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Executives

Eric Schippers - Senior Vice President of Public Affairs

Jordan Savitch - Senior Vice President and General Counsel

Steve Ducharme - Chairman of Compliance Committee

William Clifford - Chief Financial Officer and Senior Vice President of Finance

Peter Carlino - Chairman of the Board and Chief Executive Officer

Joseph Jaffoni - Investor Relations, Jaffoni & Collins Incorporated

Timothy Wilmott - President and Chief Operating Officer

Analysts

Shaun Kelley - BofA Merrill Lynch

Carlo Santarelli - Wells Fargo Securities, LLC

Joel Simkins - Crédit Suisse AG

David Katz - Jefferies & Company, Inc.

Lawrence Klatzkin - Jeffries & Co.

Felicia Hendrix - Barclays Capital

Mark Strawn - Morgan Stanley

Chris Woronka - Deutsche Bank AG

Joseph Greff - JP Morgan Chase & Co

Steven Ruggiero - CRT Capital Group LLC

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Penn National Gaming (PENN) Q4 2010 Earnings Call February 3, 2011 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Joe Jaffoni. Please go ahead.

Joseph Jaffoni

Thanks, Kameka, and good morning, everyone, and thank you for joining Penn National Gaming's 2010 Fourth Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers. But first, we'll go through the Safe Harbor disclosure as we typically do.

In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results can 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 SEC, including the company's reports on Form 10-K and Form 10-Q. Penn National assumes no obligations to publicly update or revise any forward-looking statements.

Today's call and webcast may also include non-GAAP financial measures within the meaning of SEC Regulation G. And when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are found in today's news announcement as well as on the company's website.

With that, I'm happy to turn the call over to Peter Carlino, the company's Chairman and CEO, who will start the call. Peter?

Peter Carlino

Thanks, Joe, and good morning, everyone. We're happy to report a good fourth quarter and the wind-up, I think, of a solid year in 2010. You'll recall that we entered last year with a great deal of caution, and I think justifiably so, we didn't feel we had any visibility, frankly, on where the year is going to go. And happily, it turned out to be a pretty reasonable year for us.

Though January 2011 is off to kind of a rocky start because of weather, we're actually pretty optimistic about this year and expect it to be another strong one for us company-wide.

Here today, of course, as is always the case, our entire management team, so that we can expose you to as many different thoughts as possible. And I know Tim you'd like to make some comments at the outset.

Timothy Wilmott

Yes. Thank you, Peter. We certainly saw the continued benefit of adding table games in our fourth quarter numbers at West Virginia and in Pennsylvania. And we continue to see the properties doing a very good job managing their margins as we've seen throughout 2010.

I did just want to speak about what we're seeing with the consumer and their behaviors. Clearly, we're seeing a stabilization across our businesses. We're seeing flat year-over-year kind of spending behaviors across most of our businesses and our outlook for 2011 is more of the same. We are not seeing any downward trends that we saw maybe a year ago, that has stabilized. But we're not seeing any strength and any rebound in the consumer to any note. So we're flat. We continue to expect it to be along those lines until we see the fundamentals of the macroeconomic conditions improve, which we haven't seen yet. And that's how we're thinking about 2011.

Peter Carlino

Very good. Thanks, Tim. Well then, why don't we get right away to the questions, that you folks have. And operator, can you open the floor?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Felicia Hendrix with Barclays Capital.

Felicia Hendrix - Barclays Capital

So can I just start out with just one quick housekeeping question and then I have some bigger picture questions. Just on your EBITDA guidance for 2011. The EBITDA was above consensus, the EPS was below. So it seems to us that it had something to do with depreciation, but I was wondering what was in that number that might not be evident?

Peter Carlino

It's a little hard to say since I don't have the benefit of how you got your numbers. I'll say depreciation, we've got roughly at $242 million. We've got $103.4 million of interest expense, stock comps, very much in line with last year. So I'm not exactly sure where the difference is, candidly.

Felicia Hendrix - Barclays Capital

On M Resort, just wondering if you could walk us through the mechanics of what needs to happen from here and then your plans for the resort once the entire transaction is approved?

Peter Carlino

Jordan, why don't you take that? Jordan and Tim will comment on that.

Jordan Savitch

I mean, the two things we need to do from a mechanical point of view in order to get to closing that deal is first get through the Nevada gaming regulators, which we hope to get at on the agenda some time in the second quarter. And then we need to sign a purchase agreement with the current equity holders, which we've been working on and expect to have that structured as an asset deal sometime very shortly.

Timothy Wilmott

And Felicia, now that the issues with ownership are getting resolved, we've been working with property management to improve the cost structure of the business and make decisions to make the margins of that business better for 2011, even as we speak. And on top of that, we've already started utilizing our database of customers to try to incent visitation to the M. And we dropped a mailing in excess of 100,000 pieces in early January that's getting pick up right now. So we're doing all the things that we can today in cooperation with management there to make sure that 2011 continues to show improvement over 2010.

Felicia Hendrix - Barclays Capital

Moving on to Ohio. There's been a lot in the press about you wanting to move your track. That's not new, you guys have talked about that for a while. But I'm wondering does that mean your confidence level is tied that the current administration is viewing slots at tracks favorably? And if that does happen, I'm wondering what your plans are to protect Lawrenceburg?

Peter Carlino

I'm not sure how Lawrenceburg ties to the tracks, but let's take it in two parts.

Felicia Hendrix - Barclays Capital

Well, Cincinnati, additional competition, right?

Peter Carlino

Okay. We'll take that. Look, I think no one really can speak for the governor quite yet. I mean he's obviously new. He has not expressed an opinion about where this is going to go. He is just in the process, and I know Tim will add some color to this as well, of assembling a commission. All of this is yet to happen. So I wouldn't presume to guess what is in his mind. Given their budget issues there, I think there's a reasonable hope, if not an expectation on their part, that he may, and I am to underscore may, recognize the advantage of protecting both the racing industry in the state of Ohio, which has a long history, definitely needs help. And using that opportunity, since it's already teed up and ready to go, to generate revenue perhaps with a combination of license fees up front and hopefully, a reasonable tax rate that will generate a significant amount of money for the State. I mean, part of our argument will be, once he gets settled and a board is named and we get to interface with him and his team, is that the perfect model sits next door in Pennsylvania. The most successful rollout of gaming anywhere in the United States, I think without a doubt. And the reason it works was because the legislature and the governor, in their collective wisdom, decided to maximize the opportunity. To charge fees up front but not so high as to prohibit, unlike certain other states, a real investment in real properties and to have a tax rate that was survivable, that allowed -- and to disperse these things around the state in a manner that minimized competition so that everybody had kind of fair shake. The more intense markets, obviously, have a few facilities, some markets have just one. So it was a very sensible balance, now that gets to the issue in Ohio around the racetracks. They're not optimally located in the face of the new facilities being built. So it doesn't take a genius to figure out that there are places that are not served that could be served. And we hope that, that logic will be evident to the governor, and that he and the legislation will choose to do something along those lines. Now that's speculation. That's common sense, but we just don't know how that's going to play out. Tim?

Timothy Wilmott

Yes. The only thing I'll add, Peter, on that is, the other thing good about Pennsylvania is when they put together the tax rate for tables and slots on what the state gets, it's very comparable to what we're providing the state at our 33% tax rate in Ohio. So again, the Pennsylvania model is one that we'd strongly urge the governor of Ohio to follow as he thinks about expanding gaming in his state. With regard to Lawrenceburg, Felicia, we already expect competition coming in the Cincinnati market with Rock's development. They're going to have their groundbreaking, I believe, later this week, and we expect that late '12, early 2013, they're going to be opening. So we know '11 and '12 are going to be the last two years where we're not facing competition there. I think, the land based casino in Cincinnati will be more of a competitive threat to us than what River Downs may do or what may happen elsewhere in that market. And we're preparing that to occur and trying to manage that business with the expectation that it will get smaller in 2013.

Peter Carlino

And by the way, that's all taken into account as we chose -- remember, we had an opportunity to take Cincinnati ourselves. But we judged for a lot of both practical and political reasons, it was a better to have another group have that city. There is no doubt as we look at the competitive landscape around the United States and some of the places where we do business that this is always a moving target and as gaming expands, there's an impact. Our strategy is real simple. It's a half a step backwards, a whole step forward. And that's why we've been as aggressive as we are. And we're satisfied that we've well recognized, that there's going to be hits to our business in a number of markets. But the name of the game is keep running faster, and we're doing that. And we're well satisfied, you're going to see significant growth in this business over the next few years. I mean, that's the message, I think, I've got to give to you.

Felicia Hendrix - Barclays Capital

Just on Perryville, in December, the win per unit per day was about $141. I'm trying to think about a run rate there. Obviously you have to adjust for seasonality and weather, but how are you looking at their current results versus your expectation of run rate there?

Peter Carlino

Felicia, we're right on expectations. We opened in late September. We had a very good October as you saw in the numbers. November, December are typically the slowest months of year. We're building our database up.We have over 50,000 accounts on our database that are active. Typically, in these new businesses, it takes a period of time to grow. I think we'll continue to see growth in the first quarter unless weather is a major factor in growing that business. But we think Perryville is right on course to continue to grow. And recall, we only invested $95 million because of the high tax rate in the state of Maryland. So we're going to be very pleased with the returns we get on that investment.

Felicia Hendrix - Barclays Capital

Which is translating in my mind also as seeing improvement in margins there too, correct?

Peter Carlino

We do expect to see that, as well as business growth.

Operator

Our next question is from the line of Joe Greff with JPMorgan.

Joseph Greff - JP Morgan Chase & Co

Tim, I have kind of a big picture question for you. When you look across the regional markets, and obviously you're in quite a few of them. Can you just talk about how rational the markets are, I guess, from a marketing or comping, competitive perspective, and our sense is that it's been a fairly rational environment for the last two quarters. But if you can share your views and comment on what's going on right now, that would be helpful. And then Peter, you talked earlier about January, obviously, the weather has been terrible. I was hoping if maybe you can kind of quantify that, I don't know if you can quantify it from a, I don't know, an EBITDA perspective or a snow day or a weather day perspective, January of this year versus January of last year? But if you can help us understand that, I know it's incorporated in the 1Q guidance, that would be helpful as well.

Peter Carlino

You know we can't. I really can't. Look at the crummy month, it's snow everywhere. And again, it's only a snapshot. It's 1/3 of the month. A lot of the first quarter's still left. So we're really not prepared to say what this quarter is going to look like. And I'm saying that we are optimistic that it's going to be fine.

Timothy Wilmott

We've obviously factored in, to a certain degree, what we think the impact of the weather is in the guidance that we gave.

Peter Carlino

That's all we can say, I mean, we can't say more.

Timothy Wilmott

And when weather has been good, business has been good, so we don't see that it's changing any -- we don't see anything changing in terms of consumer behavior, Joe. And to the first part of your question, you are correct, what we're seeing out there in all these regional markets is a rational environment for promotional spending. We're not seeing any of these markets that are having any of our competitors trying to capture share with increased marketing reinvestments. So knock on wood, the environment seems very stable today.

Peter Carlino

And I think you know, and we've said probably before, we don't take that kind of bad behavior. Because our industry is -- it seems to me at times that where -- there's a race to the bottom to see how much you can -- of your cash flow you can give away utterly irrationally. Our discipline is simple, that they will eventually kill themselves and the markets return to stability. And we found that universally true. We tend not to get involved in those things when they occur and happily at the moment, as Tim says, they're not occurring now, so.

Joseph Greff - JP Morgan Chase & Co

And Bill, could you give us cash debt CapEx for the fourth quarter, and maybe the timing of CapEx spend for this year?

William Clifford

Sure. Our total cash at 12/31/10, was $246.4 million, of which $78 million of that is sitting in an unrestricted sub, penned operating cash, it's the remainder of $168 million. On the debt side, we had $71 million on our revolver, $1.518 billion on our senior credit for total bank debt of $1.589 billion. Capital leases and amount we owe to the City of Aurora comes out to a total of roughly $7 million. We have the two bonds for $250 million and $325 million to give us a total debt of $2.171 billion. Capitalized interest for the quarter was $1.1 million and then cap expenditures in the quarter were $77.7 million. That breaks down between project CapEx of $59.4 million and maintenance CapEx of $18.2 million. Looking forward to next year, we're expecting CapEx in the first quarter to be $108.4 million, with new projects representing roughly $70.2 million, and maintenance CapEx roughly $26.9 million. And for the year -- and then on top of that, I'm sorry, is $11.3 million for the Hollywood -- our expected contributions for the Hollywood Kansas Speedway. And for the year, we're looking at roughly $289 million in new projects, $88.5 million in maintenance CapEx and $71.1 million for the Hollywood Kansas Speedway joint venture, which totals up to $449.2 million.

Operator

Our next question is from the line of Carlo Santarelli with Wells Fargo.

Carlo Santarelli - Wells Fargo Securities, LLC

I had a two part question as it relates to your EBITDA guidance for this year. And Tim, I think you addressed this a little bit in your opening remarks. As it relates to your EBITDA guidance, is it safe to assume that the $7 million in preopening relates to Kansas Speedway? If not, is there anything related to that in preopening? And what assumptions are you making kind of for underlying regional gaming trends in 2011? Should we assume from your comments that you're not assuming much of a ramp this year? And as such, anything in addition to kind of a flat gross gaming revenue environment would be some upside?

Peter Carlino

Yes. I'll take that one. In our guidance, the $7 million is for Toledo and Columbus, breaking out roughly, the majority of that being Toledo since we're expecting that property to open up earlier than Columbus. And in the Hollywood Kansas Speedway joint venture, there's roughly $2 million as well, but that'll run through as an unconsolidated affiliate charge. Relative to the guidance for the year, I think as Tim mentioned earlier, we're looking at what we think will be a fairly flat year. Certainly to the extent that the economy does better than that or picks up, I would expect that we would do better than our guidance. But that's the basis for what we're looking at is really taking, what I'll call a measured view of what we've seen through the 2010 and the trend lines that we've seen there. And obviously, we try to keep from becoming irrationally exuberant on one quarter good results. And those results, by property, were certainly very satisfying but certainly not long enough trend for us to get comfortable that we are now on a consistently upward trend. We think we'd like to see another quarter or two before we start assuming that everything's moving back in a consistently positive direction.

Carlo Santarelli - Wells Fargo Securities, LLC

And if could just ask one follow-up, as it relates to Charles Town and obviously, Anne Arundel, which were not looking at in guidance for '11, but given what you guys know about your database for Charles Town and the geography of the region, could you attempt in some way, maybe to quantify how you're looking at the potential impact to your asset there from Anne Arundel?

Peter Carlino

Yes. I think there's a lot of things at play. We've certainly got ranges out there in terms of what we think the potential could be. Relative to why we didn't put numbers in our guidance for is, one, is we have no control over exactly what their opening date is going to be. That's totally under the control of the Cordish group. They've announced that they're going to open in the fourth quarter. I think just assuming you have everything you need, that's a pretty aggressive timeline because we've certainly never been able to get a facility up and running that quickly. Again, we don't have any impact or any influence or any say, so we're not really sure whether they means early fourth quarter or late fourth quarter, and we are also not -- we don't really have great visibility as to exactly what their facility is going to look like.

Timothy Wilmott

It's a temporary for now. That's what they're focused on. Keep in mind, there's several lawsuits that a number of groups have filed against their zoning. and remember, we had a battle with those folks around zoning because we think it was inappropriate, but that was settled by the voters, if you will, who could have overturned the approval. Now we're into the actual legal question of whether the zoning by the county was proper. And there are some real issues that groups unrelated to us have raised. And they're going to make their way through the court, with what success, I have no idea. Clearly, they have not followed the normal kinds of approval and review that a typical subdivision plan would, which includes traffic studies and which, by the way, are going to be horrendous there. There's a lot of bad stuff that citizens groups will quickly be able to identify. So needless to say, we're not unhappy to the degree that citizens get a proper hearing, which they did not, in Anne Arundel County before. And that matter is now working its way through the court. So you might stay tuned. Again, I think we have to presume going they're going to get opened on some timeframe that Bill outlined. But the issues there are not completely settled, and it is clear, I spent a lot of my life as a developer, and I can tell you that these guys, they went through no process here. But local behavior being what it is, and money at stake, they might be able to get away with that and the court might support them. But I can tell you that they haven't done what they should've done. Let's see.

Operator

Our next question is from the line of Shaun Kelley with Bank of America Merrill Lynch.

Shaun Kelley - BofA Merrill Lynch

Just wanted to touch kind of a little bit more on the guidance or outlook for next year. If we look at, I guess, on an EBITDA margin perspective kind of the outlook, it actually looks like you're kind of planning for margins to be flat with where you came in this year. But if you look at kind of promotional expenses in the fourth quarter, those actually look like they continue to come down. So could you give us your kind of thoughts on just are you planning -- do you think the current level of promotional spending is more of the right way to go? And does that represent or present some opportunities for next year?

Peter Carlino

I think as you look back at last year, obviously, going back to the first, second, third and fourth quarter, clearly, first quarter was not our high mark last year in terms of operating efficiency from a margin perspective. But we were improving, and I think we improved throughout the year. Relative to our expectations, I think we've -- there's always room for improvement. We've certainly been pretty aggressive in terms of bringing down some of our marketing spends. I think we're pretty happy with where we're at. That doesn't mean we're not going to continue to tweak and look for improvement. But listen, really getting significant upsize in the margins from this point forward is probably going to require some revenue and some demanding.

Timothy Wilmott

A bit minor but it does weigh on the numbers a bit. We have Perryville in for the full year, at a very high tax rate. And we have M Resort in there at a lower than company-wide margin as we continue to prove those businesses, and that's dragging down a little bit the overall number you're seeing.

Shaun Kelley - BofA Merrill Lynch

Peter, obviously, it's in the news that you guys acquired Rosecroft or at leased were approved to acquire it. Can you give us just your thoughts on the potential for slots at tracks in Maryland and how like that would potentially proceed through this year?

Peter Carlino

Well, look, not a cute answer but I guess I could say, we have no idea, honestly. But our strategy is obvious that we have now a major stake in racing in Maryland. It's an industry in trouble and one that employs a great number of people and affects the Maryland economy not insignificantly. I think that is to be recognized as Governor O'Malley, who has been very helpful in this process, stepped up to break an impact between us and the horsemen. The situation is simple, the Laurel, for example and -- the entire group, Laurel, Bowie and Pimlico lost a lot of money last year and have over the last few years. That model or operating program is not sustainable. We made a suggestion to the racing commission, by the way, complies completely of horsemen, not business people but horsemen that we really, really, really needed to cut the dates and to bring this -- right size this operation to a profitable level. We got a violent reaction to that sensible suggestion, that was going to get us nowhere. The impasse was resolved because, and only because, the governor stepped up and said, look, this is important. We'll find some funds and we'll find a way to at least get you guys to break even, recognizing as we do, and I think his office does, that it's a bandaid, but a very welcome one that gets us down the road and gives us time to sort of figure out what's next. I think Maryland does value its racing industry. I think they were somewhat shocked, shouldn't have been, were shocked when Rosecroft closed. They can't make any money, and we all recognize that without slots in this day and age and all the more so since it's going to be slots competing down the road, there's no future for these racetracks in the absence of slots. So that no one should be surprised that, that is our sole focus in trying to get the racing industry back to a healthy level. But one of the huge mistakes that they made in Maryland, never happened anywhere else in the country before, was to allocate a portion of the slot proceeds to purses. Well, that's a wonderful idea, I'm glad the horses could eat well. But there not going to be running well of there aren't racetracks where they could run. So the legislation completely ignored the people who have the real investment in the state, the racetracks. So that's something that's going to have to be solved for. The Rosecroft track became available, as you saw. And by the way, we're waiting, we were approved yesterday, we still have to see a final signed order from the judge, which we anticipate should be coming soon, and then we'll have to see. We judged, for that invested amount, that the optionality for us looking ahead was worth it. And so we planted a large flag in Maryland and we're there for the long haul. But we can make no prediction about how and when or if anything positive will happen, just that where we are now is not sustainable for the long run.

Operator

Our next question is from the line of Steve Wittgenstein with Stifel Nicolaus.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Bill, first question, did you say on interest expense 103, was that one, zero, three, for the year?

William Clifford

Yes.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

And then what are you kind of thinking of run rate for your corporate expense?

William Clifford

Corporate expense is roughly 78.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

And then Tim, two questions for you, first of all, what are your current thoughts on potential for Texas? And then second question, since nobody has asked it, I'll ask the generic note, the slot spending question as well?

Timothy Wilmott

Second question, Steve, was slot spending?

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Exactly.

Peter Carlino

Eric, if you want to just want to give a current assessment of where we are in Texas?

Eric Schippers

Sure. We're starting to spend a lot of time in Texas, meeting with legislators and talking about Penn National and hopefully, serving as a resource as they start to study this issue, given our experience in other jurisdictions and getting those jurisdictions off the ground. But everyone wants to focus right now on the budget before them and looking at whatever cuts they can possibly make. So we're sort of hanging around the hoop, so to speak, to make sure that when they're ready to focus on different pieces that can perhaps address the massive budget shortfall they'll have, that gaming can potentially be one of those pieces. So it would be very difficult, if not impossible to handicap at this point, because we're still in the education effort with a lot of new faces coming in with the legislature, but towards the end or the latter half of the session, we're hoping that this will be something that will get a lot of attention in the spotlight.

Timothy Wilmott

So with regard to slot capital, I don't think, Steve, much has changed in 2011 as we thought about it in years past. It's still about 60% of our total maintenance capital, which gets us to refresh about 1/7 of the floor across the enterprise. So nothing really has changed. We're going to continue to keep our product fresh and relative to our competitors, I am very confident that we're not going to be behind any slot product that's out there in a competitive environment.

Operator

Our next question is from the line of Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank AG

Maybe just a quick comment on thoughts on kind of moving ahead with work on New Orleans. I know it's preliminary work, but just your thoughts there in terms of, I guess, what we can read through to your expectations?

Peter Carlino

Steve, do you want to take that?

Steve Ducharme

Yes, the work in New Orleans that's being done is being done by the current property owner. They're demolishing some of the existing infrastructure. So I know there were headlines that we were actually moving forward, out of the local press down there. That was inaccurate. That was basically the existing property owner. The state has set a follow-on hearing date of February 9 before the Louisiana Gaming Control Board and a subsequent meeting on February 17 to make a final determination on the award of that 15th license. We feel pretty strongly given the support that we've gotten in Jefferson Parish that we have a very fair shot. Obviously, we're one of three being selected for the award of the 15th license, but the bottom line is, stay tuned and see what happens on the 17th. We will be mobilized to move quickly if we are fortunate enough to be selected.

Peter Carlino

Yes, let me add that, look, ours is not the most dramatic project proposed in the state. This is a terrific project, great location, will be a good investment for us and we think will be a winning investment for the state. There are others, as you may know, who have proposed more grandiose schemes that may or may not make sense. The question in our mind is, is it financeable? We think not. But we don't know. So if the gaming commission wants certainty, a high-quality project and wants to get it done, we hope that they'll lean to us. But again, we can't judge just where they're going to go with this. We made our case, we'll make it again and let's see.

Chris Woronka - Deutsche Bank AG

And in Illinois, it's there any signs of kind of whatsoever of reasons to be more optimistic about the current environment, things getting better?

Peter Carlino

I'll make a comment there. There is never a reason to be optimistic in Illinois. It's just a very difficult place to do business. Every year, it's dodging whatever outrage they're going to propose. It's the least stable place that we do business in the United States, and I think most of you know that. Some of it's been public, with the governor and some of his ill behavior. It's hard to figure that place. It ought to be one of the best places to do business. It's proven not to be year end, year out. Eric, on the bill, why don't you comment?

Eric Schippers

Yes. To Peter's point, it's sort of like guarding the border between North and South Korea. War breaks out but you kind of have to just sit and watch it and be ever vigilant and throw shots at the other side, and that's what's happening here. It's always a big skirmish and then it kind of goes away and calmer heads prevail. We just have to keep beating it back. It's a never-ending game of Whac-A-Mole, just to give you one more bad analogy. We have a standing army now of lobbyists who are making the case that this will be very bad for the industry. And certainly, Neil Bluhm, who is now a member of the industry, who wants to get underway with his operation, has been lending his voice to the cause. We just have to hope yet another session passes without praising his prevalence.

Peter Carlino

I mean, let's make no mistake about it. I think we burn more capital, more of our shareholders investment in that state than any other place in America. So I mean, say what you will but it's a case I wish we could stand up in front of the legislature and make. Guys, there are consequences to your bad behavior, and this is a very difficult place to do business. And of course, it does not help employment. We've lost hundreds and hundreds and hundreds of jobs in the state because it was economically necessary. So yes, you obviously hit a hot button when you bring up the state of Illinois. And as I say, we have the distinction to being the largest operator there, but boy, I wish we didn't have to admit that.

Chris Woronka - Deutsche Bank AG

And then just one more, Florida has been in the news lately, making some noise about potentially doing some Vegas-style resort casinos, is that -- what's your guys' general feeling on that if it happens?

Peter Carlino

Steve, do you want to comment?

Steve Ducharme

Well, you've obviously read the new governor's position. I think the state, like every other state in union, is looking for revenue. I'm not sure that anyone would acknowledge that the revenue sharing deal that was cut with the Seminole trust, that was signed by the previous administration maximizes gaming revenue for the state of Florida. So it's really something that we, as we do around the country, are trying to lend our voice to and see where it might shake out. It's part of the budget process, as it is in Texas, as it is becoming in Ohio. And we just have to wait and see. It is an area, it's a state which already has a gaming industry. Other than tribal gaming, the commercial operators are certainly not thriving. So we will continue to participate in the dialogue down there and you just have to see where it goes.

Peter Carlino

There's little doubt that Florida could be the greatest gaming state in America if it wanted to. And getting balance for the commercial industry is what's necessary. Clearly, as Steve said, they sold out to the Indians some years ago which makes no sense to the rest of us. Because there is an industry there, wanting and needing to compete, that has not been given that opportunity. You've got a governor who is, first and foremost, a business guy, and we hope that perhaps some of his business thinking will realize that they've just not even touched the opportunity that exists in Florida. So we continue, as Steve said, to work at that, and hope to get lucky.

Operator

Our next question is from the line of Mark Strawn with Morgan Stanley.

Mark Strawn - Morgan Stanley

As you spend more time in Ohio, has there been any changes to your return expectations for Toledo and Columbus at all?

Timothy Wilmott

No. I don't think there's anything that we would say causes us to change our view.

Peter Carlino

We're happily working away there, so we remain very optimistic about Ohio. With or without, by the way, the addition of the racetracks. I actually think, properly placed, it's great for us and great for the state, should they include the racetrack, but if they don't, okay, we're still blissfully happy.

Operator

Our next question is from the line of Larry Klatzkin with Klatzkin Advisors.

Lawrence Klatzkin - Jeffries & Co.

Massachusetts, what's your feeling on that and would you get involved in a beauty contest?

Peter Carlino

We are involved. Eric, why don't you take that?

Eric Schippers

Yes, we've been spending some time up there. As you probably know from just the reading the clip, there is a continued impasse right now between the speaker and the governor over the composition of the bill. The speaker continues to support the notion of slots at tracks. The governor's concern is he doesn't want to give out any no-bid licenses. And so I think it's a standoff right now. We'll see how they work through those issues. But we're continuing to stay involved and talk about how excited we would be to invest in Massachusetts if given the opportunity.

Lawrence Klatzkin - Jeffries & Co.

And then I know Iowa is kind of minor for you guys, but this proposed tax increase? Is that a trend we might see elsewhere? Hopefully not.

Peter Carlino

Well, look, a tax increase like that is never a good idea. And it's not a settled issue. I noticed that even in this morning's comments, the governor is a lot more circumspect about that today than he was when he could've threw it out as a concept. We are in the process, of course, of preparing a white paper on the subject that makes clear what happens when you raise taxes. It's going to mean thousands of jobs lost, it really will because companies react. No one's going to take it lying down. And in fact, you might remember that Blagojevich -- I happen to know this, from some insiders there, was outraged that he made no money, not any money from the tax increase that he hoisted upon us. Because companies -- he thought that was bad form. I mean, we're supposed to take it in a manly fashion I suppose. There are consequences, we'll make that case, I think, intelligently to the governor. And our hope is that -- I mean, the evidence is real clear, it's not a good idea. That having been said, I don't think we see that elsewhere. Eric, you get to fight those battles but I'm not hearing anything.

Eric Schippers

No. And to Peter's point, we are preparing an analysis of the Illinois disaster, the 2004 scenario, because we want to make sure that this notion of tax your way out of a budget hole will not spread. And so obviously, the burden's on us to continue to educate these legislators that this is not a path you want to pursue.

William Clifford

Yes. I mean, reality is, if you go back to '04 which is when they implemented a similarly-sized increase in taxes, eight of the nine facilities actually generated fewer taxes for the state of Illinois after the tax increase than they did before. And the only one that was producing more was the one organization that decided, I guess, to take it like a man or follow Blagojevich's wishes and did nothing to adjust.

Peter Carlino

But they clearly had other political objectives in the state and they chose to do nothing.

William Clifford

But the rest of the state, all basically did what any rational business person would do, which is, said okay, I've now got to adjust my operating expenses and I've got to -- which means laying off hundreds of people. They had to change their business model in terms of how to try to survive given the increased tax. And candidly, that resulted in a lot lower gaming revenues, and those lower gaming revenues, even with a higher tax rate, translated into lower taxes. So I'm sure -- listen, it always sounds great to just raise taxes and therefore, you're going to somehow magically increase revenues. But the reality is, it doesn't work that way. And the case study that is out there, which was Illinois, proved that it didn't work. And I think Peter said it well earlier. I think the governor's already indicated that there is some room and obviously, we're hopeful that he is a little more rational and recognizes it's not going to accomplish what he had hoped it would accomplish. It certainly not going to generate $200 million more dollars in the state of Iowa. That number just absolutely won't happen.

Peter Carlino

Yes. What politicians struggle, I mean, to understand and most don't, is that you tax something more, you usually get less. There's couple of states, andI'll leave them nameless because we do business in them, where they've raised taxes on high-income individuals. And lo and behold, they got nothing for the result, nothing. Because people pack up and leave and say, "I can't -- I'm not going to live and die in this state." And we all know that's the case. People move, they can shop with their feet. And we can't obviously do that with our facilities but the comps are still the same. You tax something more, you're pretty quickly going to get less. So that's our case, I think we've beaten that one to death.

Timothy Wilmott

Larry, what we are seeing more of as opposed to states looking to increase taxes is states looking more to expand gaming and try to increase employment, increase new source of revenues, increase private investment in their jurisdictions. We're seeing that far more than we are seeing states considering taxing existing operators.

Lawrence Klatzkin - Jeffries & Co.

You really couldn't talk about the financial effect of the snow in January, and I understand that. There was also some pretty bad weather in the fourth quarter, do you think there's a net negative effect to your earnings in the fourth quarter?

Peter Carlino

Well, the weather this year -- last year wasn't great either. So I think when we look at the fourth quarter overall, I don't think this year's fourth quarter weather will be significant enough to say that it had an impact on a year-over-year basis.

Operator

Our next question is from the line of Joel Simkins with Credit Suisse.

Joel Simkins - Crédit Suisse AG

First, in terms of the Foxwood's Philadelphia license, there's been some discussion that, that license could be moved. How do you make sure you protect that from going anywhere near Harrisburg? And then also, could you give us an update on the Category 3 license situation there as well?

Peter Carlino

Well, let's take them in order. On that license, of course, it's now in litigation, though it's not clear to me that the Foxwood folks are going to prevail with this now late effort to try to not lose it. If it were to become available, I think there's a pretty good argument that Harrisburg is the last place that you might want to put it. Category 3 license is a different matter. For that license, I'm not going to put a star on the map, but let me tell you that we've already identified a few wonderful places where we'd like to see it go. And where we or somebody else could do extraordinarily well, not impacting in any material way, any of the existing properties. You'll have to get out your map and start putting little pins in it, but we're very much focused on that. I think we're a good bit away from having to deal with that and I think Harrisburg for that purpose is an unlikely spot. Now there is of course the Category 3 issue, which clearly, for some political reason, has been delayed. I can't put my finger on it. But we think Harrisburg there, again, is a very unlikely possibility since their application is so patently flawed. I mean, that's one we're not worried about in this round at least, because they met the hotel requirements by bringing trailers in as you may have read, pretty much outrageous. But nonetheless, that's what their application is about, we're not worried about it. The real question is will it go to Gettysburg, will it go out to Fernwood in the Poconos, will it go to Nemacolin. I think it's one of those three that quite sensibly, have offered good choices. Steve, you want to add some color to that?

Steve Ducharme

Yes. I think the only thing to add as you know, there is a transition, obviously, in the administration that's taking place and as a result, there's also a transition that's taking place in the composition of the members of the Pennsylvania Gaming Control Board. The former board all had the benefit of sitting through the presentations and hearing from each of the Category 3 applicants for this remaining license. What the new board, or the board with new membership will do, is anyone's guess. We had thought that something might happen as early as the end of December or the first meeting in January, that didn't take place. And now with these transitions of membership and new composition, it's anyone's guess. And as a matter of fact, the board has not indicated to any of the applicants what a timeframe might be. So it is hard to know and futile for us to attempt to guess.

Joel Simkins - Crédit Suisse AG

Peter, I guess the first one is the Strip. Has your view changed? I know Charles Town is probably doing more EBITDA than any property in Las Vegas besides Wynn. But has your view on the Strip changed as sort of things are stabilizing? And then secondly, Atlantic City, I'm guessing you're a big fan of Governor Christie and some of his policies and attitudes towards improving the business climate down there. Now that Revel'sgoing forward, has your philosophy at all changed on that market, perhaps, long term?

Peter Carlino

Well, that's obviously two very different questions. Look, our interest in the Strip has never changed. We just have never found an opportunity to get the kind of property we would want at the price we would want to pay. So we'd love to be in Las Vegas. I think we've been pretty clear that, the consensus around this table, that Las Vegas absolutely has a future in the short run, and the short run could run a number of years, by the way. There's going to continue to be way too much capacity. It's going to take a lot of time to get that absorbed. But as the -- you've got two companies that own the whole town, I mean, essentially, or the Strip as you have identified it. So finding a loose asset that we would like is not easy. But I'll make clear, that at the right price and at the right time, we'd love to be there. So it's still in our -- at the top of our dance card, love to be there. We're just going to stand by and see if an opportunity opens. So that's that. We feel, I think, I'll speak for myself, there's others that have even more knowledgeable opinion than mine about New Jersey. Look, I think New Jersey and certainly Atlantic City is largely cooked. The demographics around it have changed so dramatically. You've got Aqueduct going to open, [indiscernible] New York City. There may be another license yet again in the Philadelphia market, it's not clear, it's going to go far from Philly. This is all bad news. Getting Revel up, I think, is a good thing. You just can't have something of that scale and magnitude sitting like an open sore in downtown Atlantic City, you can't. So I think the governor has done a very good thing in stepping up and helping get that project done. But make no mistake, there's going to be winners and losers there. And the net -- it's a zero-sum game in my judgment, but that's just me. Revel will take business from somebody else that ain't going to have it. So I mean, it's not a pretty picture in New Jersey. There's too much competition today. So I'd welcome -- Tim, what's your...

Timothy Wilmott

No, very similar. Still got a couple of more years of contraction, I believe. Governor Christie is doing the right thing, trying to create that resort zone and making it more attractive, destination location, Revel needs to be finished for Atlantic City to continue to have a future. But it's not a place that we believe is a good place to place capital right now or in the very near term. It's got a couple more years of decline before things even begin to stabilize.

Operator

Our next question is from the line of David Katz with Jefferies & Company.

David Katz - Jefferies & Company, Inc.

I had made a note in my model about Casino Rama and I notice in your guidance you're talking about that contract, in the middle of '11. But I had made a note that the decision on that was deferred until the middle of '12. And I just wondered if my note was incorrect and that there's some change to that?

Peter Carlino

No. The contract formally ends in July. We're in the process right now of negotiating an extension, which we think is going to be a relatively abridged to the RFP process for a complete new rebid activity. But since we don't yet have the contract or the extension formally signed and we haven't finalized the terms, we're basically not including that in our guidance at this time. As soon as we get -- obviously, when we give next quarter's guidance, if we've managed to nail this thing down then obviously, we'll put it in because we'll have a good handle on what the term is and what is the fee structure is.

David Katz - Jefferies & Company, Inc.

And then just as it relates to your acquisition strategy, obviously, we look at the racetracks that are prospectively Racino's one-day, that pile of them continues to get a little bit bigger and presumably, one or two successes there could clearly more than pay for all of them. But I just wondered, has your appetite or tolerance for those changed at all? And lastly, what is your appetite for additional properties in Las Vegas locals? Should we consider M Resort, the one you would consider at this point, or are there others you might be looking at in the future?

Peter Carlino

Let's start with the racetrack question. Look, we are the proud owner of many money-losing racetracks. But clearly, there is an obvious strategy with that and that is that the tracks do tend to, except in New Jersey and Illinois, end up with slot machines. And that's a long-term play. We have said, I think, on our call last month, and I repeat again, that operating these tracks at a loss is not in our long-term plan. We will ratchet down costs in Texas, we will ratchet down costs in Maryland and do whatever it takes. I mean, we need to be tough about that and we will be very tough and brutal about that. Because we have to. We're not running a public charity. We've made those statements publicly and we're going to right size those businesses over the next year or so, because we must. All that having been said, I still think that we can make the case that slots at racetracks make a tremendous amount of sense. And it isn't because it's going to boost the handle. I'm long since past trying to defend the idea that they believe in Maryland for example, that you approve the purses that somehow, miraculously, the quality of racing is going to improve and wonderful horses. The truth is they run the same old stuff, which is 2x or 3x as much. It has little impact on handle, because there aren't sufficient numbers of racing customers in the world anymore because they've died. And nothing's going to change that demographic. Now that having been said, I mean look, there's a place for racing, there's just too many racing dates. But you could argue, clearly, that slots are a very green activity at these tracks. These are agricultural businesses. They support acres and acres and acres of green space in the markets where we are. They grow feed, they grow straw, they provide employment, they're a huge economic engine. So with a straight face, we can say yes, we're not generating more handle. But we have helped build, support and develop a very, very desirable industry in your state. We can point to that in Pennsylvania. we can point to it in West Virginia. These have been monstrously successful economically. So that's the case we need to make in the places where we're looking ahead in Maryland, in Ohio, in Texas and so forth. So there's a message to be shared there. Let's see how effectively we can share it. The second question I guess was will we be buying more local property, and by the way, a question to racetracks is this, every one of these is a one-off. There's no broad strategy to own every racetrack that we can own. It's owning a racetrack in the places where we want to be, and about that, we're pretty disciplined. Having a flag in Texas, even if it costs, absolutely worth it, we're at the table there, critically important. With respect to the local properties, the answer would be, find one that makes sense. I mean, it's all built on . .

Timothy Wilmott

I mean, our acquisition, pending acquisition of M was not about -- it wasn't about a strategy to be in Las Vegas, it was because we saw an opportunity that generated good return for the company. And it's our expectation that we'll get that property to an operating level that everybody will be very happy with. If we find another opportunity in the Las Vegas local market that we think is of similar return, profile will absolutely be 100%. Obviously, the challenge is finding those properties that make sense on a performance relative to the purchase price, so that's really going to be a challenge but sure. If we can find the right property at the right price, we'll buy as many as we can find.

David Katz - Jefferies & Company, Inc.

As you've gotten into that and gotten more involved, are your expectations about what you can do with it the same, better or not as much as they were when we discussed it, more fully, let's say, around G2E?

William Clifford

I think they're very consistent with what we discussed during G2E, David, that we're very confident that management there is making the right decisions to improve the cost structure. We see opportunities to grow business with our database, and we're just as confident as we were three months ago when we got together that we're going to get a very good return on the capital we allocated towards that acquisition.

Peter Carlino

Let me add one more thing to be clear, this does not meet our strategic objective in Las Vegas it really doesn't. This is a one-off deal, a great deal, a wonderful property, great management, a lot of good stuff you can say about it but it's just a one-off investment. We still would like to be where we'd like to be. So that's a separate issue.

Operator

Our next question will come from the line of Steven Ruggiero with CRT Capital.

Steven Ruggiero - CRT Capital Group LLC

Following up on M Resort, is the back end increase in your 2011 depreciation guidance due entirely to that pending acquisition and consolidation of M Resorts?

Peter Carlino

Well, there's full year impact from, obviously there's the M. There's also the Perryville. There's the addition in Joliet, which just came online. We've also got full year impacts from the Charles Town and Penn National.

Steven Ruggiero - CRT Capital Group LLC

Can you give us a sense of what portion of the back end increase in D&A? And when I mean back end, I'd say if you extract out the first quarter will be due to M Resorts?

Peter Carlino

I don't have that level of detail with me. Generally we don't give -- well we do eventually, but on a guidance perspective, we don't generally give that level of detail.

Steven Ruggiero - CRT Capital Group LLC

And just one last quick follow-up, do you think you can generate positive operating income from that property day one?

Peter Carlino

Well, it's certainly going to generate positive cash flow. Positive operating income, I believe the answer will be yes.

Okay, I think we're going to call it for the day. Obviously, you can call Mary or Bill and get more color on any questions yet unanswered.

In summary, we're kind of happy with where we are right now. It could always be better but we're doing fine. The team is highly motivated here and we look forward to 2011. It should be a very interesting year. Thanks very much.

Operator

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation, and we ask that you disconnect your lines.

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