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Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Third Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.
I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead, sir.
Thank you, Silvana, and good morning, everyone, and thank you for joining Penn National Gaming's 2018 third quarter conference call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first, I'll review the Safe Harbor disclosure.
In addition to historical facts or statements of current condition, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. 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 including future plans, strategies, performance, developments, acquisitions, capital expenditures, and operating results.
Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company reports on Form 10-K and Form 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements.
Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as on the company's website.
Thank you for your patience with that, and it's now my pleasure to turn the call over to the company's CEO, Tim Wilmott. Tim?
Thank you, Joe, and good morning, everyone, to Penn National's third quarter 2018 conference call. I'm going to have some introductory comments. And then follow me will be Jay Snowden, our President and Chief Operating Officer, who will give additional color on the operations for Penn in the third quarter of this year. And then following Jay will be BJ Fair, our Chief Financial Officer, who will provide certain financial metrics as well as provide details around the fourth quarter guidance for new Penn which is the full fourth quarter for Penn and for the Pinnacle properties, starting with the close that we had on October 15th to the balance of the year.
As we mentioned a couple of weeks ago, we closed on the Pinnacle deal on October 15th. We now are welcoming 12 new properties to the Penn family which will give us 40 facilities operating in 18 states. We've quickly engaged and began and will continue to engage over the next couple of weeks with these new properties to begin the budgeting process for 2019. We remain very confident in the $100 million of cost synergies that we previously have outlined which we said will be 50 % in year one and 50% in year two. And we also know now that by the end of the fourth quarter of this year, we will already be over $30 million of those synergies on a run rate basis by the end of Q4.
I did want to highlight other developments that have occurred and continue to progress in the third quarter. First, an update on the Margaritaville Resort in Bossier City, Louisiana. As we previously announced, we're purchasing the OpCo portion of this resort for $115 million. Our landlord will be VICI in a triple net lease format. It is the market's newest property, one that continues to perform very well in a relatively flat market. It opened in 2013. We expect to close by year-end on this transaction, and as we previously mentioned, the trailing 12-month multiple that we're purchasing this OpCo was – at 5.5 times and we now expect to be below 4.5 times post synergies as we get ownership of this and operate this in conjunction with the Boomtown facility that's part of the property – one of the 12 properties we picked up in the Pinnacle transaction.
We've also had some new developments and further clarity on our Category 4 licenses in the State of Pennsylvania. In mid-September we announced that we're going into a location just outside of York, Pennsylvania in a mall location on Route 30, which will require $120 million of CapEx. We'll open up Hollywood Casino York with 500 slot machines and 20 table games. We expect to open in 2020. And depending upon certain levels of approvals, we'll provide further clarity as we secure these approvals and a more definitive time line as we know more information.
And also yesterday, we announced our intent to invest $111 million at Hollywood Casino in Morgantown which will be a ground-up development right off the Pennsylvania Turnpike and Interstate 176, a great location that will give us access into the Western Philadelphia suburbs, into the Reading, Berks County area. And we think it's going to be one where we're confident to open up with full 750 slot machines which is the allowed amount – maximum amount allowed by that category here in Pennsylvania and 30 table games, with the opportunity to add 10 more table games one year post opening. Again, we think that's going to be a 2020 opening as well. And as I look at these two investments combined, slightly over $230 million, we feel very confident that these will generate north of 15% cash-on-cash return once these facilities get up and running.
Lastly and the final piece of my remarks, I wanted to just touch on the combination of Penn and Pinnacle, and the engine that will be delivered going forward generating significant amount of free cash flow where we'll continue to have the ability to delever – and BJ is going to cover some of our leverage levels, where we are today – but we want to stay focused on getting to a leverage level between 5 to 5.5 times rent-adjusted. It will also, with this free cash flow, give us the opportunity to look at tuck-in acquisitions like we announced with the Margaritaville deal in Bossier City, Louisiana.
And I want to remind the audience out there that we also have the ability, if we choose, to return capital to shareholders. We still have $75 million remaining on our share repurchase authorization to use free cash flow against as well. So as I think about and as we've talked about before and why we put the two companies together with the $100 million of synergies, we have a lot of opportunity to continue to grow our company, return capital to shareholders, and delever, which is something we're going to continue to focus on as we get into 2019.
With that, I'll turn it over to Jay Snowden.
Thanks, Tim. Good morning, everyone. Operationally, the third quarter was really a tale of two stories for us at Penn. We experienced some softness in Illinois and Mississippi due to the continued impact of VGTs, as well as some elevated promotional activity within our competitive set that we elected not to get involved in. We believe this dynamic will be short-lived but it did impact us in the third quarter nonetheless, as virtually all of our shortfall to EBITDA guidance was due to these two markets.
On the positive side and there's plenty to share, same-store sales growth when you exclude Mississippi and Illinois came in at low single-digits across the rest of the combined portfolio and was very consistent with the last several quarters. Top and bottom line strength continued throughout Ohio as well as all three of our properties in the West region.
Charles Town ended the third quarter with momentum as we launched retail sports betting in August. For the first full month of September, we saw sports betting handle of $7 million and over $1 million in sports betting win. And perhaps even more encouraging, we experienced nearly 10% growth in both table games and poker year-over-year, and introduced the property to thousands of new sports betters for the first time. And our company-wide property-level margins in the third quarter again improved by over 100 basis points year-over-year as we continue to find ways to operate smarter and more efficiently.
Transitioning to our database results, we again saw outsized gains in the high-end segment both in slots and table games driven by growth in visitation and spend per visit. Our unrated customer base also showed strength with growth in the low single-digits in the third quarter. Offsetting these results was the lower-worth rated (09:58) segments where we continue to refine our marketing strategies in an effort to reduce or eliminate unprofitable promotional spend.
And lastly, with regard to our integration work, all was positive in the first few weeks post close. Our industry best leaders on both sides continue to help us identify best practices and opportunities at the properties as well as in corporate. A lot more to share on our fourth quarter earnings call, but for now, we're off to a great start.
With that, I'll turn it over to BJ.
Thanks, Jay, and good morning. I'd like to start this morning by addressing a few key financial highlights in the quarter and present the revised 2018 financial guidance. At the close of the Pinnacle transaction, we funded our outstanding term loan commitments under our credit facility. In addition, we repriced our existing Term Loan B balance which took effect upon the close of the transaction. As a result, we increased our Term Loan A by $430 million for a total balance of $708 million, and we increased our Term Loan B to a total balance of $1.13 billion for a total variable debt commitment of $1.84 billion.
Our master lease obligations are primarily fixed, so with our master lease obligations combined with our $400 million unsecured notes and the other fixed debt obligations, we equate to a variable debt to fix debt ratio of 22% to 78%. Our percentage of variable debt rate will continue to decrease as we utilize our strong free cash flow to reduce our leverage. It's important to underscore that our lease obligations are not subject to the risk of rising interest rates nor are they subject to the potential tax deductibility limitations associated with traditional borrowings.
Further, commencing November 1, 2018, which is today, our legacy Penn mater lease annual rent payments will decline by approximately $11.8 million due to five-year revenue reset which is partially offset by a full escalator of $5.4 million due to the strong performance of our legacy Penn properties over this past lease year for a net annual benefit to the company of $6.4 million. Our Pinnacle amended master lease has revenue resets every two years with the next reset occurring in May 1, 2020.
Subsequent to the Pinnacle transaction, we remain undrawn on our revolver with approximately $670 million of availability on the facility. Our total leverage ratio post transaction is consistent with our original expectations upon the announcement of the Pinnacle transaction, and we intend to return to our target leverage ratio of 5.0 to 5.5 times EBITDAR within 12 to 18 months. Our current financial position allows us to remain opportunistic in looking for additional accretive acquisitions and/or returning capital to our shareholders via our previously announced share repurchase program.
Finally, I'd like to provide an update to our 2018 guidance to reflect the combined company post the Pinnacle transaction. While we recognize that there are many variables that impact the historical reporting of these numbers such as the impact of the divested properties, the combined corporate structures, and the mid-quarter close, we really like to emphasize that the following guidance for the combined company is consistent with our projections for 2018 that we outlined in our S-4 which we reported subsequent to the announcement of the transaction. Consistent with past practices, we'll provide further guidance for 2019 during our Q4 earnings call in February.
So our revised guidance and underlying assumptions are found on pages 5 and 6 of the press release. The guidance reflects estimated results for the entire quarter from the legacy Penn properties and the projected results for the previous Pinnacle properties, or what we call our new Penn properties, commencing on October 15th. The revised revenue guidance for the full year is $3.582 billion, $1.149 billion incurring in the fourth quarter; adjusted EBITDAR of $1.038 billion with $318 million in the fourth quarter; and adjusted EBITDA after master lease payments of $501 million, $129 million in the fourth quarter.
Our maintenance CapEx is expected at approximately $107 million for the year, $52 million of that is expected in Q4 which does include the increment necessary for our new Penn properties. Master lease rent payments, including the Penn Master lease, the amended Pinnacle lease, and the Meadows lease are forecasted to be $537 million, $190 million of which is incurred in Q4.
As of 09/30/2018, the Penn Master Lease rent coverage was 1.87. As I mentioned earlier, we'll benefit from an approximately net $6 million rent reduction after five-year revenue reset and any impact of the upcoming escalators. $1 million of the benefit will be realized in 2018. We have decreased our cash tax estimate for the year to $27 million. Due to tax benefits associated with the transaction, we have decreased cash taxes in Q4 to approximately $4 million.
Cash interest on the traditional debt has increased to $70 million as a result of the incremental term loans, $19 million of which will be in the fourth quarter. Free cash flow generation for the year is estimated at $302 million, and net free cash flow after mandatory debt payments and severance is expected to be $243 million. Cash on hand as of 09/30/2018 was $244 million and, as usual, our debt covenants will be comfortably met.
As a final note, I wanted to call everyone's attention to page 15 of the press release to commencing with our year-end results we will be changing our reporting segments. The details of our new reporting segments are outlined on page 15 of the press release.
And with that, I'll turn it back to Tim.
Thank you BJ. Hearing BJ talk about the five-year rent adjustment reminds me that today is the five-year anniversary of the creation of GLPI and the splitting up of the OpCo and the real estate back in November 1, 2013 which just seemed like yesterday to all of us.
With that, operator, we're ready to take questions from the audience.
Thank you. And our first question comes from the line of Steve Wieczynski with Stifel, Nicolaus. Please proceed with your question.
Yeah. Hey, guys, good morning. So, Jay or Tim, I want to be sure we heard this correctly and that's, I guess, if we exclude essentially Illinois and Mississippi, the underlying trends in your business really have not changed at all and in fact remain pretty healthy. Am I thinking about that the right way? And, Jay, I know you commented on the unrated play being for the most part pretty strong, but are there any markets out there where you've seen that unrated play soften at all?
Sure. I'll take that. You heard me exactly right. Outside of Mississippi and Illinois where there's some elevated competitive issues going on that again we didn't participate in in the third quarter and don't plan to, we think they'll die back down as they usually do in today's operating environment. The rest of portfolio looks very consistent with what we've seen over the last several quarters.
The only other exception to that, of course, as you saw in September we were hit a little bit with Plainridge Park with people taking a look at the MGM property in Springfield and perhaps the Tiverton property in Rhode Island. But we've seen trends in October come back to close to normalized level, so we don't think that was the beginning of any new trend in Massachusetts.
But the rest of portfolio looks good, visitation looks good on the unrated side, VIP trends look good. The only softness that we're seeing and a lot of it is we're continuing to institute changes at the low-end rated segments that are dropping visitation a bit, but the visits that come in are more profitable, so that trend will likely continue.
Okay. Got you. And then, Jay, you did talk about certain markets out there that have become overly promotional during the quarter. You guys didn't follow suit. But I guess the question is, if you guys lost some share on those markets as certain operators did become more promotional, how much longer do you think operators will remain somewhat rational around the promotional spending environment, if they do see others pick up share? I don't know if that – I hope that makes sense.
It does. Look, I mean, we're not and I think most of our competitors are not going to chase monthly gross revenue numbers. It's just a race to the bottom. I mean that's been proven out over the last few years. And so, our publicly traded competitors I think are focused on EBITDA and margins and that's certainly where our focus is. Where we've seen some elevated spend is on the private ownership side, both in Mississippi as well as in Illinois.
And so, I don't think it will last because you might benefit for the first month or two but that incremental spend when same-store sales growth are organically low single-digit, it's just not going to benefit your bottom line longer-term. So, I don't anticipate it's the beginning of any significant or troublesome trend. I think it's what happens every now and then in some of these markets. We're seeing it largely in Tunica, a little bit on the Gulf Coast, and then in Chicagoland right now.
Okay. Got you. Thanks, guys. Appreciate it.
Thanks, Steve.
Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.
Hey, everybody. Good morning. Thank you. Tim, Jay, BJ, just big picture as I think about your prior 4Q implied guidance for Penn; you guys were looking for about $215 million just backing in your full-year with your 3Q guidance. If you think a little bit more about kind of the Pinnacle assets that you brought in probably generated somewhere around $45 million to $50 million, last year, you're obviously getting a stub period of those assets, so Pinnacle contributes a little bit more than $100 million, kind of gets you into a range of like $315 million to $320 million, with your guidance at $318 million.
Acknowledging that, when you layer in the synergies that you've recognized so far, is there some conservatism in there, or did the Penn and/or Pinnacle guidance for the 4Q implied to get to the $318 million that you're guiding to, did either of those kind of projections come in a little bit?
Good question, Carlo. There's a lot of factors, as you just laid out, in our fourth quarter guidance given all the variables that BJ covered in his opening remarks. We did include a little bit of conservatism in Illinois and Mississippi continuing into the fourth quarter just because we don't have complete control over the elevated spend that we're seeing right now. So, that would be the only difference from where we were anticipating guidance previously on Penn stand-alone.
But when you combine Pinnacle and Penn, our results for the year as well as for fourth quarter are very consistent with what we put out there in our S-4. So, there's really no deviation to be concerned about. We're just again making sure that we're looking at Mississippi and Illinois the right way as we head into the final quarter of the year.
Great. That's very helpful. And then – I don't know if you mentioned – I could have missed it in your prepared remarks, but did you comment at all about kind of what you're seeing in October. And if not, would you be able to shed any light on kind of how October has looked coming out of the 3Q?
Yeah. No problem, Carlo. I did not mention that. I probably should have. October looks very similar to third quarter and previous quarters in that Mississippi, Illinois it's still a bit challenging at the moment; the rest the portfolio looks good, seeing same-store sales growth and healthy flow-through.
Awesome. Thank you very much.
Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.
Hey. Good morning. Just wanted to touch on, I think, in the release you guys hit on the new Pennsylvania satellite casinos and the opportunity there. Could you just walk us through, whether it's BJ or Tim, a little bit of timing around on both the CapEx and license fees that are going to go into those, and then just what the kind of general contribution and strategy behind those opportunities are?
Shaun, let me take a shot at that. We have already paid the State of Pennsylvania the license fees for York and Morgantown. If you remember, York was paid in the beginning part of this year, $50 million, in that neighborhood; and the Morgantown license was $7.5 million or so. So that's already been paid, and that's inclusive of the numbers that I gave in my introductory remarks of York being total CapEx of $120 million and Morgantown being a total CapEx of $111 million. Really you're going to see most of the CapEx occur in 2019 and 2020. It's difficult to be more specific than that, until we get the required approval to begin the construction work.
Yeah, no, I think that's exactly right. We're going through both with the local as well as the Gaming Commission's final approvals. The construction period for both will be between 12 to 18 months. And so, as soon as we have that, we'll get proceeding and the spend will be a typical spend based upon that construction period.
Great. And the other thing I just wanted to touch on a little bit was sort of a competitive supply of the portfolio continues to get bigger, it gets harder and harder to keep track of all of the puts and takes property to property. I think, Jay, you called out the impact that you saw a little bit from maybe trial over at MGM Springfield in Plainridge. Anything else as you look out to 2019 beyond let's call it the Massachusetts market where we know there's additional supply coming that people should be focused on or looking out when they're kind of looking at underwriting the outlook?
No, the only two factors that I would throw out there, Shaun, and we think long-term the additional hotel rooms and casino expansion of Monarch and Blackhawk is going to be terrific for us. We have the best asset in the marketplace and just don't know what that short-term impact is going to be when they open mid-2019. So, we'll obviously be staying close to that, but we've had the properties now for 2.5, 3 weeks so we're still in a bit of a learning mode and we'll be spending time at the Black Hawk property leaders here in the near future.
And then the only other factor to consider is there is going to be bridge work and I think it's been well documented, certainly by the media and most of you that cover the space, on the bridge outside of Lake Charles. So, that could impact the market in general. But again, long-term, we feel terrific about where we can take that business over the coming years, but 2019 there could be some impact with that bridge work.
Great. Thank you very much.
Thanks, Shaun.
Our next question comes from the line of Harry Curtis with Nomura Instinet. Please proceed with your question.
Good morning, everyone. Tim, you talked or prioritized about what your use of free cash flow would be beginning with deleverage, then tuck-ins, then perhaps returning capital. Wanted to focus on the acquisition side. If you could give us a sense of whether or not asking multiples have moved down at all to reflect the at least decline in public equity market valuations.
Harry, that's a tough one to speculate on. We just saw today that Churchill Downs is buying a majority interest in Rivers in Des Plaines, Illinois. And looking at the math that we saw out of the announcement, the multiple there was north of 11 times. So, based on today's news, I would say just in short the answer is no, not yet. We haven't seen any change in multiple expectations given what's happened with the equity markets.
So, then thinking about maybe the next 18 months as you integrate Pinnacle, do you have much of an appetite for larger acquisitions? And the reason I asked that is that you now have 40 properties, you have some exposure to Vegas, not a lot; what is your – I don't know if there's the right way of asking it, but what's on your wish list from a strategic point of view as you think about growth for the next three years?
Well, we certainly will take advantage of opportunities like we had in Margaritaville. If we get those kind of opportunities that make sense that give us an expanded footprint beyond the 18 states, that's important to us. But obviously with what we're building combining Penn and Pinnacle with our Las Vegas Service Center and the ability to have a cost structure that even going to be more efficient a year from now than it is today, we think we're going to be able to generate a lot of tangible synergies with acquisitions where we're plugging in another asset or two into our corporate center.
So, it's all about the return profile, the ability to get access to new and additional markets, and what opportunities are out there and what are the seller's expectations. But like I said in my introductory comments, we're going to be generating a lot of significant free cash flow to delever, give us the opportunity to look at these acquisitions where it makes sense for our shareholders, and if we have an opportunity to return capital shareholders, we'll do that as well.
Thanks, Tim.
Our next question comes from the line the Felicia Hendrix with Barclays. Please proceed with your question.
Hi. Good morning. Just in Mississippi and Illinois, is there anything that you can do to mitigate the pressures? I know that you guys have an ongoing margin expansion program but what can you do to kind of improve things there despite the competition?
Sure, Felicia. Look, there's a number of things that we can and really test on a regular basis from a marketing standpoint. We're very focused on the mid-worth and high-worth segment. We're not going to chase low-worth rated customers that are perhaps unprofitable if you get into a bit of a pricing war. And so we're not going to do that. But there's a lot of things that we can do to drive unrated business that we are in the process of doing, driving more visitation from, again, our mid-worth and high-worth customers. Cost structure is fine; we just got to stabilize the revenues and that's our focus right now.
Okay, that's helpful. Thanks. And then now that you're starting to dig in in Pinnacle, and I know it's early days, and I also know you guys are going to give us more color on your next quarter; but how are you thinking about things now versus how you – and I know what you said before like in terms of the EBITDA and things like that, that's unchanged. But I'm primarily thinking about what you anticipated you could get from revenue synergies before versus what you think you could get now that you can actually dig in and see things? And then also if you could just remind us of how you're going to think about the combined loyalty program and the leverage that, that could give you?
Yeah, Felicia, I think my answer goes – will respond to both. I mean the revenue synergies are largely database-driven; cross-property visitation, exposing the new Penn property database to our social product offerings and our Las Vegas destination properties. So we're, again, 2.5, 3 weeks in. So we continue to feel like we're getting better data, we got full access obviously to the customer databases. We're starting to do a lot of comparisons and analysis. So we're just in the very, very early innings.
I don't want to start to speculate now when I think I'll have a much better handle come early February, when we're going through 2019 guidance, what those revenue synergy opportunities are. That will be the right time to do it. But we're going through property-by-property budget reviews. We started them last week and for the next three weeks, and it's encouraging. Every review we go through, something new is identified that we hadn't thought about previously whether on the revenue side or on the cost side. So, we're feeling good and I think that we'll be able to articulate what those are and be specific in our response to your questions come February.
Thanks. And I know there's a lot of complexities with this, particularly with systems, but how long do you think it'll take for the loyalty program to be one?
We're targeting sometime in the first half of 2019, Felicia. So, a lot of it is just system integration. The markets that are most competitive, i.e., St. Louis where we have two properties – one was an existing Penn property, one is a new Penn property – will be on the front-end of that schedule. And then we anticipate having the entire company on one loyalty card program no later than mid-year 2019.
Okay. Thanks. And my final one is can you just tell us what you're seeing in Las Vegas? Two things. One is Tropicana specifically, how things are going there? But also just in Vegas in general both for – to kind of think about the fourth quarter and how you might be thinking about next year?
Sure. I mean, we have some visibility into 2019 and what we're seeing I think was consistent with what I heard MGM say which is that Q1 group business is pacing ahead of 2018 which is a good sign. I think people have a pretty good handle on what's going to come in the fourth quarter. Obviously, we're lapping the tragic events of October 1, 2017. So, our trends right now in Las Vegas are very good both top line, bottom line, margins are terrific. We've got some initiatives that are really starting to take hold at Tropicana and M Resort, and you see the locals results that are reported monthly is very healthy. We wish we were in the locals market in a bigger way in Las Vegas and Resort's has been a terrific earner for us and more to come on potential expansion ideas there. But overall, we're feeling positive about Vegas heading into the New Year.
Great. Thank you so much.
Our next question comes from the line of Joe Greff with JPMorgan. Please proceed with your question.
Good morning guys. Jay, I think you may have answered this but you said in your earlier comments about the dynamics in Illinois and Mississippi that you think it could be short-lived. And then you mentioned October, you're seeing similar trends there. So are you seeing any change in activity there or is that – you're just surmising that uneconomic activity at some point will cease?
I think the latter. We're still seeing – it's there in October. We can't predict what's going to happen in the coming months. But there's typically promotional flare-ups. Again, it's nothing broad-based. It's specific to one operator in the Gulf Coast, again, this is within our competitive set; one operator in Tunica, Mississippi; and one or two in Chicagoland. So this is not everybody in the marketplace and I don't see everybody, quite frankly, jumping in or responding either as we've taken a disciplined approach. I think others, certainly in the publicly-traded side, have done the same from what we can see in our competitive shops. (00:34:59) So again, we've built in a little bit of conservatism in those markets in Q4 because I can't predict exactly how this will play out but I don't anticipate it being long term.
Got it. So it's implied in the 4Q, is this similar impact that you experienced in the 3Q?
That's correct.
Got it. And then so when I look at your earnings release today and I look at the EBITDA variance relative to your guidance, it's $6.393 million. That's entirely related to Illinois and Mississippi?
It's over 90% with the balance really being Plainridge having a soft September due to the visitation I mentioned earlier to MGM, Springfield, and Tiverton.
Great. Thanks, Jay. Thanks, guys.
Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.
Hi. Good morning, all. Now that the Pinnacle deal is closed, I think one of the MOs of Penn has typically been a decentralized structure. But my sense is that that's moving or drifting in the other direction. With other branded companies, let's say, arguably being maybe the ones that you've worked for before being the most centralized. How are you thinking about that spectrum and where you want to put this to capture as much synergy as you can and derive as much benefit from the bigger system?
It's a great question, David, and my short answer is it's all about balance. And we – many of us have lived through companies that have gone really far on that end of the centralization spectrum, and we're trying to strike the right balance. We think that Pinnacle did a lot of things really well as an organization of which we were headed down that path on the Penn side and hit pause once the deal was announced because we didn't want to create redundancies in Wyomissing along with the Las Vegas Service Center.
So, we really view it as, we want the properties to maintain their edge from a marketing and a competitive perspective. So we're not looking to go as far as some companies have where you're making strategic marketing-based competitive decisions out of one location, call it, Las Vegas or Pennsylvania. We want to maintain that edge. It's made us who we are as a company. We're leader in most of the markets where we operate. And so, we're going to maintain that balance but we will be taking a lot of cost out of quite frankly the Penn National Gaming existing properties by the fact that we can do a lot better by leveraging our size, our scale, our purchasing power and a lot of areas in finance, in marketing, in IT that need to be centralized, and we're in the process of doing that.
So, we'll strike that right balance. We've got – properties are incentivized on their property-level results and so they've got to maintain a significant level of autonomy to be able to deliver against that, and we don't see ourselves drifting from that model now or in the future.
David, this is Tim. Our message to property management is that they're responsible and accountable for their property-level performance, so they have to be the ones making the decisions how they compete in their local markets. We're not going to do that centrally. But for things that don't touch the customer or don't engage the team members that really are just administrative tasks like payroll and accounts payable, those are things that we are looking to centralize and reduce our overall cost of delivery for those administrative tasks. And that's how we think about how far we want to push centralization versus autonomy.
If I can follow that up and just be a bit more pointed about it. The bigger you get, the more centralized – does that necessarily mean the more centralized you have to become?
I don't think so, David. I think it's really more about the functions and the activities than the size of the company. Again, the model that we have in place today that Tim and I both just described, we're going to keep that in place. We think we can best compete in each one of these markets by allowing the local property leaders to have the decision rights that allow them to compete. And so, that's not going to change. But everywhere and anywhere where we can take tasks or duties away that are, again, not touching the customer or more administrative in nature, we're going to look to do that now and forever.
Got it. Perfect. Thank you very much.
Our next question comes from the line of Barry Jonas with SunTrust. Please proceed with your question.
Hi. Good morning, guys. Just a couple. Maybe I missed this, but can you maybe comment on how sports betting has played into the Mississippi results so far? And then just relating to Pennsylvania, how do you see sports and iGaming economics playing out given the tax rate and fees? Thanks.
Sure. Yeah. No problem at all. Look, I articulated what our results are at Charles Town which have been very encouraging. Again, the dynamic at Charles Town is that we offer retail sports betting on the Eastern Panhandle and sports betting is not legal at this point in Virginia or Maryland, so we've seen some great results in Charles Town and as solid as our September results were of $7 million in handle, we're seeing that in October, it's up about another 20%. So, very encouraging on the sports handle side and related activity at Charles Town.
Our Mississippi properties are pretty small properties, so we've seen some incremental foot traffic. We are seeing some activity on the sports betting side. But in Biloxi and Tunica, we have not seen the same improvements to the other pieces of business that we're experiencing at Charles Town, and that was to be expected. We weren't expecting anything significant given the size of properties we have in Mississippi, but it's definitely a net positive from a traffic flow perspective.
And then, with regards to Pennsylvania, and we said that publicly yesterday that we're looking to go live with retail sports betting sometime mid to late November. We're just waiting on final approvals for both us and our operating partner, William Hill, from the regulators and we'll be live and taking bets before December.
And with regard to online commercial gaming, we're still anticipating an early Q1 launch. I think the tax rates are well-known. They're the highest both in sports betting and online commercial in Pennsylvania than any other state at this point and hopefully it stays that way, that no other states are competing with Pennsylvania at these tax rate levels. But we're going to be smart, we're going to be disciplined, and we're going to operate these businesses to make money.
Okay. Great. And then just one more. Clearly, VGTs are impacting Illinois. But maybe on the flip side, can you talk about the outlook for Prairie State Gaming in Illinois and maybe any other new jurisdictions?
Yeah. I mean, I'll speak to Illinois because we're not seeing anything in the near future in other jurisdictions. Our Prairie State Gaming business is doing great. It's growing at or ahead of the VGT market in Illinois. Our team, led by John Canham, there continues to do a great job. We've had some small tuck-in acquisitions over the last several years. And on a stand-alone basis, it's great. It's just that obviously the riverboat casinos have seen their market share or their overall market decline by over 20% since the advent and introduction of VGTs.
And there's just – they're nipping at the heels of the properties depending on who your competitive mix is. And I don't see that going away other than we do see the VGT approval starting to slow down finally in Illinois. So, good on the one hand with Prairie State and challenging on the other hand with our three riverboat casinos there.
And, Barry, this is Tim. We will get involved where we can in the Pennsylvania truck stop opportunity for VGTs to continue to expand our footprint into that platform as well, although it's going to be on a much smaller scale in Pennsylvania when that kicks off.
Great. Thank you so much.
Our next question comes from the line of John DeCree with Union Gaming Group. Please proceed with your question.
Good morning, everyone. Thanks for taking my question. Just one for me. Jay, I think in response to a question you talked about maybe one of the revenue synergy opportunities is getting the Pinnacle player database up onto your social gaming network and we think about your footprint now across the U.S. being much larger. What's the strategy for the social gaming interactive iGaming at a high level? Is that an opportunity where you'd look for more growth or tuck-in acquisitions? I guess, more broadly, how do you think about with the bigger network your approach to the online space?
John, this is Tim. I'll take that. Clearly, we're going to take advantage of the potentially up to 2 million additional players we're getting with the Pinnacle properties that we're absorbing today. I think longer-term, we're taking a very broad look at the fact that we have expansion of sports betting that we think is going to occur in 25 to 30 states in the next five to seven years, it's potential with and its relationship with iGaming, and how do we think about taking advantage of the right partners and the right players to take advantage of this across the United States.
We're talking to people honestly that I never thought we'd talk to before – large media companies, potential B2C partners – and we're taking we're taking a pause to see where the best long-term play is for Penn National that includes iGaming with sports betting. So that's how we're thinking about it. We've seen other competitors in our space already announced who they're making their deals with. And we want to make sure we get it right long-term and don't feel pressed that we have to be up to running for this football season. But I think you'll see in the next couple quarters we'll finalize our strategic thoughts on this opportunity and articulate it to the Street when we're ready.
And the only other point I would add on the social business is we said from day one and it's continued to play out since the acquisition of Rocket Speed that this is a great opportunity for us not only to generate cash flow in the short-term but to prepare us for real money online gaming, and we have a team in place, three locations across the country. We have CRM teams. We have acquisition teams. And we've learned a lot. I mean, obviously – and play for fun is different than play for cash, but there's a lot of similarities and we feel as though we're in a good place in preparation for going live in Pennsylvania in the first quarter, and we'll be prepared for any other jurisdiction where we operate today.
Great. Appreciate the additional color. Thanks, guys.
And our final question comes from the line of Chad Beynon with Macquarie. Please proceed with your question.
Hi. Good morning. Thanks for taking my questions. Regarding the synergies, before today, I think we're all thinking about $50 million of the $100 million in year one, $50 million in year two. So given that you noted that $30 million will be implemented by the end of the fourth quarter, should that change how we're thinking about the weighting of the $100 million year one versus year two? Thanks.
Thanks, Chad. For now, I would say I would keep your models with $50 million and $50 million. Obviously, you're going to get out a lot of it day one just because you've eliminated the redundancies between our two corporate offices. And some of these take a little bit of time for system integration purposes, you have to get your resources in place at the property level before you bring something on to corporate and vice versa.
So I wouldn't change your modeling at this point, and we'll have certainly more color for you in early February when we cover 2019 guidance in terms of not just the cost synergy sequencing and cadence but also how we're feeling about revenue synergies.
Okay. Thanks, Jay. And on that note, just for the fourth quarter guidance, I know you went into some details on this and said it's kind of right on schedule with what was outlined in the S-4. Is there some additional corporate carrying costs that went into the fourth quarter that may have brought that down by a couple of million, or is that not fair to assume?
No, no. I think our corporate expenses were consistent with what we had (00:48:24) we've got the corporate allocations that were included in there. So I think it's relatively consistent with what we had on the S-4.
Okay. Thanks. And then the last one for me, BJ, depreciation, we see that in your guidance for the fourth quarter, it went up to $66 million. If we adjust that for the full quarter with Pinnacle, is that kind of a fair number to assume for 2019 just as we think about free cash flow for next year? I know that you're not giving guidance but just know that we have the stub depreciation for 4Q, any color there would be helpful. Thank you.
Yeah, no. Let's get back to you with respect to the depreciation expectations for 2019. I think that we're very comfortable with what we've laid out for the Q4 here. But for 2019, let us come back and provide that full guidance for you at that time.
Okay. Thank you very much.
Thanks.
And Mr. Wilmott, I'll turn the call back to you. Please continue with your closing remarks.
Thank you, operator. I want to thank everyone for their attention this morning to our earnings conference call and look forward to – when we're back together in early February, to give you an update on the integration work where we're in the midst of right now and putting Penn and Pinnacle together, along with what that means for 2019 guidance. Everyone, have good holidays and we'll be back in touch in about 90 days. Thanks.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.