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Caesars Entertainment Corp (NASDAQ:CZR)

Q4 2013 Results Earnings Conference Call

March 11, 2014, 5:00 pm ET

Executives

Eric Hession - Senior Vice President of Finance & Treasurer

Gary Loveman - Chairman of the Board, President, Chief Executive Officer

Craig Abrahams - Senior Vice President and Chief Financial Officer at Caesars Interactive Entertainment, Inc.

Donald Colvin - Chief Financial Officer, Executive Vice President

Mitch Garber - Chief Executive Officer of Caesars Acquisition Company

Analysts

Susan Berliner - JPMorgan

David Farber - Credit Suisse

James Kayler - Bank of America

Shaun Kelley - Bank of America Merrill Lynch

Kevin Coyne - Goldman Sachs

Operator

Good afternoon, and welcome to the Caesars Entertainment fourth quarter 2013 earnings call. My name is Lisa, and I will be facilitating the audio portion of today's interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take a look at the options available in your event console. At this time, I would like to turn the call over to Mr. Eric Hession, Senior Vice President of Finance and Treasurer.

Mr. Hession, you may begin.

Eric Hession

All right. Thank you very much and good afternoon and welcome to the Caesars Entertainment fourth quarter 2013 results conference call. Joining me today are Gary Loveman, Chief Executive Officer of Caesars Entertainment Corporation, Mitch Garber, Chief Executive Officer of Caesars Acquisition Company, Donald Colvin, Chief Financial Officer of Caesars Entertainment Corporation and Craig Abrahams, Chief Financial Officer of Caesars Acquisition Company.

Following our prepared remarks, we will turn the call over to your questions. A copy of our press release, today's prepared remarks and a replay of this conference call will be available in the Investor Relations section of our website at caesars.com.

Before I turn the call over to Gary, I would like to call your attention to the following information. The Safe Harbor disclaimer in our public documents covers this call and the simultaneous webcast at caesars.com.

The forward looking statements made during this conference call reflect the opinion of management as of the date of this call. There are risks and uncertainties with such statements which are detailed in our filings with the SEC.

Please be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time. We do not intend, however, to update the information provided today prior to our next quarterly conference call.

Further, today we are reporting on fourth quarter 2013 results. These results are not necessarily indicative of results in future periods. Also, please note that prior to this call we furnished a Form 8-K of this afternoon's press release to the SEC.

Property EBITDA and adjusted EBITDA are non-GAAP financial measures. Reconciliations of net income and loss to property EBITDA and net income and loss to adjusted EBITDA can be found in the tables in our press release.

This call, the webcast and its replay are the property of Caesars. It's not for rebroadcast or use by any other party without the prior written consent of Caesars. If you do not agree with these terms, please disconnect now and by remaining on line, you agree to be bound by these terms.

I would now like to turn the call over to our CEO, Gary Loveman.

Gary Loveman

Thank you Eric, and welcome to this afternoon's call. 2013 was certainly an active year for Caesars on a number of fronts and the early months of this year are proving to be no different. Caesars now consists of three distinct entities, Caesars Growth Partners, Caesars Entertainment Resort Properties and Caesars Entertainment Operating Company.

Our accomplishments during the last year across these structures include the following. We have enhanced many of our entertainment and hospitality offerings, particularly here in Las Vegas. We have improved our financial structure, forming Caesars Entertainment Resort Properties, Caesars Acquisition Company and Caesars Growth Partners last year, raising equity, refinancing and repurchasing debt. Finally, last week we announced that we executed a transaction agreement dated March 1, 2013, pursuant to which, for the consideration set forth in the transaction agreement, Caesars Growth Partners will purchase from CEOC Bally's Las Vegas, The Quad, The Cromwell and Harrah's New Orleans and enter into the other agreements and transactions contemplated in the transaction agreement.

A group of lenders committed to provide $1.3 billion in senior secured credit facilities and $675 million in second lien indebtedness to Caesars Growth Partners in order to consummate the transaction and to refinance Planet Hollywood's existing indebtedness. Since the company was taken private, we have employed a full complement of financial and operational tools, including cost management, working capital management, operational improvements, acquisitions, asset sales, credit agreement amendments, innovative operating strategies, exchange offers, debt buybacks and the raising of equity.

Today, Caesars Entertainment has a market cap of approximately $3.5 billion and Caesars Acquisition Company has a market cap of approximately $2 billion. CERP and Growth Partners are both stable entities. The asset sale is an important step in our efforts to improve the health of the CEOC subsidiary. The process to address CEOC's condition is well underway, but will take quite some time to achieve.

With regard to the asset sale specifically, I would like to reiterate some of the key benefits and call your attention to some additional information. Upon completion, the asset sale will enhance our liquidity. We believe the consideration received from the sale of assets was very attractive. We anticipate closing the transaction in the second quarter, pending regulatory approvals and the completion of financing.

The transaction preserves the distribution network and retains the competitive advantage enjoyed by all of our regional properties through continued access to a diverse Las Vegas product offering and similarly for the four properties through their database access. Additionally, it creates new capacity to invest in some of the assets, especially the Quad.

Growth Partners' announcement to renovate the Quad will benefit that property and our other properties on the Strip. The Quad occupies a critically important space at the entrance to The LINQ development and will benefit substantially from a complete overhaul. The $223 million of upgrades follow some already significant improvements we have made to this property originally. We anticipate increased food and beverage and gaming revenue as a result of the upgraded property, benefiting both Growth Partners and CEOC.

Finally, the parties agreed to use reasonable best efforts to establish a new services company joint venture, which will initially be jointly owned by CEOC, CERP and CGP to provide common management of certain enterprise assets. The principal anticipated terms of the services joint venture contemplated by the transaction agreement include the following: CEOC will provide the services JV with a non-exclusive, irrevocable, royalty-free license that includes the intellectual property that CEOC and its subsidiaries own but are used in the operation of CERP and CGP assets under shared services agreements, or known as enterprise assets. CEOC and its subsidiaries will continue to own the assets licensed, contribution to the services JV by Growth Partners and CERP of cash in an amount to be determined, services JV will use cash contributions for capital expenditures relating to the maintenance, operation and upkeep of the enterprise assets and the acquisition of any new additional assets or services in connection with providing enterprise services to its members.

The users of the services will reimburse services JV for its share of any allocated expenses of services JV attributable to such user, consistent with existing arrangements. We do not expect that implementation of the services joint venture to have any day-to-day impact on jobs or property operations.

In other words, there will be no changes to how our properties function and service our guests. Please keep in mind that the ultimate terms of this agreement are subject to finalization and required regulatory approvals. We will provide a more fulsome disclosure upon completion.

I would also like to call your attention to some additional disclosure we have made today regarding the performance of the four properties involved in the asset sale. In a supplemental schedule to our press release, we have disclosed a historical EBITDA range of $145 million to $175 million for the four properties for the year ended December 31, 2013. A detailed calculation can be found in the earnings release. It's important to note that are numbers in the schedule do not reflect management fees which we expect to be 2% of net revenues and 5% of EBITDA. CEOC will retain 50% of said management fees.

As we stated previously, we anticipate using a portion of the proceeds to repay first lien debt. We are still working through our calculations and business planning. We do plan to provide more clarity regarding the specific uses of proceeds in the coming weeks.

Now, let me turn to our fourth quarter results. The operating environment in many of our regional markets was challenging in the fourth quarter. We are encouraged by growth here in Las Vegas, where we have experienced increased visitation levels and enthusiastic customer feedback from our new amenities. We are optimistic about the prospects for Vegas generally and are particularly excited to fully open the LINQ's retail, dining and entertainment experiences and as we begin to operate the High Roller shortly.

Our engineering and design teams are in the final stages of testing the High Roller. We expect to greet our first cash paying riders in a few weeks' time. We are confident the High Roller will be successful in attracting large volumes of visitors and look forward to welcoming many new guests to our center strip properties.

Over the course of 2013, we expanded the reach of our network, opening Horseshoe Cincinnati and ThistleDown, both in Ohio. Horseshoe Cincinnati celebrated its one-year anniversary last week and has welcomed nearly 5 million guests since its opening. We will expand our network again with the opening of Horseshoe Baltimore, which is expected this summer.

In marketing, some of our recent initiatives include the formation of important strategic partnerships. During the fourth quarter, we announced two. Our partnership with the Starwood Hotels Group adds a new layer of benefits and appeal to the Total Rewards program and provides us with additional sources of demand. Total Rewards customers can earn and redeem Total Rewards Credits for stays with Starwood Hotels, including Westin, W and Sheraton branded hotels.

In addition, Starwood Preferred Guests members can earn and redeem SPG points for stays and experiences at a range of Caesars properties in Las Vegas, Lake Tahoe, Atlantic City and New Orleans. In the short time since the partnership was announced in December, we have seen tens of thousands of linked Total Rewards and SPG accounts and several thousand incremental stays booked at our properties by SPG members.

We also began our exclusive partnership with Live Nation, anchored at our newly renovated venue, The Axis at Planet Hollywood. This arrangement provides us with access to Live Nation's artist network and helps us improve our ability to secure top talent as resident headliners and touring acts. These two latest partnerships build on past arrangements, such as with Norwegian Cruise Lines and the Fuel Rewards Network. We plan to announce additional partnerships in the near future.

I now like to introduce Craig Abrahams, who has overcome a Harvard Business School education and a stint at Disney. He is the CFO of our Caesars Acquisition Company and he joins us today in Las Vegas to talk about an impressive year for CIE. Craig?

Craig Abrahams

Thank you, Gary, and good afternoon everyone. CAC is not holding a call this quarter because the CGP results are consolidated at Caesars Entertainment from an accounting perspective, but we are considering hosting a separate call starting next quarter.

2013 was a significant year for CIE. We demonstrated solid economic results in the current year while simultaneously investing and positioning our business for future growth in social, mobile and real money online gaming.

CIE generated record revenues and operating performance for the full year 2013, with total revenues of $316.6 million, an increase of 52% from $207.7 million in 2012. This resulted primarily from the Buffalo Studios acquisition, organic growth at Playtika and revenue growth in the real money segment from the launch of wsop.com in Nevada and our three online sites in New Jersey.

On the real money front, in January, we increased our visibility through advertising and other marketing in New Jersey. We are pleased with the resulting total CIE revenue growth of 49% and increased market share from 32% from December to January, including 888.

We expect the impact of marketing costs and expenses related to the ramp up of operations to continue this year as we work to attract new customers, invest in operational infrastructure and create greater awareness in both Nevada and New Jersey.

On the acquisition front, we closed our fourth social game acquisition in four years. In February, we purchased Pacific Interactive, a leading social and mobile casino-themed game titled House of Fun Slots. Pacific Interactive's differentiated slot content offering and talented team will add to our portfolio of market-leading casino games.

We expect to complement this product with our marketing and operational skills to deliver an excellent experience to our newly acquired players. We have made substantial advances in 2013 and in 2014, and will continue to focus on gaining market share, growing the business via acquisitions and increasing user adoption of our mobile and web platforms through technology enhancements and content development.

I would like to now turn it over to Donald to review Caesars' financial performance.

Donald Colvin

Thank you, Craig. Detailed financial results can be found in our earnings release, which now also breaks out the three main structures we consolidate, CEOC, CERP and CGP. Diving into the details of our three main structures, let me briefly review the high level drivers of performance at each:

Q4 net revenue at CERP increased 2% from the prior year period to $462.8 million and adjusted EBITDA increased 7% to $94.8 million. CERP benefited from the Las Vegas market concentration and an increased cash ADR, stemming from the introduction of resort fees. This was offset by approximately $10 million of unfavorable hold impact from the VIP segment at Paris.

Atlantic City performance declined on a year-over-year basis. We expect CERP will benefit from the opening of the LINQ and the High Roller over the next few weeks. CERP's results will also include the contribution from these operations in future periods.

At CEOC, net revenue was $1.5 billion in the fourth quarter of 2013, down 5% from the prior year. CEOC adjusted EBITDA declined 16% to $270.7 million. Performance at CEOC was impacted by unfavorable weather, decreased visitation and increased marketing spend, partially offset by increased pass-through reimbursed management costs.

CEOC results are presented excluding the LINQ and Octavius Tower impact. Additionally, CEOC results no longer include the revenue from Planet Hollywood, given the sale of the property to CGP in early Q4 and Conrad Punta del Este, subsequent to its deconsolidation following a partial sale in Q2 of 2013.

The other key drivers of CEOC's performance were our regional business, where weather and visitation negatively impacted results and strong contributions from Caesars Palace, which drove record results through returns on our recent capital investments and exposure to the high-end play on the Las Vegas Strip. Once the asset sale with CGP closes, CEOC will receive management fees for the four properties and proforma for the end of 2013, will have an excess of $3.2 billion in cash, enhancing the entity's liquidity.

Moving on to CGP. The fourth quarter was the first quarter of financial results for CGP with results consolidated into CEC. As Craig described previously, solid operating performance was mainly driven by the growth in the social and mobile games segment, the launch of real-money online gaming in New Jersey and favorable growth across all key gaming and non-gaming segments at Planet Hollywood.

Beginning in Q1 of 2014, CGP's quarterly numbers will include the results for CIE's recently announced House of Fun acquisition. Once the transaction between CEOC and CGP closes, which is expected to occur sometime in the second quarter, CGP's results will also include contributions from the four acquired assets.

Longer term, we expect the planned renovation of the Quad to result in increased average daily room rates at the property, which are presently among the lowest in Las Vegas. In addition, we expect to see increased food and beverage and gaming revenue as a result of the upgraded property and its integration into the collection of retail, dining and entertainment experiences offered at The LINQ.

On a consolidated basis, fourth quarter net revenue was $2.1 billion, a 3% increase from the year ago primarily driven by revenue growth at CIE, higher reimbursable management costs and an increase in room revenue, all of which were partially offset by a 5% decline in casino revenues.

Breaking down our performance regionally, Las Vegas generated an 8% increase in net revenue, driven by growth in hospitality revenue streams, while Atlantic Coast was flat as increases in hotel and food and beverage revenue were offset by declines in gaming revenue. Other regional markets experienced a 5% decline in casino revenues primarily due to poor weather conditions and persistent softness in visitation. Poor weather is expected to continue to have an impact on our business in Q1 as will competitive pressures, particularly in Atlantic City.

On the expense side, costs increased due to the launch of several new marketing campaigns. Additionally, our results included a $102 million write off of our Suffolk Downs, Massachusetts investment. Consolidated adjusted EBITDA declined 3% year-over-year as strength in Las Vegas was more than offset by weakness in the rest of the country. Please note that prior results have been recast to reflect a change in accounting principle that was retrospectively applied.

As a whole, Caesars Entertainment remains committed to driving efficiency, improving working capital, generating operating and EBITDA improvements and further enhancing our balance sheet, with a particular focus on CEOC's capital structure. We did not issue any equity through our at-the-market authorization in the fourth quarter nor did we repurchase any debt.

With that, I will hand it back to Gary for his final remarks.

Gary Loveman

Thank you, Donald, and thank you, Craig. The next few months will see the realization of important development and investments initiated over the past few years in our company. The combination of improving organic trends in key markets, especially in Vegas, the arrival of exciting new assets and further attention to CEOC's capital structure bodes well indeed for Caesars in 2014.

With that, operator, we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Susan Berliner from JPMorgan. Your line is now open.

Susan Berliner - JPMorgan

Okay, good afternoon. I wanted to start. I don't know what else you could say about the joint venture agreement, but I guess just a few high level stuff. Can you confirm if it includes the rewards program and the database and if OpCo will be getting any cash compensation for it?

Gary Loveman

It will include the database and Total Rewards and the three entities that use what services provides will be charged under some likely pro rata scheme such that the services entity is a break even proposition.

Susan Berliner - JPMorgan

Okay, but with regards to OpCo, they won't specifically get any compensation for it?

Gary Loveman

Well, moving up what is now an OpCo into the service JV?

Susan Berliner - JPMorgan

Yes.

Gary Loveman

It's just a license. The asset remains in CEOC. You recall, I recognize there was a lot of content in these remarks, but in my description of the services entity which suggested that these sorts of things would be licensed into the services company.

Craig Abrahams

So the other thing I would add is that the other entities, CGP and CERC, may anticipate that they all contribute cash initially into the services JV at startup on Friday as expenses and we don't anticipate that CEOC would be contributing cash.

Susan Berliner - JPMorgan

So would this be a bankruptcy remote entity?

Gary Loveman

I don't think that's one we can answer, Sue.

Susan Berliner - JPMorgan

Okay, and then just turning to CapEx. I guess with regards to, I know talking about this entity and then the other, it just seems to me that you guys typically start out a lot higher at the beginning of the year. I guess I was just looking for OpCo, at least in terms of maintenance CapEx.

Gary Loveman

I will take the first one, and then Eric can come in on the second. We do start out with higher projections at the end of the year. Our appetite exceeds our capacity to digest. So aren't able to scope out and come to a decision on as many projects throughout the year as we anticipate when the budget cycle runs through. So we do consistently lined up with a higher level of expected CapEx than achieved.

Eric Hession

Yes, and along the line, Sue, we do anticipate that CEOC will spend less CapEx than the prior year. The remaining CapEx will be mostly maintenance in nature but there will be some growth projects at the property. I think, Gary's point is well taken that even at CEOC, from a maintenance perspective we do have a plan to spend the capital, but it is sometimes late into the future years.

Gary Loveman

Since most of the Vegas properties are now out of CEOC, so they are the ones that have had the greatest maintenance and renovation expenses, remediation expenses. So those will now be more in CACQ and CERC.

Susan Berliner - JPMorgan

Great, and then I just have two other questions and then I will get back in queue. But can you discuss AC, because I know we all know the market is weak there but it seems like you came in extremely weak for you guys and I was just looking for any color on the market.

Gary Loveman

Well, I wish I had a new theme to give you about Atlantic City, Sue, but I don't. The market is very weak. Visitation continues to be a problem. We experienced players spending what we have experience in spending in the past when they were with us but they are not with us as often as they used to be. The new assets that were applied in that market, notably the Revel have done nothing to grow the market.

There is an awful lot of capacity in that market given how much the gaming demand has declined over the last several years. We are working very hard to find ways try to stem that decline, including our new convention center development ands we are going to be doing a series of new restaurant. We just renovated Bally's. And all of these, I think, are at the margin, helpful but there are getting a strong secular decline in visitation, and I haven't seen that updated recently. We, of course, have been hit with very bad weather recently as well, which certainly hasn't helped.

Susan Berliner - JPMorgan

Okay, my last question. I am getting this question a lot. I am not sure exactly how to respond to it. It is with regards to the asset sale, if OpCo first transferred the assets to their investment basket?

Eric Hession

So, Sue, this is Eric. We have rally been focusing, at this point, on the transaction itself and preparing its financials for the call today but we are still exploring the use of proceeds. As Gary mentioned in his remarks, we have not yet quantified the amounts that will be used to repurchase first lien at this point. I am pointing that out because we are looking over the variety of options that we have, and this would include some the invested cash usage.

Susan Berliner - JPMorgan

Great. Thanks very much.

Gary Loveman

Thanks, Sue.

Operator

Your next question comes from David Farber from Credit Suisse. Your line is now open.

David Farber - Credit Suisse

Hi, guys. How are you doing?

Gary Loveman

Doing good, David.

David Farber - Credit Suisse

I have got a couple. Some have been asked. I just wanted to quickly talk about the operating company. It looks like, just making sure we have the right math, it was like a $1.240 billion of OpCo EBITDA and then you provided additional disclosures around the four assets. So I just wanted to clarify, on a go forward basis, and maybe this is best for Eric, if OpCo right now is around $1.1 billion or if there is any other adjustments in there we should be considering on a go forward basis? And then I have a number follow-up. Thanks.

Gary Loveman

So I think Eric is probably going to leave the arithmetic to you. So you have the reported CEOC EBITDA, as you have our estimated range of historical EBITDA. The only modification I would give you, and of course I will let Eric revise this in a moment if he chooses to, is that some of these properties have been under significant renovation recently as they had quite a lot of disruption. So when Mitch and Craig put money into the Quad shortly, you should expect to see some improvement in the operating performance of some of the transferred assets.

Eric Hession

Yes. I think that's exactly right, Gary. The CIC is going to start a capital program at the Quad for about $225 million. We do expect a good return from that going forward once it's completed.

David Farber - Credit Suisse

I guess I can do the math. I was hoping maybe you could provide additional thoughts on the JV services agreement to Sue sort of tried to outline. Specifically maybe you guys can help us out on who owns the entity? What's in the entity other than the license? And to the extent you can talk about of it maybe how CEOC is treated from an economic perspective, going forward, given it owns the brands? So sort of a three-part question there. If you can be helpful, that would be great. Thanks.

Gary Loveman

Okay, Mr. Hession's going to hold the fort on this.

Eric Hession

Thanks, Gary. So, from an ownership standpoint, David, we would anticipate that the three entities would be the owners and the three entities would be CGP, CERP and then CEOC. In terms of the economics to CEOC, that's still being worked out from a specific standpoint, but what we would anticipate, as Gary mentioned in his remarks, that the services company would be a breakeven entity. So the allocations and the CapEx that's required for that would be borne as a service company and then allocated out. The initial funding, though, as I mentioned would be done not by CEOC, with the exception of the licensing of the brands.

Gary Loveman

So, David, to answer this slightly differently in a complementary fashion, let's think about it by defining the residual. If you think about Mitch and Craig's company with CACQ entity, they will have the employees who work in the properties that they own and they will have management necessary to do what is unique to CACQ. All the services that are provided to the properties in Las Vegas formally would be in the services entity. So marketing, entertainment promotion, facilities, perhaps employment law, the group of people that it negotiates, our labor agreements, all the things that could be divided, or I should say provided, on a consistent basis across the three ownership structures would be in the services entity and that would include virtually all of the existing Senior Management of Caesar's.

David Farber - Credit Suisse

Okay. That's helpful. Then --

Gary Loveman

The brands would be licensed to the services entity as well.

David Farber - Credit Suisse

Right. So it has employees, and it has marketing and it has the licenses and a number of other things you sort of highlighted?

Gary Loveman

Yes, and it has virtually the entire management entity, for whatever that's worth.

David Farber - Credit Suisse

On the asset sales, away from the ones that have just been contemplated, given you are sort of still working on that, maybe you can just help us out given the others that have been done in Macau and Planet Hollywood. Obviously, a number of proceeds there. I was just curious to get some of your thoughts if you have elected at all to use any of those proceeds? Do you have any additional thoughts that you can share either on what's been announced recently or any of the proceeds you have used in the last, call it, six to 12 months. Thanks.

Gary Loveman

Let me describe the strategy and Eric or Donald can fill in any specifics .So we made clear in our remarks that we feel that CPR is composed of three entities, two of which are financially healthy, CERP and CGP, and one is overlevered and consuming cash at a rate that we are not comfortable with. So we are going to take steps, including with asset sales to address CEOC and its overleveraged circumstances. How we do that remains to be determined. Obviously, there is lots of places where the proceeds could be applied. There is no shortage of clever people who have ideas about how this might be done. Working with our shareholders and our board, we are looking at a variety of options for how to proceed. And the same would be true of the unspent portion of other sales, including the Caesars golf course in Macau that we sold recently.

David Farber - Credit Suisse

Just turning to operations because you guys do run casinos. I wanted to just talk about Las Vegas for a minute.

Gary Loveman

You keep flattering me. You notice that, David?

David Farber - Credit Suisse

Yes, I guess a decade of covering it will do that. So there has been a lot of openings, or will be in the next three to six months, in Las Vegas. So obviously you guys continue to be bullish on that segment. I guess I would be curious to hear if you can share some more qualitative thoughts on the segment. If you have any thoughts about RevPAR trends or bookings or convention mix going into 2014? And then I will hop back into the queue as well. Thanks.

Gary Loveman

Okay, with respect to trends in Las Vegas you said there is a lot of openings coming. I am not sure there is a very impactful series of openings coming. (inaudible), we certainly are going to open shortly. I wish him well. But I think they have a hard road ahead of them, largely for vocational reasons that have little to deal with the quality of the asset or what it is they propose to do. So I think we have one of the more stable supply environments we have seen in a long time. We enjoy the demand curve that is shifting out favorably. We see an improvement in the commission meeting business. We see, for example, here in March, the return of one of the biggest events throughout the cycle of conventions and meetings that we experienced in Las Vegas. We see improved visitation internationally and a larger composition of our guests coming from outside the United States. The entertainment, night life and food and beverage business continues to grow very nicely. The imposition of resort fees has been well tolerated. So there is in fact lots of reasons for buoyancy in the Las Vegas market and we see a very bright future for us here. I still believe there is no resort attractions anywhere in the world that offers what Las Vegas offers and there doesn't seem to be one anywhere in the multi-year horizon and throughout, particularly with the renovation of the Quad, which as Donald pointed, is the lowest ADAR property we offer. You will see our relative ADR position improve as our overall ADR structure of the city also improves. So I like that combination. We have the Cromwell coming online here in a few months. We will have the Quad coming online over a period of time, beginning at the end of the year, along with improvements in our hotel inventory elsewhere. That's a good story for us.

Mitch Garber

It's Mitch speaking. I think the differentiation of the assets that we are going to be opening is what's going to stand us apart. So if you take the Cromwell, for example, 188 rooms, very boutique hotel with the only rooftop pool club and nightclub in Las Vegas. It's going to be very unique, especially its location on really what's the 50 yard line and the LINQ and the Quad, combined with the Quad renovation. The LINQ and High Roller now opening, there is nothing like it in Las Vegas. So there are no openings that are similar to all the other openings that we have seen in the past. So we think that this differentiation is going to make a real revenue difference for us.

Gary Loveman

Okay, operator. I think David has going to the queue. Who is our next question from?

Operator

Your next question comes from James Kayler from the Bank of America. Your line is now open.

James Kayler - Bank of America

Hey, guys. How are you doing?

Gary Loveman

Very well, James.

James Kayler - Bank of America

Good, I guess I will clear away from the services agreement.

Gary Loveman

Your call.

James Kayler - Bank of America

Can you maybe just, you mentioned hold having a favorable impact somewhat favorable impact in the quarter. Can you guys quantify that all?

Gary Loveman

It's modest. It's favorable but its not enough for you to refine your model.

James Kayler - Bank of America

Okay, very good. I know you sort of declined to offer pro forma annualized EBITDA for CEOC excluding the properties to be sold. But is there anyway you could give us what the fourth quarter EBITDA would have been and/or what the year-over-year decline would have been if you exclude those assets?

Gary Loveman

I don't say it declined. I thought we just challenged you all. So we reported the year-end EBITDA for that entire entity and we have given you a historic range of EBITDA performance for the assets that were involved in the sale. So I think the calculation of the net is straightforward. Eric, you want to add anything to that?

Eric Hession

No.

Gary Loveman

No.

James Kayler - Bank of America

Okay. So nothing for the fourth quarter.

Gary Loveman

We do not disclose fourth quarter EBITDA results for four properties that were sold. Correct?

Eric Hession

Correct.

Gary Loveman

Well, yes. Sorry that means you will have to extract. I would just emphasize that the fourth quarter, remember the Cromwell closed. Bill's Gamblin' Hall has been closed. So you can give that one a zero comfortably. The Quad, you can have that as casino open but its rooms did not get renovated. So I think you can get, its EBITDA in that pile is relatively modest on a proportional basis, anyways. So you can probably come to a pretty good conclusion here.

James Kayler - Bank of America

Okay. Thanks. I guess just two other technical questions. I think in the press release you had mentioned that you will give an update on the first lien capacity on the call. Is that something you guys are prepared to do? What your incremental first lien capacity is?

Gary Loveman

All right. I think we have to call your buff on that one. I don't think we made any such promise.

James Kayler - Bank of America

And I sort of don't --

Gary Loveman

Eric, you wish to comment on that.

Eric Hession

Yes, James. We generally don't comment on the capacity of our various baskets and first lien offerings. So we are not able to do so at this time either.

James Kayler - Bank of America

Okay, and then last try. I know that you don't want to talk about the structure of the asset sale, but could you tell us with the size of the investment baskets are?

Eric Hession

Yes, it's the same answer. We apologize we just don't have any history of providing that and we are not going to at this point either.

James Kayler - Bank of America

Okay, thanks.

Operator

Your question comes from Shaun Kelley from Bank of America Merrill Lynch. Your line is now open.

Shaun Kelley - Bank of America Merrill Lynch

Hi, good afternoon, guys. Since I probably know the least about that as everyone on the call, I am trying to stick with fundamentals, but look I think some of the Las Vegas question got asked but I wanted to ask a little bit about the regional markets. You guys quote throughout the release discussion of variable marketing programs and that's something that from, at least, my limited experience you guys haven't talked about before, could you just characterize what those are a little bit? And is there an intention to continue those or maybe back some of those off given the response that you might or might not have seen from customers in the fourth quarter?

Gary Loveman

Well, Donald is indicating he wants a shot at this. So I am going to let him go and I am quite excited to hear what he is going to say. So, Donald?

Donald Colvin

Drama. I think the ones that are in there are intentional because we had anticipated that the fourth quarter would end with a buying and we had ramped up a lot of marketing programs in anticipation of that. Unfortunately as a result of bad weather and other factors it was more of a whimper than a buying. So we ended up having a stranded cost and something when you launch these programs, it takes a while to wind them down. So we were spending more than our models anticipated. That why we have taken some action to taper back as we through the first quarter. So that we just didn't end the year with such a high level of business as we had previously anticipated and the cost had a negative impact on us.

Gary Loveman

Everything that Donald says is right. I just want to add a little bit to this because this discussion of free play is one that is often a business understood in these discussions. So unlike a lot of other forms of marketing, free play is a bit of an endogenous variable. So I say, that when an existing customer, Shaun Kelley who spins $100 six times a month in the regional markets, then I am going to give you an incremental amount of free play and the question among those of us who proposed that is, will that lead you to setting you the money you have already spent with us or increase it because of this inducement or will simply use the incremental free play offered to offset the money you would have given us anyway. What would put it differently is your response entirely inelastic. If it is, shame on us. We have just underwritten an experience that you would have paid us for otherwise. If instead your reactions is elastic, then we might have encouraged you either to give us a visit that would have gone to our competitor or you might extend your visit with us because we have underwritten effectively the marginal cost of gambling loss. And as Donald pointed out, this experience with us had very wide and varying results across markets. Now for competitive reasons, I won't say where it works best in, but I will say where it worked least well and that was Atlantic City, where we tried to induce a greater degree of revenue along the line of Sue Berliner had asked a moment ago, and we found a surprisingly inelastic response here. Just get ended up being used by existing customers to underwrite existing play rather than generate marginal revenue and that leads to a very bad story for the CFO.

Shaun Kelley - Bank of America Merrill Lynch

Got it. It is very helpful color. Along the same lines, and I may actually refer to the same topic but in two of the regions you also mentioned that you continue to consider your (inaudible) participation strategies in the region to align what you guys are up to. And I guess, I just wanted to understand what you are referring to when you meant or when you said participation strategies? Does that involve like how you are participating in the market or number of spot machines or what exactly are you trying to allude to with that comment?

Gary Loveman

So I think it refers instead, Shaun, to, I mean that's somewhat of an ambiguous term because as you point out, it can be interpreted in a variety of ways. So I think it refers to how much supply we want to have active in each of these markets where we see protracted periods of decline.

Shaun Kelley - Bank of America Merrill Lynch

Okay. I get it. That's helpful. Just last question, specifically as it relates to the other regions or the regional property that would be and the flow through dollars here because the change in net revenues and then the change in EBITDA virtually 100%. I am just wondering if there is, albeit with the marketing programs and whatnot, that's pretty high for what we would expect to see at a regional gaming market. So are you getting one time or nonrecurring in nature that we should be aware of or is it more a function of really bad weather and maybe some of these marketing programs and kind of that simple?

Gary Loveman

Well, yes. I am going to let Eric answer just with the most important part of it. One of factors you have to consider in this is the deleterious effect of weather on them and some marginal economics of these businesses but there is also a technical explanation, Eric.

Eric Hession

Yes. As you saw, starting with some of our management joint ventures that we had in earlier quarters, because of the structure we booked the expenses associated with that property as revenue and then also have an equating expense, so that there is zero impact to our EBITDA. But what does is, it does have a negative impact on the margin and so as we opened more these including Cincinnati, ThistleDown in Cleveland and a few other, that has grown. So it inflates the revenues and the expenses and that depresses our margins. We will have more detail on that in the 10-K when we put that out.

Shaun Kelley - Bank of America Merrill Lynch

And just to be clear, Eric, that flows through the other U.S. segment and not through the managed. I would have thought that a piece of that would have entered the managed segment but it actually runs the different regional segments?

Eric Hession

I am sorry, Shaun. It does run to the others. Maybe I was misinterpreting.

Shaun Kelley - Bank of America Merrill Lynch

Right. So what I was referring to is in the other U.S. segment, right, which is I think where you are just conglomeration of regional property at this point, the flow-throughs look really, really high and I was wondering if there is anything one time that we should be aware of, or if it's really just weather?

Eric Hession

Yes, Shaun, the other thing, Donald is just mentioning to me, is that we did have Harrah's St. Louis in these results prior year which is approximately $50 million.

Shaun Kelley - Bank of America Merrill Lynch

Okay.

Eric Hession

So that would be right.

Shaun Kelley - Bank of America Merrill Lynch

Right, okay. That's helpful, great. Thanks, guys. I appreciate the color.

Gary Loveman

Sure.

Operator

Our last question comes from Kevin Coyne from Goldman Sachs. Your line is now open.

Kevin Coyne - Goldman Sachs

Hi. Good afternoon, and thanks for taking the questions.

Gary Loveman

Sure, Kevin.

Kevin Coyne - Goldman Sachs

Most of my questions have been answered, but just to confirm something on the debt pay down or potential debt pay down. It's my understanding you can pick any tranche of term loans that you want and pay them down just as you choose. It doesn't have to be pro rata. Is that the right read of that?

Eric Hession

I don't think we are in a position to answer that, Kevin. As I mentioned, we have been focusing on the transaction itself and the earnings and as we move forward and explore the various options, we will look in more detail on that. I apologize.

Kevin Coyne - Goldman Sachs

Okay. Just to try another one. In the original announcement, you said you were going to repay bank debt and then in today's comments you said you are going to repay first lien debt which literally would include a bond. So is it safe to assume that in the last eight days you have started considering adding bonds to that repayment?

Eric Hession

I think it's safe to say that we don't know specifically at this point. I think bank debt was certainly something that we look at initially. I do not want to rule anything out other than to say that it is still under consideration of what we are going to do and how much.

Kevin Coyne - Goldman Sachs

Okay.

Gary Loveman

If it makes you feel any better, I am pretty sure Eric's wife is going to ask him where he wants to eat tonight, and he will be unprepared to answer.

Kevin Coyne - Goldman Sachs

Sounds good. Maybe I could just switch again. I feel like I have to ask a question on the services JV. Do have an estimated synergy expense savings on the formation of the JV and what the cost of forming the JV would be for, let's say, either OpCo or any of the other on a consolidated basis?

Gary Loveman

Not one Kevin I am prepared to stake any answer toward. I don't think there will be consequential synergies or cost. So today we have a corporate entities that provides services to all properties that operated before CACQ or served for any of these other entities who are distinguished from one another. So if you go back to the immediate post-LBO environment, we had a property financed entity called CNBS. We have the operating entity and we ran them such that our operators and marketers never really knew what was in what bucket. And as we go forward now with a slightly more nuanced version of this, the same would be true. I don't see any meaningful synergies because there won't be an elimination of services at any of existing structures. Nor do I see meaningful cost in the establishment of the services entity.

Kevin Coyne - Goldman Sachs

Okay.

Gary Loveman

We have quite a benign and financially uneventful exercise. It will be complicated, of course, because we like complexity, but I don't think it will have any synergy or cost consequences to worry about.

Kevin Coyne - Goldman Sachs

Just as a follow-up. I guess I am still like going through it, but based upon there being no synergies, no changed operations and no change to the customer experience, I don't know if we have addressed the question just simply why are we doing, what's the rationale again for actually doing it?

Gary Loveman

Well, I think the rationale is, CCR now has a complicated interest in three different entities, all of which operate assets that are seeking to provide a seamless experience to our customers and we want to now, with these three structures in place and likely to be in place for some time, got to a more traditional corporate entity that has a services vehicle that services all three of the entities that it operates. If you look across a wide variety of industries, you would see that to be a common organizational approach. It's not that we are all that far off of it today. In fact, if your memory is really good, back several earnings calls ago, we talked about the centralization of a variety of resources such as analytics and entertainment into something called enterprise shared services which was housed in the corporate office Now we are talking about one more step in formalization of these services into an entity with that name that provides its services to each of the three operating entities.

Donald Colvin

Let me just give a practical example as I was looking into this. When we look at our capital expenditures and there was a question on that, CEOC has historically fronted a lot of capital expenditures for all the different legs of our capital structure, for instance, the WiFi network in all our properties with PCI investments for Internet security which is so important in our business. So one of the advantages that will come out of this is, we will figure out a method, not for CEOC to front it but to split that between the different legs in our capital structure and that will have or should have an advantage to CEOC as far as its cash flow is concerned, as we finalize this contract. So that's, again, the practical thing we have to look at as we look at our company not just as one but as three different legs and we have to make sure we allocate capital for example to the three different legs of our company.

Kevin Coyne - Goldman Sachs

Okay. That's helpful. Thank you.

Gary Loveman

Operator, I think that concludes our call today. There are no further questions.

Operator

This concludes today's conference. You may now disconnect.

Gary Loveman

Thanks, everyone.

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