NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Basis of Presentation
Organization: With a gaming footprint that includes 44 properties across 20 states as of December 31, 2021, Penn National Gaming, Inc., together with its subsidiaries (“Penn National,” the “Company,” “we,” “our,” or “us”) is a highly innovative omni-channel provider of retail casino gaming, online gaming, live racing, sports betting, and digital sports content. Our wholly-owned interactive division, Penn Interactive Ventures, LLC (“Penn Interactive”), operates retail sports betting in the Company’s retail properties, as well as online sports betting and online social casino, bingo, and iCasino products (collectively, “iGaming”). In October 2021, we acquired Score Media and Gaming, Inc. (“theScore”), a sports betting and digital media company. In addition, in February 2020, we entered a strategic partnership with Barstool Sports, Inc. (“Barstool Sports”), a leading digital sports, entertainment, lifestyle and media company. Combined with the power of theScore and Barstool Sports, Penn National has evolved into a leading North American digital sports content, gaming and technology company. The Company's omni-channel approach is further bolstered by its mychoice customer loyalty program (the “mychoice program”), which rewards and recognizes its over 25 million members for their loyalty to both retail and online gaming and sports betting products with a dynamic set of industry offers, experiences, and service levels.
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 12, “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. To help combat the spread of COVID-19 and pursuant to various orders from state gaming regulatory bodies or governmental authorities, operations at all of our properties were temporarily suspended for single or multiple time periods during 2020 and into 2021. Once reopened, properties operated with reduced gaming and hotel capacity and limited food and beverage offerings in order to accommodate social distancing and health and safety protocols. As of December 31, 2021, the majority of our properties are operating at full capacity while adhering to state mandated health and safety protocols.
The COVID-19 pandemic caused significant disruptions to our business and had a material adverse impact on our financial condition, results of operations and cash flows. As a consequence, between March 13, 2020 and December 31, 2020, we entered into a series of transactions to improve our financial position and liquidity, as described in the relevant notes to our Consolidated Financial Statements. Additionally, we completed a $400.0 million offering of senior unsecured notes on July 1, 2021, as discussed in Note 11, “Long term debt.” We could experience further adverse impacts as a result of the COVID-19 pandemic, including, but not limited to, temporarily suspending operations at our properties if ordered by such governmental bodies, or capacity restrictions on our operations. 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 and safety guidelines, and the sustainability of current trends in recovery at our properties. Basis of Presentation: The Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).
Note 2—Significant Accounting Policies
Principles of Consolidation: The 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 (“VOEs”) or variable interest entities (“VIEs”) are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications: Certain reclassifications have been made to conform the prior period presentation.
Use of Estimates: The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions as of the date of the Consolidated Financial Statements that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, the useful lives for depreciable and amortizable assets, the provision for credit losses, income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities, the liabilities associated with our mychoice program, the initial measurements of financing obligations associated
with the Master Leases, projected cash flows in assessing the recoverability of long-lived assets, asset impairments, goodwill and other intangible assets, projected cash flows in assessing the initial valuation of intangible assets in conjunction with acquisitions, the initial selection of useful lives for depreciable and amortizable assets in conjunction with acquisitions, contingencies and litigation inclusive of financing arrangements in which the Company receives up-front cash proceeds, and stock-based compensation expense. We applied estimation methods consistently for all periods presented within our Consolidated Financial Statements. Actual results may differ from those estimates.
Segment Information: We have five reportable segments: Northeast, South, West, Midwest, and Interactive. Our gaming and racing properties are grouped by geographic location and each is viewed as an operating segment with the exception of our two properties in Jackpot, Nevada, which are viewed as one operating segment. We consider our combined Video Gaming Terminal (“VGT”) operations, by state, to be separate operating segments. Interactive includes the operations of Penn Interactive, theScore, and our proportionate share of earnings attributable to Barstool Sports. See Note 18, “Segment Information,” for further information. For financial reporting purposes, we aggregate our operating properties into the following 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 Morgantown | Morgantown, Pennsylvania | | Morgantown Lease (1) |
Hollywood Casino at Penn National Race Course | Grantville, Pennsylvania | | Penn Master Lease |
Hollywood Casino Perryville | Perryville, Maryland | | Perryville Lease |
Hollywood Casino Toledo | Toledo, Ohio | | Penn Master Lease |
Hollywood Casino York | York, Pennsylvania | | Operating Lease (not with REIT Landlord) |
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 (2) | Pennsylvania | | N/A |
Hollywood Casino at Meadows Racetrack | Washington, Pennsylvania | | Meadows Lease |
Plainridge Park Casino | Plainville, Massachusetts | | Pinnacle Master Lease |
| | | |
South segment | | | |
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 - joint venture |
Hollywood Casino St. Louis | Maryland Heights, Missouri | | Penn Master Lease |
Prairie State Gaming (2) | Illinois | | N/A |
River City Casino | St. Louis, Missouri | | Pinnacle Master Lease |
(1)Upon termination of the Morgantown Lease, ownership of the constructed building and all tenant improvements will transfer from the Company to GLPI.
(2)VGT route operations
(3)The riverboat is owned by us and not subject to the Penn Master Lease.
(4)Pursuant to a joint venture with NASCAR and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns Hollywood Casino at Kansas Speedway.
Cash and Cash Equivalents: The Company considers all cash balances and highly-liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents.
Concentration of Credit Risk: Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market and tax-free bond funds which are exposed to minimal interest rate and credit risk. The Company has bank deposits and overnight repurchase agreements that exceed federally-insured limits.
Concentration of credit risk, with respect to casino receivables, is limited through the Company’s credit evaluation process. The Company issues markers to approved casino customers following investigations of creditworthiness. The Company utilizes a forward-looking current expected credit loss model to measure the provision for credit losses.
The Company’s receivables as of December 31, 2021 and 2020 primarily consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Markers and returned checks | $ | 15.1 | | | $ | 14.8 | |
Credit card and other advances to customers | 11.5 | | | 8.9 | |
Receivables from ATM and cash kiosk transactions | 20.9 | | | 10.9 | |
Hotel and banquet | 4.1 | | | 2.7 | |
Racing settlements | 12.8 | | | 7.7 | |
Online gaming and licensing receivables from third party operators, including taxes | 70.0 | | | 16.4 | |
Media receivables | 10.3 | | | — | |
Insurance Receivable - Hurricane Laura | 28.7 | | | 23.0 | |
Other | 29.6 | | | 20.8 | |
Provision for credit losses | (8.0) | | | (8.8) | |
Accounts receivable, net | $ | 195.0 | | | $ | 96.4 | |
Property and Equipment: Property and equipment are stated at cost, less accumulated depreciation. Capital expenditures are accounted for as either project capital or maintenance (replacement) capital expenditures. Project capital expenditures are for fixed asset additions that expand an existing facility or create a new facility. Maintenance capital expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost-effective to repair. Maintenance and repairs that neither add materially to the value of the asset nor appreciably prolong its useful life are charged to expense as incurred. Gains or losses on the disposal of property and equipment are included in the determination of income.
The estimated useful lives of property and equipment are determined based on the nature of the assets as well as the Company’s current operating strategy. Depreciation of property and equipment is recorded using the straight-line method over the shorter of the estimated useful life of the asset or the related lease term, if any, as follows:
| | | | | |
| Years |
Land improvements | 15 |
Buildings and improvements | 5 to 31 |
Vessels | 10 to 35 |
Furniture, fixtures and equipment | 3 to 31 |
All costs funded by the Company considered to be an improvement to the real estate assets subject to any of our Triple Net Leases are recorded as leasehold improvements. Leasehold improvements are depreciated over the shorter of the estimated useful life of the improvement or the related lease term.
The Company reviews the carrying amount of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on undiscounted estimated future cash flows expected to result from its use and eventual disposition. The factors considered by the Company in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other regulatory and economic factors. For purposes of recognizing and measuring impairment, assets are grouped at the individual property level representing the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. In assessing the recoverability of the carrying amount of property and equipment, we must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, we may be required to record an impairment loss for these assets. Such an impairment loss would be recognized as a non-cash component of operating income. See Note 8, “Property and Equipment.” Goodwill and Other Intangible Assets: Goodwill represents the future economic benefits of a business combination measured as the excess of the purchase price over the fair value of net assets acquired and has been allocated to our reporting units. Goodwill is tested for impairment annually on October 1st of each year, or more frequently if indicators of impairment exist. For the quantitative goodwill impairment test, an income approach, in which a discounted cash flow (“DCF”) model is utilized, and a market-based approach using guideline public company multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) from the Company’s peer group are utilized in order to estimate the fair market value of the Company’s reporting units. In determining the carrying amount of each reporting unit that utilizes real estate assets subject to our Triple Net Leases, if and as applicable, (i) the Company allocates each reporting unit their pro-rata portion of the right-of-use (“ROU”) assets, lease liabilities, and/or financing obligations, and (ii) pushes down the carrying amount of the property and equipment subject to such leases. The Company compares the fair value of its reporting units to the carrying amounts. If the carrying amount of the reporting unit exceeds the fair value, an impairment is recorded equal to the amount of the excess (not to exceed the amount of goodwill allocated to the reporting unit).
We consider our gaming licenses, trademarks, and certain other intangible assets to be indefinite-lived based on our future expectations to operate our gaming properties indefinitely as well as our historical experience in renewing these intangible assets at minimal cost with various state commissions. Indefinite-lived intangible assets are tested annually for impairment on October 1st of each year, or more frequently if indicators of impairment exist, by comparing the fair value of the recorded assets to their carrying amount. If the carrying amounts of the indefinite-lived intangible assets exceed their fair value, an impairment is recognized. The Company completes its testing of its indefinite-lived intangible assets prior to assessing the realizability of its goodwill.
The Company assesses the fair value of its gaming licenses using the Greenfield Method under the income approach, which estimates the fair value using a DCF model assuming the Company built a casino with similar utility to that of the existing casino. The method assumes a theoretical start-up company going into business without any assets other than the intangible asset being valued. The Company assesses the fair value of its trademarks using the relief-from-royalty method under the income approach. The principle behind this method is that the value of the trademark is equal to the present value of the after-tax royalty savings attributable to the owned trademark.
Other intangible assets that have a definite-life, including gaming technology and media technology, are amortized on a straight-line basis over their estimated useful lives or related service contract. The Company reviews the carrying amount of its amortizing intangible assets for possible impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Should events and circumstances indicate amortizing intangible assets may not be recoverable, the Company performs a test for recoverability whereby estimated undiscounted cash flows are compared to the carrying values of the assets. Should the estimated undiscounted cash flows exceed the carrying value, no impairments are recorded. If the undiscounted cash flows do not exceed the carrying values, an impairment is recorded based on the fair value of the asset, typically measured using either a discounted cash flow or replacement cost approach.
Equity Securities: The Company’s equity securities (including warrants) are measured at fair value each reporting period with unrealized gains and losses included in current period earnings. The Company records realized and unrealized gains and losses in “Other” within our Consolidated Statements of Operations.
Convertible Debt: Under 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 Consolidated Balance Sheets at the issuance date and the value of the equity component is treated as a debt discount. See Note 11, “Long-term Debt,” for more information. Financing Obligations: Certain of the components contained within our Master Leases (primarily buildings) are accounted for as financing obligations in accordance with ASC 470 - Debt, rather than leases.
On November 1, 2013, the Company spun-off its real estate assets into GLPI (the “Spin-Off”) and entered into the Penn Master Lease. This transaction did not meet all of the requirements for sale-leaseback accounting treatment under ASC 840, “Leases” (“ASC 840”); specifically, the Penn Master Lease contains provisions that indicate the Company has prohibited forms of continuing involvement in the leased assets, which are not a normal leaseback. Accordingly, at lease inception, we calculated a financing obligation based on the future minimum lease payments discounted at our estimated incremental borrowing rate at lease inception over the lease term of 35 years, which was determined to be 9.7%. The lease term included renewal options that were reasonably assured of being exercised and the funded construction of certain leased assets in development at the commencement of the Penn Master Lease.
On October 15, 2018, in connection with the acquisition of Pinnacle Entertainment, Inc. (the “Pinnacle Acquisition”), we assumed the Pinnacle Master Lease. Within a business combination, an arrangement that previously did not meet all of the requirements for sale-leaseback accounting treatment (and is accounted for as a financing obligation by the acquiree) retains its classification as a financing obligation on the acquiring entity’s consolidated balance sheets at the business combination date. As of the date of acquisition, we calculated the financing obligation based on the future minimum lease payments discounted at a rate determined to be fair value at the business combination date, which was determined to be 7.3%, over the remaining lease term of 32.5 years. The remaining lease term included renewal options that were reasonably assured of being exercised. Furthermore, in conjunction with the Pinnacle Acquisition, GLPI acquired the real estate assets associated with Plainridge Park Casino and leased back such assets to the Company pursuant to an amendment to the Pinnacle Master Lease (the “Plainridge Park Casino Sale-Leaseback”). The effective yield used to determine the financing obligation associated with the Plainridge Park Casino Sale-Leaseback was 9.6%.
Subsequent to the adoption of ASC 842, “Leases” (“ASC 842”) on January 1, 2019, minimum lease payments under our Master Leases are allocated between components that continue to be financing obligations (primarily buildings) and operating lease components (primarily land). Minimum lease payments related to financing obligations are recorded to interest expense and, in part, as repayments of principal reducing the associated financing obligations. Contingent payments are recorded as interest expense as incurred. The real estate assets subject to the Master Leases and which are accounted for as failed sales, are included in “Property and equipment, net” within the Company’s Consolidated Balance Sheets and are depreciated over the shorter of their remaining useful lives or lease term. Principal payments associated with financing obligations are presented as financing cash outflows and interest payments associated with financing obligations are presented as operating cash outflows within our Consolidated Statements of Cash Flows. For more information, see Note 8, “Property and Equipment,” and Note 12, “Leases.” On October 1, 2020, we sold the land underlying our Morgantown development project to GLPI in exchange for rent credits of $30.0 million. Contemporaneous with the sale, the Company entered into a triple net lease with GLPI for the land underlying Morgantown (as defined and discussed in Note 12, “Leases”). The sale-leaseback transaction did not meet the requirements for sale accounting as control of the underlying asset as defined in accordance with ASC 842 remains with the Company. Accordingly, at lease inception, we calculated a financing obligation based on the future minimum lease payments discounted at our estimated incremental borrowing rate over the lease term of 50 years, which was determined to be 11.4%. The lease term included renewal options that were reasonably assured of being exercised.
Operating and Finance Leases: The Company determines if a contract is or contains a leasing element at contract inception or the date in which a modification of an existing contract occurs. In order for a contract to be considered a lease, the contract must transfer the right to control the use of an identified asset for a period of time in exchange for consideration. Control is determined to have occurred if the lessee has the right to (i) obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (ii) direct the use of the identified asset.
Upon adoption of ASC 842, we elected the following policies: (a) to account for lease and non-lease components as a single component for all classes of underlying assets and (b) to not recognize short-term leases (i.e., leases that are less than 12 months and do not contain purchase options) within the Consolidated Balance Sheets, with the expense related to these short-term leases recorded in total operating expenses within the Consolidated Statements of Operations.
The Company has leasing arrangements that contain both lease and non-lease components. We account for both the lease and non-lease components as a single component for all classes of underlying assets. In determining the present value of lease payments at lease commencement date, the Company utilizes its incremental borrowing rate based on the information available, unless the rate implicit in the lease is readily determinable. The liability for operating and finance leases is based on the present value of future lease payments. Operating lease expenses are recorded as rent expense, which is included within general and administrative expense, within the Consolidated Statements of Operations and presented as operating cash outflows within the Consolidated Statements of Cash Flows. Finance lease expenses are recorded as depreciation expense, which is included within depreciation and amortization expense within the Consolidated Statements of Operations and interest expense over the lease term. Principal payments associated with finance leases are presented as financing cash outflows and interest payments associated with finance leases are presented as operating cash outflows within our Consolidated Statements of Cash Flows.
Debt Discount and Debt Issuance Costs: Debt issuance costs that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense using the effective interest method over the contractual term of the underlying indebtedness. These costs are classified as a direct reduction of long-term debt within the Company’s Consolidated Balance Sheets.
Self-Insurance Reserves: The Company is self-insured for employee health coverage, general liability and workers’ compensation up to certain stop-loss amounts (for general liability and workers’ compensation). We use a reserve method for each reported claim plus an allowance for claims incurred but not yet reported to a fully-developed claims reserve method based on an actuarial computation of ultimate liability. Self-insurance reserves are included in “Accrued expenses and other current liabilities” within the Company’s Consolidated Balance Sheets.
Contingent Purchase Price: The consideration for the Company’s acquisitions may include future payments that are contingent upon the occurrence of a particular event. We record an obligation for such contingent payments at fair value as of the acquisition date. We revalue our contingent purchase price obligations each reporting period. Changes in the fair value of the contingent purchase price obligation can result from changes to one or multiple inputs, including adjustments to the discount rate and changes in the assumed probabilities of successful achievement of certain financial targets. The changes in the fair value of contingent purchase price are recognized within our Consolidated Statements of Operations as a component of “General and administrative” expense.
Income Taxes: Under ASC 740, “Income Taxes” (“ASC 740”), deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more-likely-than-not (a greater than 50% probability) that some portion or all of the deferred tax assets will not be realized.
The realizability of the net deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The Company considers all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining more-likely-than-not the net deferred tax assets will be realized. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.
ASC 740 also creates a single model to address uncertainty in tax positions and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. See Note 14, “Income Taxes.”
Revenue Recognition: Our revenue from contracts with customers consists primarily of gaming wagers, inclusive of sports betting and iCasino products, food and beverage transactions, retail transactions, hotel room sales, racing wagers, management services related to the management of external operations and third-party revenue sharing agreements. See Note 5, “Revenue Disaggregation,” for information on our revenue by type and geographic location.
The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. The transaction price for food and beverage, hotel and retail contracts is the net amount collected from the customer for such goods and services. Sales tax and other taxes collected on behalf of governmental authorities are accounted for on the net basis and are not included in revenues or expenses. The transaction price for our racing operations, inclusive of live racing events conducted at our racing facilities and our import and export arrangements, is the commission received from the pari-mutuel pool less contractual fees and obligations primarily consisting of purse funding requirements, simulcasting fees, tote fees and certain pari-mutuel taxes that are directly related to the racing operations. The transaction price for our management service contracts is the amount collected for services rendered in accordance with the contractual terms.
Gaming revenue contracts involve two performance obligations for those customers earning points under our mychoice program and a single performance obligation for customers that do not participate in the mychoice program. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as opposed to an individual wagering contract. For purposes of allocating the transaction price in a gaming contract between the wagering performance obligation and the obligation associated with the loyalty points earned, we allocate an amount to the loyalty point contract liability based on the standalone selling price (“SSP”) of the points earned, which is determined by the value of a point that can be redeemed for slot play and complimentaries such as, food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores, less estimated breakage. The allocated revenue for gaming wagers is recognized when the wagering occurs as all such wagers settle immediately. The liability associated with the loyalty points is deferred and recognized as revenue when the customer redeems the loyalty points for slot play and complimentaries and such goods and services are delivered to the customer.
Food and beverage, hotel and retail services have been determined to be separate, standalone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over their stay at the hotel or when the delivery is made for the food and beverage or retail product. Cancellation fees for hotel and meeting space services are recognized upon cancellation by the customer and are included in food, beverage, hotel and other revenue within our Consolidated Statements of Operations.
Racing revenue contracts, inclusive of our (i) host racing facilities, (ii) import arrangements that permit us to simulcast in live racing events occurring at other racetracks, and (iii) export arrangements that permit our live racing events to be simulcast at other racetracks, provide access to and the processing of wagers into the pari-mutuel pool. The Company has concluded it is not the controlling entity to the arrangement, but rather functions as an agent to the pari-mutuel pool. Commissions earned from the pari-mutuel pool less contractual fees and obligations are recognized on a net basis, which is included within food, beverage, hotel and other revenues within our Consolidated Statements of Operations.
Management services have been determined to be separate, standalone performance obligations and the transaction price for such contracts are recorded as services are performed. The Company records revenues on a monthly basis calculated by applying the contractual rate called for in the contracts.
In addition to sports betting and iCasino revenues, Penn Interactive generates in-app purchase and advertising revenues from free-to-play social casino games, which can be downloaded to mobile phones and tablets from digital storefronts. Players can purchase virtual playing credits within our social casino games, which allows for increased playing opportunities and functionality. Penn Interactive records deferred revenue from the sale of virtual playing credits and recognizes this revenue over the average redemption period of the credits, which is approximately three days. Advertising revenues are recognized in the period when the advertising impression, click or install delivery occurs.
Penn Interactive also enters into multi-year agreements with sports betting operators for online sports betting and related iGaming market access (“Skins”) across our portfolio, of which the Company received cash and equity securities, including ordinary shares and warrants, specific to four operator agreements. In consideration for the use of each skin, the Company receives a monthly revenue share amount of the revenues earned by the operators less contractual fees and obligations primarily consisting of taxes, promotional credits, data fees and player costs.
The market access provided to operators by state and by activity represent separate performance obligations. The transaction price includes fixed fees for access to certain geographic markets and variable consideration in the form of a monthly revenue share, annual minimum guarantee amounts, and reimbursements for out-of-pocket expenses including state gaming taxes. The upfront and fixed access fees relate solely to distinct markets and are allocated to the performance obligations specific to those markets. Market access fees are recognized as revenue over the term of the related market access agreements. Monthly revenue share and annual minimum guarantee variable consideration relate directly to the Company’s efforts to satisfy each individual performance obligation and, as such, is allocated to each performance obligation. Revenues from monthly revenue shares are recognized in the period in which the revenue was earned by our third party operators.
Minimum guarantee revenue is deferred at the end of the period in which it relates and subsequently recognized as revenue over the remaining term of the market access agreement. The Company also recognizes revenue for reimbursements of certain out-of-pocket expenses, including license fees and state gaming taxes. The Company has elected the “right to invoice” practical expedient and recognizes revenue upon incurring reimbursable costs, as appropriate.
Complimentaries Associated with Gaming Contracts
Food, 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 SSPs 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 year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Food and beverage | $ | 173.7 | | | $ | 123.6 | | | $ | 261.4 | |
Hotel | 125.4 | | | 79.6 | | | 159.6 | |
Other | 10.2 | | | 6.7 | | | 17.6 | |
Total complimentaries associated with gaming contracts | $ | 309.3 | | | $ | 209.9 | | | $ | 438.6 | |
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 iCasino market access.
Our mychoice program allows members to utilize their reward membership card 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 and free play. The obligation associated with our mychoice program, which is included in “Accrued expenses and other current liabilities” within our Consolidated Balance Sheets, was $37.6 million and $35.8 million as of December 31, 2021 and 2020, respectively, and consisted principally of the obligation associated with the loyalty points. Our loyalty point obligations are generally settled within six months of issuance. 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) money deposited in an online wallet not yet wagered or wagered and not yet withdrawn, (iv) outstanding tickets generated by slot machine play or pari-mutuel wagering, (v) outstanding chip liabilities, (vi) unclaimed jackpots, and (vii) 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 $112.0 million and $47.1 million as of December 31, 2021 and 2020, respectively, none of which was classified as long-term on December 31, 2021 as compared to $0.5 million in the prior year. 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 Consolidated Balance Sheets, respectively.
Penn Interactive enters into multi-year agreements with sports betting operators for online sports betting and related iCasino market access across our portfolio of properties, from which we received cash and equity securities, including ordinary shares and warrants, specific to two operator agreements. Certain of the operations contemplated by these agreements commenced, resulting in the recognition of $16.3 million, $5.6 million and $0.6 million of revenue (most of which was previously deferred) during the years ended December 31, 2021, 2020 and 2019 respectively. Deferred revenue associated with third-party sports betting operators for online sports betting and related iCasino market access, which is included in “Other long-term liabilities” within our Consolidated Balance Sheets was $52.2 million and $52.7 million as of December 31, 2021 and 2020, respectively.
Advertising: The Company expenses advertising costs the first time the advertising takes place or as incurred. Advertising expenses, which generally relate to media placement costs and are primarily included in “General and administrative” expenses within the Consolidated Statements of Operations, were $88.2 million, $36.7 million, and $59.4 million, for the years ended December 31, 2021, 2020 and 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 the wagering occurs, as well as taxes on revenues derived from arrangements which allow for third-party partners to operate online casinos and online sportsbooks under our gaming licenses. For the years ended December 31, 2021, 2020 and 2019, these expenses, which were recorded in “Gaming” expense or “Food, beverage, hotel and other” expenses within the Consolidated Statements of Operations, were $2.0 billion, $1.1 billion, and $1.6 billion, respectively.
Foreign Currency Translation: The functional currency of the Company’s foreign subsidiaries is the local currency in which the subsidiary operates. Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date. Translation adjustments resulting from this process are recorded to other comprehensive income (loss). Revenues and expenses are translated at the average exchange rates during the year. Gains or losses resulting from foreign currency transactions are included in “Other” within our Consolidated Statements of Operations.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss): Comprehensive income (loss) includes net income (loss) and all other non-stockholder changes in equity, or other comprehensive income (loss). The balance of accumulated other comprehensive income (loss) consists solely of foreign currency translation adjustments.
Stock-Based Compensation: The cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award and the expense is recognized ratably over the requisite service period. The Company accounts for forfeitures in the period in which they occur based on actual amounts. The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model, which requires us to make assumptions, including the expected term, which is based on the contractual term of the stock option and historical exercise data of the Company’s employees; the risk-free interest rate, which is based on the U.S. Treasury spot rate with a term equal to the expected term assumed at the grant date; the expected volatility, which is estimated based on the historical volatility of the Company’s stock price over the expected term assumed at the grant date; and the expected dividend yield, which is zero since we have not historically paid dividends. See Note 16, “Stock-based Compensation.” 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 restricted stock units (“RSUs”), outstanding convertible preferred stock and convertible debt.
Holders of the Company’s Series D Preferred Stock (as defined in Note 7, “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. The holders of the Company’s Series D Preferred Stock are not obligated to absorb losses; therefore, in reporting periods where the Company is in a net loss position, it does not apply the two-class method. In reporting periods where the Company is in a net income position, the two-class method is applied by allocating all earnings during the period to common shares and preferred shares. See Note 17, “Earnings (Loss) per Share,” for more information.
Application of Business Combination Accounting: We utilize the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” which requires us to allocate the purchase price to tangible and identifiable intangible assets based on their fair values. The excess of the purchase price over the fair value ascribed to tangible and identifiable intangible assets is recorded as goodwill. If the fair value ascribed to tangible and identifiable intangible assets changes during the measurement period (due to additional information being available and related Company analysis), the measurement period adjustment is recognized in the reporting period in which the adjustment amount is determined and offset against goodwill. The measurement period for our acquisitions is no more than one year in duration. See Note 6, “Acquisitions and Dispositions.” Voting Interest Entities and Variable Interest Entities: The Company consolidates all subsidiaries or other entities in which it has a controlling financial interest. The consolidation guidance requires an analysis to determine if an entity should be evaluated for consolidation using the VOE model or the VIE model. Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting rights. Under the VIE model, controlling financial interest is defined as (i) the power to direct activities that most significantly impact the economic performance of the entity and (ii) the obligation to
absorb losses of or the right to receive benefits from the entity that could potentially be significant to the entity. For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company consolidates the financial position and results of operations of every VOE in which it has a controlling financial interest and VIEs in which it is considered to be the primary beneficiary. See Note 7, “Investments in and Advances to Unconsolidated Affiliates.”
Note 3—New Accounting Pronouncements
Accounting Pronouncements to be Implemented
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 an optional expedient and exceptions for applying GAAP 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 11, “Long-term Debt”) are tied to LIBOR. The Company is currently evaluating the impact of the adoption of ASU 2020-04 on our Consolidated Financial Statements. In August 2020, The FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency.
The new standard impacts the Company’s existing 2.75% convertible senior notes due May 2026 (“Convertible Notes”) which are currently accounted for under the cash conversion feature model. The cash conversion feature model is eliminated under the new standard and entities will no longer separately present in stockholders’ equity an embedded conversion feature of a debt instrument.
The new guidance also requires the use of the if-converted method when calculating diluted earnings per share for convertible instruments and the treasury stock method should no longer be used. Under the new guidance, convertible instruments that may be settled in cash or shares (e.g., the Company’s Convertible Notes) are to be included in the calculation of diluted EPS if the effect is more dilutive, with no option for rebutting the presumption of share settlement based on stated policy or past experience.
Adoption of ASU 2020-06 will result in reclassification of the $88.2 million cash conversion feature related to the Company’s Convertible Notes, from stockholders’ equity to liabilities. The adoption of ASU 2020-06 allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without recasting the financial statements in periods prior to adoption. The Company plans to elect this transition option. We expect the adoption of ASU 2020-06 to have a material impact on our Consolidated Financial Statements and related disclosures. We are finalizing the impact of ASU 2020-06 to our accounting policies, processes, disclosures, and internal control over financial reporting.
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—Hurricane Laura
On August 27, 2020, Hurricane Laura made landfall in Lake Charles, Louisiana, which caused significant damage to our L’Auberge Lake Charles property and closure of the property for approximately two weeks. The Company maintains insurance, subject to certain deductibles and coinsurance, for the repair or replacement of assets that suffered loss and provides coverage for interruption to our business, including lost profits.
The Company recorded a receivable relating to our estimate of repairs and maintenance costs which have been incurred and property and equipment which have been written off, and for which we deem the recovery of such costs and property and
equipment from our insurers to be probable. The insurance recovery receivable is included in “Accounts Receivable, net” within the Consolidated Balance Sheets. As we deem it is probable that the proceeds to be recovered from our insurers exceeds the total of our insurance recovery recorded and our insurers’ deductible and coinsurance, we did not record any loss associated with the impact of this natural disaster. Timing differences are likely to exist between the recognition of (i) impairment losses and capital expenditures made to repair or restore the assets and (ii) the receipt of insurance proceeds within the Consolidated Financial Statements.
As of December 31, 2021 and 2020, the amount of the receivable was $28.7 million and $23.0 million, respectively. No proceeds were received from our insurers during the year ended December 31, 2021, as compared to $47.5 million received during the year ended December 31, 2020. For the year ended December 31, 2021, we identified an additional $5.7 million of costs related to our policy claim. We continue to be in the process of quantifying the claim amount under the policies to be submitted to our insurers.
We will record proceeds in excess of the recognized losses and lost profits under our business interruption insurance as a gain contingency in accordance with ASC 450, “Contingencies,” which we expect to recognize at the time of final settlement or when nonrefundable cash advances are made in a period subsequent to December 31, 2021.
During the first quarter of 2022, the Company received insurance payments totaling $35.6 million.
The following table summarizes the financial impact of Hurricane Laura related matters:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Insurance proceeds received through the end of the period | $ | 47.5 | | | $ | 47.5 | |
Deductible | $ | 15.0 | | | $ | 15.0 | |
Coinsurance | $ | 2.5 | | | $ | 2.5 | |
Clean-up, restoration, and other costs | $ | 52.8 | | | $ | 47.1 | |
Fixed asset write-off | $ | 23.2 | | | $ | 23.2 | |
Inventory write-off | $ | 0.2 | | | $ | 0.2 | |
Insurance receivable | $ | 28.7 | | | $ | 23.0 | |
Note 5—Revenue Disaggregation
We generate revenues at our owned, managed or operated properties principally by providing the following types of services: (i) gaming, including iCasino, retail and online sports betting; (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, Penn Interactive’s social gaming, and revenue from third-party sports betting operators and the related gross-up for taxes. In addition, we assess our revenues based on geographic location of the related properties, which is consistent with our reportable segments. During the fourth quarter of 2021, the Company evaluated its reportable segments and changed them to: Northeast, South, West, Midwest, and Interactive as described in Note 18, “Segment Information.” As a result of the change in reportable segments, we have recast previously reported segment information to conform to the current management view for all prior periods presented. The changes to reportable segments had no impact to the Company’s consolidated financial statements. Our revenue disaggregation by type of revenue and geographic location was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2021 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Intersegment Eliminations (1) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 2,344.2 | | | $ | 1,080.4 | | | $ | 352.7 | | | $ | 1,009.6 | | | $ | 158.4 | | | $ | — | | | $ | — | | | $ | 4,945.3 | |
Food and beverage | 103.3 | | | 110.6 | | | 69.0 | | | 39.4 | | | — | | | 1.0 | | | — | | | 323.3 | |
Hotel | 28.1 | | | 93.3 | | | 80.1 | | | 29.6 | | | — | | | — | | | — | | | 231.1 | |
Other | 76.8 | | | 37.9 | | | 19.6 | | | 24.1 | | | 274.5 | | | 9.6 | | | (37.2) | | | 405.3 | |
Total revenues | $ | 2,552.4 | | | $ | 1,322.2 | | | $ | 521.4 | | | $ | 1,102.7 | | | $ | 432.9 | | | $ | 10.6 | | | $ | (37.2) | | | $ | 5,905.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2020 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Intersegment Eliminations (1) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 1,495.1 | | | $ | 684.0 | | | $ | 194.2 | | | $ | 615.2 | | | $ | 62.4 | | | $ | 0.3 | | | $ | (0.1) | | | $ | 3,051.1 | |
Food and beverage | 68.9 | | | 76.9 | | | 46.0 | | | 32.0 | | | — | | | 0.6 | | | — | | | 224.4 | |
Hotel | 17.4 | | | 64.3 | | | 46.4 | | | 18.7 | | | — | | | — | | | — | | | 146.8 | |
Other | 57.9 | | | 24.4 | | | 15.9 | | | 15.5 | | | 58.7 | | | 3.0 | | | (19.0) | | | 156.4 | |
Total revenues | $ | 1,639.3 | | | $ | 849.6 | | | $ | 302.5 | | | $ | 681.4 | | | $ | 121.1 | | | $ | 3.9 | | | $ | (19.1) | | | $ | 3,578.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, 2019 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Intersegment Eliminations (1) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 2,117.1 | | | $ | 831.1 | | | $ | 374.3 | | | $ | 938.1 | | | $ | 7.8 | | | $ | 1.0 | | | $ | (0.7) | | | $ | 4,268.7 | |
Food and beverage | 155.1 | | | 154.1 | | | 116.7 | | | 84.7 | | | — | | | 1.4 | | | — | | | 512.0 | |
Hotel | 43.5 | | | 98.2 | | | 125.9 | | | 43.4 | | | — | | | — | | | — | | | 311.0 | |
Other | 84.2 | | | 35.5 | | | 25.6 | | | 28.3 | | | 30.5 | | | 6.8 | | | (1.2) | | | 209.7 | |
Total revenues | $ | 2,399.9 | | | $ | 1,118.9 | | | $ | 642.5 | | | $ | 1,094.5 | | | $ | 38.3 | | | $ | 9.2 | | | $ | (1.9) | | | $ | 5,301.4 | |
(1) Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by Penn Interactive.
Note 6—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 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 (as defined in Note 11, “Long-term Debt”). 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 | |
Other assets | — | |
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 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 two 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. See Note 2, “Significant Accounting Policies,” for more information.
The following table includes the financial results of Greektown from the acquisition date through December 31, 2019, which is included within our Consolidated Statements of Operations for the year ended December 31, 2019:
| | | | | |
(in millions) | Period from May 23, 2019 through December 31, 2019 |
Revenues | $ | 195.9 | |
Net income | $ | 10.9 | |
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, 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 MIPA, 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, which has an initial annual rent of $23.2 million and an initial term of 15 years, with four five-year renewal options. The acquisition of the operations was financed through incremental borrowings under the Company’s Revolving Credit Facility.
During the fourth quarter of 2019, 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 | $ | 10.7 | |
Receivables, prepaid expenses, and other current assets | 7.0 | |
Property and equipment | 20.7 | |
Goodwill (1) | 44.2 | |
Other intangible assets | |
Gaming license | 48.1 | |
Customer relationships | 2.3 | |
Operating lease right-of-use assets | 196.2 | |
Total assets | $ | 329.2 | |
| |
Accounts payable, accrued expenses and other current liabilities | $ | 10.1 | |
Operating lease liabilities | 196.2 | |
Total liabilities | 206.3 | |
Net assets acquired | $ | 122.9 | |
(1)The goodwill has been assigned to our South segment. The entire $44.2 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 Margaritaville Lease, which was entered into at the time of the acquisition, represented operating lease 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, which is an indefinite-lived intangible asset, and a customer relationship, 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 and (ii) the customer relationships 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. See Note 2, “Significant Accounting Policies,” for more information. The following table includes the financial results of Margaritaville from the acquisition date through December 31, 2019, which is included within our Consolidated Statements of Operations for the year ended December 31, 2019:
| | | | | |
(in millions) | For the year ended December 31, 2019 |
Revenues | $ | 157.6 | |
Net income | $ | 13.7 | |
Tropicana Las Vegas
On April 16, 2020, we sold the real estate assets associated with the operations of Tropicana Las Vegas Hotel and Casino, Inc. (“Tropicana”) property to GLPI in exchange for rent credits of $307.5 million, and utilized the rent credits to pay rent under our existing Master Leases and the Meadows Lease, (as defined and discussed in Note 12, “Leases”), beginning in May 2020. Contemporaneous with the sale, the Company entered into the Tropicana Lease, (as defined and discussed in Note 12, “Leases”). Pursuant to the purchase agreement, GLPI would 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. We recognized a gain on this transaction of $29.8 million during the year ended December 31, 2020, which is included in “General and administrative” within our Consolidated Statements of Operations.
On January 11, 2022, Penn National entered into a definitive purchase agreement to sell its outstanding equity interest in Tropicana, which has the gaming license and operates the Tropicana, to Bally’s Corporation (“Bally’s”). This transaction is expected to close within the second half of 2022, subject to Penn National, GLPI, and Bally’s entering into definitive agreements and obtaining regulatory approval.
Morgantown
On October 1, 2020, we sold the land underlying our Morgantown development project to GLPI in exchange for rent credits of $30.0 million. Contemporaneous with the sale, the Company entered into a triple net lease with GLPI for the land underlying Morgantown (as defined and discussed in Note 12, “Leases”). As of December 31, 2020, we had utilized all of the rent credits pertaining to the Tropicana and Morgantown transactions which totaled $337.5 million (see Note 12, “Leases”). HitPoint Inc. and LuckyPoint Inc.
On May 11, 2021, we acquired 100% of the outstanding equity of HitPoint Inc. and Lucky Point Inc. (collectively, “Hitpoint”). The purchase price totaled $12.7 million, consisting of $6.2 million in cash, $3.5 million of the Company’s common equity, and a $3.0 million contingent liability. The contingent liability is payable in annual installments over three years, through a combination of cash and the Company’s common equity, and is based on achievement of certain performance factors. The preliminary purchase price allocation resulted in a recognition of $8.8 million of goodwill, $4.0 million in developed technology which is included in “Other intangible assets, net” within the Consolidated Balance Sheets, along with other miscellaneous operating assets and liabilities. The developed technology is an amortizing intangible asset with an assigned useful life of five years, and was valued using the multi-period excess earnings method, a variation of the income approach, which is supported by observable market data for peer companies.
Hollywood Casino Perryville
On July 1, 2021, we completed the acquisition of the operations of Hollywood Casino Perryville (“Perryville”), from GLPI for a purchase price of $39.4 million, including working capital adjustments. The preliminary purchase price allocation resulted in the recognition of a $12.7 million gaming license asset and a $1.0 million customer relationship asset, both of which are included in “Other intangible assets, net” within our Consolidated Balance Sheets, $9.2 million of goodwill, $8.2 million of tangible long-term assets, comprised primarily of property and equipment, and $8.3 million of various operating assets and
liabilities. Simultaneous with the closing, we entered into a lease with GLPI for the real estate assets associated with Hollywood Casino Perryville for initial annual rent of $7.8 million per year subject to escalation.
The gaming license is an indefinite-lived intangible asset, and the customer relationships is an amortizing intangible asset with a useful life of two years. The Company valued (i) the gaming license using the Greenfield Method, a form of the income approach; (ii) the customer relationships using the “with-and-without” method, a form of the income approach, and (iii) the property and equipment and other various operating assets and liabilities primarily utilizing the cost approach. All valuation methods of the income approach are supported by observable market data for peer casino operator companies.
For the period beginning July 1, 2021 through December 31, 2021 Perryville’s revenue and net income included in the Consolidated Statements of Operations were $46.9 million and $2.5 million, respectively.
Sam Houston Race Park and Valley Race Park
On August 1, 2021, we completed the acquisition of the remaining 50% ownership interest in the Sam Houston Race Park in Houston, Texas, the Valley Race Park in Harlingen, Texas, and a license to operate a racetrack in Austin, Texas (collectively, “Sam Houston”), from PM Texas Holdings, LLC for a purchase price of $57.8 million, comprised of $42.0 million in cash and $15.8 million of the Company’s common equity, which was preliminarily allocated to property and equipment. In conjunction with the acquisition, we recorded a gain of $29.9 million on our equity method investment, which is included in “Other” within our Consolidated Statements of Operations. The property and equipment assets were valued using a combination of the market and cost approaches.
Score Media and Gaming Inc.
On October 19, 2021, we acquired 100% of theScore for a purchase price of approximately $2.1 billion. Under the terms of the agreement, 1317774 B.C. Ltd. (the “Purchaser”), an indirectly wholly owned subsidiary of Penn National, acquired each of the issued and outstanding theScore shares (other than those held by Penn National and its subsidiaries) for US$17.00 per share in cash consideration, totaling $922.8 million, and either 0.2398 of a share of common stock, par value $0.01 of Penn Common Stock or, if validly elected, 0.2398 of an exchangeable share in the capital of the Purchaser (each whole share, an “Exchangeable Share”), totaling 12,319,340 shares of Penn Common Stock and 697,539 Exchangeable Shares for approximately $1.0 billion. Each Exchangeable Share will be exchangeable into one share of Penn Common Stock at the option of the holder, subject to certain adjustments. In addition, Purchaser may redeem all outstanding Exchangeable Shares in exchange for shares of Penn Common Stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances. The acquisition provides us with the technology, resources and audience reach to accelerate our media and sports betting strategy across North America.
The Company held shares of theScore common stock prior to the acquisition and, as such, the acquisition date estimated fair value of this previously held investment was a component of the purchase consideration. Based on the acquisition date fair value of this investment of $58.9 million, the Company recorded a gain of $2.9 million related to remeasurement of the equity security investment immediately prior to the acquisition date which is included in “Other” within our Consolidated Statements of Operations.
The following table reflects the preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill:
| | | | | |
(in millions) | Fair value |
Cash and cash equivalents | $ | 160.3 |
Other current assets | 22.8 |
ROU assets | 2.6 |
Property and equipment | 1.8 |
Goodwill | 1,690.2 |
Other intangible assets | |
Gaming technology | 160.0 |
Media technology | 57.0 |
Tradename | 100.0 |
Advertising relationships | 11.0 |
Customer relationships | 8.0 |
Re-acquired right | 2.6 |
Other long-term assets | 5.2 |
Total assets | $ | 2,221.5 | |
| |
Accounts payable, accrued expenses and other current liabilities | $ | 67.9 | |
Deferred tax liabilities | 69.2 | |
Other non-current liabilities | 1.7 | |
Total liabilities | 138.8 | |
Net assets acquired | $ | 2,082.7 | |
The Company used the income, or cost approach 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.
Acquired identifiable intangible assets consist of gaming technology, media technology, tradename, advertising relationships, customer relationships, and a re-acquired right. Tradename is an indefinite-lived intangible asset. All other intangible assets are definite-lived with assigned useful lives primarily ranging from 1-7 years. The re-acquired right intangible asset was assigned a 17.8 year useful life based on the remaining term of a pre-acquisition market access contract between Penn National and theScore.
Goodwill, none of which is deductible under the Canadian Income Tax Act, is approximately 81.2% of the net assets acquired and represents synergies, incremental market share capture and expansion into new markets not existing as of the acquisition date, and future technology development.
The following valuation approaches were utilized to determine the fair value of each intangible asset:
| | | | | |
Intangible Asset | Valuation Approach |
Gaming technology | Relief-from-royalty (variation of income approach) |
Media technology | Replacement cost |
Tradename | Relief-from-royalty (variation of income approach) |
Advertising relationships | With-and-without (variation of income approach) |
Customer relationships | Replacement cost |
Re-acquired right | Replacement cost |
For the period beginning October 19, 2021 through December 31, 2021 theScore’s revenue and net loss included in the Consolidated Statements of Operations were $7.5 million and $11.9 million, respectively.
Unaudited Pro Forma Financial Information
The following table includes unaudited pro forma consolidated financial information assuming our acquisition of Hitpoint, Perryville, Sam Houston and theScore had occurred as of January 1, 2020. The pro forma financial information does not necessarily represent the results that may occur in the future. The pro forma amounts include the historical operating results of Penn National and Hitpoint, Perryville, Sam Houston and theScore prior to our acquisitions. For the year ended December 31, 2021, pro forma adjustments directly attributable to the acquisitions include acquisition and transaction related costs of $77.1 million incurred by both Penn National and the respective acquirees’ and gains of $51.0 million related to our purchase of the remaining 50% of Sam Houston and a net unrealized gain on the equity security investment in theScore. For the year ended December 31, 2020, pro forma adjustments directly attributable to the acquisitions primarily include a net unrealized gain of $8.3 million on the equity security investment in theScore.
| | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 |
Revenues | $ | 5,978.0 | | | $ | 3,677.4 | |
Net income (loss) | $ | 347.6 | | | $ | (705.4) | |
Note 7—Investments in and Advances to Unconsolidated Affiliates
As of December 31, 2021 and 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 joint venture with NASCAR that owns Hollywood Casino at Kansas Speedway; its 50% interest in Freehold Raceway; and its 50% joint venture with Sam Houston that owns and operates racetracks in Texas. On August 1, 2021, the Company purchased the remaining 50% ownership interest of Sam Houston. See Note 6, “Acquisitions and Dispositions” for further information. 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). Within 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 $62.0 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 (originally subject to a cap of $650.0 million, and subject to such cap, a floor of 2.25 times the annualized revenue of Barstool Sports, all subject to various adjustments).
On October 1, 2021, the terms of the February 2020 stock purchase agreement were amended to (i) set a definitive purchase price of $325.0 million on the second 50% of Barstool Sports common stock, which eliminates the floor of 2.25 times the annual revenue of Barstool Sports and (ii) fix a number of Penn common shares to be delivered to existing February 2020 employee holders of Barstool Sports common stock, to the extent Penn’s stock price exceeds a specified value defined in the amended stock purchase agreement and Penn elects to settle using a combination of cash and equity. Consistent with the February 2020 stock purchase agreement: (i) the Barstool Sports common stock remains subject to our immediately exercisable call rights and the existing Barstool Sports stockholders put rights beginning in February 2023, (ii) the requirement to increase our ownership in Barstool Sports to approximately 50% by purchasing approximately $62.0 million worth of additional shares in Barstool Sports common stock remains consistent with the implied valuation at the time of the initial investment, which was $450.0 million, and (iii), we may settle the call and put options, at our sole election, using either cash or a combination of cash and equity.
On February 20, 2020, the Company issued 883 shares of Series D Preferred Stock, par value $0.01 (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 stockholders are 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 four years as stipulated in the stock purchase agreement, with the first
20% tranche having been available for conversion into Penn Common Stock in the first quarter of 2021. As of December 31, 2021, 26 shares of the Series D Preferred Stock can be converted into Penn Common Stock.
During the first quarter of 2021, the Company acquired 0.3%, and subsequently acquired an additional 0.3% during the third quarter of 2021, of Barstool Sports common stock, par value $0.0001 per share, which represents a partial settlement of the 1% purchase on a delayed basis as noted above. The acquisition of the acquired Barstool Sports common stock was settled through a predetermined number of Series D Preferred Stock as contained within the stock purchase agreement (see Note 15, “Stockholders’ Equity,” and Note 16, “Stock-based Compensation,” for further information). 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).
As of December 31, 2021 and 2020, we have an amortizing intangible asset pertaining to the customer list of $0.8 million and $1.6 million, respectively. As of December 31, 2021 and 2020, we have a prepaid expense pertaining to the advertising in the amount of $15.4 million and $16.5 million, respectively, of which $14.2 million and $15.4 million was classified as long-term, respectively. The long-term portion of the prepaid advertising expense is included in “Other assets” within our Consolidated Balance Sheets.
As of December 31, 2021 and 2020, our investment in Barstool Sports was $162.5 million and $147.5 million, respectively. We record our proportionate share of Barstool Sports’ net income or loss one quarter in arrears.
The Company determined that Barstool Sports qualified as a VIE as of December 31, 2021 and 2020. The Company did not consolidate the financial position of Barstool Sports as of and for the year ended December 31, 2021 and 2020, nor the results of operations for the years ended December 31, 2021 and 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 subsequent periods, 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 December 31, 2021 and 2020, our investment in Kansas Entertainment was $83.8 million and $85.2 million, respectively. During the years ended December 31, 2021, 2020 and 2019, the Company received distributions from Kansas Entertainment totaling $31.8 million, $20.0 million and $29.0 million, respectively. The Company deems these distributions to be returns on its investment based on the source of those cash flows from the normal business operations of Kansas Entertainment.
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 joint venture, primarily as it did not have the ability to direct the activities of the joint venture that most significantly impacted the joint venture’s economic performance without the input of NASCAR. Therefore, the Company did not consolidate the financial position of Kansas Entertainment as of December 31, 2021 and 2020, nor the results of operations for the years ended December 31, 2021 and 2020.
The following table provides summarized balance sheet and results of operations information related to Kansas Entertainment and our share of income from unconsolidated affiliates from our investment in Kansas Entertainment:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
| | | |
| |
Current assets | $ | 19.1 | | | $ | 14.7 | |
Long-term assets | $ | 145.1 | | | $ | 151.4 | |
Current liabilities | $ | 11.0 | | | $ | 10.2 | |
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
| | | | | |
| |
Revenues | $ | 149.5 | | | $ | 104.2 | | | $ | 162.3 | |
Operating expenses | 88.7 | | | 75.5 | | | 101.3 | |
Operating income | 60.8 | | | 28.7 | | | 61.0 | |
Net income | $ | 60.8 | | | $ | 28.7 | | | $ | 61.0 | |
| | | | | |
Net income attributable to Penn National | $ | 30.4 | | | $ | 14.4 | | | $ | 30.5 | |
Texas and New Jersey Joint Ventures
The Company had a 50% interest in a joint venture with Sam Houston, which 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. On August 1, 2021, we completed the acquisition of the remaining 50% ownership interest in Sam Houston. In conjunction with the acquisition we recorded a gain of $29.9 million on our equity method investment, which is included in “Other” within our Consolidated Statements of Operations. See Note 6, “Acquisitions and Dispositions” for further information. During the first quarter of 2020, we recorded an other-than-temporary impairment on our investment in the joint venture of $4.6 million, which is included in “Impairment losses” within our Consolidated Statements of Operations. No further impairment loss was recorded for the years ended December 31, 2021 and 2020. Sam Houston Race Park hosts thoroughbred and quarter-horse racing and offers daily simulcast operations, and Valley Race Park features dog racing and simulcasting. In addition, through a separate arrangement, the Company has a 50% interest in a joint venture with Greenwood, which owns and operates Freehold Raceway, in Freehold, New Jersey. The property features a half-mile standardbred racetrack and a grandstand.
As of December 31, 2021 and 2020, we determined that our New Jersey joint venture did not qualify as a VIE, nor did our former interest in our Texas joint venture for the year ended December 31, 2020. Using the guidance for entities that are not VIEs, in both cases, the Company determined that it did not have a controlling financial interest in either of the joint ventures as of and for the years ended December 31, 2021 and 2020, primarily as it did not have the ability to direct the activities of either of the joint ventures that most significantly impacted the joint ventures’ economic performance without the input of Sam Houston or Greenwood, respectively. Therefore, the Company did not consolidate either of its investment in the joint ventures as of and for the years ended December 31, 2021 and 2020.
Note 8—Property and Equipment
Property and equipment, net, consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Property and equipment - Not Subject to Master Leases | | | |
Land and improvements | $ | 147.6 | | | $ | 105.6 | |
Building, vessels and improvements | 327.3 | | | 205.4 | |
Furniture, fixtures and equipment | 1,714.8 | | | 1,620.4 | |
Leasehold improvements | 292.0 | | | 219.5 | |
Construction in progress | 70.7 | | | 89.8 | |
| 2,552.4 | | | 2,240.7 | |
Less: Accumulated depreciation | (1,634.1) | | | (1,559.0) | |
| 918.3 | | | 681.7 | |
Property and equipment - Subject to Master Leases | | | |
Land and improvements | 1,523.2 | | | 1,523.2 | |
Building, vessels and improvements | 3,640.0 | | | 3,640.3 | |
| 5,163.2 | | | 5,163.5 | |
Less: Accumulated depreciation | (1,499.3) | | | (1,315.9) | |
| 3,663.9 | | | 3,847.6 | |
Property and equipment, net | $ | 4,582.2 | | | $ | 4,529.3 | |
Depreciation expense was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Depreciation expense (1) | $ | 314.3 | | | $ | 336.9 | | | $ | 381.6 | |
(1)Of such amounts, $183.4 million, $156.1 million, and $158.9 million, respectively, pertained to real estate assets subject to either of our Master Leases.
Hurricane Laura
In August 2020, Hurricane Laura made landfall in Lake Charles, Louisiana, which caused significant damage to our L’Auberge Lake Charles property. As a result, we wrote off property and equipment with a net book value of $23.2 million of which $2.1 million and $21.1 million was included in Property and equipment – Not subject to Master Lease, and Property and equipment – Subject to Master Leases, respectively.
Tropicana
During the year ended December 31, 2020, we recorded $7.3 million of impairment on the property and equipment associated with Tropicana, relating to the operating assets, which is included in “Impairment losses” within our Consolidated Statements of Operations. The charge was the result of an impairment assessment performed after reviewing the projected results of this property over the remaining lease term contained within the Tropicana Lease. There were no impairment charges recorded to property and equipment during the year ended December 31, 2021.
Note 9—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 | | Interactive | | Other | | Total |
Balance as of January 1, 2020 | | | | | | | | | | | | | |
Goodwill, gross | $ | 914.3 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 67.8 | | | $ | 88.3 | | | $ | 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 | | | 67.8 | | | 0.6 | | | 1,270.7 | |
| | | | | | | | | | | | | |
Impairment losses during year | (43.5) | | | (9.0) | | | — | | | (60.5) | | | — | | | — | | | (113.0) | |
Other(1) | — | | | — | | | — | | | — | | | — | | | (0.6) | | | (0.6) | |
Balance as of December 31, 2020 | | | | | | | | | | | | | |
Goodwill, gross | 914.3 | | | 236.6 | | | 216.8 | | | 1,116.7 | | | 67.8 | | | 87.7 | | | 2,639.9 | |
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 | | | 67.8 | | | — | | | 1,157.1 | |
Goodwill acquired during year | 9.2 | | | — | | | — | | | — | | | 1,699.0 | | | — | | | 1,708.2 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Effects of foreign currency exchange rates | — | | | — | | | — | | | — | | | (42.8) | | | — | | | (42.8) | |
Balance as of December 31, 2021 | | | | | | | | | | | | | |
Goodwill, gross | 923.5 | | | 236.6 | | | 216.8 | | | 1,116.7 | | | 1,724.0 | | | 87.7 | | | 4,305.3 | |
Accumulated goodwill impairment losses | (761.4) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,482.8) | |
Goodwill, net | $ | 162.1 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,724.0 | | | $ | — | | | $ | 2,822.5 | |
(1)Amounts relate to the write-off of goodwill related to the land sale at Sanford Orlando Kennel Club which discontinued our racing operations. The write-off of this goodwill balance is included as a component of the gain calculation recorded on the sale.
2021 Annual Assessment for Impairment
The Company completed its annual assessment for impairment as of October 1, 2021, which did not result in any impairment charges to goodwill, gaming licenses and trademarks. The estimated fair values of the reporting units were determined through a combination of discounted cash flow models and market-based approaches, 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.
2020 Annual and 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.
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.
Upon reopening of our gaming facilities and throughout the fourth quarter of 2020 we undertook various initiatives to mitigate the impact of regulatory restrictions imposed as a result of the COVID-19 pandemic. We completed our annual assessment for impairment as of October 1, 2020, which did not result in any impairment charges to goodwill, gaming licenses and trademarks. The estimated fair values of the reporting units were determined through a combination of discounted cash
flow models 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.
2019 Annual Assessment for Impairment
As a result of our 2019 annual assessment for impairment, we recognized impairments on our goodwill, gaming licenses, and trademarks, of $88.0 million, $62.6 million, and $20.0 million, respectively. The impairments of goodwill were largely driven by increases in the carrying amount of certain of our reporting units as a result of decreases in the allocated amount of the financing obligation to such reporting units, which was driven by the adoption of ASC 842. The impairments of gaming licenses and trademarks were largely driven by reductions in the long-term projections for certain of our properties where competition has increased due to expansion of gaming legislation, primarily within the Northeast segment. The estimated fair values of the reporting units were determined through a combination of discounted cash flow models 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.
The goodwill impairments pertained to our Northeast, South and Midwest segments, in the amounts of $10.3 million, $17.4 million and $60.3 million, respectively. The gaming license impairments pertained to our Northeast and South segments in the amounts of $55.1 million and $7.5 million, respectively. The trademark impairments pertained to our Northeast, South and Midwest segments, in the amounts of $11.5 million, $6.5 million and $2.0 million, respectively.
Carrying Values of Goodwill and Other Intangible Assets
As of October 1, 2021, the date of the most recent annual impairment test, seven reporting units had negative carrying amounts. The amount of goodwill at these reporting units was as follows (in millions):
| | | | | |
Northeast segment | |
Hollywood Casino Toledo | $ | 5.8 | |
Plainridge Park Casino | $ | 6.3 | |
South segment | |
Ameristar Vicksburg | $ | 19.5 | |
Boomtown New Orleans | $ | 5.2 | |
Hollywood Casino Gulf Coast | $ | 2.7 | |
West segment | |
Cactus Petes and Horseshu | $ | 10.2 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived intangible assets | | | | | | | | | | | |
Gaming licenses | $ | 1,285.4 | | | $ | — | | | $ | 1,285.4 | | | $ | 1,246.1 | | | $ | — | | | $ | 1,246.1 | |
Trademarks | 338.2 | | | — | | | 338.2 | | | 240.9 | | | — | | | 240.9 | |
Other | 0.7 | | | — | | | 0.7 | | | 0.7 | | | — | | | 0.7 | |
Amortizing intangible assets | | | | | | | | | | | |
Customer relationships | 114.9 | | | (91.4) | | | 23.5 | | | 106.9 | | | (85.2) | | | 21.7 | |
Technology | 252.7 | | | (40.5) | | | 212.2 | | | 32.7 | | | (28.6) | | | 4.1 | |
Other | 19.4 | | | (6.8) | | | 12.6 | | | 6.9 | | | (6.9) | | | — | |
Total other intangible assets, net | $ | 2,011.3 | | | $ | (138.7) | | | $ | 1,872.6 | | | $ | 1,634.2 | | | $ | (120.7) | | | $ | 1,513.5 | |
There were no impairment charges recorded to other intangible assets for the year ended December 31, 2021.
Amortization expense related to our amortizing intangible assets was $19.6 million, $21.7 million, and $24.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. The following table presents the estimated amortization expense based on our amortizing intangible assets as of December 31, 2021 (in millions):
| | | | | |
Years ending December 31: | |
2022 | $ | 57.0 | |
2023 | 48.3 | |
2024 | 45.6 | |
2025 | 30.9 | |
2026 | 24.3 | |
Thereafter | 42.2 | |
Total | $ | 248.3 | |
Note 10—Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Accrued salaries and wages | $ | 155.5 | | | $ | 120.4 | |
Accrued gaming, pari-mutuel, property, and other taxes | 103.6 | | | 75.0 | |
Accrued interest | 20.9 | | | 13.2 | |
Other accrued expenses (1) | 317.5 | | | 229.1 | |
Other current liabilities (2) | 201.0 | | | 137.4 | |
Accrued expenses and other current liabilities | $ | 798.5 | | | $ | 575.1 | |
(1)Amounts as of December 31, 2021 and 2020 include $47.6 million and $40.8 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 December 31, 2021 and 2020 include $82.1 million and $86.3 million, respectively, pertaining to the Company’s non-qualified deferred compensation plan that covers management and other highly-compensated employees.
Note 11—Long-term Debt
The table below presents long-term debt, net of current maturities, debt discounts and issuance costs:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Senior Secured Credit Facilities: | | | |
Revolving Credit Facility due 2023 | $ | — | | | $ | — | |
Term Loan A Facility due 2023 | 583.8 | | | 636.9 | |
Term Loan B-1 Facility due 2025 | 979.9 | | | 991.2 | |
5.625% Notes due 2027 | 400.0 | | | 400.0 | |
4.125% Notes due 2029 | 400.0 | | | — | |
2.75% Convertible Notes due 2026 | 330.5 | | | 330.5 | |
Other long-term obligations | 146.3 | | | 73.0 | |
| 2,840.5 | | | 2,431.6 | |
Less: Current maturities of long-term debt | (99.5) | | | (81.4) | |
Less: Debt discount | (73.1) | | | (86.2) | |
Less: Debt issuance costs | (30.6) | | | (32.8) | |
| $ | 2,637.3 | | | $ | 2,231.2 | |
The following is a schedule of future minimum repayments of long-term debt as of December 31, 2021 (in millions):
| | | | | |
Year ending December 31: | |
2022 | $ | 99.5 | |
2023 | 543.5 | |
2024 | 21.3 | |
2025 | 946.8 | |
2026 | 91.1 | |
Thereafter | 1,138.3 | |
Total minimum payments | $ | 2,840.5 | |
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”).
On October 15, 2018, in connection with the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”), we entered into an incremental joinder agreement (the “Incremental Joinder”), which amended the Credit Agreement (the “Amended 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 $1.1 billion 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 “Second Amendment”) to provide for certain modifications to required financial covenants and interest rates during, and subsequent to, a covenant relief period, which concluded on May 7, 2021 (the “Covenant Relief Period”).
Upon conclusion of the Covenant Relief Period, the Second Amendment permits the Company to (i) maintain a maximum consolidated total net leverage ratio of 5.50:1.00 for the quarter ended March 31, 2021, 5.00:1.00 for the quarter ended June 30, 2021, 4.75:1.00 for the quarter ended September 30, 2021, 4.50:1.00 for the quarter ended December 31, 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 4.50:1.00 for the quarter ended March 31, 2021, 4.00:1.00 for the quarter ended June 30, 2021, 3.75:1.00 for
the quarter ended September 30, 2021, 3.50:1.00 for the quarter ended December 31, 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, upon conclusion of the Covenant Relief Period, loans under the Senior Secured Credit Facilities bear interest at either a base rate or an adjusted LIBOR rate, plus an applicable margin. The applicable margins for the Revolving Credit Facility and Term Loan A Facility range from 1.25% to 3.00% per annum for LIBOR loans and 0.25% to 2.00% per annum for base rate loans, in each case depending on the Consolidated Total Net Leverage Ratio (as defined in the Amended Credit Agreement) as of the most recent fiscal quarter. The Term Loan B-1 Facility continues to bear interest at 2.25% per annum for LIBOR loans and 1.25% per annum for base rate loans. All loans under the Senior Secured Credit Facilities are subject to a LIBOR “floor” of 0.75%. In addition, a commitment fee is paid on the unused portion of the commitments under the Revolving Credit Facility at a rate that ranges from 0.20% to 0.50% per annum, depending on the Consolidated Total Net Leverage Ratio as of the most recent fiscal quarter.
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.
As of December 31, 2021 and 2020, the Company had conditional obligations under letters of credit issued pursuant to the Senior Secured Credit Facilities with face amounts aggregating to $26.0 million and $28.2 million, respectively, resulting in $674.0 million and $671.8 million of available borrowing capacity under the Revolving Credit Facility, respectively.
5.625% Senior Unsecured Notes
On January 19, 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. The 5.625% Notes are not guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary-guaranteed debt securities. The Company may redeem the 5.625% Notes at any time on or after January 15, 2022, at the declining redemption premiums set forth in the indenture governing the 5.625% Notes, and, prior to January 15, 2022, at a “make-whole” redemption premium set forth in the indenture governing the 5.625% Notes.
4.125% Senior Unsecured Notes
On July 1, 2021, the Company completed an offering of $400.0 million aggregate principal amount of 4.125% senior unsecured notes that mature on July 1, 2029 (the “4.125% Notes”). The 4.125% Notes were issued at par and interest is payable semi-annually on January 1st and July 1st of each year. The 4.125% Notes are not guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary-guaranteed debt securities. The Company may redeem the 4.125% Notes at any time on or after July 1, 2024, at the declining redemption premiums set forth in the indenture governing the 4.125% Notes, and, prior to July 1, 2024, at a “make-whole” redemption premium set forth in the indenture governing the 4.125% Notes.
2.75% Unsecured Convertible Notes
In May 2020, the Company completed a public 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 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.
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 December 31, 2021, 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 $621.5 million.
Starting in the fourth quarter of 2020 and prior to February 15, 2026, at their election, holders of the Convertible Notes may convert outstanding notes 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.
As of December 31, 2021 and December 31, 2020, no Convertible Notes have been converted into the Company’s common stock.
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) | December 31, 2021 | | December 31, 2020 | | |
Liability component: | | | | | |
Principal | $ | 330.5 | | | $ | 330.5 | | | |
Unamortized debt discount | (71.7) | | | (84.4) | | | |
Unamortized debt issuance costs | (5.3) | | | (6.2) | | | |
Net carrying amount | $ | 253.5 | | | $ | 239.9 | | | |
| | | | | |
Carrying amount of equity component | $ | 88.2 | | | $ | 88.2 | | | |
Interest expense, net
The table below presents interest expense, net:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Interest expense | $ | (566.9) | | | (546.3) | | | (535.9) | |
Interest income | 1.1 | | | 0.9 | | | 1.4 | |
Capitalized interest | 4.1 | | | 2.2 | | | 0.3 | |
Interest expense, net | $ | (561.7) | | | $ | (543.2) | | | $ | (534.2) | |
The table below presents interest expense related to the Convertible Notes:
| | | | | | | | | | | | |
| For the year ended December 31, | |
(in millions) | 2021 | | 2020 | |
Coupon interest | $ | 9.1 | | | $ | 5.7 | | |
Amortization of debt discount | 12.7 | | | 7.3 | | |
Amortization of debt issuance costs | 0.9 | | | 0.5 | | |
Convertible Notes interest expense | $ | 22.7 | | | $ | 13.5 | | |
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 4.4 years as of December 31, 2021.
Covenants
Our Senior Secured Credit Facilities, 5.625% Notes and 4.125% Notes, require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Senior Secured Credit Facilities, 5.625% Notes and 4.125% notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the Penn Master Lease and the Pinnacle Master Lease (both of which are defined in Note 12, “Leases”), 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 December 31, 2021, the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Annual Report on Form 10-K with the SEC.
Other Long-Term Obligations
Other Long-term Obligation
In February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability, which is expected to be settled in a future period of which the principal is contingent and predicated on other events. Consistent with an obligor’s accounting under a debt instrument, period interest will be accreted using an effective interest rate of 27.0% and until such time that the claims and related obligation is settled. The amount included in interest expense related to this obligation was $17.9 million for the year ended December 31, 2021.
Ohio Relocation Fees
Other long-term obligations included $44.5 million and $60.9 million as of December 31, 2021 and 2020, 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 facility is payable as follows: $7.5 million upon the opening of the facilities 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%.
Event Center
As of December 31, 2021 and 2020, other long-term obligations included $11.4 million and $12.0 million, respectively, related to the repayment obligation of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg, which was constructed by the City of Lawrenceburg Department of Redevelopment. Effective in January 2015, by contractual agreement, we assumed a repayment obligation for the hotel and event center in the amount of $15.3 million, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment, in exchange for conveyance of the property. Beginning in January 2016, the Company was obligated to make annual payments on the loan of $1.0 million for 20 years. This obligation is accreted to interest expense at its effective yield of 3.0%.
Note 12—Leases
Lessee
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.
Penn Master Lease
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 (see below).
As a result of the annual escalator, effective as of November 1, 2021 for the lease year ended October 31, 2021, the fixed component of rent increased by $5.6 million and an additional ROU asset and corresponding lease liability of $34.2 million were recognized associated with the operating lease components, and an additional ROU asset and corresponding lease liability of $3.1 million were recognized associated with the finance lease components. We did not incur an annual escalator on November 1, 2020 for the lease year ended October 31, 2020. As a result of the annual escalator, effective as of November 1, 2019, for the lease year ended October 31, 2019, the fixed component of rent increased by $5.5 million and an additional ROU asset and corresponding lease liability of $34.4 million were recognized associated with operating lease components and an additional ROU asset and corresponding lease liability of $3.1 million were recognized associated with finance lease components. The next annual escalator test date is scheduled to occur effective November 1, 2022, and the next Penn Percentage Rent reset test date is scheduled for November 1, 2023.
The acquisition of Greektown on May 23, 2019 activated a competition clause within the Penn Master Lease, which introduced a rent floor specific to Toledo. As a result, an additional ROU asset and corresponding lease liability of $151.2 million were recognized associated with operating lease components. Lease payments resulting from the rent floor associated with components determined to continue to be financing obligations are included in “Interest expense, net” within our Consolidated Statements of Operations.
Monthly rent associated with Columbus and monthly rent in excess of the Toledo rent floor are variable and considered contingent rent. Expense related to operating lease components associated with Columbus and Toledo are included in “General and administrative” within our Consolidated Statements of Operations and the variable expense related to the financing obligation component is included in “Interest expense, net” within our Consolidated Statements of Operations. Total monthly variable expenses were as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Variable expenses included in “General and administrative” | $ | 18.7 | | | $ | 12.9 | | | $ | 16.4 | |
Variable expenses included in “Interest expense, net” | 17.1 | | | 11.8 | | | 16.1 | |
Total variable expenses | $ | 35.8 | | | $ | 24.7 | | | $ | 32.5 | |
On January 14, 2022, the ninth amendment to the Penn Master Lease between the Company and GLPI became effective. The ninth amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property, establishes a “floor” with respect to the Hollywood Casino at Penn National Race Course Net Revenue amount used in the calculation of the annual rent escalator and Penn Percentage Rent, and modifies the rent calculations upon a lease termination event as defined in the amendment. The lease term and the four five-year optional renewal periods, which if exercised would extend the Penn Master Lease through October 31, 2048, were not modified in the ninth amendment.
We concluded the ninth amendment to the Penn Master Lease constitutes a modification event under ASC 842. We are currently reassessing, remeasuring, and quantifying the impact of the modification to the Consolidated Financial Statements, which may be material. The modification event will result in (i) a non-cash debt extinguishment charge recorded to our Consolidated Statements of Operations and corresponding change in our financing obligations on our Consolidated Balance Sheets; and (ii) a revaluation of our lease right-of-use assets and corresponding lease liabilities on our Consolidated Balance Sheets.
Pinnacle Master Lease
In connection with the Pinnacle Acquisition, we 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 of the properties, 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”).
As a result of the annual escalator, effective as of May 1, 2021 for the lease year ended April 30, 2021, the fixed component of rent increased by $4.5 million and an additional ROU asset and corresponding lease liability of $17.2 million were recognized associated with the operating lease components. We did not incur an annual escalator on May 1, 2020 for the lease year ended April 30, 2020. As a result of the annual escalator, effective as of May 1, 2019 for the lease year ended April 30, 2019, the fixed component of rent increased by $1.0 million and an additional ROU asset and corresponding lease liability of $3.8 million were recognized associated with operating lease components. The next annual escalator test date is scheduled to occur on May 1, 2022.
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.
On January 14, 2022, the fifth amendment to the Pinnacle Master Lease between the Company and GLPI became effective. The fifth amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property and modifies the rent calculations upon a lease termination event as defined in the amendment. The lease term and the five five-year optional renewal periods, which if exercised would extend the Pinnacle Master Lease through April 30, 2051, were not modified in the fifth amendment.
We concluded the fifth amendment to the Pinnacle Master Lease constitutes a modification event under ASC 842. We are currently reassessing, remeasuring, and quantifying the impact of the modification to the Consolidated Financial Statements, which may be material. The modification event will result in (i) a non-cash debt extinguishment charge recorded to our Consolidated Statements of Operations and corresponding change in our financing obligations on our Consolidated Balance Sheets; and (ii) a revaluation of our lease right-of-use assets and corresponding lease liabilities on our Consolidated Balance Sheets.
Morgantown Lease
On October 1, 2020, the Company entered into a triple net lease with a subsidiary of GLPI for the land underlying our development project in Morgantown, Pennsylvania (“Morgantown Lease”) in exchange for $30.0 million in rent credits to be utilized to pay rent under the Master Leases, Meadows Lease, and the Morgantown Lease, as discussed in Note 6, “Acquisitions and Dispositions.”
The initial term of the Morgantown Lease is 20 years with six subsequent, five-year renewal periods, exercisable at the Company’s option. Initial annual rent under the Morgantown Lease is $3.0 million, subject to a 1.50% fixed annual escalation in each of the first three years subsequent to the facility opening, which occurred on December 22, 2021. Thereafter, the lease will be subject to an annual escalator consisting of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%. All improvements made on the land, including the constructed building, will be owned by the Company while the lease is in effect, however, on the expiration or termination of the Morgantown Lease, ownership of all tenant improvements on the land will transfer to GLPI. We determined the transaction to be a financing arrangement and upon execution of the Morgantown Lease, recorded a $30.0 million financing obligation which is included in “Long-term portion of financing obligations” within our Consolidated Balance Sheets. Lease payments are included in “Interest expense, net” within our Consolidated Statements of Operations.
Perryville Lease
In conjunction with the acquisition of the operations of Hollywood Casino Perryville on July 1, 2021, the Company entered into a triple net lease with GLPI for the real estate assets associated with the property (“Perryville Lease”) for initial annual rent of $7.8 million per year subject to escalation, as discussed in Note 6, “Acquisitions and Dispositions.”
The initial term of the Perryville Lease is 20 years with three subsequent, five-year renewal periods, exercisable at the Company’s option. The building portion of the annual rent is subject to a fixed annual escalation of 1.50% in each of the following three years, with subsequent annual escalations of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%. We determined the transaction to be a finance lease arrangement and upon execution of the Perryville Lease, recorded a $102.9 million ROU asset and a corresponding lease liability. The interest portion of lease payments is included in “Interest expense, net” and the depreciation of the ROU asset is included in “Depreciation and amortization”, both within our Consolidated Statements of Operations.
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 Hollywood Casino at Meadows Racetrack (the “Meadows Lease”), (ii) individual triple net leases with 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 operating lease components (primarily the land), the Meadows Lease, the Margaritaville Lease and the Tropicana Lease, the “Triple Net Operating 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.
Tropicana Lease
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 cash rent. Under the lease agreement, we 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. In the event that GLPI sells the real estate assets used in the operations of Tropicana, the Tropicana Lease will automatically terminate. On January 11, 2022, Penn National entered into a definitive purchase agreement to sell its outstanding equity interest in Tropicana, which has the gaming license and operates the Tropicana, to Bally’s. This transaction is expected to close within the second half of 2022, subject to Penn National, GLPI, and Bally’s entering into definitive agreements and obtaining regulatory approval. See Note 6, “Acquisitions and Dispositions” for further detail. 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 Consolidated Balance Sheets. Meadows Lease
In connection with the Pinnacle Acquisition, we assumed the Meadows Lease, originally effective September 9, 2016. Upon assumption of the Meadows Lease, there were eight years remaining of the initial ten-year term, with three subsequent, five-year renewal options followed by one four-year renewal option on the same terms and conditions, exercisable at the Company’s option. The payment structure under the Meadows Lease includes a fixed component (“Meadows Base Rent”), which is subject to an annual escalator of up to 5% for the initial term or until the lease year in which Meadows Base Rent plus Meadows Percentage Rent (as defined below) is a total of $31.0 million, subject to certain adjustments, and up to 2% thereafter, subject to an Adjusted Revenue to Rent Ratio (as defined in the Meadows Lease) of 2.0:1. The “Meadows Percentage Rent” is based on performance, which is prospectively adjusted for the next two-year period equal to 4.0% of the average annual net revenues of the property during the trailing two-year period.
We did not incur an annual escalator on October 1, 2021 or 2020, for the lease years ended September 30, 2021 and 2020, respectively. Effective October 1, 2019, as a result of the annual escalator for the lease year ended September 30, 2019, which was determined to be $0.8 million, an additional operating ROU asset and corresponding operating lease liability of $4.3 million were recognized. The next annual escalator test date is scheduled to occur on October 1, 2022.
Effective October 1, 2020, the Meadows Percentage Rent resulted in an annual rent reduction of $2.1 million, which will be in effect until the next Meadows Percentage Rent reset, scheduled to occur on October 1, 2022. Upon reset of the Meadows Percentage Rent, effective October 1, 2020, we recognized an additional operating lease ROU asset and corresponding lease liability of $17.1 million.
On January 14, 2022, the second amendment to the Meadows Lease between the Company and GLPI became effective. The second amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at the facility. This amendment did not result in a modification event under ASC 842.
Margaritaville Lease
The Margaritaville Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and conditions, exercisable at the Company’s option. The payment structure under the Margaritaville Lease includes a fixed component, a portion which was originally subject to an annual escalator of up to 2% depending on an Adjusted Revenue to Rent Ratio (as defined in the Margaritaville Lease) of 1.9:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the property compared to a contractual baseline during the preceding two years (“Margaritaville Percentage Rent”). On February 1, 2020, the Margaritaville Lease was amended to provide for a change in the measurement of the annual escalator from an Adjusted Revenue to Rent Ratio of 1.9:1 to a minimum coverage floor ratio of Net Revenue to Rent of 6.1:1.
We did not incur an annual escalator for the lease year ended January 31, 2021. As a result of the annual escalator, which was determined to be $0.3 million, effective February 1, 2020 for the lease year ended January 31, 2020, an additional operating lease ROU asset and corresponding operating lease liability of $3.1 million were recognized.
On February 1, 2021, the Margaritaville Percentage Rent reset resulted in an annual rent reduction of $0.1 million which will be in effect until the next Margaritaville Percentage Rent reset, scheduled to occur on February 1, 2023. Upon reset of the Margaritaville Percentage Rent, effective February 1, 2021, we recognized an additional operating lease ROU asset and corresponding lease liability of $5.5 million.
Greektown Lease
The Greektown Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and conditions, exercisable at the Company’s option. The payment structure under the Greektown Lease includes a fixed component, a portion subject to an annual escalator of up to 2% depending on an Adjusted Revenue to Rent Ratio (as defined in the Greektown Lease) of 1.85:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the property compared to a contractual baseline during the preceding two years (“Greektown Percentage Rent”).
In May 2020, the lease was amended to remove the escalator for the lease years ending May 31, 2021 and 2022 and to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the fourth lease year (June 1, 2022). We did not incur an annual escalator on June 1, 2020 for the lease year ended May 31, 2020.
On June 1, 2021, the Greektown Percentage Rent reset resulted in an annual rent reduction of $4.2 million, which will be in effect until the next Greektown Percentage Rent reset, scheduled to occur on June 1, 2023. Upon reset of the Greektown Percentage Rent, effective June 1, 2021, we recognized an additional operating lease ROU asset and corresponding lease liability of $4.1 million.
Information related to lease term and discount rate was as follows:
| | | | | |
| December 31, 2021 |
Weighted-Average Remaining Lease Term | |
Operating leases | 25.7 years |
Finance leases | 24.3 years |
Financing obligations | 28.5 years |
| |
Weighted-Average Discount Rate | |
Operating leases | 6.7 | % |
Finance leases | 6.4 | % |
Financing obligations | 8.1 | % |
The components of lease expense were as follows:
| | | | | | | | | | | | | | |
| Location on Consolidated Statements of Operations | For the year ended December 31, |
(in millions) | 2021 | | 2020 |
Operating Lease Costs | | | | |
Rent expense associated with triple net operating leases (1) | General and administrative | $ | 454.4 | | | $ | 419.8 | |
Operating lease cost (2) | Primarily General and administrative | 16.6 | | | 15.8 | |
Short-term lease cost | Primarily Gaming expense | 64.9 | | | 37.7 | |
Variable lease cost (2) | Primarily Gaming expense | 4.3 | | | 2.5 | |
Total | | $ | 540.2 | | | $ | 475.8 | |
| | | | |
Finance Lease Costs | | | | |
Interest on lease liabilities (3) | Interest expense, net | $ | 17.2 | | | $ | 15.2 | |
Amortization of ROU assets (3) | Depreciation and amortization | 10.6 | | | 8.0 | |
Total | | $ | 27.8 | | | $ | 23.2 | |
| | | | |
Financing Obligation Costs | | | | |
Interest expense (4) | Interest expense, net | $ | 416.9 | | | $ | 403.1 | |
(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).
(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 lease components and the Perryville Lease (effective July 1, 2021).
(4)Pertains to the components contained within the Master Leases (primarily buildings) and the Morgantown Lease determined to be a financing obligation, inclusive of the variable expense associated with Columbus and Toledo for the finance lease components (the buildings).
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities(1) | | | |
Operating cash flows from finance leases | $ | 17.2 | | | $ | 15.2 | |
Operating cash flows from operating leases | $ | 428.3 | | | $ | 426.7 | |
Financing cash flows from finance leases | $ | 8.5 | | | $ | 6.3 | |
(1)Amounts related to the year ended December 31, 2020 are inclusive of utilized rent credits.
Total payments made under the Triple Net Leases, inclusive of rent credits utilized, were as follows:
| | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 |
Penn Master Lease (1) | $ | 475.7 | | | $ | 457.9 | |
Pinnacle Master Lease (1) | 328.3 | | | 326.9 | |
Perryville Lease | 3.9 | | | — | |
Meadows Lease (1) | 24.9 | | | 26.4 | |
Margaritaville Lease | 23.5 | | | 23.5 | |
Greektown Lease | 53.1 | | | 55.6 | |
Morgantown Lease (1) | 3.0 | | | 0.8 | |
Total (2) | $ | 912.4 | | | $ | 891.1 | |
(1)During the twelve months ended December 31, 2020 we utilized rent credits to pay $190.7 million, $135.5 million, $11.0 million and $0.3 million of rent under the Penn Master Lease, Pinnacle Master Lease, Meadows Lease and Morgantown Lease, respectively.
(2)Cash rent payable under the Tropicana Lease is nominal. Therefore, it has been excluded from the table above.
The following is a maturity analysis of our operating leases, finance leases and financing obligations as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
(in millions) | Operating Leases | | Finance Leases | | Financing Obligations |
Years ending December 31: | | | | | |
2022 | $ | 424.1 | | | $ | 30.0 | | | $ | 370.3 | |
2023 | 407.8 | | | 29.1 | | | 370.4 | |
2024 | 391.9 | | | 25.0 | | | 370.4 | |
2025 | 388.7 | | | 25.0 | | | 370.5 | |
2026 | 384.2 | | | 25.1 | | | 370.5 | |
Thereafter | 7,518.5 | | | 492.8 | | | 8,724.2 | |
Total lease payments | 9,515.2 | | | 627.0 | | | 10,576.3 | |
Less: Imputed interest | (5,061.1) | | | (309.6) | | | (6,479.5) | |
Present value of future lease payments | 4,454.1 | | | 317.4 | | | 4,096.8 | |
Less: Current portion of lease obligations | (132.8) | | | (10.1) | | | (39.0) | |
Long-term portion of lease obligations | $ | 4,321.3 | | | $ | 307.3 | | | $ | 4,057.8 | |
Lessor
The Company leases its hotel rooms to patrons and records the corresponding lessor revenue in “Food, beverage, hotel and other revenues” within our Consolidated Statements of Operations. For the years ended December 31, 2021, 2020, and 2019, the Company recognized $231.1 million, $146.8 million, and $311.0 million, of lessor revenues related to the rental of hotel rooms, respectively. Hotel leasing arrangements vary in duration, but are short-term in nature. The cost and accumulated depreciation of property and equipment associated with hotel rooms is included in “Property and equipment, net” within our Consolidated Balance Sheets.
Note 13—Commitments and Contingencies
Litigation
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.
Location Share Agreements
Prairie State Gaming (“PSG”) enters into location share agreements with bar and retail establishments in Illinois. These agreements are contracts which allow PSG to place VGTs in the bar or retail establishment in exchange for a percentage of the variable revenue generated by the VGTs. PSG holds the gaming license with the state of Illinois and the location share percentage is determined by the state of Illinois. For the years ended December 31, 2021, 2020 and 2019, the total location share payments made by PSG, which are recorded within our Consolidated Statements of Operations as gaming expenses, were $43.3 million, $20.2 million, and $33.1 million, respectively.
Purchase Obligations
The Company has obligations to purchase various goods and services totaling $255.2 million as of December 31, 2021, of which $101.7 million will be incurred in 2022. Purchase obligations totaled $149.1 million as of December 31, 2020. The increase over the prior year is primarily due to Penn Interactive launching operations in new states as well as the acquisition of theScore.
Capital Expenditure Commitments
Pursuant to each of our Triple Net Leases with the exception of our Morgantown Lease (which is a land lease we entered into on October 1, 2020 with GLPI as discussed in Note 12, “Leases”), we are obligated to spend a minimum of 1% of annual net revenues, in the aggregate under each lease, on the maintenance of such facilities. Employee Benefit Plans
The Company maintains a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended, which covers all eligible employees (the “Penn 401(k) Plan”). The Penn 401(k) Plan enables participating employees to defer a portion of their salary in a retirement fund to be administered by the Company. The Company makes a discretionary match contribution, where applicable, of 50% of employees’ elective salary deferrals, up to a maximum of 6% of eligible employee compensation. The matching contributions to the Penn 401(k) Plan for the years ended December 31, 2021, 2020 and 2019 were $10.2 million, $6.0 million, and $11.7 million, respectively.
We maintain a non-qualified deferred compensation plan (the “EDC Plan”) that covers most management and other highly-compensated employees. The EDC Plan was effective beginning March 1, 2001. The EDC Plan allows the participants to defer, on a pre-tax basis, a portion of their base annual salary and/or their annual bonus and earn tax-deferred earnings on these deferrals. The EDC Plan also provides for matching Company contributions that vest over a five-year period. The Company has established a trust, and transfers to the trust, on a periodic basis, an amount necessary to provide for its respective future liabilities with respect to participant deferral and Company contribution amounts. The Company’s matching contributions for the EDC Plan for the years ended December 31, 2021, 2020 and 2019 were $3.3 million, $2.6 million, and $2.3 million, respectively. Our deferred compensation liability, which is included in “Accrued expenses and other current liabilities” within the Consolidated Balance Sheets, was $82.1 million and $86.3 million as of December 31, 2021 and 2020, respectively.
As part of our initiative to reduce our cost structure while our properties were temporarily closed due to the COVID-19 pandemic, we suspended our matching contributions to the Penn 401(k) Plan and the EDC Plan from April 1, 2020 to September 30, 2020.
Labor Agreements
We are required to have agreements with the horsemen at the majority of our racetracks to conduct our live racing and/or simulcasting activities. In addition, in order to operate gaming machines and table games in West Virginia, the Company must maintain agreements with each of the Charles Town horsemen, pari-mutuel clerks and breeders. As of December 31, 2021, we had 43 collective bargaining agreements covering approximately 4,341 active employees. Four collective bargaining agreements are scheduled to expire in 2022.
Note 14—Income Taxes
The following table summarizes the tax effects of temporary differences between the Consolidated Financial Statements carrying amount of assets and liabilities and their respective tax basis, which are recorded at the prevailing enacted tax rate that will be in effect when these differences are settled or realized. These temporary differences result in taxable or deductible amounts in future years. The Company assessed all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize our existing net deferred tax assets.
The components of the Company’s deferred tax assets and liabilities were as follows:
| | | | | | | | | | | |
| December 31, |
(in millions) | 2021 | | 2020 |
Deferred tax assets: | | | |
Stock-based compensation expense | $ | 10.6 | | | $ | 18.2 | |
Accrued expenses | 86.2 | | | 43.3 | |
Financing and operating leasing obligations | 2,351.3 | | | 2,336.9 | |
Unrecognized tax benefits | 8.9 | | | 7.9 | |
| | | |
Net operating losses, interest limitation and tax credit carryforwards | 115.7 | | | 153.9 | |
Gross deferred tax assets | 2,572.7 | | | 2,560.2 | |
Less: Valuation allowance | (124.3) | | | (101.0) | |
Net deferred tax assets | 2,448.4 | | | 2,459.2 | |
Deferred tax liabilities: | | | |
Property and equipment, not subject to the Master Leases | (65.6) | | | (51.1) | |
Property and equipment, subject to the Master Leases | (992.9) | | | (1,051.2) | |
Investments in and advances to unconsolidated affiliates | (6.8) | | | (27.9) | |
Discount on convertible notes | (18.1) | | | (20.9) | |
Undistributed foreign earnings | — | | | (0.4) | |
Intangible assets | (284.8) | | | (183.4) | |
Lease right of use assets | (1,269.3) | | | (1,250.6) | |
Net deferred tax liabilities | (2,637.5) | | | (2,585.5) | |
Long-term deferred tax liabilities, net | $ | (189.1) | | | $ | (126.3) | |
The realizability of the net deferred tax assets is evaluated quarterly by assessing the need for a valuation allowance and by adjusting the amount of the allowance, if necessary. The Company gives appropriate consideration to all available positive and negative evidence including statutory carryback periods, projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining if the net deferred tax assets will be realized. ASC 740 suggests that additional scrutiny should be given to deferred taxes of an entity with cumulative pre‑tax book losses during the three most recent years and is widely considered significant negative evidence that is objective and verifiable and therefore, difficult to overcome. Due to the financial results during the year ended December 31, 2021, the Company has a cumulative pre‑tax book loss of $189.1 million, which reflects the significant negative evidence used in our assessment.
Additionally, the Company expects to remain in a three year cumulative loss position in the near future. As a result of these facts, the Company has recorded a valuation allowance against its net deferred tax assets, excluding net operating losses (“NOLs”) that can be realized based on statutory carryback periods and the reversal of net deferred taxes related to indefinite‑lived intangibles. The Company intends to continue to maintain a valuation allowance on its net deferred tax assets until there is sufficient objectively verifiable positive evidence to support the realization of all or some portion of these deferred tax assets. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.
During the year ended December 31, 2021, the Company increased the valuation allowance by $23.3 million of which $18.2 million was recorded to the balance sheet as a purchase accounting adjustment for the theScore acquisition and $5.1 million was recorded through income tax expense.
In general, the Company has not recognized any U.S. tax expense on undistributed foreign earnings, as we intend to reinvest and expand into new markets outside the U.S. for the foreseeable future. If our intent changes or if these earnings are needed for our U.S. operations, we would be required to accrue and pay U.S. taxes on a portion or all these undistributed earnings. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries. The undistributed foreign earnings were immaterial at December 31, 2021.
Following the ownership changes of the Tropicana, the Company has $102.8 million of total gross federal NOL carryforwards that will expire on various dates through 2035. All acquired tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations. During the year ended December 31, 2021, the Company decreased its U.S. federal NOL carryforward by $153.7 million due to the current year utilization and generated a current U.S. federal NOL carryforward of $7.9 million due to the acquisition of the theScore’s U.S. operations. The Company acquired total gross U.S. federal NOLs of $16.5 million, state NOLs of $5.8 million, and Canadian NOLs of $42.2 million from theScore acquisition in the amount of $64.5 million. The tax benefit associated with these acquired NOLs is $3.4 million, $0.4 million, and $11.2 million respectively, against which a valuation allowance was recorded of $3.9 million for U.S. federal and state NOLs that will not be recognized. All acquired tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations, however, we believe it is more-likely-than-not that the benefit from these attributes will be realized outside of the portion of NOLs with a valuation allowance recorded as noted above.
For state income tax reporting, as of December 31, 2021, the Company had gross state NOL carryforwards aggregating $1.2 billion available to reduce future state income taxes, primarily for the Commonwealth of Pennsylvania, Colorado, Illinois, Iowa, Louisiana, Maryland, Michigan, Missouri, New Mexico and Ohio and Michigan localities. The tax benefit associated with these NOL carryforwards was $71.0 million. Due to statutorily limited NOL carryforwards and the level of earnings projections in the respective jurisdictions, a valuation allowance of $49.1 million has been recorded. If not used, the majority of the carryforwards will expire at various dates from December 31, 2022 through December 31, 2041 with the remaining being carried forward indefinitely.
The domestic and foreign components of income (loss) before income taxes for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Domestic | $ | 606.0 | | | $ | (834.0) | | | $ | 85.5 | |
Foreign | (66.9) | | | (0.2) | | | 0.6 | |
Total | $ | 539.1 | | | $ | (834.2) | | | $ | 86.1 | |
The components of income tax benefit (expense) for the years ended December 31, 2021, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Current tax benefit (expense) | | | | | |
Federal | $ | (100.0) | | | $ | 47.0 | | | $ | (12.5) | |
State | (23.1) | | | 0.2 | | | (9.2) | |
Foreign | — | | | (0.4) | | | (0.2) | |
Total current | (123.1) | | | 46.8 | | | (21.9) | |
Deferred tax benefit (expense) | | | | | |
Federal | (11.9) | | | 103.6 | | | (16.7) | |
State | 13.3 | | | 14.7 | | | (4.4) | |
Foreign | 3.1 | | | — | | | — | |
Total deferred | 4.5 | | | 118.3 | | | (21.1) | |
Total income tax benefit (expense) | $ | (118.6) | | | $ | 165.1 | | | $ | (43.0) | |
The following table reconciles the statutory federal income tax rate to the actual effective income tax rate, and related amounts of income tax benefit (expense), for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
(in millions, except tax rates) | Percent | | Amount | | Percent | | Amount | | Percent | | Amount |
Percent and amount of pretax income | | | | | | | | | | | |
Federal statutory rate | 21.0 | % | | $ | (113.2) | | | 21.0 | % | | $ | 175.2 | | | 21.0 | % | | $ | (18.1) | |
State and local income taxes, net of federal benefits | 1.4 | | | (7.7) | | | 1.4 | | | 12.1 | | | 9.9 | | | (8.5) | |
Nondeductible expenses | 2.5 | | | (13.3) | | | (0.3) | | | (2.6) | | | 4.0 | | | (3.5) | |
Goodwill impairment losses | — | | | — | | | (2.3) | | | (19.0) | | | 14.4 | | | (12.4) | |
Compensation | (1.2) | | | 6.5 | | | 2.5 | | | 20.5 | | | 0.3 | | | (0.3) | |
Foreign | (0.2) | | | 0.9 | | | — | | | (0.4) | | | 0.1 | | | (0.1) | |
Federal valuation allowance | 1.1 | | | (5.9) | | | (3.9) | | | (32.7) | | | — | | | — | |
Tax credits | (1.1) | | | 5.8 | | | 1.2 | | | 10.0 | | | — | | | — | |
Equity investment write-off | (2.1) | | | 11.3 | | | — | | | — | | | — | | | — | |
Other | 0.6 | | | (3.0) | | | 0.2 | | | 2.0 | | | 0.2 | | | (0.1) | |
Total effective tax rate and income tax benefit (expense) | 22.0 | % | | $ | (118.6) | | | 19.8 | % | | $ | 165.1 | | | 49.9 | % | | $ | (43.0) | |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
| | | | | |
(in millions) | Unrecognized tax benefits |
Unrecognized tax benefits as of January 1, 2019 | $ | 29.7 | |
Additions based on prior year positions | 6.5 | |
Decreases due to settlements and/or reduction in reserves | (0.2) | |
Unrecognized tax benefits as of December 31, 2019 | 36.0 | |
Additions based on prior year positions | 1.2 | |
Decreases due to settlements and/or reduction in reserves | (0.9) | |
Unrecognized tax benefits as of December 31, 2020 | 36.3 | |
Additions based on prior year positions | 3.8 | |
Decreases due to settlements and/or reduction in reserves | (0.1) | |
Unrecognized tax benefits as of December 31, 2021 | $ | 40.0 | |
During the year ended December 31, 2021, we did not record any new tax reserves, and accrued interest or penalties related to current year uncertain tax positions. Regarding prior year tax positions, we recorded $4.6 million of tax reserves and accrued interest and reversed $0.1 million of previously recorded tax reserves and accrued interest for uncertain tax positions. As of December 31, 2021 and 2020, unrecognized tax benefits, inclusive of accruals for income tax related penalties and interest, of $42.3 million and $38.2 million, respectively, were included in “Other long-term liabilities” within the Company’s Consolidated Balance Sheets. Overall, the Company recorded a net tax expense of $3.6 million in connection with its uncertain tax positions for the year ended December 31, 2021.
The liability for unrecognized tax benefits as of December 31, 2021 and 2020 included $33.4 million and $30.2 million, respectively, of tax positions that, if reversed, would affect the effective tax rate. During the years ended December 31, 2021, 2020 and 2019, we recognized $0.7 million, $0.5 million and $0.1 million, respectively, of interest and penalties, net of deferred taxes. In addition, the Company had no reductions in previously accrued interest and penalties for the years ended December 31, 2021 and 2020. We classify any income tax related penalties and interest accrued related to unrecognized tax benefits in “Income tax benefit (expense)” within the Consolidated Statements of Operations.
The Company is currently in various stages of the examination process in connection with its open audits. Generally, it is difficult to determine when these examinations will be closed, but the Company reasonably expects that its ASC 740 liabilities will not significantly change over the next twelve months. As of December 31, 2021, the Company has open tax years 2018 through 2020 that could be subject to examination for U.S. federal income taxes. In addition, we are subject to state and local income tax examinations for various tax years in the taxing jurisdictions in which we operate. Such audits could result in
increased tax liabilities, interest and penalties. While the Company believes its tax positions are appropriate, we cannot assure the outcome will remain consistent with our expectation. The Company believes we have adequately reserved for potential audit exposures of uncertain tax positions. In the event the final outcome of these matters is different than the amounts recorded, such differences will impact our income tax provision in the period in which the determination is made. As of December 31, 2021 and 2020, prepaid income taxes of $42.5 million and $52.7 million, respectively, were included in “Prepaid expenses” within the Company’s Consolidated Balance Sheets.
Note 15—Stockholders’ Equity
Common Stock
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.
On September 24, 2020, the Company completed a public offering of 14,000,000 shares of Penn Common Stock and on September 25, 2020, the underwriters exercised their right to purchase an additional 2,100,000 shares of Penn Common Stock, resulting in an aggregate public offering of 16,100,000 shares of Penn Common Stock. All of the shares were issued at a public offering price of $61.00 per share, resulting in gross proceeds of $982.1 million, and net proceeds of $957.6 million after underwriter fees and discounts of $24.5 million.
On June 17, 2021, the Company filed its Second Amended and Restated Articles of Incorporation with the Department of State of the Commonwealth of Pennsylvania. These Articles of Incorporation, as amended and restated and approved by the Company’s shareholders at the 2021 Annual Meeting of Shareholders, increase the number of authorized shares of common stock from 200,000,000 to 400,000,000.
On October 19, 2021, as part of the acquisition of theScore, the Company issued 12,319,340 shares of common stock and authorized and issued 697,539 Exchangeable Shares for approximately $1.0 billion, each with a par value of $0.01, as discussed in Note 6, “Acquisitions and Dispositions.” As of December 31, 2021 there were 697,539 Exchangeable Shares issued and 653,059 outstanding.
Share Repurchase Program
In January 2019, the Company announced a share repurchase program pursuant to which the Board of Directors authorized the repurchase of up to $200.0 million of the Company’s common stock, which expired on December 31, 2020. During the year ended December 31, 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. There were no repurchases of the Company’s common stock for the years ended December 31, 2021, and 2020.
On February 1, 2022, the Board of Directors of Penn National approved a $750.0 million share repurchase program. The three year authorization expires on January 31, 2025. Repurchases by the Company will be subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the
Company is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice.
During February 2022, the Company repurchased 2,195,290 shares of its common stock in open market transactions for $107.1 million at an average price of $48.78 per share. The cost of all repurchased shares is recorded as “Treasury stock” in the Consolidated Balance Sheets. The remaining availability under our $750.0 million share repurchase program was $642.9 million as of February 28, 2022.
Preferred Stock
The Company previously issued two series of preferred stock, Series B and Series C, each with a par value of $0.01 per share. As of December 31, 2021 and 2020, there were 1,000,000 and 18,500 shares authorized of our Series B and Series C preferred stock, respectively. There were no shares outstanding of either Series B or Series C preferred stock as of December 31, 2021 and 2020.
During each of the quarters ended March 31, 2021 and September 30, 2021, the Company issued 43 shares of Series D Preferred Stock, for a total of 86 shares, in conjunction with acquiring an additional 0.6% of Barstool Sports common stock. The acquisition of the incremental Barstool Sports common stock represents a partial settlement of the 1% purchase on a delayed basis as described in Note 7, “Investments in and Advances to Unconsolidated Affiliates.”
During the quarters ended March 31, 2021 and September 30, 2021, 151.2 and 43 shares of Series D Preferred Stock were converted to Penn Common Stock, respectively. As a result of the conversion, the Company issued 151,200 and 43,000 shares of common stock, each with a par value of $0.01.
As of December 31, 2021 and December 31, 2020, there were 5,000 shares authorized of Series D Preferred Stock of which 775 shares and 883 shares were outstanding, respectively.
Other
In the second quarter of 2021, the Company entered into two promissory notes with shareholders for a total of $9.0 million. The promissory notes are unsecured and bear interest of 2.25%. The receivable is recorded as a reduction of equity within our Consolidated Balance Sheets and is presented within our Consolidated Statement of Changes in Stockholders’ Equity within the “Other” caption.
Note 16—Stock-Based Compensation
2018 Long Term Incentive Compensation Plan
The Company’s 2018 Long Term Incentive Compensation Plan, as amended (the “2018 Plan”) permits it to issue stock options (incentive and/or non-qualified), stock appreciation rights (“SARs”), RSAs, RSUs, cash-settled phantom stock units (“CPSUs”), and other equity and cash awards to employees and any consultant or advisor to the Company or subsidiary. Non-employee directors and the chairman emeritus 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 share limit. As of December 31, 2021, there were 4,434,660 shares available for future grants under the 2018 Plan.
On April 12, 2021, the Board of Directors granted 600,000 RSUs and 300,000 RSAs with market-based and service-based vesting conditions (collectively the “Stock Awards”), solely to the Company’s President and Chief Executive Officer pursuant to the 2018 Plan. The Stock Awards are classified as equity with separate tranches and requisite service periods identified for each separately achievable component. As of the grant date, the fair value of the Stock Awards was $48.7 million and was calculated using a Monte Carlo simulation. The fair value of the RSAs was estimated at $19.4 million and segregated into 15 tranches with expense recognition periods ranging from 2.2 to 6.0 years. The fair value of the RSUs was estimated at
$29.3 million and segregated into four tranches with expense recognition periods ranging from 6.7 to 8.7 years. We recognized $6.3 million of stock compensation expense for the Stock Awards during the year ended December 31, 2021.
Score Media And Gaming Inc. Second Amended And Restated Stock Option And Restricted Stock Unit Plan (“theScore Plan”)
In connection with the acquisition of theScore on October 19, 2021, the Company registered theScore Plan. theScore Plan permits the Company to issue non-qualified stock options and RSUs to employees and service providers affiliated with theScore prior to the acquisition date. At the date of acquisition, the Company rolled over all outstanding, non-vested and unexercised stock options and non-vested RSUs equivalent to 853,904 shares of the Company. Each rollover option and RSU is subject to substantially the same terms and conditions applicable to the award immediately prior to the acquisition. In connection with the transaction, the vesting provisions of unvested options and RSUs, awarded under the theScore Plan prior to August 4, 2021, were amended to provide for a new acceleration right for legacy Score employees and service providers. The amendment provides that, if an involuntary termination without cause occurs at any time prior to April 19, 2023, unvested options and RSUs will automatically accelerate and become fully vested on the effective date of termination.
As of December 31, 2021, there were 207,156 shares available for future grants to legacy Score employees and service providers.
2008 Long Term Incentive Compensation Plan
In November 2008, the Company’s shareholders approved the 2008 Long Term Incentive Compensation Plan (the “2008 Plan”), which permitted the Company to issue stock options (incentive and/or non-qualified), SARs, RSAs, CPSUs and other equity and cash awards to employees. Non-employee directors were eligible to receive all such awards, other than incentive stock options. Upon approval of the 2018 Plan, awards were no longer available to be granted under the 2008 Plan. However, the 2008 Plan remains in place until all of the awards previously granted thereunder have been paid, forfeited or expired.
Stock-based Compensation Expense
Stock-based compensation expense, which pertains principally to our stock options, RSAs and RSUs for the years ended December 31, 2021, 2020 and 2019 totaled $35.1 million, $14.5 million and $14.9 million, respectively, and is included within the Consolidated Statements of Operations under “General and administrative.”
Stock Options
Stock options that expire between January 6, 2022 and October 8, 2031 have been granted to officers, directors, employees, and predecessor employees to purchase common stock at prices ranging from $2.51 to $117.82 per share, including options rolled over from theScore Plan. All options were granted at the fair market value of the common stock on the grant date (as defined in the respective plan document) and have contractual lives ranging from four to ten years. The Company issues new authorized common shares to satisfy stock option exercises.
During the year ended December 31, 2021, the Company granted 587,399 stock options, of which 352,768 were rolled over under theScore Plan. The Company granted 652,733, and 2,436,811 stock options during the years ended December 31, 2020 and 2019, respectively.
The following table contains information about our stock options:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Option Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
Outstanding as of January 1, 2021 | 3,599,189 | | | $ | 19.79 | | | | | |
Granted and rolled over | 587,399 | | | $ | 41.96 | | | | | |
Exercised | (627,523) | | | $ | 17.28 | | | | | |
Forfeited | (201,691) | | | $ | 27.24 | | | | | |
Outstanding as of December 31, 2021 | 3,357,374 | | | $ | 23.69 | | | 6.28 | | $ | 100.0 | |
Exercisable as of December 31, 2021 | 1,551,263 | | | $ | 18.56 | | | 4.62 | | $ | 50.8 | |
The combined weighted-average grant-date fair value of options granted and rolled over under theScore Plan during the year ended December 31, 2021, was $57.70. The weighted-average grant-date fair values of options granted during the years ended December 31, 2020 and 2019 were $8.62 and $6.39, respectively. The aggregate intrinsic values of stock options exercised during the years ended December 31, 2021, 2020 and 2019 were $53.1 million, $128.9 million and $2.0 million, respectively. The total fair values of stock options that vested during the years ended December 31, 2021, 2020 and 2019 were $6.2 million, $9.6 million and $6.2 million, respectively.
As of December 31, 2021, the unamortized compensation costs not yet recognized related to stock options granted totaled $24.1 million and the weighted-average period over which the costs are expected to be recognized was 1.6 years.
The following are the weighted-average assumptions used in the Black-Scholes option-pricing model for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
Risk-free interest rate | 0.46 | % | | 1.55 | % | | 2.00 | % |
Expected volatility | 75.33 | % | | 33.78 | % | | 32.90 | % |
Dividend yield | — | | | — | | | — | |
Weighted-average expected life (in years) | 5.2 | | 5.0 | | 5.3 |
Restricted Stock Awards and Restricted Stock Units
As noted above, the Company grants RSAs and RSUs to our employees and certain non-employee directors. In addition, the Company issues its named executive officers (“NEOs”) and other key executives RSAs and RSUs with performance conditions (we refer to our RSAs and RSUs with performance conditions as “PSAs”), which are discussed in further detail below.
Performance Share Programs
The Company’s Performance Share Programs (as defined below) were adopted in order to provide our NEOs and certain other key executives with stock-based compensation tied directly to the Company’s performance, which further aligns their interests with those of shareholders and provides compensation only if the designated performance goals are met for the applicable performance periods.
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.
On February 14, 2019, an aggregate of 278,780 PSAs with performance-based vesting conditions, at target, was granted under the Performance Share Program II, to be granted in one-third increments.
On February 25, 2020, an aggregate of 107,297 PSAs with performance-based vesting conditions, at target, was granted under the Performance Share Program II, to be granted in one-third increments.
On April 12, 2021, in addition to the Stock Awards mentioned above, an aggregate of 94,673 PSAs with performance-based vesting conditions, at target, was granted under the Performance Share Program II, to be granted in one-third increments.
PSAs issued pursuant to the Performance Share Programs consist of three one-year performance periods over a three-year service period. The awards have the potential to be earned at between 0% and 200% of the number of shares granted depending on achievement of the annual performance goals, but remain subject to vesting for the full three-year service period.
The grant date fair values of our RSAs and RSUs are based on the most recent closing stock price of the Company’s shares of common stock. The stock-based compensation expense is recognized over the remaining service period at the time of grant, adjusted for the Company’s expectation of the achievement of the performance conditions. During the year ended December 31, 2021, the Company granted 871,763 RSAs and RSUs without performance conditions, of which 501,136 were RSUs rolled over under theScore Plan.
The following table contains information on our RSAs and RSUs:
| | | | | | | | | | | | | | | | | | | | | | | |
| With Performance Conditions | | Without Performance Conditions |
| Number of Shares | | Weighted- Average Grant Date Fair Value | | Number of Shares | | Weighted- Average Grant Date Fair Value |
Nonvested as of January 1, 2021 | 229,632 | | | $ | 28.84 | | | 390,815 | | | $ | 25.67 | |
Granted and rolled over | 1,106,613 | | | $ | 62.81 | | | 871,763 | | | $ | 78.15 | |
Vested | (136,859) | | | $ | 31.38 | | | (142,350) | | | $ | 24.83 | |
Forfeited | (31,022) | | | $ | 77.12 | | | (17,215) | | | $ | 47.81 | |
Nonvested as of December 31, 2021 | 1,168,364 | | | $ | 58.89 | | | 1,103,013 | | | $ | 66.90 | |
As of December 31, 2021, the unamortized compensation costs not yet recognized related to RSAs and RSUs totaled $117.3 million and the weighted-average period over which the costs are expected to be recognized is 3.4 years. The total fair values of RSAs and RSUs that vested during the year ended December 31, 2021 was $28.9 million. The total fair values of RSAs that vested during the years ended December 31, 2020 and 2019 were $16.7 million and $5.5 million, respectively.
Cash-settled Phantom Stock Units
Our outstanding CPSUs entitle employees, non-employee directors, and the chairman emeritus to receive cash based on the fair value of the Company’s common stock on the vesting date. Our CPSUs vest over a period of three or four years. The cash-settled CPSUs 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 Consolidated Balance Sheets, associated with its cash-settled CPSUs of $8.6 million and $10.1 million as of December 31, 2021 and 2020 respectively.
For CPSUs held by employees, non-employee directors, and the chairman emeritus of the Company, there was $13.2 million of total unrecognized compensation cost as of December 31, 2021 that will be recognized over the awards remaining weighted-average vesting period of 1.1 years. For the years ended December 31, 2021, 2020 and 2019, the Company recognized $12.1 million, $11.5 million, and $4.1 million of compensation expense associated with these awards, respectively. Compensation expense associated with our CPSUs is recorded in “General and administrative” within the Consolidated Statements of Operations. We paid $13.3 million, $4.7 million, and $2.5 million during the years ended December 31, 2021, 2020 and 2019, respectively, pertaining to our cash-settled CPSUs.
Stock Appreciation Rights
Our outstanding cash-settled 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 Consolidated Balance Sheets, associated with its cash-settled SARs of $18.5 million and $54.6 million as of December 31, 2021 and 2020 respectively.
For SARs held by employees of the Company, there was $25.0 million of total unrecognized compensation cost as of December 31, 2021 that will be recognized over the awards remaining weighted-average vesting period of 1.8 years. For the years ended December 31, 2021, 2020, and 2019 the Company recognized a charge to compensation expense of $3.1 million, $69.7 million, and $10.7 million respectively. Compensation expense associated with our SARs is recorded in “General and administrative” within the Consolidated Statements of Operations. We paid $39.6 million, $32.6 million and $3.5 million during the years ended December 31, 2021, 2020 and 2019, respectively, related to cash-settled SARs.
Note 17—Earnings (Loss) per Share
For the years ended December 31, 2021 and December 31, 2019, we recorded net income attributable to Penn National. As such, we used diluted weighted-average common shares outstanding when calculating diluted income per share for the years ended December 31, 2021 and December 31, 2019. Stock options, RSAs, RSUs, convertible preferred shares and convertible debt that could potentially dilute basic EPS in the future are included in the computation of diluted income per share.
For the year ended December 31, 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. 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 year ended December 31, 2020 |
Assumed conversion of dilutive stock options | 3.0 | |
Assumed conversion of dilutive RSAs | 0.5 | |
Assumed conversion of convertible preferred shares | 0.7 | |
Assumed conversion of convertible debt | 9.1 | |
The following table sets forth the allocation of net income for the year ended December 31, 2021, under the two-class method. For the year ended December 31, 2020 we did not utilize the two-class method due to incurring a net loss for the period, nor did we utilize the two-class method for the year ended December 31, 2019, as we issued Series D Preferred stock on February 20, 2020, as discussed in Note 15, “Stockholders’ Equity.” | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Net income (loss) attributable to Penn National | $ | 420.8 | | | $ | (669.5) | | | $ | 43.9 | |
Net income applicable to preferred stock | 2.1 | | | — | | | — | |
Net income (loss) applicable to common stock | $ | 418.7 | | | $ | (669.5) | | | $ | 43.9 | |
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 years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Weighted-average common shares outstanding—Basic | 158.7 | | 134.0 | | | 115.7 | |
Assumed conversion of: | | | | | |
Dilutive stock options | 2.3 | | — | | | 1.8 | |
Dilutive RSAs and RSUs | 0.4 | | — | | | 0.3 | |
Convertible debt | 14.1 | | — | | | — | |
Weighted-average common shares outstanding—Diluted | 175.5 | | | 134.0 | | | 117.8 | |
RSAs and RSUs with performance and market based vesting conditions that have not been met as of the period end date are excluded from the computation of diluted earnings per share.
Options to purchase 0.2 million, 0.0 million, and 2.4 million shares were outstanding during the years ended December 31, 2021, 2020 and 2019, respectively, but were not included in the computation of diluted earnings (loss) per share because they were anti-dilutive.
In addition, 0.8 million shares from the assumed conversion of convertible preferred shares were excluded from the computation of diluted earnings (loss) per share for the year ended December 31, 2021, because including them would have been anti-dilutive.
The Company’s calculation of weighted-average common shares outstanding includes the Exchangeable Shares issued in connection with theScore acquisition, as discussed in Note 6, “Acquisitions and Dispositions” and Note 15, “Stockholders’ Equity.” The following table presents the calculation of basic and diluted earnings (loss) for the Company’s common stock for the years ended December 31, 2021, 2020 and 2019: | | | | | | | | | | | | | | | | | |
| | | |
(in millions, except per share data) | 2021 | | 2020 | | 2019 |
Calculation of basic earnings (loss) per share: | | | | | |
Net income (loss) applicable to common stock | $ | 418.7 | | | $ | (669.5) | | | $ | 43.9 | |
Weighted-average shares outstanding - Penn National | 158.6 | | | 134.0 | | | 115.7 | |
Weighted-average shares outstanding - Exchangeable Shares | 0.1 | | | — | | | — | |
Weighted-average common shares outstanding - basic | 158.7 | | | 134.0 | | | 115.7 | |
Basic earnings (loss) per share | $ | 2.64 | | | $ | (5.00) | | | $ | 0.38 | |
| | | | | |
Calculation of diluted earnings (loss) per share: | | | | | |
Net income (loss) applicable to common stock | $ | 418.7 | | | $ | (669.5) | | | $ | 43.9 | |
Interest expense, net of tax (1): | | | | | |
Convertible Notes | 17.0 | | | — | | | — | |
Diluted income applicable to common stock | $ | 435.7 | | | $ | (669.5) | | | $ | 43.9 | |
Weighted-average common shares outstanding - diluted | 175.5 | | | 134.0 | | | 117.8 | |
Diluted earnings (loss) per share | $ | 2.48 | | | $ | (5.00) | | | $ | 0.37 | |
(1)The year ended December 31, 2021 was tax-affected at a rate of 22%.
Note 18—Segment Information
During the fourth quarter of 2021, the Company evaluated its reportable segments and changed them to: Northeast, South, West, Midwest, and Interactive. This change reflects management’s belief that the operating results of our Interactive segment represent a strategic and high growth component of our overall operations. The Interactive segment, which was previously reported within Other, includes the operating results of Penn Interactive, theScore, and the Company’s proportionate share of earnings attributable to its equity method investment in Barstool Sports. Corporate expense will continue to be reported in Other in addition to stand-alone racing operations, other joint ventures, management contracts, and Heartland Poker Tour.
As a result of the change in reportable segments described above, the Company has recast previously reported segment information to conform to the current management view for all prior periods presented. The changes to reportable segments had no impact to the Company’s consolidated financial statements.
We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate: Northeast, South, West, and Midwest. Our Interactive segment includes our interactive operations (as defined above). 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).
The following tables present the Company’s segment information. As a result of the change in reportable segments described above, we have recast previously reported segment information to conform to the current presentation in the following tables:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Revenues: | | | | | |
Northeast segment | $ | 2,552.4 | | | $ | 1,639.3 | | | $ | 2,399.9 | |
South segment | 1,322.2 | | | 849.6 | | | 1,118.9 | |
West segment | 521.4 | | | 302.5 | | | 642.5 | |
Midwest segment | 1,102.7 | | | 681.4 | | | 1,094.5 | |
Interactive segment | 432.9 | | | 121.1 | | | 38.3 | |
Other (1) | 10.6 | | | 3.9 | | | 9.2 | |
Intersegment eliminations (2) | (37.2) | | | (19.1) | | | (1.9) | |
Total | $ | 5,905.0 | | | $ | 3,578.7 | | | $ | 5,301.4 | |
| | | | | |
Adjusted EBITDAR (3): | | | | | |
Northeast segment | $ | 848.4 | | | $ | 478.9 | | | $ | 720.8 | |
South segment | 587.0 | | | 318.9 | | | 369.8 | |
West segment | 195.0 | | | 82.2 | | | 198.8 | |
Midwest segment | 500.1 | | | 258.3 | | | 403.6 | |
Interactive segment | (35.4) | | | 37.2 | | | 11.6 | |
Other (1) | (100.7) | | | (80.7) | | | (99.4) | |
| | | | | |
Total (3) | 1,994.4 | | | 1,094.8 | | | 1,605.2 | |
| | | | | |
Other operating benefits (costs) and other income (expenses): | | | | | |
Rent expense associated with triple net operating leases (4) | (454.4) | | | (419.8) | | | (366.4) | |
Stock-based compensation | (35.1) | | | (14.5) | | | (14.9) | |
Cash-settled stock-based awards variance | (1.2) | | | (67.2) | | | (0.8) | |
Gain (loss) on disposal of assets | (1.1) | | | 29.2 | | | (5.5) | |
Contingent purchase price | (1.9) | | | 1.1 | | | (7.0) | |
Pre-opening expenses (5) | (5.4) | | | (11.8) | | | (22.3) | |
Depreciation and amortization | (344.5) | | | (366.7) | | | (414.2) | |
Impairment losses | — | | | (623.4) | | | (173.1) | |
| | | | | |
Insurance recoveries, net of deductible charges | — | | | 0.1 | | | 3.0 | |
Non-operating items of equity method investments (6) | (7.7) | | | (4.7) | | | (3.7) | |
Interest expense, net | (561.7) | | | (543.2) | | | (534.2) | |
Loss on early extinguishment of debt | — | | | (1.2) | | | — | |
Other (5)(7) | (42.3) | | | 93.1 | | | 20.0 | |
Income (loss) before income taxes | 539.1 | | | (834.2) | | | 86.1 | |
Income tax benefit (expense) | (118.6) | | | 165.1 | | | (43.0) | |
Net income (loss) | $ | 420.5 | | | $ | (669.1) | | | $ | 43.1 | |
(1)The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, Sam Houston and Valley Race Parks (the remaining 50% was acquired by Penn National on August 1, 2021), the Company’s joint venture interests in Freehold Raceway; our management contract for Retama Park Racetrack and our live and televised poker tournament series that operates under the trade name, Heartland Poker Tour (“HPT”). Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property.
(2)Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by Penn Interactive.
(3)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, net of deductible charges; changes in the estimated fair value of our contingent purchase price obligations; gain or loss on disposal of assets; the difference between budget and actual expense for cash-settled stock-based awards; pre-opening expenses (see footnote (5) below); and other. Adjusted EBITDAR is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (see footnote (6) below) added back for Barstool Sports and our Kansas Entertainment joint venture.
(4)The Company’s triple net operating leases include the operating lease components contained within our triple net master lease dated November 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition of Pinnacle Entertainment, Inc. (primarily land), our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana Las Vegas Hotel and Casino and Hollywood Casino at Meadows Racetrack, and our individual triple net leases with VICI for the real estate assets used in the operations of Margaritaville Casino Resort and Greektown Casino-Hotel.
(5)During 2019, 2020 and during the first quarter of 2021, acquisition costs were included within pre-opening and acquisition costs. Beginning with the quarter ended June 30, 2021, acquisition costs are presented as part of other expenses.
(6)Consists principally of interest expense, net; income taxes; depreciation and amortization; and stock-based compensation expense associated with Barstool Sports and our Kansas Entertainment joint venture. We record our portion of Barstool Sports’ net income or loss, including adjustments to arrive at Adjusted EBITDAR, one quarter in arrears.
(7)Includes holding gains and losses on our equity securities, which are discussed in Note 19, “Fair Value Measurements.” Additionally, consists of non-recurring acquisition and transaction costs, finance transformation costs associated with the implementation of our new Enterprise Resource Management system and non-recurring restructuring charges (primarily severance) associated with a company-wide initiative, triggered by the COVID-19 pandemic, designed to (i) improve the operational effectiveness across our property portfolio; and (ii) improve the effectiveness and efficiency of our Corporate functional support area. | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
(in millions) | 2021 | | 2020 | | 2019 |
Capital expenditures: | | | | | |
Northeast segment | $ | 144.8 | | | $ | 78.0 | | | $ | 96.2 | |
South segment | 39.0 | | | 15.8 | | | 29.8 | |
West segment | 8.5 | | | 8.2 | | | 21.2 | |
Midwest segment | 19.8 | | | 15.1 | | | 32.7 | |
Interactive segment | 6.3 | | | 9.1 | | | — | |
Other | 25.7 | | | 10.8 | | | 10.7 | |
Total capital expenditures | $ | 244.1 | | | $ | 137.0 | | | $ | 190.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other (1) | | Total |
As of December 31, 2021 | | | | | | | | | | | | | |
Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 83.8 | | | $ | 164.4 | | | $ | 6.8 | | | $ | 255.1 | |
Total assets | $ | 2,283.6 | | | $ | 1,224.6 | | | $ | 394.8 | | | $ | 1,215.8 | | | $ | 2,618.3 | | | $ | 9,135.0 | | | $ | 16,872.1 | |
| | | | | | | | | | | | | |
As of December 31, 2020 | | | | | | | | | | | | | |
Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 85.2 | | | $ | 149.3 | | | $ | 32.2 | | | $ | 266.8 | |
Total assets | $ | 1,958.4 | | | $ | 1,165.4 | | | $ | 401.5 | | | $ | 1,161.1 | | | $ | 434.1 | | | $ | 9,546.8 | | | $ | 14,667.3 | |
| | | | | | | | | | | | | |
As of December 31, 2019 | | | | | | | | | | | | | |
Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 90.9 | | | $ | 1.9 | | | $ | 35.4 | | | $ | 128.3 | |
Total assets | $ | 2,273.7 | | | $ | 1,397.0 | | | $ | 752.1 | | | $ | 1,412.2 | | | $ | 124.1 | | | $ | 8,235.4 | | | $ | 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.
Note 19—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 December 31, 2021, we held $84.3 million in equity securities of ordinary shares which are reported as “Other assets” in our Consolidated Balance Sheets. During the year ended December 31, 2021, all warrants were exercised for ordinary shares which resulted in a loss of $20.1 million included in “Other” within our Consolidated Statements of Operations. As of December 31, 2020, we held $143.1 million in equity securities, which included ordinary shares and warrants which are reported as “Other assets” in our Consolidated Balance Sheets. 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 iCasino market access across our portfolio.
During the years ended December 31, 2021 and 2020, we recognized realized and unrealized losses of $24.9 million and an unrealized gain of $106.7 million, respectively, related to these equity securities, which is included in “Other” within our Consolidated Statements of Operations.
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 previously associated with the exercised 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 December 31, 2021 and 2020, 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 December 31, 2021 and 2020, the promissory notes and the local government corporation bonds were included in “Other assets” within our Consolidated Balance Sheets.
During the year ended December 31, 2019, principally due to the lack of legislative progress and on-going negative operating results of Retama Park Racetrack, we recorded an other-than-temporary impairment on the promissory notes and the local government corporation bonds totaling $2.5 million, which is included in “Impairment losses” within our Consolidated Statements of Operations.
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, 4.125% Notes, and the 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 December 31, 2021 and 2020 included a financing arrangement entered in February of 2021, the relocation fees for Dayton and Mahoning Valley, and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. See Note 11, “Long-term Debt” for details. The fair values of the Dayton and Mahoning Valley relocations fees and the Lawrenceburg repayment obligation 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. Additionally, in February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability and the fair value of the financing obligation is based on what we expect to be settled in a future period of which the principal is contingent and predicated on other events, plus accreted period non-cash interest using an effective interest rate of 27.0% until the claims and related obligation is settled. The financing obligation has been classified as a Level 3 measurement and is included within our Consolidated Balance Sheets in “Long-term debt, net of current maturities, debt discount and debt issuance costs.” See Note 11, “Long-term Debt.” Other Liabilities
Other liabilities as of December 31, 2021 includes contingent purchase price liabilities related to Plainridge Park Casino and Hitpoint, of which Hitpoint was acquired on May 11, 2021. The Hitpoint contingent purchase price liability is payable in $1.0 million installments in the form of cash and equity, on the first three anniversaries of the acquisition close date (May 11, 2021) and is based on the achievement of mutual goals established by the Company and Hitpoint. The Plainridge Park Casino contingent purchase price liability is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced on June 24, 2015. As of December 31, 2021, we were contractually obligated to make four additional annual payments. The fair value of the Plainridge Park Casino contingent purchase price liability is estimated based on an income approach using a discounted cash flow model. These contingent purchase price liabilities have been classified as a Level 3 measurement and are included within our 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | — | | | $ | — | |
Equity securities | $ | 84.3 | | | $ | 84.3 | | | $ | — | | | $ | 84.3 | | | $ | — | |
Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
Promissory notes | $ | 15.1 | | | $ | 15.1 | | | $ | — | | | $ | 15.1 | | | $ | — | |
Puts and calls related to certain Barstool Sports shares | $ | 1.9 | | | $ | 1.9 | | | $ | — | | | $ | 1.9 | | | $ | — | |
Financial liabilities: | | | | | | | | | |
Long-term debt | | | | | | | | | |
Senior Secured Credit Facilities | $ | 1,544.5 | | | $ | 1,559.6 | | | $ | 1,559.6 | | | $ | — | | | $ | — | |
5.625% Notes | $ | 399.6 | | | $ | 411.5 | | | $ | 411.5 | | | $ | — | | | $ | — | |
4.125% Notes | $ | 392.9 | | | $ | 389.5 | | | $ | 389.5 | | | $ | — | | | $ | — | |
Convertible Notes | $ | 253.5 | | | $ | 780.0 | | | $ | 780.0 | | | $ | — | | | $ | — | |
Other long-term obligations | $ | 146.3 | | | $ | 144.3 | | | $ | — | | | $ | 53.9 | | | $ | 90.4 | |
Other liabilities | $ | 13.3 | | | $ | 13.2 | | | $ | — | | | $ | 2.7 | | | $ | 10.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,853.8 | | | $ | 1,853.8 | | | $ | 1,853.8 | | | $ | — | | | $ | — | |
Equity securities | $ | 143.1 | | | $ | 143.1 | | | $ | — | | | $ | 143.1 | | | $ | — | |
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 | $ | 1,600.3 | | | $ | 1,609.3 | | | $ | 1,609.3 | | | $ | — | | | $ | — | |
5.625% Notes | $ | 399.5 | | | $ | 418.0 | | | $ | 418.0 | | | $ | — | | | $ | — | |
Convertible Notes | $ | 239.8 | | | $ | 1,274.5 | | | $ | 1,274.5 | | | $ | — | | | $ | — | |
Other long-term obligations | $ | 73.0 | | | $ | 72.8 | | | $ | — | | | $ | 72.8 | | | $ | — | |
Other liabilities | $ | 10.1 | | | $ | 10.1 | | | $ | — | | | $ | 2.8 | | | $ | 7.3 | |
Puts and calls related to certain Barstool Sports shares | $ | 0.3 | | | $ | 0.3 | | | $ | — | | | $ | 0.3 | | | $ | — | |
The following table summarizes the changes in fair value of our Level 3 liabilities measured on a recurring basis:
| | | | | |
(in millions) | Other Liabilities |
Balance as of January 1, 2019 | $ | 19.0 | |
| |
Payments | (8.5) | |
Included in earnings (1) | 7.0 | |
Balance as of December 31, 2019 | 17.5 | |
| |
Payments | (9.1) | |
Included in loss (1) | (1.1) | |
Balance as of December 31, 2020 | 7.3 | |
Additions | 75.5 | |
Interest | 17.9 | |
Payments | (1.7) | |
Included in earnings (1) | 1.9 | |
Balance as of December 31, 2021 | $ | 100.9 | |
(1)The expense is included in “General and administrative” within our Consolidated Statements of Operations.
There were no impairment charges to goodwill, gaming licenses and trademarks for the year ended December 31, 2021. The following table sets forth the assets measured at fair value on a non-recurring basis as of December 31, 2020:
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(in millions) | Valuation Date | | Valuation Technique | | Level 1 | | Level 2 | | Level 3 | | Total Balance | | Total Reduction in Fair Value Recorded |
Property and equipment (1) | 12/31/2020 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (7.3) | |
Goodwill (2) | 3/31/2020 | | Discounted cash flow and market approach | | $ | — | | | $ | — | | | $ | 160.5 | | | $ | 160.5 | | | $ | (113.0) | |
Gaming licenses (2) | 3/31/2020 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 568.0 | | | $ | 568.0 | | | $ | (437.0) | |
Trademarks (2) | 3/31/2020 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 216.5 | | | $ | 216.5 | | | $ | (61.5) | |
(1)The fair value, which was concluded to be zero, of our property and equipment associated with Tropicana was determined using Level 3 inputs. See Note 8, “Property and Equipment,” for more information.
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities on a recurring basis as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Valuation Technique | | Unobservable Input | | Discount Rate |
Other long-term obligation | Discounted cash flow | | Discount rate | | 27.0% |
Contingent purchase price - Plainridge Park Casino | Discounted cash flow | | Discount rate | | 4.5% |
As discussed in Note 9, “Goodwill and Other Intangible Assets,” our annual assessment for impairment as of October 1, 2021, did not result in any impairment charges to goodwill, gaming licenses and trademarks. We recorded impairments on our goodwill, gaming licenses and trademarks as a result of the interim assessment for impairment during the first quarter of 2020. 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 20—Related Party Transactions
The Company currently leases executive office buildings in Wyomissing, Pennsylvania from affiliates of its chairman emeritus of the Board of Directors. Rent expense was $1.2 million for each of the years ended December 31, 2021, 2020 and 2019. Two leases were renewed in the current year, and expire in December 2022 and August 2026; the remaining lease, which had been previously on a month-to-month basis, has been terminated as of December 31, 2021. The future minimum lease commitments relating to these leases as of December 31, 2021 are $2.3 million.