Good day, and welcome to the Eldorado Resorts 2019 third quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Joseph Jaffoni, investor relations. Please go ahead.
Thank you, Stephanie. Good afternoon, everyone, and welcome to Eldorado Resorts 2019 third quarter conference call. Joining us today from the company are Chief Executive Officer, Tom Reeg, President and Chief Operating Officer, Anthony Carano, and Chief Financial Officer, Bret Yunker. On today's call, we'll review the company's third quarter financial results and the company's ongoing progress against its key strategic priorities, including the status of Eldorado's proposed acquisition of Caesars Entertainment. We will then open the call to participants for questions. This afternoon, Eldorado issued a release announcing its third quarter financial results for the period ending September 30, 2019. The release is available in the investor relations section of the company's website at www.eldoradoresorts.com.
Before we get started, I'd like to remind everyone that this call is being recorded, and a webcast replay will be available for 90 days, the details of which are included in today's press release. During today's call, we may make certain forward-looking statements about the company's performance. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release, as well as the risk factors contained in the company's filings with the U.S. Securities and Exchange Commission.
Eldorado Resorts undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after the call. Also, during today's call, the company may discuss non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at www.eldoradoresorts.com by selecting the press release regarding the company's 2019 third quarter financial results. Thank you for your patience with that, and at this time, it's now my pleasure to turn the call over to the company's CEO, Tom Reeg. Tom, go ahead, please.
Thanks, Joe. Good afternoon, everyone. We're pleased to report strong third quarter results, EBITDA up about 8% on a same-store basis to just under $198 million for the quarter, against a plus 12.5% comp from last year. I think we were facing the most difficult comp in the space, and we posted the strongest same-store EBITDA growth. Our margins increased by over 300 basis points to just under 30% consolidated EBITDA margin for the quarter. We hit our synergy targets in both the Tropicana and Grand Victoria acquisitions during the quarter, and had some notable standouts, in the central region in particular. That's the cleanest region in terms of looking at what happens with properties as we bring them into our system. Those are assets, the longest of which, in Elgin, we owned since August of last year. We're quite pleased with the performance there.
You can see that we still had some weather impact in the south, although not enough to make a material difference to the consolidated quarter, not as material a difference as the first couple of quarters of the year. You can see the south was hit by tropical storms, and you see that in the numbers. Generally speaking, very pleased with the quarter from a performance perspective in our business. We've spent the bulk of the last four months since we announced the Caesars acquisition, digging further into Caesars' organization and operations. We were quite pleased with the quarter that they reported yesterday, particularly in Las Vegas. Their Las Vegas operation is performing extraordinarily well on cash revenue, RevPAR growth basis, generating solid EBITDA gains versus its peers.
You've seen that they've started to make some moves on the cost side that are similar to things that we might do as we enter the fray there. In terms of timing of the transaction, our shareholder vote on both sides is November 15th, a week from Friday. We continue to work through regulatory and antitrust. You can see in our release, we're still targeting a first half of 2020 closing date. If I were to place a bet today, I'd be betting on a first quarter close versus a second quarter close. We're going through regulatory and antitrust in real-time. In terms of what we're finding, we thought we would find strength at the operating management level in the properties in Caesars.
We've spent the last couple of months visiting every Caesars property and meeting their management teams, letting them take us through the properties and their views on where the properties are today, where they can go. We are pleased to report that their property-level management team across the board is generally quite strong. They should adapt well and quickly to our operating style, where they have much more of a say in what happens in the business, and we're excited to get there. In terms of our announced synergy targets, we've announced $500 million of synergies post-closing, as most of you are aware. We are supremely confident in that number, growing increasingly confident as we dig deeper into the organization. Indeed, we think that those synergies will be heavily front-end loaded.
We feel very good about where we're headed with Caesars, about where Caesars is on its own, and on where our own business is. I tell you also in Caesars, we're excited to see areas where we think we can drive shareholder value that's not just generating more free cash flow or EBITDA at the property level. We see opportunities to monetize assets in Caesars that we've started on a path toward in other transactions, and some unique areas within Caesars that we think will drive material incremental value to shareholders beyond just a multiple of EBITDA or a free cash flow yield. We're very pleased with how the quarter finished. The consumer remains strong for us as you go into fourth quarter.
On our side of the ledger, fourth quarter is always the most difficult to forecast because so much of the business is collapsed into a handful of weeks around the holidays, and we are facing a plus almost 22% same-store sales comp. We're facing a difficult comp, but we feel good about where the consumer is and good about what we'll post in the fourth quarter. With that, I'll turn it to Anthony for more specifics on the properties.
Thank you, Tom, and good afternoon to everyone on the call. I'd like to take a few minutes to provide you with some third quarter operational highlights. The third quarter was strong with four out of our five regions delivering adjusted EBITDA growth, led by the Central region at 22.3% growth year-over-year. Looking at our five operating segments, I'll begin with the East segment, where adjusted EBITDA increased 5.3% year-over-year to $57.2 million, and the adjusted EBITDA margin rose 190 basis points to 30.7%. All three properties in the East generated year-over-year growth in adjusted EBITDA during the quarter. Scioto's adjusted EBITDA rose for the 19th consecutive quarter. LTM EBITDA in Atlantic City is now ahead of the LTM period preceding the Hard Rock and Ocean openings. Adjusted EBITDA for the South region was down 7.2% to $24.7 million on a 10.6% decline in net revenue.
Results in the South segment were negatively impacted by Hurricanes Barry and Dorian, which impacted Pompano and Lake Charles during the quarter. Our property-level operating teams reacted quickly. Despite the weather headwinds in the South region's adjusted EBITDA margin improved 85 basis points to 22.9%. Turning to the West region, EBITDA improved 1.4% year-over-year to $49.5 million. Results improved sequentially in the third quarter in the West region, following the completion of our Black Hawk renovations late in Q2 of 2019. The West region's adjusted EBITDA margin improved 200 basis points to 32.7%. Revenues in the Midwest declined 4%. Segment adjusted EBITDA rose 1.2% to $35.7 million. Four of the six properties in the Midwest achieved year-over-year increases in adjusted EBITDA. The Midwest adjusted EBITDA margin increased 190 basis points to 37.2%.
Similar to Q2, our Central region delivered an exceptionally strong third quarter with EBITDA growth of 22.3% on a 2.4% decline in net revenues. All three assets in this segment delivered double-digit year-over-year gains in adjusted EBITDA. Our ability to run these assets more efficiently is evident in the 630 basis point improvement in the segment's EBITDA margin to 31.4% during the quarter. As I reflect upon our Q3 results, our diversified portfolio of 26 regional gaming assets had a solid quarter, delivering 8% same-store adjusted EBITDA growth. Our recently acquired assets are performing well, our property-level teams continue to find ways to improve operating margins, as evidenced by the 330 basis point improvement in consolidated margins this quarter. I'm excited about the opportunities ahead as we look forward to closing the Caesars acquisition.
With that, I'll now turn the call over to Bret for some additional insights on the third quarter financial performance and details on our balance sheet and capital structure. Bret?
Yep, great. Thanks, Anthony. Third quarter was very productive from my perspective. We ended the quarter with $2.95 billion of debt and over $200 million of cash on the balance sheet. During the quarter, we paid down $70 million on our term loan, and year-to-date, we've repaid over $300 million of debt. In the third quarter, we spent $38 million on CapEx, and we continue to estimate full-year 2019 CapEx of $200 million. We expect to begin construction on our Lake Charles land-based project later this quarter. We anticipate receiving $385 million of gross proceeds from the Century asset sale before the end of this year, and $230 million from Twin River proceeds in the first half of 2020. We plan to use these proceeds to pay down debt.
With that, I'll turn the call back to Tom.
Thanks, Bret. We'll turn it back to the operator for any questions.
Thank you. At this time, we will open the floor for questions. If you'd like to ask a question, you may press the star key, followed by the one key on your touchtone phone now. If you muted your phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, you may press star one to ask a question. Our first question is coming from Carlo Santarelli with Deutsche Bank.
Hey, it's Steve Pizzello on for Carlo. Thanks for taking our questions. Last night, Caesars CEO Tony Rodio mentioned that they now see $75 million-$100 million of cost saves. How do you think about that in terms of your $500 million synergy target and the timeline for realization of your synergies?
What I'd tell you is, as in any merger agreement, there are operating covenants in terms of what each company can do between signing and closing. Both of us are operating our business as independent entities at this point, so Caesars is making those decisions. As they make material decisions, if it reaches a certain threshold of materiality, we opine as well. Tony has been with us through all of our due diligence in the last four months, both property and in Las Vegas. He's heard a lot of the same things that we've heard. We've been discussing publicly and privately what we would intend to do once we take over. You should expect that some of what Tony is tackling are things that we would have started tackling at closing.
We get to accelerate that a little bit and see the benefits quicker than we have in other transactions.
Okay, great. Thanks. Just one follow-up. Given the value Caesars brings to you with respect to their sports partnerships, how do you foresee the monetization of said value?
Can you repeat that question? Get closer to the mic. We can't hear you.
Yeah. Given the value Caesars brings to you with respect to their sports partnerships, how do you foresee the monetization of said value?
I tell you, we have our partnership with William Hill. Caesars has a lot of its own sports betting partnerships. As we come together, it's an obvious time to figure out how are we going to tackle sports going forward. That's clearly a much higher growth business than the core casino operating business. I think if we can find a path where we can spotlight that value so that it's not buried in a giant casino operating company, you should expect that we'd explore the ability to do that.
Okay, great. Thank you.
Thank you. Our next question comes from David Katz with Jefferies.
Hi. Afternoon, everyone.
Hey, David.
Tom, I think a lot of the operating discussion is quite clear. You did mention in your opening remarks about other embedded value. I assume that the previous question would be under that heading of other value drivers within the combined entity. I would assume that the Pompano discussion, which we've had, would be under that heading also. What other kinds of things would you include either generally or specifically under that heading? If there is any incremental update since G2E on Pompano that's discussable, I'd love to hear it.
Sure. Take the second one first on Pompano. We still expect zoning to be complete in early 2020. That's just been bureaucratic in terms of how long it takes. There's no controversy in terms of what we're doing. Third-party interest in the project has been meaningfully stronger than either us or Cordish anticipated going in. The scope has expanded a bit. You've seen some public meeting data that's come out of Florida, and a lot of what's in there is accurate in terms of what we're pursuing. You should expect to see construction in earnest in 2020. In terms of what else is out there, yes, sports is an opportunity. Caesars has a lot of excess real estate, both in and out of Las Vegas, that could be used for future development, both for ourselves or in a partnership.
There's lots and lots of entities that would like to get close to or on the Vegas Strip. As you know, Caesars owns a lot of land in that area, and there could be opportunity. Caesars has payment streams embedded in the business that others in the past have monetized at particularly attractive capitalization rates. You have those sorts of opportunities as well. Not just improving free cash flow and operating casino EBITDA, but extracting value from the pieces of Caesars. We think this will be an even more target-rich environment than we have seen historically.
Got it. I think that's it for me. Thank you very much.
Thank you. Our next question comes from Steve Wieczynski with Stifel.
Yeah. Good afternoon, guys. Tom, you talked about your property visits to all the Caesars assets, and you touched on the management side of things. Are there any other high-level takeaways in terms of what you guys learned? Maybe either what needs fixing, if anything, or even what those guys might do better than you guys, if that's even possible.
I'd say, the specter of, is there a ton of CapEx out there that hasn't been spent to date? There's really not a material amount. There's some hotel towers that we'll touch in the non-Vegas markets, but nothing that's an extraordinarily big number. We are generally pleased with the shape of the assets. In terms of what they do better than us, their Rewards Program is light years beyond ours. What they do in e-commerce and social is well ahead of what we do. Their table games business generally is far more developed than ours, all of which I think can drive substantial incremental value through our own properties, while at the same time we're converting their operating style to ours in their property. We think there's going to be synergy opportunities from an operating cash flow standpoint on both sides in this transaction.
Okay. If I can add on that a little bit, Tom, I think you guys have talked about that $500 million synergy target does not include any real contribution from right-sizing of player reinvestment spend across their portfolio, and I just want to make sure that's still a fair statement, and if you still think there's some considerable upside as you go through that process.
That's still a fair statement, Steve.
Okay. Last question real quick. I know you talked about on this call the $500 million synergy target, but I don't think, if I missed it, I apologize, but I don't think I heard you talk about the $10 free cash flow number. Is that still a fair number in play?
Yeah. We still see a path to $4 billion-$4.5 billion of EBITDA out of the combined portfolio, which would lead to free cash flow in excess of $10 a share.
Okay. That's it for me. Thanks, guys. Appreciate it.
Thank you. Our next question comes from Harry Curtis with Instinet. Harry, if you muted your phone, please unmute.
Sorry about that. Can you hear me?
Yes.
Okay, very good. A twist on the last question about giving property managers more autonomy. When you visited with them, were there any consistent strategies that they are likely to adopt with less corporate influence?
I think the opportunity is there's a tremendous amount of inefficiency in their system. It's very difficult to target the local customer from thousands of miles away. As an example, it takes them considerably longer, let's say somewhere between 2 and 3 times as long, for them to produce direct mail to their customers than us. That's really a function of all of the sausage-making that it has to go through. I'd tell you that one piece is marketing. Another piece is the food and beverage operations, that we take a different tack than they do. There's an opportunity there. Where else would we say the property level guys taking control would be considerably different than the way that we're doing it?
Mostly marketing.
Mainly marketing. That's, like I said, both time to market and the way that you attack your customer base is going to be very different if it's driven by the local level than out in Las Vegas. Caesars also runs as almost like a Vegas and a non-Vegas company. As you have needs in the corporate infrastructure of Caesars, when you're outside of Las Vegas, it's difficult to get the attention that you need on a timely basis because understandably, they're focused on Vegas, where more of their cash flow is generated. That speaks to why a lot of this stuff needs to be relocated to the local level.
Following up on that, it sounds to me like the key functions that Caesars corporate has maybe had their thumb on the scale, if that's the right term, has been marketing and food and beverage. Are there any other ones that you think really need to be more at the property level?
They've had it everywhere. The way I would characterize it is non-customer facing responsibilities can, in our estimation, effectively be consolidated at the corporate level. When you're talking about customer facing responsibilities, those need to be as close to the customer as they can be. In Caesars case, everything is centralized at this point effectively.
Okay. Very good. That clarifies it. Thank you very much.
Thank you. Again, as a quick reminder, if you'd like to ask a question, you may press star one now. Our next question comes from Jared Shojaian with Wolfe Research.
Hey, good afternoon, everybody. Thanks for taking my question. Tom, I heard you on your comments about just fourth quarter being a little bit more difficult to forecast than a typical quarter, but maybe you can walk us through some of the puts and takes, as to why fourth quarter should be better or worse than the 8% same store growth rate that you put up in the third quarter. I guess maybe talk me out of why fourth quarter shouldn't be better than that, just given some of the weather challenges you had in the third quarter. You also have the Reno housing agreement for a full quarter in the fourth quarter.
Well, you're in a low volume quarter where the lower your volumes, the more volatility you have generally. The biggest reason I would caution you on fourth quarter expectations is the comp. We're up against +22% on a same store basis, and in that number, there was some positive hold in Atlantic City. I would say to expect us to accelerate from here in this quarter is aggressive given the comp.
Okay, thank you. Just shifting gears to, I guess, the asset sale topic. Can you help us think about how you're thinking about that in the next few years? What I'm really trying to understand is your thought process on if there's a gross number that you're targeting, if it's a property count that you're targeting, or if it's a mindset that you're just going to keep selling assets if the multiples are attractive enough. How do you think about that? How do you size up that opportunity?
You have some pre-closing activity. You saw Caesars announce the Rio transaction. We've announced the sale of Kansas City and Vicksburg to Twin River since we announced the Caesars deal. You should expect some additional modest sales announcements pre-closing. The ultimate impact of that is we'll be borrowing, presuming all those transactions close, over $1 billion less to fund the transaction than we presented at the time of the announcement of the deal, because Rio was not in there, Twin River was not in there. Any subsequent asset sales were not in there. You should expect us to be always looking at non-core assets. The smaller assets in the portfolio. We've talked about we intend to sell one Las Vegas asset on the Strip post-closing. That remains the case. Our intention is to see how did that sales process go?
How did that impact the system once that property was removed from it? We'll make decisions from there. I would generally say, personally, I think the PropCo OpCo model will prove itself out through a cycle. I think that once it does, I think multiples will start to expand because the specter of what happens to an OpCo in a downturn will be answered. I think it'll be in our interest to own as much of our portfolio as we can at that point. We'll be about 50/50 owned and leased at closing. We'd like to maintain in that area for the foreseeable future. Outside of what I've described in terms of the smaller non-core stuff and a Vegas Strip asset sale, I'd say we're not contemplating anything beyond that. I'd also tell you, in our company, everything is for sale every day.
If somebody came to us with an offer for any asset that was in the best interest of our stakeholders, we would be listening.
Great. Thank you. One quick follow-up, if I may, and I apologize if I missed this, but what was the weather impact to EBITDA in the quarter?
We didn't quantify that, Jared. You can see in the South numbers, we were down for the quarter. You should presume we wouldn't have been down save for weather.
Okay. Thank you very much.
Thank you. Our next question comes from Barry Jonas with SunTrust.
Hi, guys. Tom, that was some good color
potential sales, just curious from an FTC perspective, any additional color you can give in terms of any potential forced divestments?
We're working through the process. We've talked to you about markets where you should expect us to be active in Northwest Louisiana and in the Tahoe area. Beyond that, we're not expecting any divestitures pre-closing that are related to closing the transaction.
Nothing in Atlantic City then?
We don't know at this point, Barry.
Okay. Just a housekeeping. Corporate came in meaningfully below our model in Q3. Just curious if that's driven by permanent cost savings or if just something shifted around.
Keep in mind that's corporate and others, so sports betting activity through the JV flows through there now too. You can look at the corporate number that's in the income statement in the back of the earnings release and in the 10-Q will give you a straight corporate number, and in the Q you'll see the stock compensation that's non-cash against that.
Got it. Thanks a lot.
Yep.
Thank you. Again, if you'd like to ask a question, you may press star one. Our next question comes from John DeCree with Union Gaming.
Hey, everyone. Thanks for taking the questions. Tom, or maybe Bret, one up your alley about net leverage. You've talked about some of the moving parts with asset sales heading in. I was wondering if you could give us a little bit of color on where you expect net leverage to be on the existing business, at the end of the year when you get to closing kind of pro forma for the pending asset sales, and then what's your thoughts on net leverage kind of post-closing and your kind of thoughts on targets and when you might get to your target net leverage ratio?
Yeah. Hey, John, it's Bret. Still expecting to be mid fives on a net rent adjusted basis once you're pro forma for closing asset sales and expected synergies.
Okay.
Ultimately, John, our intention would be to drive leverage towards 3x and below on a gross lease adjusted basis.
Okay.
Our primary use of free cash flow will be to pay down debt.
Okay. Just switching gears a little bit, we've spent some time talking about synergies with the integration of Caesars on the horizon, you've mentioned we're anniversarying Tropicana and Elgin here, reach synergy targets there. In prior acquisitions, you've been able to exceed those. Arguably, their synergies are just ongoing operational improvements. I was wondering, Tom, if you could talk a little bit about what you see across the existing portfolio today and how much opportunity you think there is with what you have today, not including Caesars.
Yeah, I would tell you that we continue to see opportunity in assets that we've owned for a very long time. We've got growers that we've owned back to, frankly, the 1970s in the case of Reno. Scioto continues to be high single digit, low double digit grower every quarter. We're now seeing growth out of Atlantic City. You're seeing continued strong results out of the Midwest. I should have pointed out in the Midwest, you had some lingering flooding issues early in the quarter as well. Otherwise, the Midwest would have looked a little better as well. We really look across the entire portfolio and see continued opportunity across the board just from basic blocking and tackling.
You add on projects like we've talked about in Pompano, moving land-based in Lake Charles, our recent activity in Colorado in terms of upgrading that facility that should bear fruit. You plug that system into Caesars Rewards, where you have markets like Denver and Columbus and St. Louis and South Florida, where Caesars really didn't have a feeder into their system. Those are very large markets. We think those are markets that should benefit the most from plugging into Caesars Rewards.
Got it. If I could, Tom, wanted to follow up on your comments about real estate a little earlier to a prior question. We saw a big print with the Bellagio on the Strip and a general view, I think, across the markets that the valuations are on the rise, particularly in Las Vegas. What you might be able to do with the Caesars portfolio. Has that changed your view or expectations on valuation for the Strip asset that you might be looking to market or sell at some point and/or the timing of when you may want to do that? Is there, I guess, any sense of urgency to delever or will you kind of take it as the market goes?
It doesn't change the timing of what we're looking to do. We certainly were very happy to see where MGM printed Bellagio real estate. We're even happier that there's new capital in the real estate investment arena that's coming into the space. We think that that's the tip of the iceberg. We think there's going to be others that are interested as well. We think that will improve the value of our assets, but we want to manage our leverage down. That's why we're talking about selling an asset quickly post-closing the transaction. We're not in a hurry to run out and sell assets. We think that the value of Vegas real estate is going to continue to climb as you have more capital that becomes interested in making those types of investments. Both the Bellagio trade and the Circus Circus trade were spectacular trades from our standpoint.
We feel very good about what we're buying and our ability to create value from those assets moving forward.
Sounds good. Thanks for the additional color, guys, and congratulations on the solid quarter.
Thanks, John.
Thank you. Our next question comes from David Bain with Roth Capital.
Oh, great. Thank you. I just had one question. It was a quick follow-up on, I believe, the initial question, just for clarity of the additional $25 million-$50 million of the announced cost reduction run rate estimate by Caesars. Can you just give us a broad range of what may overlap, from a quantitative standpoint, with your year one $500 million synergy target?
I don't want to get to that level of granularity, David, but you can see that the categories that were mentioned yesterday by Tony were similar to what we've been talking about since June. You should expect that there's a fair amount that we would have done at closing that's going to start to get done a little bit earlier.
Okay. All right, great. Thanks so much.
Yep.
Thank you. There are no additional questions at this time. I'd like to now turn it back to our presenters for closing remarks.
Thanks everybody for your participation. We'll speak to you soon.
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.