May 2020. Contemporaneous with the sale, the Company entered into the Tropicana Lease (as defined and discussed in Note 10, “Leases”). Pursuant to the purchase agreement, GLPI will conduct a sale process with respect to both the real estate assets and the operations of Tropicana for up to 24 months (the “Sale Period”), with the Company receiving (i) 75% of the proceeds above $307.5 million plus certain taxes, expenses and costs if an agreement for such sale is signed in the first 12 months of the Sale Period or (ii) 50% of the proceeds above $307.5 million plus certain taxes, expenses and costs if an agreement for such sale is signed in the remainder of the Sale Period. As noted above, Tropicana is scheduled to reopen on September 1, 2020.
As of June 30, 2020, we had $176.7 million of rent credits that will be utilized in future periods. The rent credits are included in “Other current assets” within our unaudited Condensed Consolidated Balance Sheets. We recognized a gain on this transaction of $28.5 million during the three and six months ended June 30, 2020, which is included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Note 6—Property and Equipment
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2020
|
|
December 31,
2019
|
Property and equipment - Not Subject to Master Leases
|
|
|
|
Land and improvements
|
$
|
113.0
|
|
|
$
|
353.2
|
|
Buildings, vessels and improvements
|
220.7
|
|
|
420.4
|
|
Furniture, fixtures and equipment
|
1,681.3
|
|
|
1,598.3
|
|
Leasehold improvements
|
188.0
|
|
|
183.6
|
|
Construction in progress
|
96.8
|
|
|
59.3
|
|
|
2,299.8
|
|
|
2,614.8
|
|
Less: Accumulated depreciation
|
(1,585.2)
|
|
|
(1,548.3)
|
|
|
714.6
|
|
|
1,066.5
|
|
Property and equipment - Subject to Master Leases
|
|
|
|
Land and improvements
|
1,525.9
|
|
|
1,525.9
|
|
Buildings, vessels and improvements
|
3,664.6
|
|
|
3,664.6
|
|
|
5,190.5
|
|
|
5,190.5
|
|
Less: Accumulated depreciation
|
(1,228.1)
|
|
|
(1,136.8)
|
|
|
3,962.4
|
|
|
4,053.7
|
|
Property and equipment, net
|
$
|
4,677.0
|
|
|
$
|
5,120.2
|
|
Depreciation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Depreciation expense (1)
|
$
|
83.8
|
|
|
$
|
97.7
|
|
|
$
|
171.3
|
|
|
$
|
193.9
|
|
(1)Of such amounts, $45.8 million, $46.1 million, $91.8 million and $92.9 million, respectively, pertained to real estate assets subject to either of our Master Leases.
Note 7—Goodwill and Other Intangible Assets
A reconciliation of goodwill and accumulated goodwill impairment losses, by reportable segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Total
|
Balance as of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
914.3
|
|
|
$
|
236.6
|
|
|
$
|
216.8
|
|
|
$
|
1,116.7
|
|
|
$
|
156.1
|
|
|
$
|
2,640.5
|
|
Accumulated goodwill impairment losses
|
(717.9)
|
|
|
(52.0)
|
|
|
(16.6)
|
|
|
(495.6)
|
|
|
(87.7)
|
|
|
(1,369.8)
|
|
Goodwill, net
|
196.4
|
|
|
184.6
|
|
|
200.2
|
|
|
621.1
|
|
|
68.4
|
|
|
1,270.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses during period
|
(43.5)
|
|
|
(9.0)
|
|
|
—
|
|
|
(60.5)
|
|
|
—
|
|
|
(113.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
914.3
|
|
|
236.6
|
|
|
216.8
|
|
|
1,116.7
|
|
|
156.1
|
|
|
2,640.5
|
|
Accumulated goodwill impairment losses
|
(761.4)
|
|
|
(61.0)
|
|
|
(16.6)
|
|
|
(556.1)
|
|
|
(87.7)
|
|
|
(1,482.8)
|
|
Goodwill, net
|
$
|
152.9
|
|
|
$
|
175.6
|
|
|
$
|
200.2
|
|
|
$
|
560.6
|
|
|
$
|
68.4
|
|
|
$
|
1,157.7
|
|
2020 Interim Assessment for Impairment
During the first quarter of 2020, we identified an indicator of impairment on our goodwill and other intangible assets due to the COVID-19 pandemic. As a result of the COVID-19 pandemic, we revised our cash flow projections to reflect the current economic environment, including the uncertainty surrounding the nature, timing and extent of reopening our gaming properties. As a result of the interim assessment for impairment, during the first quarter of 2020, we recognized impairments on our
goodwill, gaming licenses and trademarks of $113.0 million, $437.0 million and $61.5 million, respectively. The estimated fair values of the reporting units were determined through a combination of a discounted cash flow model and a market-based approach, which utilized Level 3 inputs. The estimated fair values of the gaming licenses and trademarks were determined by using discounted cash flow models, which utilized Level 3 inputs.
As noted in the table above, the goodwill impairments pertained to our Northeast, South and Midwest segments, in the amounts of $43.5 million, $9.0 million and $60.5 million, respectively. The gaming license impairments pertained to our Northeast, South and Midwest segments in the amounts of $177.0 million, $166.0 million and $94.0 million, respectively. The trademark impairments pertained to our Northeast, South, Midwest and West segments, in the amounts of $17.0 million, $17.0 million, $15.0 million and $12.5 million, respectively.
There were no impairment charges recorded on goodwill and other intangible assets during the three months ended June 30, 2020 or the three and six months ended June 30, 2019.
The aforementioned impairments are included in “Impairment losses” within our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 16, “Fair Value Measurements,” for quantitative information about the significant unobservable inputs used in the fair value measurements of other intangible assets.
As of March 31, 2020, the date of the most recent interim impairment test, five reporting units had negative carrying amounts. The amount of goodwill at these reporting units was as follows (in millions):
|
|
|
|
|
|
Northeast segment
|
|
Hollywood Casino at Charles Town Races
|
$
|
8.7
|
|
Hollywood Casino Toledo
|
$
|
5.8
|
|
Plainridge Park Casino
|
$
|
6.3
|
|
South segment
|
|
Boomtown New Orleans
|
$
|
5.2
|
|
Midwest segment
|
|
Ameristar Council Bluffs
|
$
|
36.2
|
|
The table below presents the gross carrying amount, accumulated amortization and net carrying amount of each major class of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
(in millions)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Gaming licenses
|
$
|
1,246.0
|
|
|
$
|
—
|
|
|
$
|
1,246.0
|
|
|
$
|
1,681.9
|
|
|
$
|
—
|
|
|
$
|
1,681.9
|
|
Trademarks
|
240.9
|
|
|
—
|
|
|
240.9
|
|
|
302.4
|
|
|
—
|
|
|
302.4
|
|
Other
|
0.7
|
|
|
—
|
|
|
0.7
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
Amortizing intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
106.8
|
|
|
(78.3)
|
|
|
28.5
|
|
|
104.4
|
|
|
(69.0)
|
|
|
35.4
|
|
Other
|
36.6
|
|
|
(33.0)
|
|
|
3.6
|
|
|
36.1
|
|
|
(30.0)
|
|
|
6.1
|
|
Total other intangible assets
|
$
|
1,631.0
|
|
|
$
|
(111.3)
|
|
|
$
|
1,519.7
|
|
|
$
|
2,125.5
|
|
|
$
|
(99.0)
|
|
|
$
|
2,026.5
|
|
Amortization expense related to our amortizing intangible assets was $6.2 million and $12.3 million for the three and six months ended June 30, 2020, respectively, as compared to $6.4 million and $12.3 million for the three and six months ended June 30, 2019, respectively. The following table presents the estimated amortization expense based on our amortizing intangible assets as of June 30, 2020 (in millions):
|
|
|
|
|
|
Years ending December 31,
|
|
2020 (excluding the six months ended June 30, 2020)
|
$
|
8.4
|
|
2021
|
6.7
|
|
2022
|
4.8
|
|
2023
|
3.7
|
|
2024
|
3.6
|
|
Thereafter
|
4.9
|
|
Total
|
$
|
32.1
|
|
Note 8—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2020
|
|
December 31,
2019
|
Accrued salaries and wages
|
$
|
113.1
|
|
|
$
|
142.1
|
|
Accrued gaming, pari-mutuel, property, and other taxes
|
86.1
|
|
|
103.3
|
|
Accrued interest
|
14.1
|
|
|
13.0
|
|
Other accrued expenses (1)
|
225.8
|
|
|
225.8
|
|
Other current liabilities (2)
|
121.3
|
|
|
147.1
|
|
Accrued expenses and other current liabilities
|
$
|
560.4
|
|
|
$
|
631.3
|
|
(1)Amounts as of June 30, 2020 and December 31, 2019 included $40.4 million and $38.3 million, respectively, pertaining to the Company’s accrued progressive jackpot liability. Additionally, amounts include the obligation associated with its mychoice program and the current portion of advance payments on goods and services yet to be provided and for unpaid wagers, which are discussed in Note 2, “Significant Accounting Policies.”
(2)Amounts as of June 30, 2020 and December 31, 2019 included $71.7 million and $80.1 million, respectively, pertaining to the Company’s non-qualified deferred compensation plan that covers management and other highly-compensated employees.
Note 9—Long-term Debt
Long-term debt, net of current maturities, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2020
|
|
December 31,
2019
|
Senior Secured Credit Facilities:
|
|
|
|
Revolving Credit Facility due 2023
|
$
|
670.0
|
|
|
$
|
140.0
|
|
Term Loan A Facility due 2023
|
654.6
|
|
|
672.3
|
|
Term Loan B-1 Facility due 2025
|
1,111.8
|
|
|
1,117.5
|
|
5.625% Notes due 2027
|
400.0
|
|
|
400.0
|
|
2.75% Convertible Notes due 2026
|
330.5
|
|
|
—
|
|
Other long-term obligations
|
80.8
|
|
|
89.2
|
|
|
3,247.7
|
|
|
2,419.0
|
|
Less: Current maturities of long-term debt
|
(72.1)
|
|
|
(62.9)
|
|
Less: Debt discount
|
(92.6)
|
|
|
(2.4)
|
|
Less: Debt issuance costs
|
(38.2)
|
|
|
(31.5)
|
|
|
$
|
3,044.8
|
|
|
$
|
2,322.2
|
|
Senior Secured Credit Facilities
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” and collectively with the Revolving Credit Facility and the Term Loan A Facility, the “Senior Secured Credit Facilities”). The Term Loan B Facility was fully repaid and terminated prior to 2019. 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.
In October 2018, in connection with the acquisition of Pinnacle Entertainment, Inc. (the “Pinnacle Acquisition”), we 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”). 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, 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.
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 and the amount by which the Convertible Notes if-converted value exceeded its principal amount was $230.2 million.
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.
The Convertible Notes contain a cash conversion feature, and as a result, the Company has separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, which is recognized as debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component. The equity component was valued at $91.8 million upon issuance of the Convertible Notes.
In connection with the Convertible Notes issuance, the Company incurred debt issuance costs of $10.2 million, which were allocated on a pro rata basis to the liability component and the equity component in the amounts of $6.6 million and $3.6 million, respectively.
The Convertible Notes consisted of the following components:
|
|
|
|
|
|
|
|
(in millions)
|
June 30,
2020
|
|
|
Liability component:
|
|
|
|
Principal
|
$
|
330.5
|
|
|
|
Unamortized debt discount
|
(90.4)
|
|
|
|
Unamortized debt issuance costs
|
(6.5)
|
|
|
|
Net carrying amount
|
$
|
233.6
|
|
|
|
|
|
|
|
Carrying amount of equity component
|
$
|
88.2
|
|
|
|
Interest expense, net
Interest expense, net, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest expense
|
$
|
(135.7)
|
|
|
$
|
(135.0)
|
|
|
$
|
(266.1)
|
|
|
$
|
(267.6)
|
|
Interest income
|
0.2
|
|
|
0.3
|
|
|
0.4
|
|
|
0.6
|
|
Capitalized interest
|
0.5
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
Interest expense, net
|
$
|
(135.0)
|
|
|
$
|
(134.7)
|
|
|
$
|
(264.8)
|
|
|
$
|
(267.0)
|
|
Interest expense related to the Convertible Notes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2020
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Coupon interest
|
$
|
1.2
|
|
|
|
|
|
|
|
Amortization of debt discount
|
1.4
|
|
|
|
|
|
|
|
Amortization of debt issuance costs
|
0.1
|
|
|
|
|
|
|
|
Convertible Notes interest expense
|
$
|
2.7
|
|
|
|
|
|
|
|
The debt discount and the debt issuance costs attributable to the liability component are being amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 9.23%. The remaining term of the Convertible Notes was 5.9 years as of June 30, 2020.
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, our Credit Agreement and the indenture governing our 5.625% Notes restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the Penn Master Lease and the Pinnacle Master Lease, 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 Quarterly Report on Form 10-Q with the SEC.
Other Long-Term Obligations
Ohio Relocation Fees
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 (“Dayton”) and Hollywood Gaming at Mahoning Valley Race Course (“Mahoning Valley”), 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. This obligation is accreted to interest expense at an effective yield of 5.0%. The amount included in interest expense related to this obligation was $0.9 million and $1.8 million for the three and six months ended June 30, 2020, respectively, as compared to $1.1 million and $2.2 million for the three and six months ended June 30, 2019, respectively.
Note 10—Leases
Master Leases
The components contained within the Master Leases are accounted for as either (i) operating leases, (ii) finance leases, or (iii) financing obligations. Changes to future lease payments under the Master Leases (i.e., when future escalators become known or future variable rent resets occur), which are discussed below, require the Company to either (i) increase both the ROU assets and corresponding lease liabilities with respect to operating and finance leases or (ii) record the incremental variable payment associated with the financing obligation to interest expense. In addition, monthly rent associated with Hollywood Casino Columbus (“Columbus”) and monthly rent in excess of the Hollywood Casino Toledo (“Toledo”) rent floor, which are discussed below, are considered contingent rent.
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.
Penn Master Lease
Pursuant to the 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 Company has determined that the lease term is 35 years.
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 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 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 acquisition of Pinnacle Entertainment, Inc., on October 15, 2018, 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, on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 32.5 years.
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 the performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues 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. Upon reset of the Pinnacle Percentage Rent, effective May 1, 2020, we recognized an additional operating lease ROU asset and corresponding lease liability of $14.9 million. 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.
Operating Leases
In addition to the operating lease components contained within the Master Leases (primarily land), the Company’s operating leases consist mainly of (i) individual triple net leases with GLPI for the real estate assets used in the operations of Tropicana Las Vegas (the “Tropicana Lease”) and Meadows Racetrack and Casino (the “Meadows Lease”), (ii) individual triple net leases with VICI Properties Inc. (NYSE: VICI) (“VICI”) for the real estate assets used in the operations of Margaritaville (the “Margaritaville Lease”) and Greektown (the “Greektown Lease” and collectively with the Master Leases, the Meadows Lease, the Margaritaville Lease, and the Tropicana Lease, the “Triple Net Leases”), (iii) ground and levee leases to landlords which were not assumed by our REIT Landlords and remain an obligation of the Company, and (iv) building and equipment not subject to the Master Leases. Certain of our lease agreements include rental payments based on a percentage of sales over specified contractual amounts, rental payments adjusted periodically for inflation, and rental payments based on usage. The Company’s leases include options to extend the lease terms. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
On April 16, 2020, we entered into the Tropicana Lease with a subsidiary of GLPI for the real estate assets used in the operations of Tropicana for nominal rent 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 in Note 5, “Acquisitions and Dispositions.” In the event that GLPI sells the real estate assets used in the operations of Tropicana, the Tropicana Lease will automatically terminate. Upon execution of the Tropicana Lease, we recorded an operating lease ROU asset of $61.6 million, which is included in “Lease right-of-use assets” within the unaudited Condensed Consolidated Balance Sheets.
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, which was determined to be $0.3 million, effective February 1, 2020, an additional operating lease ROU asset and corresponding operating lease liability of $3.1 million were recognized.
The following is a maturity analysis of our operating leases, finance leases and financing obligations as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Operating Leases
|
|
Finance Leases
|
|
Financing Obligations
|
Years ending December 31,
|
|
|
|
|
|
2020 (excluding the six months ended June 30, 2020)
|
$
|
214.4
|
|
|
$
|
10.8
|
|
|
$
|
183.6
|
|
2021
|
412.4
|
|
|
21.7
|
|
|
367.3
|
|
2022
|
403.7
|
|
|
21.6
|
|
|
367.3
|
|
2023
|
398.0
|
|
|
20.8
|
|
|
367.3
|
|
2024
|
381.7
|
|
|
16.7
|
|
|
367.3
|
|
Thereafter
|
8,156.4
|
|
|
393.5
|
|
|
9,270.6
|
|
Total lease payments
|
9,966.6
|
|
|
485.1
|
|
|
10,923.4
|
|
Less: Imputed interest
|
(5,435.4)
|
|
|
(262.4)
|
|
|
(6,804.2)
|
|
Present value of future lease payments
|
4,531.2
|
|
|
222.7
|
|
|
4,119.2
|
|
Less: Current portion of lease obligations
|
(123.4)
|
|
|
(6.7)
|
|
|
(34.6)
|
|
Long-term portion of lease obligations
|
$
|
4,407.8
|
|
|
$
|
216.0
|
|
|
$
|
4,084.6
|
|
Total payments made under the Triple Net Leases, inclusive of rent credits utilized, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended 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.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location on unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating Lease Costs
|
|
|
|
|
|
|
|
|
|
Rent expense associated with triple net operating leases (1)
|
General and administrative
|
|
$
|
103.8
|
|
|
$
|
90.0
|
|
|
$
|
201.3
|
|
|
$
|
174.7
|
|
Operating lease cost (2)
|
Primarily General and administrative
|
|
3.7
|
|
|
4.6
|
|
|
8.0
|
|
|
9.0
|
|
Short-term lease cost
|
Primarily Gaming expense
|
|
4.1
|
|
|
14.8
|
|
|
16.2
|
|
|
28.5
|
|
Variable lease cost (2)
|
Primarily Gaming expense
|
|
0.2
|
|
|
0.3
|
|
|
1.0
|
|
|
1.8
|
|
Total
|
|
|
$
|
111.8
|
|
|
$
|
109.7
|
|
|
$
|
226.5
|
|
|
$
|
214.0
|
|
|
|
|
|
|
|
|
|
|
|
Finance Lease Costs
|
|
|
|
|
|
|
|
|
|
Interest on lease liabilities (3)
|
Interest expense, net
|
|
$
|
3.8
|
|
|
$
|
3.9
|
|
|
$
|
7.7
|
|
|
$
|
7.7
|
|
Amortization of ROU assets (3)
|
Depreciation and amortization
|
|
2.0
|
|
|
1.9
|
|
|
4.0
|
|
|
3.9
|
|
Total
|
|
|
$
|
5.8
|
|
|
$
|
5.8
|
|
|
$
|
11.7
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
Financing Obligation Costs
|
|
|
|
|
|
|
|
|
|
Interest on financing obligations (4)
|
Interest expense, net
|
|
$
|
99.1
|
|
|
$
|
98.4
|
|
|
$
|
196.5
|
|
|
$
|
196.0
|
|
(1)Pertains to the operating lease components contained within the Master Leases (primarily land), the Meadows Lease, the Margaritaville Lease, the Greektown Lease, and the Tropicana Lease, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components (the land), which was $1.6 million and $4.7 million for the three and six months ended June 30, 2020, respectively, pertaining to Columbus, and $6.2 million and $13.0 million for the three and six months ended June 30, 2019, respectively, pertaining to Columbus and Toledo.
(2)Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.
(3)Primarily pertains to the Dayton and Mahoning Valley finance leases.
(4)Pertains to the components contained within the Master Leases (primarily buildings) determined to be financing obligations, inclusive of the variable expense associated with Columbus and Toledo for the finance lease components (the buildings), which was $2.2 million and $5.6 million for the three and six months ended June 30, 2020, respectively, pertaining to Columbus, and $5.7 million and $12.0 million for the three and six months ended June 30, 2019, respectively, pertaining to Columbus and Toledo.
Note 11—Investments in and Advances to Unconsolidated Affiliates
As of June 30, 2020, investments in and advances to unconsolidated affiliates primarily consisted of the Company’s 36% interest in Barstool Sports, its 50% investment in Kansas Entertainment, the JV with International Speedway that owns Hollywood Casino at Kansas Speedway, its 50% interest in Freehold Raceway, and its 50% JV with MAXXAM, Inc. (“MAXXAM”) that owns and operates racetracks in Texas.
Investment in Barstool Sports
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, par value $0.0001 per share, of Barstool Sports for a purchase price of $161.2 million. The purchase price consisted of $135.0 million in cash and $23.1 million in shares of a new class of non-voting convertible preferred stock of the Company (as discussed below). 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). As part of our investment, we recorded various forward arrangements with a fair value of $3.1 million.
On February 20, 2020, the Company issued 883 shares of Series D Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”), to certain individual stockholders affiliated with Barstool Sports. 1/1,000th of a share of Series D Preferred Stock is convertible into one share of Penn Common Stock. The Series D Preferred Stock will be entitled to participate equally and ratably in all dividends and distributions paid to holders of Penn Common Stock based on the number of shares of Penn
Common Stock into which such Series D Preferred Stock could convert. Series D Preferred Stock is nonvoting stock. The Series D Preferred Stock issued to certain individual stockholders affiliated with Barstool Sports will be available for conversion into Penn Common Stock in tranches over the next four years as stipulated in the stock purchase agreement, with the first 20% tranche available for conversion into Penn Common Stock in the first quarter of 2021. As of June 30, 2020, none of the Series D Preferred Stock can be converted into Penn Common Stock.
As a part of the stock purchase agreement, we entered into a commercial agreement that provides us with access to Barstool Sports’ customer list and exclusive advertising on the Barstool Sports platform over the term of the agreement. The initial term of the commercial agreement is ten years and, unless earlier terminated and subject to certain exceptions, will automatically renew for three additional ten-year terms (a total of 40 years assuming all renewals are exercised). Upon consummation of the transaction, we recorded an amortizing intangible asset pertaining to the customer list of $2.4 million and a prepaid expense pertaining to the advertising in the amount of $17.5 million, of which $16.3 million was classified as long-term. The long-term portion of the prepaid advertising expense is included in “Other assets” within our unaudited Condensed Consolidated Balance Sheets.
As of June 30, 2020, our investment in Barstool Sports was $144.0 million, which is inclusive of $3.4 million of costs we incurred to close the transaction. We record our proportionate share of Barstool Sports’ net income (loss) one quarter in arrears.
The Company determined that Barstool Sports qualified as a VIE as of June 30, 2020. The Company did not consolidate its investment in Barstool Sports as of and for the three and six months ended June 30, 2020 as the Company determined that it did not qualify as the primary beneficiary of Barstool Sports either at the commencement date of its investment or for the subsequent period ended June 30, 2020, primarily as a result of the Company not having the power to direct the activities of the VIE that most significantly affect Barstool Sports’ economic performance.
Kansas Joint Venture
As of June 30, 2020 and December 31, 2019, our investment in Kansas Entertainment was $87.3 million and $90.8 million, respectively. The Company has determined that Kansas Entertainment does not qualify as a VIE. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the JV, primarily as it did not have the ability to direct the activities of the JV that most significantly impacted the JV’s economic performance without the input of International Speedway. Therefore, the Company did not consolidate its investment in Kansas Entertainment as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019.
The following table provides summary income statement information of Kansas Entertainment for the comparative periods that are included within the Company’s unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Revenues
|
$
|
13.2
|
|
|
$
|
40.2
|
|
|
$
|
47.4
|
|
|
$
|
79.6
|
|
Operating expenses
|
12.6
|
|
|
26.8
|
|
|
37.0
|
|
|
54.2
|
|
Operating income
|
0.6
|
|
|
13.4
|
|
|
10.4
|
|
|
25.4
|
|
Net income
|
$
|
0.6
|
|
|
$
|
13.4
|
|
|
$
|
10.4
|
|
|
$
|
25.4
|
|
|
|
|
|
|
|
|
|
Net income attributable to Penn National
|
$
|
0.3
|
|
|
$
|
6.7
|
|
|
$
|
5.2
|
|
|
$
|
12.7
|
|
Texas Joint Venture
MAXXAM owns and operates the Sam Houston Race Park in Houston, Texas and the Valley Race Park in Harlingen, Texas, and holds a license for a racetrack in Austin, Texas. During the first quarter of 2020, principally due to on-going negative operating results of these racetracks, we recorded an other-than-temporary impairment on our investment in the JV of $4.6 million, which is included in “Impairment losses” within our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Note 12—Income Taxes
On March 27, 2020, the President of the United States signed into law the CARES Act, which focused on providing relief in response to the adverse economic impact of the COVID-19 pandemic. Among other provisions, the CARES Act provides various forms of income tax relief to U.S. taxpayers through temporary amendments to net operating loss (“NOLs”) rules, temporarily increases the limitation on interest expense deductibility and immediate expensing for eligible qualified improvement property. We are currently evaluating the provisions of the CARES Act. As of June 30, 2020, although we do not expect these provisions to have a significant impact on our effective tax rate, we are estimating an income tax refund between approximately $40 million and $50 million primarily attributable to the carryback of NOLs.
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, valuation allowance adjustments based on new evidence and enactment of tax laws, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss 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. 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 pretax earnings, are considered in assessing our ability to realize our net deferred tax assets.
As of each reporting date, the Company considers all available positive and negative evidence that could affect its view of the future realization of deferred tax assets pursuant to ASC Topic 740, “Income Taxes.” As of December 31, 2019, the Company had significant three-year cumulative pretax income of $150.9 million and concluded that a valuation allowance was not necessary except for a federal capital loss carryforward and certain state deferred tax assets where we continue to be in a three-year cumulative pretax loss position. The Company’s valuation allowance as of December 31, 2019 was $54.2 million.
During the three months ended June 30, 2020, the Company determined that a valuation allowance was still necessary due to the significant impairment charge previously recorded during the first quarter of 2020, related to the COVID-19 pandemic. Such objective evidence of being in a three-year cumulative pretax loss limits our ability to consider other subjective evidence such as our forecast of pretax earnings. As a result of this objective negative evidence, during the three months ended June 30, 2020, the Company increased the valuation allowance in the amount of $9.4 million on certain federal and state deferred tax assets that are more likely than not to be realized. The Company also recorded a $22.5 million release in the valuation allowance recognized as part of “Additional paid-in-capital” related to the offering of the Convertible Notes (see Note 9, “Long-term Debt”).
On March 27, 2020, we entered into the Term Sheet with GLPI whereby GLPI agreed to (i) purchase the real estate assets associated with our Tropicana property, which closed on April 16, 2020, and (ii) purchase the land underlying our Morgantown development project subject to regulatory approval, which we expect to close in the fourth quarter of 2020. These transactions are treated as a sale of business assets for income tax purposes. The Morgantown land sale will be included in the interim period when the transaction closes, which may impact our estimated 2020 net operating loss.
Note 13—Commitments and Contingencies
The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions, development agreements and other matters arising in the ordinary course of business. Although the Company maintains what it believes to be adequate insurance coverage to mitigate the risk of loss pertaining to covered matters, legal and administrative proceedings can be costly, time-consuming and unpredictable. The Company does not believe that the final outcome of these matters will have a material adverse effect on its financial position, results of operations, or cash flows.
Note 14—Stockholders’ Equity and Stock-Based Compensation
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.
2018 Long Term Incentive Compensation Plan
The Company’s 2018 Long Term Incentive Compensation Plan (the “2018 Plan”) permits it to issue stock options (incentive and/or non-qualified), stock appreciation rights (“SARs”), RSAs, phantom stock units (“PSUs”) and other equity and cash awards to employees. Non-employee directors are eligible to receive all such awards, other than incentive stock options. Pursuant to the 2018 Plan, 12,700,000 shares of the Company’s common stock are reserved for issuance. For purposes of determining the number of shares available for issuance under the 2018 Plan, stock options and SARs (except cash-settled SARs) count against the 12,700,000 limit as one share of common stock for each share granted and restricted stock or any other full value stock award count as issuing 2.30 shares of common stock for each share granted. Any awards that are not settled in shares of common stock are not counted against the limit. As of June 30, 2020, there were 7,532,384 shares available for future grants under the 2018 Plan.
Performance Share Program
In February 2019, the Company’s Compensation Committee of the Board of Directors adopted a performance share program (the “Performance Share Program II”) pursuant to the 2018 Plan. An aggregate of 107,297 RSAs with performance-based vesting conditions, at target, was granted in February 2020 under the Performance Share Program II, with the grant having a three-year award period consisting of three one-year performance periods and a three-year service period. The performance threshold for vesting of these awards is 50% of target and, based on the level of achievement, up to 150% of target.
Stock Options
The Company granted 0.6 million and 1.3 million stock options during the six months ended June 30, 2020 and 2019, respectively.
Stock-based Compensation Expense
Stock-based compensation expense, which pertains principally to our stock options and RSAs, for the three and six months ended June 30, 2020 was $2.9 million and $8.9 million, respectively, as compared to $3.3 million and $6.7 million for the three and six months ended June 30, 2019, respectively, and is included within the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) under “General and administrative.”
Stock Appreciation Rights
Our SARs are accounted for as liability awards since they will be settled in cash and vest over a period of four years. The fair value of cash-settled SARs is calculated each reporting period and estimated using the Black-Scholes option pricing model. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Condensed Consolidated Balance Sheets, associated with its cash-settled SARs of $17.0 million and $14.4 million as of June 30, 2020 and December 31, 2019, respectively.
For SARs held by employees of the Company, there was $23.0 million of total unrecognized compensation cost as of June 30, 2020 that will be recognized over the awards remaining weighted-average vesting period of 2.9 years. For the three and six months ended June 30, 2020, the Company recognized a charge to compensation expense of $17.7 million and $12.2 million, respectively, associated with these awards, as compared to a reduction to compensation expense of $0.5 million and a charge to compensation expense of $2.5 million for the three and six months ended June 30, 2019, respectively. Compensation expense associated with our SARs is recorded in “General and administrative” within the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We paid $10.2 million and $1.8 million during the six months ended June 30, 2020 and 2019, respectively, related to cash-settled SARs.
Phantom Stock Units
Our PSUs entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date. Our PSUs vest over a period of three or four years. The cash-settled PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Condensed Consolidated Balance Sheets, associated with its cash-settled PSUs of $2.6 million and $3.3 million as of June 30, 2020 and December 31, 2019, respectively.
For PSUs held by employees and directors of the Company, there was $3.3 million of total unrecognized compensation cost as of June 30, 2020 that will be recognized over the awards remaining weighted-average vesting period of 1.7 years. For the three and six months ended June 30, 2020, the Company recognized $1.9 million and $2.0 million of compensation expense, respectively, associated with these awards, as compared to $0.5 million and $1.6 million for the three and six months ended June 30, 2019, respectively. Compensation expense associated with our PSUs is recorded in “General and administrative” within the unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We paid $2.8 million and $2.5 million during the six months ended June 30, 2020 and 2019, respectively, pertaining to cash-settled PSUs.
Share Repurchase Program
In January 2019, the Company announced a share repurchase program pursuant to which the Board of Directors authorized to repurchase up to $200.0 million of the Company’s common stock, which expires on December 31, 2020. The Company did not repurchase any shares of its common stock during the six months ended June 30, 2020. During the six months ended June 30, 2019, the Company repurchased 1,271,823 shares of its common stock in open market transactions for $24.9 million at an average price of $19.55 per share. All of the repurchased shares were retired.
Note 15—Earnings (Loss) per Share
For the three and six months ended June 30, 2020, we recorded a net loss attributable to Penn National. As such, because the dilution from potential common shares was antidilutive, we used basic weighted-average common shares outstanding, rather than diluted weighted-average common shares outstanding when calculating diluted loss per share. The stock options, RSAs, convertible preferred shares and convertible debt that could potentially dilute basic EPS in the future that were not included in the computation of diluted loss per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the three months ended June 30, 2020
|
|
For the six months ended June 30, 2020
|
Assumed conversion of dilutive stock options
|
1.5
|
|
|
1.8
|
|
Assumed conversion of dilutive RSAs
|
0.2
|
|
|
0.3
|
|
Assumed conversion of convertible preferred shares
|
0.8
|
|
|
0.6
|
|
Assumed conversion of convertible debt
|
7.9
|
|
|
4.0
|
|
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the three months ended June 30, 2019
|
|
For the six months ended June 30, 2019
|
Weighted-average common shares outstanding - Basic
|
116.0
|
|
|
116.1
|
|
Assumed conversion of dilutive stock options
|
1.6
|
|
|
1.9
|
|
Assumed conversion of dilutive RSAs
|
0.1
|
|
|
0.2
|
|
Weighted-average common shares outstanding - Diluted
|
117.7
|
|
|
118.2
|
|
Options to purchase 3.0 million and 1.9 million shares were outstanding during the three and six months ended June 30, 2020, respectively, as compared to 2.0 million and 1.9 million shares during the three and six months ended June 30, 2019, respectively, but were not included in the computation of diluted earnings (loss) per share because they were antidilutive.
The following table presents the calculation of basic and diluted earnings (loss) per share for the Company’s common stock for the three and six months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions, except per share data)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Calculation of basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
$
|
(213.9)
|
|
|
$
|
51.6
|
|
|
$
|
(822.5)
|
|
|
$
|
92.5
|
|
Weighted-average common shares outstanding - basic
|
126.8
|
|
|
116.0
|
|
|
121.3
|
|
|
116.1
|
|
Basic earnings (loss) per share
|
$
|
(1.69)
|
|
|
$
|
0.44
|
|
|
$
|
(6.78)
|
|
|
$
|
0.80
|
|
Calculation of diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stock
|
$
|
(213.9)
|
|
|
$
|
51.6
|
|
|
$
|
(822.5)
|
|
|
$
|
92.5
|
|
Weighted-average common shares outstanding - diluted
|
126.8
|
|
|
117.7
|
|
|
121.3
|
|
|
118.2
|
|
Diluted earnings (loss) per share
|
$
|
(1.69)
|
|
|
$
|
0.44
|
|
|
$
|
(6.78)
|
|
|
$
|
0.78
|
|
Note 16—Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s trade accounts receivable and payables approximates the carrying amounts.
Cash and Cash Equivalents
The fair value of the Company’s cash and cash equivalents approximates their carrying amount, due to the short maturity of the cash equivalents.
Equity Securities
As of June 30, 2020 and December 31, 2019, we held $48.3 million and $40.5 million in equity securities, respectively, including ordinary shares and warrants, which are reported as “Other assets” in our unaudited Condensed Consolidated Balance Sheet. These equity securities are the result of Penn Interactive entering into multi-year agreements with third-party sports betting operators for online sports betting and related iGaming market access across our portfolio during the third quarter of 2019. During the three and six months ended June 30, 2020, we recognized a holding gain of $29.5 million and $7.7 million, respectively, related to these equity securities, which is included in “Other,” as reported in “Other income (expenses)” within our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The fair value of the equity securities was determined using Level 2 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities, foreign currency exchange rates, a discount for lack of marketability (“DLOM”) with respect to the ordinary shares, and a Black-Scholes option pricing model with respect to the warrants. The DLOM is based on the remaining term of the relevant lock-up periods and the volatility associated with the underlying equity securities. The Black-Scholes option pricing model utilizes the exercise price of the warrants, a risk-free rate, volatility associated with the underlying equity securities and the expected life of the warrants.
Held-to-maturity Securities and Promissory Notes
We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own 1.0% of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack, and a 75.5% interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future.
As of June 30, 2020 and December 31, 2019, PRP held $15.1 million in promissory notes issued by RDC and $6.7 million in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and the local government corporation bonds are collateralized by the assets of Retama Park Racetrack. As of June 30, 2020 and December 31, 2019, the promissory notes and the local government corporation bonds, which have long-term contractual maturities, were included in “Other assets” within our unaudited Condensed Consolidated Balance Sheets.
The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered. The estimated fair values of such investments are principally based on appraised values of the land associated with Retama Park Racetrack, which are classified as Level 2 inputs.
Long-term Debt
The fair value of our Term Loan A Facility, Term Loan B-1 Facility, 5.625% Notes, and Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement. The fair value of our Revolving Credit Facility approximates its carrying amount as it is revolving, variable-rate debt, which we also classify as a Level 1 measurement.
Other long-term obligations as of June 30, 2020 and December 31, 2019 included the relocation fees for Dayton and Mahoning Valley, which are discussed in Note 9, “Long-term Debt,” and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. The fair values of these long-term obligations are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and are classified as Level 2 measurements.
Other Liabilities
Other liabilities as of June 30, 2020 principally consisted of contingent purchase price related to Plainridge Park Casino and, as of December 31, 2019, principally consisted of contingent purchase price related to Plainridge Park Casino and Absolute Games, LLC (“Absolute Games”), which was acquired by Penn Interactive during the second quarter of 2018. The Plainridge Park Casino contingent purchase price is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced in June 24, 2015. As of June 30, 2020, we were contractually obligated to make six additional annual payments. During the second quarter of 2020, we made the second and final payment of $8.2 million on the Absolute Games contingent purchase price, which corresponded to the second year of operations after the acquisition and was calculated based on earnings. The fair value of these liabilities, which are estimated based on an income approach using a discounted cash flow model and have been classified as Level 3 measurements, are included within our unaudited Condensed Consolidated Balance Sheets in “Accrued expenses and other current liabilities” or “Other long-term liabilities,” depending on the timing of the next payment.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
(in millions)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,244.3
|
|
|
$
|
1,244.3
|
|
|
$
|
1,244.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
$
|
48.3
|
|
|
$
|
48.3
|
|
|
$
|
—
|
|
|
$
|
48.3
|
|
|
$
|
—
|
|
Held-to-maturity securities
|
$
|
6.7
|
|
|
$
|
6.7
|
|
|
$
|
—
|
|
|
$
|
6.7
|
|
|
$
|
—
|
|
Promissory notes
|
$
|
15.1
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
|
$
|
2,403.1
|
|
|
$
|
2,345.4
|
|
|
$
|
2,345.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5.625% Notes
|
$
|
399.4
|
|
|
$
|
375.3
|
|
|
$
|
375.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Convertible Notes
|
$
|
233.6
|
|
|
$
|
497.1
|
|
|
$
|
497.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other long-term obligations
|
$
|
80.8
|
|
|
$
|
81.1
|
|
|
$
|
—
|
|
|
$
|
81.1
|
|
|
$
|
—
|
|
Other liabilities
|
$
|
10.6
|
|
|
$
|
10.6
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
(in millions)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
437.4
|
|
|
$
|
437.4
|
|
|
$
|
437.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
|
$
|
40.5
|
|
|
$
|
40.5
|
|
|
$
|
—
|
|
|
$
|
40.5
|
|
|
$
|
—
|
|
Held-to-maturity securities
|
$
|
6.7
|
|
|
$
|
6.7
|
|
|
$
|
—
|
|
|
$
|
6.7
|
|
|
$
|
—
|
|
Promissory notes
|
$
|
15.1
|
|
|
$
|
15.1
|
|
|
$
|
—
|
|
|
$
|
15.1
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
|
$
|
1,896.5
|
|
|
$
|
1,930.6
|
|
|
$
|
1,930.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5.625% Notes
|
$
|
399.4
|
|
|
$
|
426.0
|
|
|
$
|
426.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other long-term obligations
|
$
|
89.2
|
|
|
$
|
89.7
|
|
|
$
|
—
|
|
|
$
|
89.7
|
|
|
$
|
—
|
|
Other liabilities
|
$
|
20.3
|
|
|
$
|
20.3
|
|
|
$
|
—
|
|
|
$
|
2.8
|
|
|
$
|
17.5
|
|
The following table summarizes the changes in fair value of our Level 3 liabilities measured on a recurring basis:
|
|
|
|
|
|
|
Other Liabilities
|
(in millions)
|
Contingent Purchase Price
|
Balance as of January 1, 2020
|
$
|
17.5
|
|
|
|
Payments
|
(8.3)
|
|
Included in loss (1)
|
(1.4)
|
|
Balance as of June 30, 2020
|
$
|
7.8
|
|
(1)The reduction in expense is included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
The following table sets forth the assets measured at fair value on a non-recurring basis during the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Valuation Date
|
|
Valuation Technique
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Balance
|
|
Total Reduction in Fair Value
Recorded
|
Goodwill
|
3/31/2020
|
|
Discounted cash flow and market approach
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
160.5
|
|
|
$
|
160.5
|
|
|
$
|
(113.0)
|
|
Gaming licenses
|
3/31/2020
|
|
Discounted cash flow
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
568.0
|
|
|
$
|
568.0
|
|
|
$
|
(437.0)
|
|
Trademarks
|
3/31/2020
|
|
Discounted cash flow
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
216.5
|
|
|
$
|
216.5
|
|
|
$
|
(61.5)
|
|
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities on a recurring basis as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Discount Rate
|
Contingent purchase price - Plainridge Park Casino
|
Discounted cash flow
|
|
Discount rate
|
|
8.09%
|
As discussed in Note 7, “Goodwill and Other Intangible Assets,” we recorded impairments on our gaming licenses and trademarks, which are indefinite-lived intangible assets, as a result of the first quarter of 2020 interim assessment for impairment. The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements of other indefinite-lived intangible assets as of the valuation date below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range or Amount
|
As of March 31, 2020
|
|
|
|
|
|
|
|
Gaming licenses
|
$
|
568.0
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
13.25% - 14.0%
|
|
|
|
|
|
Long-term revenue growth rate
|
|
2.0
|
%
|
Trademarks
|
$
|
216.5
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
13.25% - 14.0%
|
|
|
|
|
|
Long-term revenue growth rate
|
|
2.0
|
%
|
|
|
|
|
|
Pretax royalty rate
|
|
1.0% - 2.0%
|
Note 17—Segment Information
We have aggregated our operating segments into four reportable segments based on the similar characteristics of the operating segments within the regions in which they operate: Northeast, South, West and Midwest. The Other category is included in the following tables in order to reconcile the segment information to the consolidated information.
The Company utilizes Adjusted EBITDAR (as defined below) as its measure of segment profit or loss. The following table highlights our revenues and Adjusted EBITDAR for each reportable segment and reconciles Adjusted EBITDAR on a consolidated basis to net income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAR (3):
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
Other operating benefits (costs) and other income (expenses):
|
|
|
|
|
|
|
|
Rent expense associated with triple net operating leases (4)
|
(103.8)
|
|
|
(90.0)
|
|
|
(201.3)
|
|
|
(174.7)
|
|
Stock-based compensation
|
(2.9)
|
|
|
(3.3)
|
|
|
(8.9)
|
|
|
(6.7)
|
|
Cash-settled stock-based awards variance
|
(16.1)
|
|
|
3.4
|
|
|
(7.2)
|
|
|
3.0
|
|
Gain (loss) on disposal of assets
|
28.5
|
|
|
(0.4)
|
|
|
27.9
|
|
|
(0.9)
|
|
Contingent purchase price
|
(0.8)
|
|
|
(1.0)
|
|
|
1.4
|
|
|
(5.8)
|
|
Pre-opening and acquisition costs
|
(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
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Non-operating items of equity method investments (5)
|
(1.1)
|
|
|
(0.9)
|
|
|
(2.0)
|
|
|
(1.9)
|
|
Interest expense, net
|
(135.0)
|
|
|
(134.7)
|
|
|
(264.8)
|
|
|
(267.0)
|
|
|
|
|
|
|
|
|
|
Other
|
29.3
|
|
|
—
|
|
|
7.5
|
|
|
—
|
|
Income (loss) before income taxes
|
(272.8)
|
|
|
69.9
|
|
|
(980.9)
|
|
|
125.7
|
|
Income tax benefit (expense)
|
58.4
|
|
|
(18.5)
|
|
|
157.9
|
|
|
(33.4)
|
|
Net income (loss)
|
$
|
(214.4)
|
|
|
$
|
51.4
|
|
|
$
|
(823.0)
|
|
|
$
|
92.3
|
|
(1)The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club and the Company’s JV 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 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, the Other category includes our proportionate share of the Adjusted EBITDAR of Barstool Sports (as determined and discussed in footnotes (3) and (5) below).
(2)Represents the elimination of intersegment revenues associated with Penn Interactive and HPT.
(3)We define Adjusted EBITDAR as earnings before interest expense, net; income taxes; depreciation and amortization; rent expense associated with triple net operating leases (see footnote (4) below); 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 EBITDAR is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (see footnote (5) below) added back for Barstool Sports and our Kansas Entertainment JV.
(4)The Company’s triple net operating leases include certain components of the Master Leases (primarily land), the Meadows Lease, the Margaritaville Lease, the Greektown Lease, and the Tropicana Lease.
(5)Consists principally of interest expense, net; income taxes; depreciation and amortization; and stock-based compensation expense associated with Barstool Sports and our Kansas Entertainment JV.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
For the six months ended June 30,
|
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Capital expenditures:
|
|
|
|
|
|
|
|
Northeast segment
|
$
|
21.7
|
|
|
$
|
31.8
|
|
|
$
|
52.0
|
|
|
$
|
44.4
|
|
South segment
|
3.8
|
|
|
7.7
|
|
|
7.8
|
|
|
16.6
|
|
West segment
|
1.6
|
|
|
7.1
|
|
|
4.1
|
|
|
14.1
|
|
Midwest segment
|
1.3
|
|
|
9.3
|
|
|
4.9
|
|
|
16.4
|
|
Other
|
2.5
|
|
|
1.5
|
|
|
4.9
|
|
|
3.5
|
|
Total capital expenditures
|
$
|
30.9
|
|
|
$
|
57.4
|
|
|
$
|
73.7
|
|
|
$
|
95.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates (2)
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87.3
|
|
|
$
|
176.6
|
|
|
$
|
264.0
|
|
Total assets
|
$
|
1,928.5
|
|
|
$
|
1,142.5
|
|
|
$
|
382.7
|
|
|
$
|
1,171.8
|
|
|
$
|
9,696.0
|
|
|
$
|
14,321.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
90.9
|
|
|
$
|
37.3
|
|
|
$
|
128.3
|
|
Total assets
|
$
|
2,273.7
|
|
|
$
|
1,397.0
|
|
|
$
|
752.1
|
|
|
$
|
1,412.2
|
|
|
$
|
8,359.5
|
|
|
$
|
14,194.5
|
|
(1)The real estate assets subject to the Master Leases, which are classified as either property and equipment, operating lease ROU assets, or finance lease ROU assets, are included within the Other category.
(2)Our investment in Barstool Sports is included within the Other category.