The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Condensed Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . EXECUTIVE OVERVIEW Our BusinessPenn National Gaming, Inc. , together with its subsidiaries ("Penn National," the "Company," "we," "our," or "us"), is a leading, diversified, multi-jurisdictional owner and manager of gaming and racing properties, sports betting operations, and video gaming terminal ("VGT") operations. We are licensed to offer live sports betting at our properties inIndiana ,Iowa ,Michigan ,Mississippi ,Nevada ,Pennsylvania andWest Virginia . In addition, we operate an interactive gaming ("iGaming") division through our subsidiary,Penn Interactive Ventures, LLC ("Penn Interactive"), which has launched an online casino ("iCasino") inPennsylvania through our HollywoodCasino.com gaming platform and entered into multi-year agreements with leading sports betting operators for online sports betting and iGaming market access across our portfolio of properties. We also hold a 36% equity interest inBarstool Sports, Inc. ("Barstool Sports "), a leading digital sports, entertainment and media platform, and expect to launch our online sports betting app calledBarstool Sports in the third quarter of 2020. Our MYCHOICE® customer loyalty program currently has over 20 million members and provides our members with various benefits, including complimentary goods and/or services. We believe our continued evolution into the best-in-class omni-channel provider of retail and online gaming and sports betting entertainment will be a catalyst for our core land-based business, while also providing a platform for significant long-term shareholder value. As ofMarch 31, 2020 , we owned, managed, or had ownership interests in 41 properties in 19 states. The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the Penn Master Lease and the Pinnacle Master Lease (as such terms are defined in "Liquidity and Capital Resources" and collectively referred to as the "Master Leases"), with Gaming and Leisure Properties, Inc. (NASDAQ: GLPI) ("GLPI"), a real estate investment trust ("REIT"). Impact of COVID-19 Pandemic and Company Response OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus (known as "COVID-19") outbreak to be a global pandemic. As a result, we began temporary suspension of the operations of all of our 41 gaming properties starting betweenMarch 13, 2020 andMarch 19, 2020 pursuant to various orders from state gaming regulatory bodies or governmental authorities to combat the rapid spread of COVID-19, all of which remained temporarily closed as ofMarch 31, 2020 and the date of filing this Quarterly Report on Form 10-Q with theU.S. Securities and Exchange Commission (the "SEC"). These developments have caused significant disruptions to our business and have caused a material adverse impact on our financial condition, results of operations and cash flows, the extent of which is primarily based on the duration of the property closures as well as the timing and extent of any recovery in visitation and consumer spending at our properties. We are currently unable to determine whether, when or how the conditions surrounding the COVID-19 pandemic will change, including when any restrictions or closure requirements will be lifted, when we will be able to reopen all of our gaming properties, whether we will be able to successfully staff our properties, the manner in which our properties will reopen, the impact that social distancing protocols will have on our operations, and the degree to which our customers will patronize our properties. OnMarch 13, 2020 , in order to maintain maximum financial flexibility in light of the COVID-19 pandemic, we borrowed the remaining available amount of$430.0 million under our Revolving Credit Facility (as defined in "Liquidity and Capital Resources" ). OnApril 14, 2020 , we entered into a second amendment to our Amended Credit Agreement (as defined in "Liquidity and Capital Resources" ), which, among other things, provides us with relief from our financial covenants for a period of up to one year. OnMarch 27, 2020 , we entered into a binding term sheet with GLPI (the "Term Sheet") whereby GLPI agreed to (i) purchase the real estate assets associated with our Tropicana Las Vegas ("Tropicana") property in exchange for rent credits of$307.5 million , which closed onApril 16, 2020 , and (ii) purchase the land underlying ourHollywood Casino Morgantown 32
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("Morgantown") development project inMorgantown, Pennsylvania , in exchange for rent credits of$30.0 million , which we expect to close byAugust 31, 2020 . The Company has taken various actions to reduce its cost structure during the property closures to help mitigate the operating and financial impact of the COVID-19 pandemic, including: (i) reducing its rent payments through the transactions with GLPI related to Tropicana andMorgantown described above; (ii) furloughing approximately 26,000 employees and operating with a minimum, mission-critical staffing of less than 850 employees company-wide during the closures; (iii) enacting meaningful compensation reductions to its remaining property and corporate leadership teams effectiveApril 1, 2020 and until such time as the Company determines that its properties have substantially returned to normal operations; and (iv) executing substantial reductions in operating expenses, capital expenditures, including temporarily suspending construction of our two planned Category 4 development projects, and overall costs. In addition, the Company's Board of Directors elected to forgo their cash compensation effectiveApril 1, 2020 and until such time as the Company determines that its properties have substantially returned to normal operations. We have been actively engaged in discussions with our regulators, local and state governments, and public health authorities to prepare and develop comprehensive protocols for resuming operations at each of our properties, which are focused on protecting the health, safety and wellbeing of our employees and customers. We are currently planning to reopen all of our gaming properties in the second quarter of 2020, if approved by our regulators, local and state governments, and/or public health authorities. However, in the event that reopening approvals are delayed to the end of the third quarter of 2020 or if cash flows generated by our reopened properties are insufficient to cover our expenses, we may need to take additional actions to preserve liquidity and remain in compliance with our financial covenants. We calculate our current monthly fixed costs based on continuing complete closure through the end of the year, which we refer to as cash burn, to be an average of approximately$83 million . The actions described above have significantly reduced this amount from what it would be if we continued full operations. OnMarch 27, 2020 , the President ofthe United States signed into law the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which provides emergency economic assistance for American workers, families and businesses affected by the COVID-19 pandemic. The economic relief package includes government loan enhancement programs and various tax provisions to help improve liquidity for American businesses. Based on our preliminary evaluation of the CARES Act, we currently believe we qualify for certain employer refundable payroll credits, deferral of applicable payroll taxes, net operating loss carryback and immediate expensing for eligible qualified improvement property. We intend to continue to review and consider any available potential benefits under the CARES Act for which we qualify, including those described above. We cannot precisely predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered, and we cannot assure you that we will be able to receive such benefits in a timely manner or at all.The Penn National Gaming Foundation established a COVID-19 emergency relief fund to assist our team members and local relief organizations affected by the COVID-19 pandemic. More than$1.7 million has been raised through personal donations from our Chief Executive Officer, senior management team, Board of Directors and property general managers, in addition to contributions from the Company and property employee assistance funds. We have also extended medical benefits of furloughed employees throughJune 30, 2020 . The Company continues to evaluate the nature and extent of the impact of the COVID-19 pandemic on its business. We are currently unable to determine the length and severity of the crisis. The continuation of the outbreak may cause prolonged periods of property closures; modified opening schedules; limits on the number of customers in casinos; prohibitions of large gatherings, such as concerts and conventions; changes in customer behavior; or a potential reduction in consumer discretionary spending. The COVID-19 pandemic had a material adverse impact on our business, financial condition, results of operations and cash flows for the first quarter of 2020 and will have a material adverse impact on the second quarter of 2020. Due to the developing situation, our business, financial condition, results of operations and cash flows for the third quarter 2020 and full year 2020 could be impacted in ways we are not able to fully predict today. Even if we are able to reopen all of our gaming properties, there can be no assurance that our business, financial condition, results of operations and cash flows will return to levels that existed prior to the COVID-19 pandemic. Recent Acquisitions, Development Projects and Other InFebruary 2020 , we closed on our investment inBarstool Sports pursuant to a stock purchase agreement withBarstool Sports and stockholders ofBarstool Sports , in which we purchased 36% (inclusive of 1% on a delayed basis) of the common stock ofBarstool Sports for a purchase price of$161.2 million . Furthermore, three years after the closing of the transaction (or earlier at our election), we will increase our ownership inBarstool Sports to approximately 50% by purchasing approximately$62 million worth of additional shares ofBarstool Sports common stock, consistent with the implied valuation at the time of 33
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the initial investment, which was$450.0 million . With respect to the remainingBarstool Sports shares, we have immediately exercisable call rights, and the existingBarstool Sports stockholders have put rights exercisable beginning three years after closing, all based on a fair market value calculation at the time of exercise (subject to a cap of$650.0 million and a floor of 2.25 times the annualized revenue ofBarstool Sports , all subject to various adjustments). We also have the option to bring in another partner who would acquire a portion of our share ofBarstool Sports . Upon closing, we becameBarstool Sports' exclusive gaming partner for up to 40 years and have the sole right to utilize the Barstool Sports brand for all of our online and retail sports betting and iCasino products. InMay 2019 , we acquiredGreektown Casino-Hotel ("Greektown") inDetroit, Michigan , subject to a triple net lease with VICI Properties Inc. (NYSE: VICI) ("VICI" and collectively with GLPI, our "REIT Landlords") (the "Greektown Lease") and inJanuary 2019 , we acquiredMargaritaville Casino Resort ("Margaritaville") inBossier City, Louisiana , subject to a triple net lease with VICI (the "Margaritaville Lease"). InMarch 2020 , in light of the COVID-19 pandemic, we temporarily suspended construction of our development of two Category 4 satellite gaming casinos inPennsylvania :Hollywood Casino York ("York") andMorgantown . The Term Sheet discussed above also provides that the Company and GLPI will enter into an option agreement whereby GLPI will grant the Company the exclusive right untilDecember 31, 2020 to purchase the operations ofHollywood Casino Perryville for$31.1 million , with the closing of such purchase to occur on a date selected by the Company during 2021. If the transaction is completed, we would lease the real estate assets associated withHollywood Casino Perryville with initial rent of$7.8 million per year subject to escalation. The option agreement will be executed at a later date. Additionally, pursuant to the Term Sheet, we agreed that we would exercise the next scheduled five-year renewal under the Penn Master Lease as well as the PinnacleMaster Lease , and GLPI agreed they would grant us the option to exercise an additional five-year renewal term at the end of the lease term on the Penn Master Lease and the PinnacleMaster Lease , subject to certain conditions. If each of these renewal options were exercised, the term of the Penn Master Lease would extend toNovember 30, 2033 and the term of the PinnacleMaster Lease would extend toApril 30, 2031 ; and if all renewals options contained within the Penn Master Lease and the PinnacleMaster Lease were exercised, inclusive of the these renewal options, the term of the Penn Master Lease would extend toNovember 30, 2053 and the term of the PinnacleMaster Lease would extend toApril 30, 2056 . Operating and Competitive Environment Most of our properties operate in mature, competitive markets. While the full impact of the COVID-19 pandemic on our business cannot be reasonably estimated at this time, we continue to expect that the majority of our future growth will come from new business lines or distribution channels, such as retail and online gaming and sports betting; entrance into new jurisdictions; expansions of gaming in existing jurisdictions; and, to a lesser extent, improvements/expansions of our existing properties and strategic acquisitions of gaming properties. Our portfolio is comprised largely of well-maintained regional gaming facilities, which has allowed us to develop what we believe to be a solid base for future growth opportunities. We have also made investments in joint ventures that we believe will allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee. As reported by most jurisdictions, regional gaming industry trends have shown little revenue growth the last several years as numerous jurisdictions now permit gaming or have expanded their gaming offerings. In recent years, the proliferation of new gaming properties has impacted the overall domestic gaming industry as well as our results of operations in certain markets. Prior to the COVID-19 pandemic, the economic environment, specifically historically low levels of unemployment, strength in residential real estate prices, and high levels of consumer confidence, had resulted in a stable operating environment in recent years. The COVID-19 pandemic has significantly increased the level of unemployment and decreased the level of consumer confidence. Our ability to succeed in this new environment will be predicated on the nature, extent and timing of reopening our gaming properties, operating our properties efficiently, realizing revenue and cost synergies from recent acquisitions, and offering our customers additional gaming experiences through our omni-channel distribution strategy. We seek to continue to expand our customer database through accretive acquisitions or investments, such asBarstool Sports , and capitalize on organic growth opportunities from the development of new properties or the expansion of recently-developed business lines. The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery, iGaming, online and retail sports betting, gaming at taverns, gaming at truck stop establishments, sweepstakes and poker machines not located in casinos, the potential for increased fantasy sports, Native American gaming, and other forms of gaming in theU.S. More specifically, due to recent legislation to expand gaming in and aroundIllinois ,Indiana ,Massachusetts andPennsylvania , several of our properties within 34
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our Northeast segment and some of our properties within our Midwest segment have been and will continue to be negatively impacted by new or increased competition. Key Performance Indicators In our business, revenue is driven by discretionary consumer spending. We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period-to-period; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers' spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact than others. For example, decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, and high fuel or other transportation costs. In addition, visitation and the volume of play have historically been negatively impacted by significant construction surrounding our properties, adverse regional weather conditions and natural disasters. We believe that the COVID-19 pandemic will lead to significant decreases in discretionary consumer spending and will continue to negatively impact visitation and the volume of play for the foreseeable future, even after our gaming properties have reopened. In all instances, such insights are based solely on our judgment and professional experience and no assurance can be given as to the accuracy of our judgments. The vast majority of our revenues is gaming revenue, which is highly dependent upon the volume and spending levels of customers at our properties. Our gaming revenue is derived primarily from slot machines (which represented approximately 92% of our gaming revenue in both 2019 and 2018) and, to a lesser extent, table games and sports betting. Aside from gaming revenue, our revenues are derived from our hotel, dining, retail, commissions, program sales, admissions, concessions and certain other ancillary activities, and our racing operations. Key performance indicators related to gaming revenue are slot handle and table game drop, which are volume indicators, and "win" or "hold" percentage. Our typical property slot win percentage is in the range of approximately 7% to 9% of slot handle, and our typical table game hold percentage is in the range of approximately 16% to 25% of table game drop. Slot handle is the gross amount wagered during a given period. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Given the stability in our slot hold percentages on a historical basis, we have not experienced significant impacts to net income from changes in these percentages. For table games, customers usually purchase chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit worthy customers) are deposited in the gaming table's drop box. Table game hold is the amount of drop that is retained and recorded as gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional gaming markets, our table game hold percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in hold percentages. Therefore, changes in table game hold percentages do not typically have a material impact to our results of operations and cash flows. Under normal operating conditions, our properties generate significant operating cash flow since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate sufficient cash to satisfy our obligations under the Triple Net Leases, repay debt, fund maintenance capital expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions. Additional information regarding our capital projects is discussed in "Liquidity and Capital Resources" below. Reportable Segments We view each of our gaming and racing properties as an operating segment with the exception of our two properties inJackpot, Nevada , which we view as one operating segment. We consider our combined VGT operations, by state, to be separate operating segments. We aggregate our operating segments into four reportable segments: Northeast, South, West and Midwest. For a listing of our gaming properties and VGT operations included in each reportable segment, see
Note 2, "Significant Accounting Policies," in the notes to our unaudited Condensed Consolidated Financial Statements.
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RESULTS OF OPERATIONS The following table highlights our revenues, net income (loss), and Adjusted EBITDA, on a consolidated basis, as well as our revenues and Adjusted EBITDAR by reportable segment. Such segment reporting is on a basis consistent with how we measure our business and allocate resources internally. We consider net income (loss) to be the most directly comparable financial measure calculated in accordance with generally accepted accounting principles inthe United States ("GAAP") to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures. Refer to "Non-GAAP Financial Measures" below for the definitions of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDAR, and Adjusted EBITDAR margin; as well as a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDAR and related margins. For the three months ended March 31, (dollars in millions) 2020 2019 Revenues: Northeast segment $ 520.7 $ 550.6 South segment 223.3 292.0 West segment 126.6 158.6 Midwest segment 228.1 271.2 Other (1) 20.3 10.2 Intersegment eliminations (2) (2.9 ) - Total$ 1,116.1 $ 1,282.6 Net income (loss) $ (608.6 ) $ 41.0 Adjusted EBITDAR: Northeast segment $ 124.5 $ 164.8 South segment 52.6 97.8 West segment 24.6 49.9 Midwest segment 69.5 99.2 Other (1) (18.9 ) (20.3 ) Total (3) 252.3 391.4 Rent expense associated with triple net operating leases (4) (97.5 ) (84.7 ) Adjusted EBITDA (5) $
154.8 $ 306.7
Net income (loss) margin (54.5 )% 3.2 % Adjusted EBITDAR margin (6) 22.6 % 30.5 % Adjusted EBITDA margin (7) 13.9 % 23.9 %
(1) The Other category consists of the Company's stand-alone racing
operations, namely
venture interests in
Raceway. The Other category also includes Penn Interactive, which operates
social gaming, our internally-branded retail sportsbooks, and iGaming; our
management contract for Retama
poker tournament series that operates under the trademark Heartland Poker
Tour ("HPT"). Expenses incurred for corporate and shared services
activities that are directly attributable to a property or are otherwise
incurred to support a property are allocated to each property. The Other
category also includes corporate overhead costs, which consist of certain
expenses, such as: payroll, professional fees, travel expenses and other
general and administrative expenses that do not directly relate to or have
not otherwise been allocated to a property. (2) Represents the elimination of intersegment revenues associated with Penn Interactive and HPT.
(3) The total is a mathematical calculation derived from the sum of reportable
segments (as well as the Other category). As noted within "Non-GAAP
Financial Measures" below, Adjusted EBITDAR is presented on a consolidated
basis outside the financial statements solely as a valuation metric.
Adjusted EBITDAR decreased for the three months ended
compared to the prior year period, due to the temporary closures of our
gaming properties as a result of the COVID-19 pandemic, offset slightly by
the acquisition of Greektown, which contributed$15.7 million . (4) Solely comprised of rent expense associated with the operating lease components contained within the Master Leases (primarily land), the Margaritaville Lease, the Greektown Lease, and the Meadows Lease (as defined in "Liquidity and Capital Resources" ) (referred to
collectively as our "triple net operating leases"). The finance lease
components contained within the Master Leases (primarily buildings) result
in interest expense, as opposed to rent expense. 36
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(5) Adjusted EBITDA decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to the temporary closures of our
gaming properties as a result of the COVID-19 pandemic, offset slightly by
the acquisition of Greektown, which contributed
expense is a normal, recurring cash operating expense, it is included
within the calculation of Adjusted EBITDA.
(6) As noted within "Non-GAAP Financial Measures" below, Adjusted EBITDAR
margin is presented on a consolidated basis outside the financial statements solely as a valuation metric. (7) Adjusted EBITDA margin decreased for the three months endedMarch 31 ,
2020, as compared to the prior year period, due to the temporary closures
of our gaming properties as a result of the COVID-19 pandemic.
Consolidated comparison of the three months ended
For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % Revenues Gaming$ 902.9 $ 1,034.5 $ (131.6 ) (12.7 )% Food, beverage, hotel and other 213.2 248.1 (34.9 ) (14.1 )% Total revenues$ 1,116.1 $ 1,282.6 $ (166.5 ) (13.0 )% Consolidated revenues decreased due to the fact that during the period fromMarch 13, 2020 toMarch 19, 2020 , we temporarily suspended the operations of all of our 41 gaming properties due to the COVID-19 pandemic with all of our gaming properties remaining temporarily closed as ofMarch 31, 2020 . The decrease is slightly offset by the acquisition of Greektown onMay 23, 2019 , which contributed$66.8 million to the three months endedMarch 31, 2020 , of which$57.8 million was gaming revenues and$9.0 million was food, beverage, hotel and other revenues. See "Segment comparison of the three months endedMarch 31, 2020 and 2019" below for more detailed explanations of the fluctuations in revenues. Operating expenses The following table presents our consolidated operating expenses: For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % Operating expenses Gaming$ 500.9 $ 547.4 $ (46.5 ) (8.5 )% Food, beverage, hotel and other 157.0 161.8 (4.8 ) (3.0 )% General and administrative 307.0 286.9 20.1 7.0 % Depreciation and amortization 95.7 104.1 (8.4 ) (8.1 )% Impairment losses 616.1 - 616.1 N/M Total operating expenses$ 1,676.7 $ 1,100.2 $ 576.5 52.4 % N/M - Not meaningful Gaming expenses consist primarily of salaries and wages associated with our gaming operations and gaming taxes. Food, beverage, hotel and other expenses consist principally of salaries and wages and costs of goods sold associated with our food, beverage, hotel, retail, racing, and other operations. Gaming, food, beverage, hotel and other expenses for the three months endedMarch 31, 2020 decreased year over year primarily as a result of the temporary closures of all of our gaming properties as a result of the COVID-19 pandemic, which reduced our gaming taxes, costs of goods sold, and other expenses aside from salaries and wages. After the closures, we continued to pay our employees until the majority of our workforce was furloughed beginningApril 1, 2020 . The decreases are offset slightly by the acquisition of Greektown, which increased gaming expenses by$30.4 million and food, beverage, hotel and other expenses by$9.1 million . General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include lobbying expenses, gains and losses on disposal of assets, changes in the fair value of our contingent purchase 37
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price obligations, expense associated with cash-settled stock-based awards (including changes in fair value thereto) and rent expense associated with our triple net operating leases. General and administrative expenses for the three months endedMarch 31, 2020 increased year over year primarily as a result of an increase in rent expense associated with our triple net operating leases of$12.8 million , which principally relates to the Greektown Lease; an increase in stock-based compensation expense of$2.6 million ; and$11.6 million of general and administrative expenses associated with Greektown. The increases are offset by decreases in the expense associated with the Company's cash-settled stock awards of$9.3 million , which is due to the decrease in the Company's stock price during the three months endedMarch 31, 2020 , and the expense associated with the Company's contingent purchase price obligations of$6.9 million for the three months endedMarch 31, 2020 , as compared to the prior year period. As noted above, effectiveApril 1, 2020 , members of our property and corporate leadership teams who were not furloughed took meaningful compensation reductions and our Board of Directors elected to forgo their cash compensation, both of which will reduce our general and administrative expense beginning in the second quarter of 2020. Depreciation and amortization for the three months endedMarch 31, 2020 decreased year over year primarily due to fixed assets becoming fully depreciated sinceMarch 31, 2019 and a$0.6 million decrease in amortization expense at Penn Interactive, offset by Greektown, which contributed$3.4 million to the three months endedMarch 31, 2020 . Impairment losses for the three months endedMarch 31, 2020 primarily relate to impairments taken on our goodwill and other intangible assets of$113.0 million and$498.5 million , respectively, as a result of an interim impairment assessment during the first quarter of 2020, which was triggered by the COVID-19 pandemic, which caused all of our gaming properties to temporarily close. As a result, we revised our cash flow projections to reflect the current economic environment, including the uncertainty of the nature, timing and extent of reopening our gaming properties. Other income (expenses) The following table presents our consolidated other income (expenses): For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % Other income (expenses) Interest expense, net $ (129.8 ) $ (132.3 )$ 2.5 (1.9 )% Income from unconsolidated affiliates $ 4.1 $ 5.7$ (1.6 ) (28.1 )% Income tax benefit (expense) $ 99.5 $ (14.8 )$ 114.3 N/M Other $ (21.8 ) $ -$ (21.8 ) N/M N/M - Not meaningful Interest expense, net decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, primarily due to decreases in the amount of interest expense recorded relating to our Master Leases of$0.2 million and our Senior Secured Credit Facilities (as defined in "Liquidity and Capital Resources" ) of$1.5 million . Despite the incremental borrowings under our Revolving Credit Facility in light of the COVID-19 pandemic, interest expense incurred from our Senior Secured Credit Facilities decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, as a result of a decrease in the London Interbank Offered Rate (referred to as "LIBOR") during the corresponding periods. Income from unconsolidated affiliates relates principally to our joint venture inKansas Entertainment . The decrease for the three months endedMarch 31, 2020 , as compared to the prior year period, was due to a decrease in the results of operations ofHollywood Casino at Kansas Speedway , which temporarily closed onMarch 18, 2020 and remained temporarily closed as ofMarch 31, 2020 . Income tax benefit (expense) was$99.5 million and$(14.8) million for the three months endedMarch 31, 2020 and 2019, respectively. Our effective tax rate (income taxes as a percentage of income or loss from operations before income taxes) including discrete items was 14.1% for the three months endedMarch 31, 2020 , as compared to 26.5% for the three months endedMarch 31, 2019 , primarily due to a reduction of pre-tax income. The CARES Act temporarily removes certain restrictions originally imposed by the Tax Cuts and Jobs Act of 2017. Corporate taxpayers are now permitted to carryback up to five years of federal net operating losses ("NOLs") originating in tax years 2018, 2019, and 2020 and offset 100% of taxable income with available NOLs. The CARES Act also temporarily (i) 38
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increases the interest deductibility threshold from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020, (ii) allows a refund of alternative minimum tax credits, (iii) increases the corporate charitable deduction limit to 25% and (iv) makes eligible qualified improvement property available for immediate expensing. The enactment of the CARES Act did not have a significant impact on our effective tax rate for the three months endedMarch 31, 2020 ; however, we are estimating an income tax refund between approximately$40 million and$50 million primarily attributable to the carryback of NOLs. We will continue to monitor any impact and revise our preliminary near-term liquidity benefit as a result of this new law. As ofMarch 31, 2020 , we have a valuation allowance on the portion of the deferred tax assets that is not more likely than not to be realized as a result of the negative objective evidence of being in a three-year cumulative loss and we intend to continue maintaining a valuation allowance on our deferred tax assets until there is sufficient positive evidence to support the reversal of all or a portion of these allowances. A reduction in the valuation allowance would result in a significant decrease to income tax expense in the period the release is recorded. However, the exact timing and reversal amount in our valuation allowance are currently unknown. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, changes to our valuation allowance and the level of our tax credits. Certain of these and other factors, including our history and projections of pre-tax earnings, are considered in assessing our ability to realize our net deferred tax assets. Other includes miscellaneous income and expense items. The amount for the three months endedMarch 31, 2020 relates to an unrealized holding loss of$21.8 million on equity securities (including warrants), which were acquired during the third quarter of 2019 in connection with Penn Interactive entering into multi-year agreements with sports betting operators for online sports betting and related iGaming market access across our portfolio. Segment comparison of the three months endedMarch 31, 2020 and 2019 Northeast Segment For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % / bps
Revenues
Gaming $ 458.7 $ 487.7$ (29.0 ) (5.9 )% Food, beverage, hotel and other 62.0 62.9 (0.9 ) (1.4 )% Total revenues $ 520.7 $ 550.6$ (29.9 ) (5.4 )% Adjusted EBITDAR $ 124.5 $ 164.8$ (40.3 ) (24.5 )% Adjusted EBITDAR margin 23.9 % 29.9 % (600) bps The Northeast segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to the temporary closures of our gaming properties within the Northeast segment beginning betweenMarch 13, 2020 andMarch 19, 2020 as a result of the COVID-19 pandemic, offset by the acquisition of Greektown inMay 2019 , which contributed$66.8 million of total revenues and$15.7 million of Adjusted EBITDAR to the three months endedMarch 31, 2020 . Prior to the temporary closures, all four of our properties inOhio , ourAmeristar East Chicago , ourHollywood Casino at Charles Town Races and ourHollywood Casino Lawrenceburg properties were performing favorably as compared to the prior year period. The operating results of Meadows Racetrack and Casino andHollywood Casino at Penn National Race Course were negatively impacted by increases in competition in and around thePennsylvania market. In addition, ourPlainridge Park Casino property continues to face increased competition as a result of the opening of a new competitor inJune 2019 . 39
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Table of Contents South Segment For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % / bps
Revenues
Gaming $ 168.6 $ 220.1$ (51.5 ) (23.4 )% Food, beverage, hotel and other 54.7 71.9 (17.2 ) (23.9 )% Total revenues $ 223.3 $ 292.0$ (68.7 ) (23.5 )% Adjusted EBITDAR $ 52.6 $ 97.8$ (45.2 ) (46.2 )% Adjusted EBITDAR margin 23.6 % 33.5 % (990) bps The South segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to the temporary closures of our gaming properties within the South segment onMarch 17, 2020 as a result of the COVID-19 pandemic. Prior to the temporary closures, our 1stJackpot Casino , ourHollywood Casino Tunica , and our L'AubergeBaton Rouge properties were performing favorably as compared to the prior year period. The cessation of the operations ofResorts Casino Tunica onJune 30, 2019 benefited the operating results of 1stJackpot Casino andHollywood Casino Tunica for the three months endedMarch 31, 2020 , as compared to the prior year period. West Segment For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % / bps
Revenues
Gaming $ 71.9 $ 92.8$ (20.9 ) (22.5 )% Food, beverage, hotel and other 54.7 65.8 (11.1 ) (16.9 )% Total revenues $ 126.6 $ 158.6$ (32.0 ) (20.2 )% Adjusted EBITDAR $ 24.6 $ 49.9$ (25.3 ) (50.7 )% Adjusted EBITDAR margin 19.4 % 31.5 % (1210) bps The West segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to the temporary closures of our gaming properties within the West segment beginning betweenMarch 16, 2020 andMarch 19, 2020 as a result of the COVID-19 pandemic. Prior to the temporary closures, our Cactus Petes and Horseshu properties, our Tropicana property and ourZia Park property were performing favorably as compared to the prior year period. Midwest Segment For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % / bps
Revenues
Gaming $ 196.2 $ 233.8$ (37.6 ) (16.1 )% Food, beverage, hotel and other 31.9 37.4 (5.5 ) (14.7 )% Total revenues $ 228.1 $ 271.2$ (43.1 ) (15.9 )% Adjusted EBITDAR $ 69.5 $ 99.2$ (29.7 ) (29.9 )% Adjusted EBITDAR margin 30.5 % 36.6 % (610) bps The Midwest segment's total revenues, Adjusted EBITDAR and Adjusted EBITDAR margin decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to the temporary closures of our gaming properties within the Midwest segment beginning betweenMarch 16, 2020 andMarch 18, 2020 as a result of the COVID-19 pandemic. 40
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Prior to the temporary closures, all of our properties within the Midwest segment were performing favorably as compared to the prior year period, particularly ourHollywood Casino St. Louis and River City Casino properties. Adverse winter weather during the three months endedMarch 31, 2019 negatively impacted visitation at the majority of our properties within the Midwest segment, which resulted in lower revenues and Adjusted EBITDAR. Other Total revenues and Adjusted EBITDAR of the Other category were$20.3 million and$(18.9) million , respectively, for the three months endedMarch 31, 2020 . Revenues and Adjusted EBITDAR increased for the three months endedMarch 31, 2020 by$10.1 million and$1.4 million , respectively, principally as a result of Penn Interactive, which began operating live sports betting at retail sportsbooks at several of the Company's properties as well as iGaming inPennsylvania during the third quarter of 2019. The increase in Adjusted EBITDAR attributable to Penn Interactive was offset partially by a$1.1 million increase in corporate overhead costs. Non-GAAP Financial Measures Use and Definitions In addition to GAAP financial measures, management uses Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDAR and Adjusted EBITDAR margin as non-GAAP financial measures. These non-GAAP financial measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. Each of these non-GAAP financial measures is not calculated in the same manner by all companies and, accordingly, may not be an appropriate measure of comparing performance among different companies. We define Adjusted EBITDA as earnings before interest expense, net; income taxes; depreciation and amortization; stock-based compensation; debt extinguishment and financing charges; impairment losses; insurance recoveries and deductible charges; changes in the estimated fair value of our contingent purchase price obligations; gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards; pre-opening and acquisition costs; and other income or expenses. Adjusted EBITDA is inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for ourKansas Entertainment joint venture. Adjusted EBITDA is inclusive of rent expense associated with our triple net operating leases. Although Adjusted EBITDA includes rent expense associated with our triple net operating leases, we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our consolidated results of operations. We define Adjusted EBITDA margin as Adjusted EBITDA divided by consolidated revenues. Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We present Adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, and to fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their Adjusted EBITDA calculations certain corporate expenses that do not relate to the management of specific casino properties. However, Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a commonly-used measure of performance in the gaming industry and that it is considered by many to be a key indicator of the Company's operating results. We define Adjusted EBITDAR as Adjusted EBITDA (as defined above) plus rent expense associated with triple net operating leases (which is a normal, recurring cash operating expense necessary to operate our business). Adjusted EBITDAR is presented on a consolidated basis outside the financial statements solely as a valuation metric. Management believes that Adjusted EBITDAR is an additional metric traditionally used by analysts in valuing gaming companies subject to triple net leases since it eliminates the effects of variability in leasing methods and capital structures. This metric is included as supplemental disclosure because (i) we believe Adjusted EBITDAR is traditionally used by gaming operator analysts and investors to determine the equity value of gaming operators and (ii) Adjusted EBITDAR is one of the metrics used by other financial analysts in valuing our business. We believe Adjusted EBITDAR is useful for equity valuation purposes because (i) its calculation isolates the effects of financing real estate; and (ii) using a multiple of Adjusted EBITDAR to calculate enterprise value allows for an adjustment to the balance sheet to recognize estimated liabilities arising from operating leases related to real estate. However, Adjusted EBITDAR when presented on a consolidated basis is not a financial measure in accordance with 41
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GAAP and should not be viewed as a measure of overall operating performance or considered in isolation or as an alternative to net income because it excludes the rent expense associated with our triple net operating leases and is provided for the limited purposes referenced herein. Adjusted EBITDAR margin is defined as Adjusted EBITDAR on a consolidated basis divided by revenues on a consolidated basis. Adjusted EBITDAR margin is presented on a consolidated basis outside the financial statements solely as a valuation metric. We further define Adjusted EBITDAR margin by reportable segment as Adjusted EBITDAR for each segment divided by segment revenues. Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures The following table includes a reconciliation of net income (loss), which is determined in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures, as well as related margins: For the three months ended March 31, (dollars in millions) 2020 2019 Net income (loss) $ (608.6 ) $ 41.0 Income tax expense (benefit) (99.5 ) 14.8 Income from unconsolidated affiliates (4.1 ) (5.7 ) Interest expense, net 129.8 132.3 Other expense 21.8 - Operating income (loss) (560.6 ) 182.4 Stock-based compensation (1) 6.0 3.4 Cash-settled stock-based award variance (1)(2) (8.9 ) 0.4 Loss on disposal of assets (1) 0.6 0.5 Contingent purchase price (1) (2.2 ) 4.7 Pre-opening and acquisition costs (1) 3.2 4.4 Depreciation and amortization 95.7 104.1 Impairment losses 616.1 - Insurance recoveries, net of deductible charges (1) (0.1 ) - Income from unconsolidated affiliates 4.1 5.7 Non-operating items of joint venture (3) 0.9 1.1 Adjusted EBITDA 154.8 306.7 Rent expense associated with triple net operating leases (1) 97.5 84.7 Adjusted EBITDAR $ 252.3 $ 391.4 Net income (loss) margin (54.5 )% 3.2 % Adjusted EBITDA margin 13.9 % 23.9 % Adjusted EBITDAR margin 22.6 % 30.5 %
(1) These items are included in "General and administrative" within the
Company's unaudited Condensed Consolidated Statements of Operations.
(2) The Company's cash-settled stock-based awards are adjusted to fair value
each reporting period based primarily on the price of the Company's common
stock. As such, significant fluctuations in the price of the Company's
common stock during any reporting period could cause significant variances
to budget on cash-settled stock-based awards. During the three months
ended
significantly, which resulted in favorable variances to budget, while the
price of the Company's common stock did not vary significantly during the
three months ended
budget.
(3) Consists principally of depreciation and amortization associated with the
operations ofHollywood Casino at Kansas Speedway . 42
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LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity and capital resources have been and are expected to be cash flow from operations, borrowings from banks, and proceeds from the issuance of debt and equity securities. Our ongoing liquidity will depend on a number of factors, including cash flow from operations, which is predicated on when we will be able to reopen our gaming properties; access to debt and equity capital markets; available cash resources; acquisitions and dispositions; funding of construction of development projects; and our compliance with covenants contained under our debt agreements. The Company began temporary suspension of the operations of all of its gaming properties starting betweenMarch 13, 2020 andMarch 19, 2020 due to the COVID-19 pandemic, all of which remained temporarily closed as ofMarch 31, 2020 and the date of filing this Quarterly Report on Form 10-Q with theSEC . The COVID-19 pandemic has had a material adverse impact on our financial condition and cash flows. In order to help mitigate the operating and financial impact of the COVID-19 pandemic, we have taken various actions to reduce our cost structure during the property closures, which has significantly reduced our average cash burn (assuming complete closure) to approximately$83 million per month beginningApril 2020 through the end of the year. OnMarch 13, 2020 , in order to maintain maximum financial flexibility in light of the COVID-19 pandemic, the Company borrowed the remaining available amount of$430.0 million under its Revolving Credit Facility. Additionally, onApril 16, 2020 , we entered into and closed on a purchase agreement with GLPI pursuant to which GLPI purchased the real estate assets associated with our Tropicana property for rent credits of$307.5 million that we began utilizing to pay rent under our existing Master Leases inMay 2020 . For the three months ended March 31, Change (dollars in millions) 2020 2019 $ % Net cash provided by (used in) operating activities $ (33.2 ) $ 125.7$ (158.9 ) N/M Net cash used in investing activities $ (183.4 ) $ (147.1 )$ (36.3 ) 24.7 % Net cash provided by (used in) financing activities $ 508.8 $ (45.7 )$ 554.5 N/M N/M - Not meaningful Operating Cash Flow The decrease in net cash provided by operating activities of$158.9 million for the three months endedMarch 31, 2020 , compared to the prior year period, is due to the temporary closures of all of our gaming properties from the COVID-19 pandemic, which significantly decreased cash receipts from customers, offset slightly by the acquisition of Greektown. In addition, cash paid for rent and interest payments under the Master Leases, the Meadows Lease, the Margaritaville Lease, and the Greektown Lease (collectively referred to as our "Triple Net Leases") increased by$15.9 million , which is largely driven by the timing of the commencement of the Greektown Lease. Investing Cash Flow The increase in net cash used in investing activities of$36.3 million for the three months endedMarch 31, 2020 , compared to the prior year period, is primarily due to our investment inBarstool Sports made during the first quarter of 2020 and an increase in capital expenditures (as discussed below), partially offset by the acquisition of the operations of Margaritaville for$109.1 million , net of cash acquired, during the first quarter of 2019. As a part of the acquisition of Margaritaville, the Company entered into a sale-leaseback transaction with VICI in the amount of$261.1 million , which had no net impact on the determination of net cash used in investing activities for the three months endedMarch 31, 2019 . Capital Expenditures 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 and typically consist of slot machines and other gaming equipment. Given the uncertainty surrounding the COVID-19 pandemic and its impact on our business, in order to preserve liquidity, we have temporarily suspended construction of our two planned Category 4 satellite casinos inYork andMorgantown, Pennsylvania , respectively, which represented overall capital investments of approximately$120 million and$111 million inclusive of each of the gaming licenses acquired in the prior year, respectively. We previously expected both of these projects 43
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to be complete by the end of 2020. Furthermore, in light of the COVID-19 pandemic, we do not expect that we will spend as much as previously budgeted for in 2020 and disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 on capital expenditures. The following table summarizes our capital expenditures by segment for the three months endedMarch 31, 2020 and 2019, which were principally funded by cash provided by operating activities as well as borrowings under our Revolving Credit Facility prior to the onset of the COVID-19 pandemic: For the Three Months Ended March 31, 2020 For the Three Months Ended March 31, 2019 (in millions) Project Maintenance Total Project Maintenance Total Northeast (1) $ 13.1$ 17.2 $ 30.3 $ 1.1 $ 11.6 $ 12.7 South - 4.0 4.0 - 8.9 8.9 West - 2.5 2.5 - 7.0 7.0 Midwest - 3.4 3.4 - 7.0 7.0 Other - 2.6 2.6 0.4 1.7 2.1 Total $ 13.1$ 29.7 $ 42.8 $ 1.5 $ 36.2 $ 37.7
(1) Includes York and
of the Northeast segment.
Project capital expenditures increased for the three months endedMarch 31, 2020 , as compared to the prior year period, due to spending on theYork andMorgantown development projects prior to temporarily suspending construction. Maintenance capital expenditures decreased for the three months endedMarch 31, 2020 , as compared to the prior year period, partially due to decreases in spending in advance of and upon temporarily closing all of our gaming properties. Financing Cash Flow For the three months endedMarch 31, 2020 , as compared to the prior year period, net cash from financing activities increased by$554.5 million to net cash provided by financing activities of$508.8 million from$45.7 million of net cash used in financing activities. The increase is driven by net borrowings under our Senior Secured Credit Facilities of$518.3 million during the three months endedMarch 31, 2020 (see below) as opposed to net repayments under our Senior Secured Credit Facilities of$31.7 million during the three months endedMarch 31, 2019 . Senior Secured Credit Facilities As ofMarch 31, 2020 , the Company's Senior Secured Credit Facilities had a gross outstanding balance of$2,448.1 million , consisting of a$663.4 million Term Loan A Facility and a$1,114.7 million Term Loan B-1 Facility (as such terms are defined below), and a Revolving Credit Facility, which had$670.0 million drawn as ofMarch 31, 2020 . Additionally, as ofMarch 31, 2020 , the Company had conditional obligations under letters of credit issued pursuant to the Senior Secured Credit Facilities with face amounts aggregating$29.5 million . OnMarch 13, 2020 , we borrowed the remaining available amount of$430.0 million under our Revolving Credit Facility, resulting in$0.5 million available borrowing capacity as ofMarch 31, 2020 . The Company elected to draw down the remaining available funds from its Revolving Credit Facility in order to maintain maximum financial flexibility in light of the COVID-19 pandemic. InJanuary 2017 , the Company entered into an agreement to amend and restate its previous credit agreement, datedOctober 30, 2013 , as amended (the "Credit Agreement"), which provided for: (i) a five-year$700.0 million revolving credit facility (the "Revolving Credit Facility"), a five-year$300.0 million term loan A facility (the "Term Loan A Facility"), and a seven-year$500.0 million term loan B facility (the "Term Loan B Facility"). The Term Loan B Facility was fully repaid and terminated prior to 2019. InOctober 2018 , in connection with the acquisition ofPinnacle Entertainment, Inc. , (the "Pinnacle Acquisition"), the Company 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$1,128.8 million of loans as a new tranche having new terms (the "Term Loan B-1 Facility" and collectively with the Revolving Credit Facility and the Term Loan A Facility, the "Senior Secured Credit Facilities"). With the exception of extending the maturity date, the Incremental Joinder did not impact the Revolving Credit Facility. 44
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The payment and performance of obligations under the Senior Secured Credit Facilities are guaranteed by a lien on and security interest in substantially all of the assets (other than excluded property such as gaming licenses) of the Company and its subsidiaries. 5.625% Senior Unsecured Notes InJanuary 2017 , the Company completed an offering of$400.0 million aggregate principal amount of 5.625% senior unsecured notes that mature onJanuary 15, 2027 (the "5.625% Notes") at a price of par. Interest on the 5.625% Notes is payable onJanuary 15th andJuly 15th of each year. Covenants Our Amended Credit Agreement and the indenture governing our 5.625% Notes require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, the Company's Amended Credit Agreement and the indenture governing our 5.625% Notes restrict, among other things, its ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the Penn Master Lease and the PinnacleMaster Lease , each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an acceleration of payment terms. OnApril 14, 2020 , the Company entered into a second amendment to its Amended Credit Agreement with its various lenders (the "Amendment Agreement") to provide for certain modifications. During the period beginning onApril 14, 2020 and ending on the earlier of (x) the date that is two business days after the date on which the Company delivers a covenant relief period termination notice to the administrative agent and (y) the date on which the administrative agent receives a compliance certificate for the quarter endingMarch 31, 2021 (the "Covenant Relief Period"), the Company will not have to comply with any Maximum Leverage Ratio or Minimum Interest Coverage Ratio (as such terms are defined in the Credit Agreement). During the Covenant Relief Period, the Company will be subject to a minimum liquidity covenant that requires cash and cash equivalents and availability under its Revolving Credit Facility to be (i) at least$400.0 million throughApril 30, 2020 ; (ii)$350.0 million during the period fromMay 1, 2020 throughMay 31, 2020 ; (iii)$300.0 million during the period fromJune 1, 2020 throughJune 30, 2020 ; and (iv)$225.0 million during the period fromJuly 1, 2020 throughMarch 31, 2021 . The Amendment Agreement also amends the financial covenants that are applicable after the Covenant Relief Period to permit the Company to (i) maintain a maximum consolidated total net leverage ratio of up to a ratio that varies by quarter, ranging between 5.50:1.00 and 4.50:1.00 in 2021 and 4.25:1.00 thereafter, tested quarterly on a pro forma trailing twelve month ("PF TTM") basis; (ii) maintain a maximum senior secured net leverage ratio of up to a ratio that varies by quarter, ranging between 4.50:1.00 and 3.50:1.00 in 2021 and 3.00:1.00 thereafter, tested quarterly on a PF TTM basis; and (iii) maintain an interest coverage ratio of 2.50:1.00, tested quarterly on a PF TTM basis. In addition, the Amendment Agreement (i) provides that, during the Covenant Relief Period, loans under the Revolving Credit Facility and the Term Loan A Facility shall bear interest at either a base rate or an adjusted LIBOR rate, in each case, plus an applicable margin, in the case of base rate loans, of 2.00%, and in the case of adjusted LIBOR rate loans, of 3.00%; (ii) provides that, during the Covenant Relief Period, the Company shall pay a commitment fee on the unused portion of the commitments under the Revolving Credit Facility at a rate of 0.50% per annum; (iii) provides for a 0.75% LIBOR floor applicable to all LIBOR loans under the Senior Secured Credit Facilities; (iv) carves out COVID-19 related effects from certain terms of the Senior Secured Credit Facilities during the Covenant Relief Period; and (v) makes certain other changes to the covenants and other provisions of the Amended Credit Agreement. As ofMarch 31, 2020 , the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with theSEC . Triple Net Leases The majority of the gaming facilities used in the Company's operations are subject to triple net master leases; the most significant of which are the Penn Master Lease and the PinnacleMaster Lease . The Company's Master Leases are accounted for as either operating leases, finance leases, or financing obligations. In addition, three of the Company's gaming facilities, Meadows, Margaritaville, and Greektown, are subject to individual triple net leases. As previously mentioned, we refer to ourPenn Master Lease , our PinnacleMaster Lease , our Meadows Lease, our Margaritaville Lease, and our Greektown Lease, collectively as our Triple Net Leases. See "Payments to our REIT Landlords under Triple Net Leases" below for tabular 45
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information on the payments made during the three months endedMarch 31, 2020 and 2019 pertaining to our Triple Net Leases.Penn Master Lease Pursuant to a triple net master lease with GLPI (the "Penn Master Lease"), which became effectiveNovember 1, 2013 , the Company leases real estate assets associated with 19 of the gaming facilities used in its operations. The Penn Master Lease has an initial term of 15 years with four subsequent, five-year renewal periods on the same terms and conditions, exercisable at the Company's option. The payment structure under the Penn Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue toRent 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 thanHollywood Casino Columbus andHollywood Casino Toledo ("Columbus andToledo ")) 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 ofColumbus andToledo in excess of a contractual baseline and subject to a rent floor specific toHollywood Casino Toledo . The next annual escalator test date is scheduled to occur effectiveNovember 1, 2020 and the next Penn Percentage Rent reset is scheduled to occur onNovember 1, 2023 . PinnacleMaster Lease In connection with the Pinnacle Acquisition inOctober 2018 , the Company assumed a triple net master lease with GLPI ("PinnacleMaster Lease "), originally effectiveApril 28, 2016 , and entered into an amendment to the PinnacleMaster Lease to, among other things, remove properties that were divested in connection with the Pinnacle Acquisition and addPlainridge Park Casino . Reflecting this amendment, the Company leases real estate assets associated with twelve of the gaming facilities used in the Company's operations from GLPI. Upon assumption of the PinnacleMaster Lease , as amended, there were 7.5 years remaining of the initial ten-year term, with five subsequent, five-year renewal periods exercisable at the Company's option. The payment structure under the PinnacleMaster Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue toRent Ratio (as defined in the PinnacleMaster Lease ) of 1.8:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of all properties under the PinnacleMaster Lease compared to a contractual baseline during the preceding two years ("Pinnacle Percentage Rent"). The annual escalator test date and the Pinnacle Percentage Rent reset occurred onMay 1, 2020 . Meadows Lease, Margaritaville Lease, and Greektown Lease In connection with the Pinnacle Acquisition, we assumed a triple net lease of the real estate assets used in the operations of Meadows (the "Meadows Lease"), originally effectiveSeptember 9, 2016 , with GLPI as the landlord. Upon assumption of the Meadows Lease, there were eight years remaining of the initial ten-year term, with three subsequent, five-year renewal options followed by one four-year renewal option on the same terms and conditions, exercisable at the Company's option. The payment structure under the Meadows Lease includes a fixed component ("Meadows Base Rent"), which is subject to an annual escalator of up to 5% for the initial term or until the lease year in which Meadows Base Rent plus Meadows Percentage Rent (as defined below) is a total of$31.0 million , subject to certain adjustments, and up to 2% thereafter, subject to an Adjusted Revenue toRent Ratio (as defined in the Meadows Lease) of 2.0:1. The "Meadows Percentage Rent" is based on performance, which is prospectively adjusted for the next two-year period equal to 4% of the average annual net revenues of the property during the trailing two-year period. The next scheduled annual escalator test date and the next Meadows Percentage Rent reset are scheduled to occur onOctober 1, 2020 . In connection with the acquisition of Margaritaville, we entered into the Margaritaville Lease with VICI for the real estate assets used in the operations of Margaritaville. The Margaritaville Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and conditions, exercisable at the Company's option. The payment structure under the Margaritaville Lease includes a fixed component ("Margaritaville Base Rent"), a portion of which is subject to an annual escalator of up to 2%, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the property compared to a contractual baseline during the preceding two years ("Margaritaville Percentage Rent"). OnFebruary 1, 2020 , the Margaritaville Lease was amended to provide for a change in the measurement of the annual escalator from an Adjusted Revenue toRent Ratio (as defined in the Margaritaville Lease) of 1.9:1 to a minimum ratio of net revenue to rent of 6.1:1. As a result of the annual escalator, which was determined to be$0.3 million , effectiveFebruary 1, 2020 , an additional operating right-of-use asset and corresponding operating lease liability of$3.1 million were recognized. 46
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The next scheduled annual escalator test date and the first Margaritaville Percentage Rent reset are scheduled to occur onFebruary 1, 2021 . In connection with the acquisition of Greektown, we entered into the Greektown Lease with VICI for the real estate assets used in the operations of Greektown. The Greektown Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and conditions, exercisable at the Company's option. The payment structure under the Greektown Lease includes a fixed component ("Greektown Base Rent"), a portion of which is subject to an annual escalator of up to 2% subject to an Adjusted Revenue toRent Ratio (as defined in the Greektown Lease) of 1.85:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the facility compared to a contractual baseline during the preceding two years ("Greektown Percentage Rent"). The next scheduled annual escalator test date is scheduled forJune 1, 2020 and the first Greektown Percentage Rent reset is scheduled to occur onJune 1, 2021 . Payments to our REIT Landlords under Triple Net Leases Total payments made to our REIT Landlords, GLPI and VICI, were as follows: For the three months ended March 31, (in millions) 2020 2019 Penn Master Lease $ 114.8$ 114.4 Pinnacle Master Lease 82.5 81.3 Meadows Lease 6.7 6.5 Margaritaville Lease 5.9 5.7 Greektown Lease 13.9 - Total $ 223.8$ 207.9 Other Long-Term Obligations Relocation Fees As ofMarch 31, 2020 andDecember 31, 2019 , other long-term obligations included$68.8 million and$76.4 million , respectively, related to the relocation fees for Hollywood Gaming atDayton Raceway and Hollywood Gaming atMahoning Valley Race Course , which opened inAugust 2014 andSeptember 2014 , respectively. The relocation fee for each property is payable as follows:$7.5 million upon the opening of the property and eighteen semi-annual payments of$4.8 million beginning one year after the commencement of operations. Outlook Due to the COVID-19 pandemic, we have temporarily suspended the operations of all of our gaming properties. Accordingly, we cannot be certain whether cash generated from operations and cash on hand, together with amounts available under our Senior Secured Credit Facilities, will be adequate to meet our anticipated obligations under our Triple Net Leases, debt service requirements, capital expenditures and working capital needs for the foreseeable future. Our ability to generate sufficient cash flow from operations will depend on a range of economic, competitive and business factors, many of which are outside our control, including the impact of the COVID-19 pandemic. We cannot be certain: (i) that our gaming properties will reopen in the upcoming months or what the operating limitations will be when they do; (ii) of the magnitude and duration of the impact of the COVID-19 pandemic on general economic conditions, capital markets, unemployment and our liquidity, operations, supply chain and personnel; (iii) that our business will generate sufficient cash flow from operations; (iv) that theU.S. economy and our business will recover to levels that existed prior to the COVID-19 pandemic and on what time frame; (v) that we will fully achieve the synergies in connection with the Pinnacle Acquisition; (vi) that we will be able to maintain the minimum liquidity required under our Senior Secured Credit Facilities; or (vii) that future borrowings will be available under our Senior Secured Credit Facilities or capital will be available in the credit or equity markets on favorable terms to enable us to service our indebtedness, to make capital expenditures or to maintain working capital. In addition, while we anticipated that a significant amount of our future growth would come through the pursuit of opportunities within other distribution channels, such as retail gaming, live sports betting, social gaming, and iGaming; from acquisitions of gaming properties at reasonable valuations; greenfield projects; and jurisdictional expansions and property expansion in under-penetrated markets; there can be no assurance that this will be the case given the uncertainty arising from the COVID-19 pandemic. While we do not anticipate pursuing material acquisition opportunities in the near term, if we consummate significant acquisitions in the future or 47
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undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control, including without limitation the lasting impacts of the COVID-19 pandemic. See Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q. See also "Risks Related to Our Capital Structure" in Part I, Item 1A. "Risk Factors" of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 for a discussion of the risks related to the Company's capital structure. We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace and in an effort to maximize our enterprise value for our shareholders. We have in the past met our debt obligations as they have come due through internally generated funds from operations or refinancing them through the debt or equity markets prior to their maturity, although there can be no assurance that we will continue to be able to do so or be able to do so at favorable rates or on favorable terms in the future in light of the COVID-19 pandemic and other factors. 48
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CRITICAL ACCOUNTING ESTIMATES A complete discussion of our critical accounting estimates is included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . With the exception of the table below, which provides updated sensitivities on the impairments of our goodwill and other intangible assets, there have been no significant changes in our critical accounting estimates during the three months endedMarch 31, 2020 .
Increase in the Recorded Amount of
Impairment Loss as a Result of:
Carrying Discount Rate Terminal Growth Rate (dollars in millions) Amount Cushion +100 bps -50 bpsGoodwill Argosy Casino Riverside$ 161.2 3.5 % $ 8.0 $ - Greektown Hotel Casino$ 67.4 - % $ 19.5 $ 6.0 Hollywood Casino Aurora$ 100.6 - % $ 6.0 $ 1.5 Hollywood Casino Lawrenceburg$ 24.7 - % $ 11.5 $ 3.5 Hollywood Casino St. Louis$ 211.9 8.1 % $ - $ - Margaritaville Resort Casino$ 35.2 - % $ 4.5 $ 1.0 Gaming licenses Ameristar East Chicago$ 55.6 - % $ 7.5 $ 2.0 Boomtown Bossier City$ 9.5 - % $ 2.0 $ 0.5 Boomtown New Orleans$ 62.5 - % $ 7.5 $ 2.0 Greektown Hotel Casino$ 166.4 19.3 % $ - $ -
Hollywood Gaming at
- $ - Hollywood Gaming atMahoning Valley Race Course$ 125.0 14.8 % $ - $ - L'Auberge Baton Rouge$ 36.0 - % $ 10.0 $ 3.0 L'Auberge Lake Charles$ 220.5 - % $ 26.0 $ 7.5
- $ - Meadows Racetrack and Casino$ 51.5 - % $ 6.5 $ 2.0 River City Casino$ 132.5 - % $ 14.0 $ 4.0 Trademarks Ameristar Black Hawk$ 27.5 - % $ 2.5 $ 0.5 Ameristar Council Bluffs$ 22.0 - % $ 1.5 $ 0.5 Ameristar East Chicago$ 16.0 - % $ 1.5 $ 0.5 Ameristar Vicksburg$ 13.0 - % $ 1.0 $ - Boomtown Bossier City$ 3.5 - % $ 0.5 $ - Boomtown New Orleans$ 15.5 - % $ 1.5 $ 0.5 Cactus Petes and Horseshu$ 8.5 - % $ 1.0 $ - L'Auberge Baton Rouge$ 14.0 - % $ 1.5 $ 0.5 L'Auberge Lake Charles$ 47.5 - % $ 4.0 $ 1.0 Meadows Racetrack and Casino$ 19.0 - % $ 1.5 $ - River City Casino$ 30.0 - % $ 2.5 $ 0.5 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For information with respect to new accounting pronouncements and the impact of these pronouncements on our unaudited Condensed Consolidated Financial Statements, see Note 3, "New Accounting Pronouncements," in the notes to our unaudited Condensed Consolidated Financial Statements. 49 -------------------------------------------------------------------------------- IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the use of forward-looking terminology such as "expects," "believes," "estimates," "projects," "intends," "plans," "seeks," "may," "will," "should," or "anticipates" or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward looking statements include, but are not limited to, statements regarding: COVID-19; the length of time our gaming properties will be required to remain closed and the impact of these closures on our business and our stakeholders; demand for gaming once the gaming properties reopen as well as the impact of post-opening restrictions; the impact of COVID-19 on general economic conditions, capital markets, unemployment and our liquidity, operations, supply chain and personnel; the potential benefits and expected timing of theMorgantown and Perryville transactions with GLPI; our estimated cash burn and future liquidity, future revenue and Adjusted EBITDAR; availability of potential benefits to us under the CARES Act or other legislation that may be enacted in response to the COVID-19 pandemic; the expected benefits and potential challenges of the investment inBarstool Sports , including the benefits for our online and retail sports betting and iCasino products; the expected financial returns from the transaction withBarstool Sports ; the expected launch of the Barstool-branded mobile sports betting product and its future revenue and profit contributions; growth opportunities and potential synergies related to the Pinnacle Acquisition; our ability to obtain third-party approvals, including regulatory approvals; our expectations of future results of operations and financial condition; our expectations for our properties, our development projects or our iGaming initiatives; the timing, cost and expected impact of planned capital expenditures on our results of operations; our expectations with regard to the impact of competition; our expectations with regard to acquisitions, potential divestitures and development opportunities, as well as the integration of and synergies related to any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new business partners; our expectations with regard to the impact of competition in online sports betting, iGaming and retail/mobile sportsbooks as well as the potential impact of this business line on our existing businesses; the performance of our partners in online sports betting, iGaming and retail/mobile sportsbooks, including the risks associated with any new business, the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to online sports betting, iGaming and retail/mobile sportsbooks and the impact of any such actions; and our expectations regarding economic and consumer conditions. Such statements are all subject to risks, uncertainties and changes in circumstances that could significantly affect the Company's future financial results and business. Accordingly, the Company cautions that the forward-looking statements contained herein are qualified by important factors that could cause actual results to differ materially from those reflected by such statements. Such factors include, but are not limited to: (a) the magnitude and duration of the impact of the COVID-19 pandemic on general market conditions, capital markets, unemployment and our liquidity, operations, supply chain and personnel; (b) industry, market, economic, political, regulatory and health conditions; (c) disruptions in operations from data protection breaches, cyberattacks, extreme weather conditions, medical epidemics or pandemics such as the COVID-19, and other natural or manmade disasters or catastrophic events; (d) the reopening of our gaming properties are subject to various conditions, including numerous regulatory approvals and potential delays and operational restrictions; (e) our ability to access additional capital on favorable terms or at all; (f) our ability to remain in compliance with the financial covenants of our debt obligations; (g) the consummation of the proposedMorgantown and Perryville transactions with GLPI are subject to various conditions, including third-party agreements and approvals, and accordingly may be delayed or may not occur at all; (h) actions to reduce costs and improve efficiencies to mitigate losses as a result of the COVID-19 pandemic could negatively impact guest loyalty and our ability to attract and retain employees; (i) the outcome of any legal proceedings that may be instituted against us or our directors, officers or employees; (j) the impact of new or changes in current laws, regulations, rules or other industry standards; (k) the ability of our operating teams to drive revenue and margins; (l) the impact of significant competition from other gaming and entertainment operations; (m) our ability to obtain timely regulatory approvals required to own, develop and/or operate our properties, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, and increased costs; (n) the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our properties or the award of additional gaming licenses proximate to our properties, as recently occurred withIllinois andPennsylvania legislation); (o) the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; (p) the activities of our competitors (commercial and tribal) and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and VGTs in bars and truck stops); (q) increases in the effective rate of taxation for any of our operations or at the corporate level; (r) our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; (s) the 50
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costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; (t) our expectations for the continued availability and cost of capital; (u) the impact of weather, including flooding, hurricanes and tornadoes; (v) changes in accounting standards; (w) the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data (particularly as our iGaming division grows); (x) with respect to our iGaming and sports betting endeavors, the impact of significant competition from other companies for online sports betting, iGaming and sportsbooks, our ability to achieve the expected financial returns related to our investment inBarstool Sports , our ability to obtain timely regulatory approvals required to own, develop and/or operate sportsbooks may be delayed and there may be impediments and increased costs to launching the online betting, iGaming and sportsbooks, including delays, and increased costs, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative products that attract and retain a significant number of players in order to grow our revenues and earnings, our ability to establish key partnerships, our ability to generate meaningful returns and the risks inherent in any new business; (y) with respect to our proposed Pennsylvania Category 4 casinos inYork andBerks counties, risks relating to construction, and our ability to achieve our expected budgets, timelines and investment returns, including the ultimate location of other gaming properties in theCommonwealth of Pennsylvania ; and (z) other factors as discussed in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 , this Quarterly Report on Form 10-Q for the quarterly period endedMarch 31, 2020 and subsequent Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, each as filed with theU.S. Securities and Exchange Commission . The Company does not intend to update publicly any forward-looking statements except as required by law.
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