Good day, and thank you for standing by. Welcome to the Caesars Entertainment third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Finance, Treasury, and Investor Relations. Please go ahead.
Thank you, Elizabeth, and good afternoon to everyone on the call. Welcome to our conference call to discuss our third quarter 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended September 30, 2022. A copy of the press release is available in the investor relations section of our website at investor.caesars.com. Joining me on the call today are Tom Reeg, our Chief Executive Officer, Anthony Carano, our President and Chief Operating Officer, Bret Yunker, our Chief Financial Officer, and Eric Hession, President, Caesars Sports and Online Gaming. Before I turn the call over to Anthony, I would like to remind you that during today's conference 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 Securities and Exchange Commission. Caesars Entertainment undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after today's call. Also, during today's call, the company may discuss certain 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 investor.caesars.com by selecting the press release regarding the company's 2022 third quarter financial results. I will now turn the call over to Anthony.
Thank you, Brian, and good afternoon to everyone on the call. In the third quarter, we generated a new consolidated EBITDA record excluding digital of $1.05 billion. Our Las Vegas segment continued to deliver strong results with $491 million of adjusted EBITDA, excluding the Rio rent payment. Our regional segment delivered a new Q3 record with same-store adjusted EBITDA of $570 million, up 25% versus Q3 of 2019. Caesars Digital reported a $38 million adjusted EBITDA loss, which was our smallest loss quarter since rebranding to Caesars Sportsbook in August of 2021. In our Las Vegas segment, all areas of the big business combined to contribute to the strong EBITDA quarter. Excluding Rio rent payments, our Las Vegas segment generated EBITDA of $491 million and a 46% EBITDA margin.
Occupancy was strong, reaching 94%, driven by July and September. Cash hotel revenue and profit set a new Q3 record. Gaming revenue also set a new Q3 record during the quarter. Group room nights during Q3 of 2022 represented approximately 12% of occupied room nights. Forward group revenue pace for the remainder of the year and into 2023 is up over double digits versus 2019. Results in our 55+ segment in Las Vegas were up again in Q3 to pre-COVID, continuing the trend we experienced in the second quarter. International travel continues to recover and remains a tailwind. Las Vegas has further runway for growth with many exciting new entertainment and sporting events coming to the market over the next 18 months. In our regional markets, results strengthened in the third quarter, posting growth versus a strong third quarter last year.
Reported EBITDA of $570 million was up 25% to Q3 of 2019 and up 30% when excluding Lake Charles, which remained closed during Q3. EBITDA margins improved 840 basis points to 38% on a same-store basis versus Q3 of 2019, excluding Lake Charles. Trends in our regional segment remain very consistent over the last few quarters. Turning to an update on our capital program, renovations in AC will complete in the first half of 2023 with the opening of the Nobu Hotel Tower, and we're excited about the recent restaurant openings of Hell's Kitchen and Nobu at Caesars AC. Horseshoe Lake Charles is set to open on December 12, and we look forward to showcasing this brand-new land-based facility. We also expect to open our expanded casino offering in Pompano in December as well.
We expect to open temporary casinos in both Danville, Virginia, and Columbus, Nebraska, by mid-2023. Our expansion at Harrah's Hoosier Park is underway and should open by mid-2023. Lastly, our construction on our new hotel tower and additional amenities at our New Orleans property is progressing well with the new sportsbook and poker room recently opened. As we look to the remainder of 2022, we remain optimistic about our business as consumer trends remain healthy, especially versus 2019. As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, the return of the international consumer, as well as the potential for the full recovery of our older demographic consumer who's been the most impacted by COVID-19.
I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, their execution, and their exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the third quarter performance in our digital segment.
Thanks, Anthony. Our digital business reported revenue growth of over 120% and a smaller-than-expected EBITDA loss in the quarter. On the sports betting side, we recently started to realize the benefits from the efforts that we've made over the summer to improve the overall experience for our customers. Specifically, improvements in cash-out speed, customer service response times, and our in-play parlay and alternative line offerings are all being well received by our customers. We've also created several analytical tools that provide real-time assistance and insights for our trading team, allowing them to expand the number of markets we offer to our customers and to be more responsive during in-play trading sessions. As a result, our hold volatility has declined and our overall expected hold levels have increased.
During the quarter, we also began to see the results of our initial segmented marketing campaigns that allow us to reward our customers more directly for their loyalty and play with us. These efforts contributed towards our net revenue growth as they allowed us to improve our promotional spending efficiency. We anticipate continued enhancements in this important area over the course of 2023. On the iCasino side, we hired a new leader for the vertical who started on October first. In conjunction with our tech team, we have an aggressive product improvement roadmap identified with numerous enhancements for our customers that will be rolled out as completed with a full product targeted for the start of the second half of 2023. iGaming remains a critical component of our digital growth strategy.
From an expansion standpoint, during the quarter, we launched our online sports betting product in Kansas and upgraded our tech package in Illinois, Pennsylvania, and Washington, D.C. to our most current version. We now offer sports betting in 27 North American jurisdictions, 19 of which offer mobile wagering. In Q4, pending regulatory approval, we anticipate launching online sports betting in Maryland and on January first in Ohio. In addition, we plan on adding two new third-party retail locations during the quarter. With that, I'll turn it over to Bret for some additional comments.
Thanks, Eric. Q3 was another productive quarter from a balance sheet perspective, as we permanently reduced approximately $900 million of debt using asset sale proceeds and free cash flow. We also successfully syndicated a new $3 billion credit facility comprised of a $2.25 billion revolver and a $750 million term loan A. 16 domestic and international banks subscribed to the new facility, and we appreciate their support. Total 2022 CapEx spend net of Atlantic City is now expected to come in at approximately $800 million, which is also our current estimate for total 2023 CapEx spend across growth and maintenance. Finally, we announced that we will be pursuing a downstate casino license in New York with our partner, SL Green.
It will obviously be a very competitive process, and we look forward to putting our best foot forward when the RFP begins. Given the inherent sensitivities around the bid process, we aren't in a position to go into details around project cost at this stage. However, we can tell you now that the project starts with an existing building and will be financed within a new joint venture that is not on our balance sheet. Caesars will brand and manage the asset under a long-term management agreement, and any equity investment into the joint venture will be very manageable relative to our free cash flow. Now I'll turn the call over to Tom.
Thanks, Bret. I'm going to touch a little further on the quarter, and I want to talk about October as well. In Las Vegas, very strong results in the quarter. Normal seasonality returned to Las Vegas in the third quarter. We also had a couple headwinds that I would call out. Utility expenses for the quarter were extraordinarily high, particularly August. We had the finish of the construction of the entrance, which caused some construction disruption. If you look at the impact of the two of those and added back, you'd have ended up a little bit ahead of last year on an EBITDA basis and similar from a margin standpoint. As you look into October, it was the strongest month in the history of Las Vegas for Caesars.
We did over $200 million of EBITDA in October, which is up double digits versus last year. On a consolidated basis, October EBITDA for brick and mortar is pacing double-digit percentage above last year's October, despite having one fewer weekend day in the 2022 period. Regional is obviously quite strong as well. Had a little bit of a margin improvement there. Strongest third quarter that we've ever had in regionals. We've got, as Anthony touched on, Lake Charles coming. We've got temporary casinos in Columbus, Nebraska, Danville, Virginia, that will hit next year. We've got the completion of the Atlantic City spend as well, and the Harrah's Hoosier Park outside Indianapolis should finish by the middle of next year.
A number of tailwinds. Cash that you allowed us to invest as shareholders that you're gonna see the fruits of going into the rest of 2022 and into 2023. I also like to touch on the Strip asset sale, and say that we intend to keep all of our Strip assets as we move forward. We ran into a market where the cash flow of the asset continued to increase. The ability of buyers to raise financing made it a very easy decision for us to keep. I know that despite us talking about how this is and was a discretionary process for us, it created an unnecessary overhang in the stock, and I apologize to all of our shareholders for that. That was a self-inflicted error, and that was me.
We will be keeping our Vegas Strip assets as we move forward. In digital, October digital inflected to positive EBITDA for us. We are extremely pleased. That's 12 months ahead of the schedule that we anticipated. I think most of you are aware we've got a fairly high profile liability out there with the Astros, so that will be a swing factor in whether fourth quarter is positive as a whole. We'd expect that we have inflected and digital will be a contributor as we move forward. That's extremely exciting news for us. Great work by Eric and his team in digital. Thank you to all of our shareholders for the capital to invest in that, in digital, and the patience as we work through it.
We continue to believe that on our $1.1 billion of cumulative EBITDA losses, that metric will be doing in excess of 50% of that in annual EBITDA out of digital. That business continues to outperform our expectations, and really, really inflected over the last 60-90 days. We are quite pleased with that. With that, I'll flip back to the operator for questions.
If you'd like to ask a question at this time, please press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Carlo Santarelli with Deutsche Bank. Carlo, your line is now open.
Hey, guys. Good afternoon. Tom, appreciate the commentary on digital. Could you talk a little bit about how you foresaw or foresee going forward the promotional environment, perhaps based a little bit on your experience in the three Qs as well as what you saw in October as we're now in the meat of football season? Further, let's set aside the World Series liability. Could I take your comments to kind of infer that perhaps next year, you're looking at a positive EBITDA contribution from digital?
Yeah. For modeling purposes, Carlo, I'd expect you to be around break even, but I'd expect that we've got a really good shot that that's a contributor on a full year basis in 2023. Obviously, that's subject to hold, but we feel very, very good about where we are. In terms of promotional environment, we've talked for a very long time about how your customers as they come in in new states, that's when they're taking advantage of sign-up offers, that's your highest promotional spending. We've got obviously a mix this year of states, most of which are in their second year, if not second full year, at least second year of operation during football season. Your promos are to your existing customers. That's typically a much smaller promotional bite than new signups.
I'd also say, you know, we have the ability to segment customers now, which we didn't last year. We've got a full year of looking at. As you know, we had all spigots open in digital as we launched the business and launched the brand. Now we can look at various verticals and see what type of customer is coming in through the various channels and adjust our spend based on are we getting return on our investment. We made some significant changes there, led by Eric in the last 60 days, that have flowed virtually entirely. Basically shutting off particular segments, and that cash has flowed immediately to the bottom line with no degradation in market position. We feel very, very good about where we're at.
As I've told you, this is what we've done on the brick-and-mortar side, is figure out how to invest more in your best customers and less in your less profitable customers, and that's really the basic blocking and tackling that we're doing in digital that has led to these results.
Yes, I have noticed the latter personally. Thanks, Tom. I appreciate that. One follow-up from the regional perspective. Obviously, results were good against a difficult comparison. It looks like you guys were able to more or less keep OpEx kind of ex gaming taxes to the best of our estimation, flat. Are you kind of where you need to be? Are there any pressures that are kind of creeping there that we need to be aware of outside of you know, traditional labor inflation, things like that, or is this a pretty good run rate in terms of OpEx?
Yeah, I'd say you're at a pretty good run rate. You're, you know, you've been around us long enough that you know we're never done. But we don't see any real cost that's on the sidelines. As you touched on, we've got labor cost inflation that rolls through, but that's been for quite some time. Frankly, the labor picture continues to look better as we get quarters in the rearview mirror.
Great. Thank you, sir. Thanks, everyone.
Our next question comes from the line of Joseph Greff with J.P. Morgan. Your line is now open.
Hey, everybody. Tom, just starting off on the digital side. As you talk about increasing profitability in this segment, can you talk about over, you know, the next few years, 2023, 2024, and beyond, you know, the magnitude of additional operating expenses coming out of that business, maybe particularly with some partnership expenses, and how this might be sort of, I don't want to say low hanging fruit or easy to extract, you know, efficiencies from, but can you talk about, you know, some of those that kind of get you to increasing profitability as you think about some of those partnership expenses winding down?
Sure, Joe. As you look at current business, you've got for us what is a sports dominated business at this point, inflecting to profitability. Obviously, we have significant opportunity in front of us in iCasino. We think we now have the right leadership in place to attack that. So we think that will grow from what's a fairly small contributor today into a much more meaningful contributor. But what I think you're referring to is as we launch, and this is not unique to us, this is throughout the entire digital space. There were a number of partnership deals signed up with media partners, with teams, with leagues that all kind of run in three to five years, in our case from, let's say, you know, middle of last year.
You'll have some running off in a year, you'll have more running off over the next three years, and then you'll look at, you know, there were assumptions made in terms of what you were willing to pay for those sponsorship opportunities, those partnership opportunities that were based on customer generation, new customers to your platform. Obviously, we've got much more data today than we had before, and you're not gonna be in virtually all of these cases in a launch situation anymore. For us, that's something that runs in, you know, north of $200 million of annual expense. For now, that's a fixed expense for us as long as those contracts are in place.
You should expect some of them will live in a form that may not be as expensive as it is today. A fair amount of those will go away entirely, and that should flow straight to EBITDA for us if you're looking out in that 2024-2025 timeframe that you laid out.
Great. Tom, just to clarify your comments, switching over to Las Vegas, you'd mentioned the 3Q would have generated in Las Vegas, EBITDAR north of last year and margins that are similar. That delta between what you reported and those comments relates to those two headwinds, utility costs and disruption at TPLV. Can you sort of break out the magnitude of each and explain to us what maybe the elevated utility expenses, how do you think about that going forward? Is it recurring? Is it one time? And then also.
Yeah.
Tough not to notice that corporate expenses were down a lot sequentially. Can you help explain that, or was there an expense, you know, shifted out to the properties versus what may have been in the past sort of allocated to corporate?
Bret Yunker will take corporate expense. I'll take Vegas.
On corporate expense, yeah, we're a bit light to our typical run rate of $30-$35 per quarter. That's due to a lack of transaction activity and a continued focus on all expenses.
For Vegas, Joe, if you normalize utilities, which was primarily rate in August alone, that's virtually the entire gap between Q3 of 2022 and Q3 of 2021. Then you have the construction disruption as well. To give you an idea, October, on a preliminary basis, Vegas EBITDA margin was about 52% for us.
Great. Excellent. Thanks, guys.
Our next question comes from the line of Steven Wieczynski with Stifel. Your line is now open.
Yeah, hey, guys, good afternoon. So Tom, you just mentioned that Vegas did, I think you said $200 million in EBITDA in October. I guess the most simplistic way I can ask this question is, you know, should the quarter end up being $600 million in EBITDA? I guess what I mean by that is obviously with, you know, there's some holidays coming up and whatnot, I just wanna make sure that expectations for the fourth quarter are, you know, rightfully set at this point. You know, hopefully, that makes sense.
Sure, Steve. October is typically the strongest month in fourth quarter. November is the weakest month. Thanksgiving is not a particularly strong holiday, and you're. November is the seasonal slowest in the fourth quarter, and then you get New Year's in December. If I were thinking about, you know, what does the quarter look like, October should be the best month, December should be slightly lower, and November lower than that.
Okay, perfect. Second question, Tom, you know, on the digital side of the business and, you know, clearly there's been some significant progress made here in terms of getting that segment, you know, profitable. I guess my question is or maybe give us your updated kind of thoughts about, you know, down the road, you know, you see any kind of scenario where you would want to potentially spin this business off at some point? I understand there's probably a lot of value here with the business being tied so closely to the brick-and-mortar side. Just wondering if that would possibly make sense at some point down the road to, you know, to help the leverage side of the equation.
I'd say that, you know, our competitive advantage here is tying into the existing brick-and-mortar business and our Caesars Rewards database. It would be my preference that that remain 100% owned by the parent company. If you get to different shareholder bases for the two business, there's a complexity introduced that you see, you know, in some of our peers in terms of when you get to different shareholder bases in the same business. I tell you know that we're constantly focused on how do we drive shareholder value. If you get into a market where that ultimately makes sense and that's the way to increase the pie for shareholders in total, certainly that's something we would consider.
You know, in the recent market environment, there hasn't been much value placed on these digital assets, so it's a very easy decision as we sit here today.
Okay. Gotcha. Thanks, guys. Appreciate it.
Our next question comes from the line of Shaun Kelley with Bank of America. Your line is now open.
Great. Good afternoon, everyone. I wanted to dig in on regionals a little bit. The performance there in the quarter was obviously excellent and probably stronger than many of us were expecting. You know, I was wondering if you just kind of call out any key markets that might have driven that strength in the third quarter, and specifically if you could comment on Atlantic City. I feel like in that it's a big seasonal quarter for that market. You know, directionally, I think we had seen the Caesars properties on a gross revenue basis not performing as well as some of the other market participants. I was curious if you know, you're doing something different there, focusing on margin, just kind of how that market's evolving specifically.
What I'd say we're doing differently is we've had most of our market torn up during the peak season. We've had rooms out of service both at Caesars and at Harrah's. Obviously the intention as we began the project was that would be finished prior to peak season of 2022. There's obviously a well-known story of what happened to supply chain, and we missed the peak season. Really the results you're seeing in Atlantic City are a function of the construction disruption that we've had going on in that market. That's not a, you know, we're making a conscious decision to run off revenue and focus on margin. Atlantic City, on a relative basis to the regionals, was an underperformer.
You know, in terms of overperformers, New Orleans has come back quite nicely from both the hurricane and the severe COVID restrictions that were in place in the city. Northern Nevada continues to be extraordinarily strong. The levels of business that we're doing in Reno and Tahoe are, frankly, beyond what we ever dreamed when we were putting this thing together a few years ago.
Great color. Thank you, Tom. Then just as my follow-up, switching to digital if I could, you know, while we have Eric, you know, one thing that's been a discussion point in the market is obviously, you know, really strong hold levels across, you know, much of the OSB landscape in the third quarter or certainly in September. Kind of curious on, you know, the thoughts. You made a call out on hold and that improving a bit over time.
You know, just could you talk to us a little bit about relative to maybe what we're seeing in the market in September and October, how much you think this is sustainable based on product and mix versus how much is really just a factor of, you know, game luck, where we've definitely seen some outcomes that have favored the books? Thank you.
Yeah. Let me start this and I'll flip to Eric in terms of. There's two pieces here, right? There's just your normal luck, and football season started pretty strong for all books. There's a couple weeks so far that have been the reverse of that, but the bulk has been favorable to books. When I say we're positive in October, that's even adjusted for that hold. We've also made a number of changes that have improved our own hold that I'm gonna flip to Eric to talk through.
Yeah. Thanks, Tom. We had higher than expected hold towards the higher end of our range for the quarter, partially, as Tom mentioned, through luck. You know, the football season has been fortunate to us so far. Beyond that, as I mentioned, you know, in the remarks, we did put a lot of tools in place. We're increasing our uptime and our percentage of in-play hold and in-play volume, which naturally translates into a higher hold product. In addition, our percentage of parlays has steadily grown and really improved in the third quarter relative to the second and first quarter. A lot of that is due to some enhancements that we made on the tech side to improve the ability for customers to visualize and to place their parlay bets.
We also have our analytics team that's come over from the retail casino side that have put together a number of models that allow our traders to be able to keep the odds up during the game longer, and then also to be more accurate with respect to their pricing. Through a combination of all of those factors, we've really been able to reduce the volatility, and you can see it when we get our results each day. Even on days when we're not lucky with the outcomes, we still manage to pull off positive hold or at least hold that's reasonable for a particular day. Then when we do get lucky, it really compounds, and we can get some, you know, really solid double-digit holds.
Overall, you know, we put a lot of structural hold changes in place, but we were also a bit lucky in the third quarter.
We are a huge.
Very helpful. Thank you.
We are huge Phillies fans for the next game.
Thank you, everyone.
Our next question comes from the line of Barry Jonas with Truist. Your line is now open.
Hey, guys. Looks like you found the right structure to move forward with a bid in New York. Just curious if there are any other greenfield opportunities you're interested in, either domestically or internationally.
I mean, I would say greenfield international, you never say never, but highly unlikely. In the U.S., you know, if you see a major market open like, say, Texas, you should expect that we're gonna look for a way to participate there. You've seen us in Danville, Virginia, where the temporary will open next year. Columbus, Nebraska, which is smaller, where temporary will open next year. You know, we will pick and choose, but you should expect it to be domestic-focused.
Got it. Just shifting to digital, you talked about Ohio and Maryland going live. Any expectations you could share for other jurisdictions, whether that's Massachusetts, Nebraska, Puerto Rico? Just for iCasino, you know, I think the legislative movement has been softer than people thought. Any progress on states making a push for iCasino that you're seeing?
Yeah. I'll take that one. You definitely listed off a lot of the ones that we're aware of. In addition to Maryland, which will hopefully be in November, and then Ohio on October first, you've also got Massachusetts. The date hasn't been finalized there, but it's looking pretty good for first quarter. Sounds like the retail locations will open first and then online, and we're participating in the online side of that. In addition to Massachusetts, Maine has been moving forward. That's probably gonna be late 2023 rather. We are planning to launch in Puerto Rico. That could happen in the fourth quarter, it might push to the first quarter.
As you mentioned with Nebraska as well, we will plan to have some kiosks up for our temporary casino there. We're gonna launch a sports book at Caesars Windsor up in Canada. That'll be kiosk later this week. Early next year, we'll open a full book as well.
Got it. Any movement on the iCasino side that you're starting to see from the States?
Yeah. You know, the iCasino is a little bit more tricky. There really has to be, you know, a real coalition. There's a lot of competing interests from both within our industry and, you know, ancillary businesses, you know, that sometimes compete with us and sometimes participate with us. At this point, you know, it's certainly possible that there could be another state that legalizes or two next year, but I wouldn't, you know, call out any particular state at this point. You know, just to add on to that, when we think about the model that Tom's outlined, we really don't look at any incremental states from those that have been already passed through the legislation.
Anything we get on the iCasino side or even any additional states beyond those that I mentioned would be upside to the model.
Perfect. Thanks so much.
Our next question comes from the line of John DeCree with CBRE Securities. Your line is now open.
Hi, everyone. Thanks for taking my question. Covered a lot of ground, so I apologize. Maybe this one's a little bit more granular on the October performance in Las Vegas. Kind of record EBITDA levels. I think you've mentioned the low 50s% margin, 52%, if I heard correctly. I'm curious if you could kind of give us a little bit of insight into customer mix. It's typically a bigger group customer quarter, but it seems like everything's kind of working with that margin. I think 12% group room nights in 3Q. Curious if you could kind of unpack October a little bit in terms of customer mix and what kind of pushed that record performance from a customer perspective.
Yeah, I'd prefer not to go super deep there, but yes, John, groups are a big part of it. Group business was strong in October. SEMA's here this week, so it's just a culmination of a significant wave of demand that has included now the group side, and we're thrilled with the way things are coming together. We're gonna do over $1 billion of cash room revenue in Vegas, which, for those that have been in the market in Caesars would have viewed that as impossible not that long ago. We're really hitting on all cylinders here.
Maybe a follow-up for the outlook. I think maybe Anthony mentioned that the group room nights are pacing above 2019. With some big events next year, have you started to see the benefit in booking? You know, we all see the kind of pricing for F1, but it's, you know, still a bit of ways away, I think a year now. You know, curious if you really started to get traction on some of the big events that you expect next year or if you think there's an opportunity to have an acceleration in both, you know, group room nights and pricing for next year.
Yeah. Certainly, yes. We think Formula One is kind of a different animal. The demand for that particular event is well beyond what we were expecting. You saw as we rolled out rates yesterday, the pricing reflects that. You know, with a lot of the big events skewed toward the second half of the year beyond normal, you know, CES coming back, things like that. There's easy comps in the first quarter with Omicron impacting 2022. As you look further deeper into the bigger groups, it's a little early to talk about traction, but it should all be extremely positive for room rates and occupancy in the market in 2023.
That's great. Thanks, Tom. I appreciate the additional color.
Our next question comes from the line of David Katz with Jefferies. Your line is now open.
Afternoon, everyone. Thanks for taking my question. I wanted to just go back to a topic I raised, I think, last quarter about kind of normalized Las Vegas margins. I think the discussion we had was around that 50% benchmark. It seems to me that what we saw was some seasonality as well as some of the cost headwinds. Were those attributable to Las Vegas? If we can maybe take it a step further, that 50% level or neighborhood, is that a full year number implying that some may be higher and, you know, 3Q may be lower?
Yeah, that's accurate. When I was talking about the utility impact, that was entirely Las Vegas. You're talking about, you know, if you normalize, we should have been between 48%-49% in third quarter, and then you should see first and fourth quarter should be better than that. Second should be, you know, somewhere around, just let's say high 40s%. Again, we manage for aggregate EBITDA, not EBITDA margin. That 50% that we're talking about is really what falls out of the operating model, not, you know, necessarily a target for us.
Understood. There was 300 or 400 basis points of impact in the current quarter.
I'd say not quite that much. We were 46. I said we'd have been 48-49. Call it 200-300 basis points.
Okay. Got it. If I can ask one other longer-term question with respect to digital, and this may not be the way you're thinking about it either, but when we start getting to a more normalized business level for digital, is there a sort of margin level that makes sense? I'm just wondering whether it's, you know, accretive or dilutive to the aggregate on the company.
You know, we can see what other mature operators in other mature non-U.S. markets generate in EBITDA margins. We've got a pretty good track record of being a margin leader. If, you know, you're seeing 25%-30% away from us, I would expect that ultimately we're gonna do better than that, which should be, you know, around in line with the rest of the business.
Got it. Perfect. Thank you.
Our next question comes from the line of Daniel Politzer with Wells Fargo. Your line is now open.
Hey, good afternoon, everyone. Tom, I think on the interactive, you mentioned you still get back to that 50% return on the, call it, $1.1 billion investment. Can you maybe just bridge us from that few hundred million dollars that roll off from the partnerships to how you get to that return? Is it iGaming? Is it sports betting? Is it just general growth of the industry?
You know, clearly the industry is continuing to grow. We know what's happening with our cost structure, what's going to happen with our cost structure, and we make some assumptions on what we'll be able to do in terms of iGaming as we move forward and, you know, very comfortable with that 50% plus return on a annual EBITDA to cumulative EBITDA loss measure.
Got it. Just moving to the balance sheet. You've certainly been generating some cash and you know, pulling some levers. What additional levers do you have to reduce your debt from here? How topical is Centaur in your mind right now, just given we're you know, coming up on a period where it might become more topical, and you know, any other levers we should be thinking about to reduce debt in short order? Thanks.
Yeah. We should be doing something in the neighborhood, if not exceeding $1 billion of free cash flow in 2023. You should expect that will be used to pay down debt. It has always been our expectation that Vici would choose to exercise the call option it has on the Centaur assets that opened in January of this year. It closes toward the end of 2024. You know, Vici has been very clear that they that they anticipate exercising that option for us. If you run that forward and assume they do it toward the end of that period, that should be about a $2.5 billion dollar inflow to us, so quite substantial. By then you'll have, you know, if we do nothing else, you should have another couple of billion dollars of free cash flow that we've generated.
Between now and then, the vast majority we expect to use to pay down debt.
Understood. Thanks for all the detail.
Our next question comes from the line of Stephen Grambling with Morgan Stanley. Your line is now open.
Hi. As a follow-up to your comments on the digital business hitting the 50% ROI, and I think you said 25%-30% margins, how important is market share as an input in those assumptions? Or zooming out, how do you think about scale benefits for this business in general?
We think there's clear benefits to scale in the business. You know, we expect that we're not going to remain static over time, particularly on the iGaming space. But, you know, it's important to me personally, that we prove that we can generate the returns that we've laid out for the investment that our shareholders allowed us to make before we're doing any, "Let's go out and try to grab significantly more share through promotions." You should expect us to be living in this band of market share that we've been living in. That's. Market share is ultimately not a target for us. It's, can we get the return on investment that we're looking for, as in the brick-and-mortar business. Market share falls out of that. It's not an input.
Makes sense. One other quick follow-up on, I think you said $1 billion in free cash flow next year. Within that assumption, do you anticipate being a cash taxpayer, excluding any asset sales? Perhaps just in general, when do you expect to be a cash taxpayer? Thanks.
No, we will not be a cash taxpayer in 2023. Bret, you wanna talk?
Yeah. We've got multiple years of runway before we're a taxpayer.
Helpful. Thanks so much.
Our next question comes from the line of Brandt Montour with Barclays. Your line is now open.
Hey, good afternoon, everybody. Thanks for taking my questions. Just a quick follow-up on the digital side, whoever wants to take it. Just curious on the iCasino roadmap that you just sort of started to sort of lay out for us, how should we think about any sort of incremental investment for that revised or new roadmap? Is that manageable within the, you know, existing OpEx that you're currently running in the business?
Yeah, I think, you know, as Tom mentioned, this is a really scalable business. When you're growing at 120% quarter-over-quarter, you know, we are gonna continue to staff up to handle state expansions, product improvements, those types of things, but not to the same pace as revenue and not even close to that level. We will have some slight increases in capitalized labor associated with the iCasino product next year. Any impact to the actual PNL will be fairly minimal.
From a promo perspective, it's a very different business than sports. While you will see some advertising activity around in local markets advertising our casino product, it's a very different scale in terms of launching the sports business. Certainly easily manageable within the numbers that I laid out earlier.
Oh, okay. Great. Thanks for that. That's really helpful. Then as a follow-up on Las Vegas, I guess no one's asked this macro question, so I might as well take a shot. Tom, you know, what are you guys seeing in terms of any sensitivity on the part of your FIT customers related to the macro? As a second part of that, you know, as Las Vegas continues to sort of evolve into a more sports-friendly destination, what have you seen from sports focused travelers in terms of gambling habits? Is that something that's a little bit of a concern, or is that something that it seems to be in line with other patrons in the market?
Yeah. Bret, we're. You know, we see the same macro going forward that others see in terms of fears of what happens with continued rate rises that crimp the consumer. Are we facing a recession? You know, we're not. We're certainly cognizant of what's out there. I can't point you to anything in our business in or out of Vegas that shows any slowdown in the consumer. We feel very good. October was obviously very strong. You see the third quarter. You know, we know what investors are anticipating. We're not seeing that in our business to date, nor in, you know, the forward metrics that we see, that we look at in our own business. In terms of, you know, sports is, you know, digital for us.
You know, we are getting over $200 million of incremental brick-and-mortar casino play out of customers that were sourced in digital. That number continues to grow. You know, sports in Vegas, the Raiders have been very, very good for the city, give us, you know, additional length of the stays on weekends that they're in town, generates a lot of incremental travel from visiting teams. That's been really a home run from the city's perspective, and we've been able to benefit.
Perfect. Thanks so much, guys.
Our next question comes from the line of Chad Beynon with Macquarie. Your line is now open.
Thanks for taking my question. Just one last follow-up on Vegas. I think we covered pretty much everything out there. Just on the piece with international, the opportunity to kind of bring that back as a tailwind, what do you think it's gonna take to get that business back? Is it passage of time? Is it FX related? Or is it really just kind of the sports and the holidays that bring in that customer, you know, maybe more on the VIP side? When do you think this can kind of inflect? Thanks.
Yeah. We just started to see that business start to come back over the last quarter or so. Obviously, this Chinese New Year will be the first without, knock on wood, without impact of the virus and with ability to travel. That'll be something we're watching closely. You know, as you know, here we've got Adele starting in middle of November, and I can tell you she's an enormous draw across the board, but appeals particularly to that international high-end clientele. We're excited about that. Chad, it's been, you know, two and a half years at this point. We understand that those people that were coming to Vegas to play, I don't think they stopped gambling. They found other places to do it when travel was impacted, and that's gonna be a long road as we build it back.
Thanks, Tom. Appreciate it.
As a reminder, if you'd like to ask a question at this time, that's star one one. Our next question comes from the line of Joe Stauff with Susquehanna. Your line is now open. Joe, your line is now open.
Oh, thank you very much. Thanks for fitting me in. I just had a question. You know, I believe your annual rent adjusts, maybe this month or later this quarter. What does it, you know, without the CPI caps, can you just give us what that number adjusts to and from? Just wondering, you know, you had mentioned that decision to keep the Strip assets, and wondering if that changes, you know, the way you think about, say, your investments. Do you have to now invest maybe in some of those older properties, as a result of that? Thank you.
Joe, on the VICI CPI escalator, it's 8.1%, which started on November first. Rent next year should be around $1.285 billion consolidated, including GLPI.
Gotcha.
In terms of investment, obviously, Joe, we're doing as much EBITDA as we've ever done here. The particular asset that we're talking about had some low-hanging fruit that we were talking to potential buyers about. You know, you shouldn't be surprised if we take advantage of that in the coming 12-18 months.
Makes sense. Thanks a lot.
That concludes today's.
All right. Thank you for your time. We'll talk to you next quarter.
Thanks a lot, everybody.
This concludes today's conference call. Thank you for participating. You may now disconnect.