Penn National Gaming Reports Record Fourth Quarter Net Revenues of $1.155 Billion and Operating Income of $124.4 Million

Penn National Gaming, Inc. (PENN: Nasdaq) (“Penn National” or the “Company”) today announced financial results for the three months and year ended December 31, 2018 and established 2019 first quarter and full year guidance. The financial results for the three months and year ended December 31, 2018 reflect the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”) on October 15, 2018 (and the divestiture of four Pinnacle properties simultaneous with the completion of the transaction).

Timothy J. Wilmott, Chief Executive Officer, commented: “I am pleased to report that Penn National beat guidance for the fourth quarter, with improvements across the board in our principal financial metrics. These results were driven by contributions from the Pinnacle acquisition and continued growth in our same-store portfolio of properties.”

2018 Fourth Quarter Financial Highlights:

• Net revenues of $1.155 billion, an increase of $386.3 million, driven primarily by contributions from the Pinnacle acquisition;
• Operating income of $124.4 million, an increase of $97.6 million, with a net loss of $42.0 million, driven largely by one-time transaction costs associated with the Pinnacle acquisition;
• Adjusted EBITDAR of $323.9 million, an increase of $124.8 million, driven by a $113.0 million contribution from the Pinnacle acquisition and growth of $11.8 million, or 5.9%, in the Company’s same-store portfolio of properties;
• Adjusted EBITDAR margins increased by 210 basis points to 28.0%; the Company’s same-store Adjusted EBITDAR margin increased by 150 basis points to 27.4%, with 17 of 23 gaming operations delivering improved same-store margins;
• Adjusted EBITDA, after Lease Payments of $133.5 million; and
• Traditional debt increased by $1.36 billion during the quarter, principally as a result of the additional debt incurred to partially finance the Pinnacle acquisition and a $100.0 million draw on our revolving credit facility to finance our acquisition of Margaritaville Resort Casino (“Margaritaville”) on January 1, 2019. As of December 31, 2018, on a pro forma basis for the acquisitions of Pinnacle and Margaritaville, our traditional net debt ratio was 3.12x and gross and net leverage inclusive of master lease obligations were 6.12x and 5.87x, respectively.

“The fourth quarter marked the end of a transformational year for Penn National,” continued Mr. Wilmott. “With the closing of our acquisition of Pinnacle in October, we added over 10,000 new team members and 12 gaming properties to what was already the industry’s leading regional gaming portfolio. In addition, we obtained the approvals for our acquisition of Margaritaville in Bossier City, Louisiana in the fourth quarter, and we announced our acquisition of Greektown Casino-Hotel (“Greektown”) in Detroit, Michigan, which will expand our operating base to 42 facilities in 19 jurisdictions following receipt of all remaining customary approvals. Both transactions are expected to be immediately accretive to operating results upon closing.

Pinnacle Integration Update

“As anticipated, we remain well on pace to achieve our two-year, $100 million run rate cost synergy target, with a run rate of $50 million anticipated in 2019 and an additional $50 million expected by the end of 2020,” continued Mr. Wilmott. “We have begun to focus on revenue synergies and plan for initiatives to commence in late-2019. We currently anticipate incremental Adjusted EBITDAR associated with revenue synergies related to Pinnacle to be in the range of $15-$20 million. The majority of those synergies should be realized in 2020 and early 2021. As noted in the tables below, Penn National incurred significant one-time transaction costs and charges in the 2018 fourth quarter. We anticipate our transition-related expenses to stabilize as we complete our integration efforts later this year,” said Mr. Wilmott.

Strong M&A and Expansion Opportunities

“On January 1^st, we completed the acquisition of the operations of Margaritaville for total consideration of $115 million and welcomed their nearly 1,000 team members to Penn National,” continued Mr. Wilmott. “The transaction was financed with incremental borrowings under our Company’s revolving credit facility with the purchase price representing a multiple of approximately 5.0x trailing twelve months adjusted earnings before interest, taxes, depreciation, amortization, and management fees for the period ended December 31, 2018. We expect the purchase multiple will be reduced to below 4.5x based on projected operating synergies and cost savings. Simultaneous with the closing of the transaction, Penn National entered into a triple net lease agreement with VICI Properties Inc. (VICI: NYSE) (“VICI”) for the Margaritaville facility (the “Margaritaville Lease”).

“In November, we announced another accretive transaction in combination with VICI for the acquisition of the operations of Greektown for approximately $300 million,” continued Mr. Wilmott. “We are excited to be entering the Detroit market, which is the beneficiary of billions of dollars of new investments in the city’s residential, commercial, entertainment and cultural center, all of which are driving new residents, businesses, tourists and employment to the downtown area. The transaction will be financed with a combination of cash on hand and debt. The waiting period for Hart Scott Rodino antitrust review has expired and we are targeting a second quarter closing of this acquisition, subject to state regulatory approvals.

“Meanwhile, in Pennsylvania, our development efforts continue on our planned $120 million Hollywood Casino York and the $111 million Hollywood Casino Morgantown developments,” continued Mr. Wilmott. “The Pennsylvania Gaming Control Board (“PGCB”) has held the local community impact hearing for the casino in York and has set March 4^th for the community hearing on our Morgantown project. Meanwhile we are working with local government officials on the necessary local permits and approvals for the development of the projects. The construction timetable for both facilities is anticipated to be approximately 12-18 months following receipt of all requisite approvals, including final licensing by the PGCB,” said Mr. Wilmott.

Return of Capital

“Finally, in December, the Company repurchased approximately 2.3 million shares at an average price per share of $21.74 for a total of $50 million,” said Mr. Wilmott. “This was conducted under the Company’s $100 million share repurchase program that expired on February 1, 2019. Our Board of Directors approved a new $200 million share repurchase program that is in effect until December 31, 2020. The new authorization reflects our confidence in the Company’s growing free cash flow from operations and is consistent with our historical practice of providing management the flexibility to allocate capital to share repurchases, debt reduction, and/or accretive transactions,” said Mr. Wilmott.

Near Term Focus

“As we head into 2019, we’ll be principally focused on completing the integration of Pinnacle and our latest acquisitions, with a goal of creating a new organization that capitalizes on the talents and strengths of all of our team members, while continuing to generate significant free cash flow for our shareholders,” concluded Mr. Wilmott.

Summary of Fourth Quarter Results

Review of 2018 Fourth Quarter Results vs. Guidance

Financial Guidance for the 2019 First Quarter and Full Year

The Company’s first quarter and full year guidance targets reflect the anticipated impacts of several items, including the ongoing bridge work in Lake Charles, Louisiana and the hotel and casino expansion at Monarch Casino in Black Hawk, Colorado. In addition, the table below is inclusive of projected results from Margaritaville, which was acquired on January 1, 2019, but does not yet include the projected results of Greektown. Finally, the guidance is based on the following assumptions:

• Corporate overhead expenses, which is net of allocations to our properties, of $98.6 million, with $24.7 million to be incurred in the first quarter;
• Depreciation and amortization charges of $398.8 million, with $102.8 million in the first quarter;
• Lease payments (which continue to be fully tax deductible) to our REIT landlords under our triple net leases of $839.4 million, with $209.8 million in the first quarter. This includes projected full escalator payments of $0.9 million under our existing triple net master lease with GLPI (the “Penn Master Lease”), $0.7 million under the triple net master lease with GLPI, which we assumed and amended as a part of the Pinnacle acquisition (the “Pinnacle Master Lease” and collectively with the Penn Master Lease, the “Master Leases”) and $0.2 million under the Meadows Lease;
• Maintenance capital expenditures of $188.4 million, with $27.8 million in the first quarter;
• Project capital expenditures for Hollywood Casino York and Hollywood Casino Morgantown of $15.0 million and $21.5 million, respectively, with $0.7 million of spend in the first quarter for each facility;
• Cash interest on traditional debt of $126.0 million, with $38.5 million in the first quarter;
• Interest expense of $854.4 million, with $212.3 million in the first quarter, inclusive of interest expense related to the financing obligations associated with our Master Leases;
• Cash taxes of $16.8 million, with $5.0 million in the first quarter;
• Our share of non-operating items (such as depreciation and amortization expense) associated with our Kansas JV of $3.7 million, with $1.1 million to be incurred in the first quarter;
• Estimated non-cash stock compensation expenses of $14.0 million, with $3.5 million to be incurred in the first quarter;
• LIBOR is based on the forward yield curve;
• A diluted share count of approximately 119.0 million; and
• There will be no material changes in applicable legislation, regulatory environment, world events, weather, recent consumer trends, economic conditions, oil prices, competitive landscape (other than listed above) or other circumstances beyond our control that may adversely affect the Company’s results of operations.

The guidance table below includes comparative prior period actual results.

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Segment Information

During the fourth quarter 2018, the Company made revisions to its reportable segments upon the consummation of the Pinnacle acquisition in order to maintain alignment with its internal organizational structure. Apart from the addition of the new properties, the most significant change was dividing the South/West segment into two separate reportable segments. The periods prior to October 15, 2018 have been restated to provide comparability, but do not reflect the pre-acquisition operating results of Pinnacle.

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Reconciliation of Comparable GAAP Financial Measure
to Adjusted EBITDAR and Adjusted EBITDA, after Lease Payments

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Supplemental Information
2018 Impact of Adopting New Revenue Standard

Selected Financial Information

Balance Sheet Data

Kansas Entertainment Distributions

The Company’s definition of Adjusted EBITDAR adds back our share of the impact of non-operating items (such as depreciation and amortization) at our joint ventures that have gaming operations. At this time, Kansas Entertainment, the operator of Hollywood Casino at Kansas Speedway, is Penn National’s only joint venture that meets this definition. Kansas Entertainment does not currently have, nor has it ever had, any indebtedness. The table below presents cash flow distributions we have received from this investment.

Cash Flow Data

The table below summarizes certain cash expenditures incurred by the Company.

Share Repurchase Activity

During the fourth quarter 2018, the Company repurchased a total of 2,299,498 shares of its common stock at an average price of $21.74 for $50.0 million pursuant to its share repurchase program that expired on February 1, 2019. In total, under this program, the Company repurchased 3,563,647 shares of its common stock for $74.8 million. All repurchased shares were retired.

On January 9, 2019, our Board of Directors approved a new $200 million share repurchase program, which is in effect until December 31, 2020.

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Supplemental Segment Information - Combined for Pinnacle Acquisition

Although Penn National did not own Pinnacle for the entirety of the periods and year presented below, the Company believes the following financial information is useful to investors to assess the value this transaction brings to the Company and its stakeholders.

The following financial information shows the Company’s reported results for the periods or year presented, the results of the acquired Pinnacle properties for the applicable pre-acquisition period or year presented, and the combined Company results as if the Pinnacle acquisition was completed at the beginning of the period or year presented. Combined Net Revenues and Combined Adjusted EBITDAR are non-GAAP financial measures. Further, the financial information below depicts the historical results of both Penn National and Pinnacle and do not reflect any cost savings or revenue synergies from potential operating efficiencies or associated costs to achieve such savings or synergies that are expected to result from the transaction. See the “Non-GAAP Financial Measures” section below for more information as well as the definitions of Adjusted EBITDAR; Lease Payments; Adjusted EBITDA, after Lease Payments; Combined Net Revenues; and Combined Adjusted EBITDAR. Additionally, see below for reconciliations of these Non-GAAP financial measures to their GAAP equivalent financial measure.

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Reconciliation of Comparable GAAP Financial Measure
to Combined Adjusted EBITDAR

Non-GAAP Financial Measures

In addition to GAAP financial measures, Adjusted EBITDAR; Adjusted EBITDA, after Lease Payments; Combined Net Revenues; and Combined Adjusted EBITDAR are used by management as important measures of the Company’s operating performance and to compare operating results between accounting periods.

We define Adjusted EBITDAR as earnings before interest income and expense, income taxes, depreciation and amortization, rent expense associated with triple net operating leases, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards, pre-opening and acquisition costs, and other income or expenses. Adjusted EBITDAR is also inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDAR excludes payments associated with our Master Leases with GLPI as these leases are accounted for as financing obligations. As of December 31, 2018, the Company’s only triple net operating lease, for purposes of this definition, was the Meadows Lease. However, beginning with the first quarter 2019, we expect that the Margaritaville Lease with VICI will be included in this definition.

In the fourth quarter 2018, in connection with the Pinnacle acquisition, we began utilizing Adjusted EBITDAR instead of Adjusted EBITDA. The difference between Adjusted EBITDAR and Adjusted EBITDA is the exclusion of rent expense associated with the Meadows Lease.

In the first quarter 2018, we changed the definition of Adjusted EBITDA to exclude pre-opening and acquisition costs and the variance between budget and actual expense for cash-settled stock-based awards, which are required to be re-measured at fair market value at the end of each reporting period. We decided to exclude pre-opening and acquisition costs to more closely align the Company’s calculation of Adjusted EBITDA with our competitors. We decided to exclude both the favorable and unfavorable difference between the budgeted expense and actual expense for our cash-settled stock-based awards due to its non-operational nature. In connection with these changes, we have reclassified our prior period results, where applicable, to conform to the current period presentation.

Adjusted EBITDAR has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also present Adjusted EBITDAR because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, and to fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In addition, other gaming companies also utilize Adjusted EBITDAR as a supplement to financial measures in accordance with GAAP. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their Adjusted EBITDAR calculations certain corporate expenses that do not relate to the management of specific casino properties. However, Adjusted EBITDAR is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDAR information is presented as a supplemental disclosure, as management believes that it is a commonly-used measure of performance in the gaming industry, is used in the valuation of gaming companies, and that it is considered by many to be a key indicator of the Company’s operating results. Management uses Adjusted EBITDAR as an important measure of the operating performance of its segments, including the evaluation of operating personnel.

Adjusted EBITDA, after Lease Payments is defined as Adjusted EBITDAR less Lease Payments, which is defined as lease payments made to our REIT landlords under our triple net leases. Adjusted EBITDA, after Lease Payments is a measure we believe provides useful information to investors because it is an indicator of the performance of ongoing business operations after incorporating the cash flow impact of the Lease Payments to our REIT landlords. In addition, Adjusted EBITDA, after Lease Payments is the metric that our management team is measured against for incentive-based compensation purposes. As of December 31, 2018, the Company’s only REIT landlord under our triple net leases, for purposes of this definition, was GLPI as it pertains to both the Master Leases and the Meadows Lease. However, beginning with the first quarter 2019, we expect that the Margaritaville Lease with VICI will be included in this definition.

The Company defines Combined Net Revenues as net revenues of Penn National and Pinnacle assuming that Pinnacle was a part of Penn National during the historical periods beginning on January 1, 2017. The Company defines Combined Adjusted EBITDAR as Adjusted EBITDAR (as defined above) of Penn National and Pinnacle assuming that Pinnacle was a part of Penn National during the previous historical periods beginning on January 1, 2017.

Combined Net Revenues and Combined Adjusted EBITDAR are being presently solely as supplemental disclosure, as these are methods that management reviews and uses to analyze the performance of its business and to compare operating results between accounting periods. Management believes that Combined Net Revenues and Combined Adjusted EBITDAR are useful to investors because they are indicators of the strength and performance of the ongoing business and for evaluating the historical results of Penn National and Pinnacle on a combined basis assuming Pinnacle was a part of the Company for the historical periods beginning on January 1, 2017. Further, the combined company results depict the historical results of both Penn National and Pinnacle and do not reflect any cost savings from potential operating efficiencies or associated costs to achieve such savings or synergies that are expected to result from the transaction.

Each of these measures is not calculated in the same manner by all companies and, accordingly, may not be an appropriate measure of comparing performance among different companies. See the attached “supplemental information” tables for reconciliations of these measures to the GAAP equivalent financial measures.

Conference Call, Webcast and Replay Details

Penn National Gaming is hosting a conference call and simultaneous webcast at 9:00 am ET today, both of which are open to the general public. The conference call number is 212/231-2936. Please call five minutes in advance to ensure that you are connected prior to the presentation. Questions will be reserved for call-in analysts and investors. Interested parties may also access the live call on the Internet at www.pngaming.com. Please allow 15 minutes to register and download and install any necessary software. A replay of the call can be accessed for thirty days on the Internet at www.pngaming.com.

This press release, which includes financial information to be discussed by management during the conference call and disclosure and reconciliation of non-GAAP financial measures, is available on the Company’s web site, www.pngaming.com, in the “Investors” section (select link for “Press Releases”).

About Penn National Gaming

Penn National Gaming owns, operates or has ownership interests in gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. Reflecting the recent acquisitions of Pinnacle and Margaritaville, the Company operates 41 facilities in 18 jurisdictions. In total, Penn National Gaming’s facilities feature approximately 50,000 gaming machines, 1,200 table games and 8,400 hotel rooms. The Company also offers social online gaming through its Penn Interactive Ventures division and has leading customer loyalty programs with over five million active customers.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “seeks,” “may,” “will,” “should” or “anticipates” or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward-looking statements may include, among others, statements concerning: our expectations of future results of operations and financial condition; expectations for our properties or our development projects; the timing, cost and expected impact of planned capital expenditures on our results of operations; our expectations with regard to the impact of competition; our expectations with regard to acquisitions and development opportunities, as well as the integration of and synergies related to any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; our expectations relative to margin improvement initiatives; our expectations regarding economic and consumer conditions; and our expectations for the continued availability and cost of capital. As a result, actual results may vary materially from expectations. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: the assumptions included in our financial guidance; the ability of our operating teams to drive revenue and margins; the impact of significant competition from other gaming and entertainment operations; our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, and increased costs; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities or the award of additional gaming licenses proximate to our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors (commercial and tribal) and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and VGTs in bars and truck stops); increases in the effective rate of taxation for any of our operations or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our ability to maintain market share in established markets and to continue to ramp up operations at our recently opened facilities; our expectations for the continued availability and cost of capital; the impact of weather; changes in accounting standards; the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data; factors which may cause the Company to curtail or suspend the share repurchase program; with respect to our Plainridge Park Casino in Massachusetts, the ultimate location and timing of the other gaming facilities in the state and the region; with respect to our interactive gaming endeavors, risks related to the commencement of real money online gaming in the state of Pennsylvania, significant competition in the social gaming industry, employee retention, cyber-security, data privacy, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative products that attract and retain a significant number of players in order to grow our revenues and earnings; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie State Gaming, risks relating to potential changes in the VGT laws, our ability to successfully compete in the VGT market, our ability to retain existing customers and secure new customers, risks relating to municipal authorization of VGT operations and the implementation and the ultimate success of the products and services being offered; with respect to our proposed Pennsylvania casinos in York and Berks Counties, risks relating to construction, including the receipt of all requisite approvals, and our ability to achieve our expected budget, timeline and investment returns, including the ultimate location of other gaming facilities in the state; risks related to the integration of Pinnacle and the Margaritaville operations and the ability to realize the synergies as a result of the transactions, potential adverse reactions or changes to business or employee relationships, including those resulting from the transaction; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the two companies; and risks associated with increased leverage from the Pinnacle and Margaritaville transactions; with respect to our recently completed acquisition of the Margaritaville operations, the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the companies and our ability to realize potential synergies or projected financial results; with respect to the pending acquisition of the Greektown operations, the possibility that the proposed transaction does not close when expected or at all because all required regulatory or other approvals are not received or other conditions are not satisfied on a timeline basis or at all; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the companies and our ability to realize potential synergies or projected financial results; with respect to our sports betting operations, risks relating to entering into a new line of business, including our ability to establish relationships with key partners or vendors and generate sufficient returns on investment, as well as risks relating to potential legislation in various jurisdictions; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the United States Securities and Exchange Commission. The Company does not intend to update publicly any forward-looking statements except as required by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this press release may not occur.

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William J. Fair
Chief Financial Officer
610/373-2400

Joseph N. Jaffoni, Richard Land
JCIR
212/835-8500 or [email protected]