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Executives

Eric Schippers - Senior Vice President of Public Affairs

Steve Ducharme - Chairman of Compliance Committee

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

Unknown Executive -

Timothy J. Wilmott - President and Chief Operating Officer

Peter M. Carlino - Chairman of the Board and Chief Executive Officer

Joseph Jaffoni - Investor Relations, Jaffoni & Collins Incorporated

Analysts

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

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

Felicia R. Hendrix - Barclays Capital, Research Division

Brian Egger - Harris Nesbitt

Steven Kent - Goldman Sachs Group Inc., Research Division

Joel H. Simkins - Crédit Suisse AG, Research Division

David B. Katz - Jefferies & Company, Inc., Research Division

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Adam Steinberg - Morgan Joseph

Mark Strawn - Morgan Stanley, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Penn National Gaming (PENN) Q3 2011 Earnings Call October 20, 2011 10:00 AM ET

Operator

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

Joseph Jaffoni

Thanks, Frank, and good morning, everyone, and thank you for joining Penn National Gaming's third quarter 2011 conference call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the Safe Harbor disclosure.

In addition to the 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 could vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Penn National Gaming assumes no obligations to publicly update or revise any forward-looking statements.

Today's call and webcast may also -- will 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 measure calculated and presented in accordance with GAAP can be found in today's news announcement, as well as on the company's website.

With that, I'll turn the call over to Penn National's Chairman and CEO, Peter Carlino. Peter?

Peter M. Carlino

Thanks, Joe, and good morning, everyone. We are, of course, happy to report another very good quarter here at Penn with good performance in virtually all of our properties.

Notably, construction is proceeding well with our 3 large projects in Kansas City, Toledo and Columbus, Ohio. And so this, from my view, is a very good time here at Penn National. As has been our custom for now quite a few years, I will -- that probably ends my official comments and we'll open the floor to questions and go to the issues that you folks want to hear. So with that, operator, would you please open the floor?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Felicia Hendrix of Barclays Capital.

Felicia R. Hendrix - Barclays Capital, Research Division

So first, I wanted to ask you, you reported a good quarter. Peter, you stated in the release that you're not seeing it. Despite the macroeconomic environment, you're not seeing disruption at your properties. You're not alone in stating that. Others, other regional operators have said the same thing and I'm wondering, do you think that's mainly because the markets really haven't recovered since 2008? Or is it something else? I know that you have made a lot of investments in your properties, but I'm really asking about the stability as a whole in the regional gaming arena, because people are certainly concerned about that.

Peter M. Carlino

Well, I'll give you a very quick answer. I'll turn it over to Tim, who of course, lives with this day-to-day, hour-by-hour. Look, I think this is more a macroeconomic issue. It is broadly how people are feeling. I mean, I think, this is my own view, as you know, we were all out in Las Vegas and much of the industry for the gaming conferences a couple of weeks ago, and the place was busy. I mean, it really was busy. Look, it's not what it had been. But obviously, people want to get out and want to have a good time, enjoy what we offer, and I think that's true on a regional basis as well. So the issue in our view, I think, is absolutely macro. But look, if we continue with the market down quarter-after-quarter-after-quarter and people start looking at their 401(k)s and retirement funds and so forth, I mean that could change. But at the moment, it's been pretty strong. Tim?

Timothy J. Wilmott

Yes. Felicia, we saw flat same-store sales growth year-over-year in our existing businesses, and I agree with Peter. I think it's more of a macro issue. I've always contended that our consumers are very sensitive to unemployment rates and their home prices, and that really hasn't changed too much in the last quarter. And I think that's reflected in our business lines that they remain very stable. We're not seeing any uptick. We're not seeing any downtick. And on top of that, as I mentioned recently when I was speaking in Las Vegas, we've seen a very, very rational promotional spending environment in the regional markets that have allowed us to continue to be smarter marketers and continue to shave off expenses to have better overall margins in our properties.

Felicia R. Hendrix - Barclays Capital, Research Division

Great. That's really helpful. Thank you. And then, Peter, you've talked in the past about how you guys don't necessarily do well when you have to bid on a new project. With that in mind, I'm just wondering, how do you view your opportunity in Massachusetts? And of all the opportunities for future growth you have after Ohio, I was just wondering if you could list out for us how you would prioritize those?

Peter M. Carlino

Well, look, let's talk to your first point, namely my view about options. I've always jokingly said the winner loses, which in my experience has often been the case. If you don't care about what you pay, then boy, you can buy a painting, for example, at Sotheby's for almost anything. So look, we generally are not anxious to win auctions. I've been very open about that. That being said, that doesn't mean we're not going to participate. If you look at Massachusetts, for example, that in effect may be semi-auction. I think the project quality is going to count, location and community support is going to count, and ultimately, dollar spend is going to count. I think in that situation, we probably will be a major contender, and because I think the market can support that one facility in the various identified regions. So we'll be probably pretty formidable there. You can count on that. In Ohio, I'm not sure how that relates so much to bidding. That's more of a legislative issue. The freestanding facilities, of course, are settled. It's not clear to us just what the state would wish to do with the race tracks. Much of the mechanics of this has been identified. What remains, of course, is this question of where will the tracks be located? And it's fully down to that. Eric, do you want to volunteer a thought on timing or any -- or Steve, whoever wants to?

Steve Ducharme

Yes, Peter. With respect to timing on the relocation, the state is obviously very anxious to get these facilities put to bid. There's been a constructive discussion with the administration through their financial adviser, and we just have to wait to see. I don't know if that will be this week, this month, but they certainly are motivated to get the lay of the land for VLTs clarified in Ohio.

Peter M. Carlino

Yes, and we're willing to do what it takes, frankly, to maximize revenue there. Look, we've made our case to both, as we said [ph], the adviser to the State of Ohio and to the government itself that the right idea is to do much as Pennsylvania did and put these things where they're going to have most impact, and that is to spread them around the state. I think that idea has pretty well sold. How it will play out, we don't yet know, but I think Steve said it, they clearly want to get to an answer sooner rather than later, and we expect that any time, any week, any today, there should be some answer.

Eric Schippers

Let me just add, if I could, Felicia, this is Eric Schippers, we successfully -- as it relates to Massachusetts and the auction process, we successfully lobbied for a provision that we'll call, for lack of a better term, put your money where your mouth is, which essentially means that when you apply for your license, you have to lay out your project and you have to commit to the full project and the big PR number that you're throwing out there. Or it could be something that the Gaming Commission ultimately will revoke your license for, if you don't fulfill all the phases of the project that you have promised. You also have to put up 10% of the project cost into escrow to commit to this. So when we go into these auctions and people promise these 5-phase wonderful huge things and then the state comes to learn that they really didn't have the financial wherewithal to do it, or they were really only intending to do the first phase of the project. I think Massachusetts has wisened up to that, and I think this whole thing will keep the game honest for us.

Peter M. Carlino

Yes. So, and believe me, we intend to hold our competitors' feet to the fire, put up the cash or don't bother. So we will be formidable on this.

Operator

Our next question comes from the line of Carlo Santarelli, Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

I guess I could understand and appreciate that the desire to maybe keep some information to yourselves with such a large breadth for a portfolio, but could you guys kind of talk to us through maybe some of the thinking behind the way you're now organized in the geographic regions and the reasons for doing so? And if you could, as a follow-up, if you can comment, obviously, you bought back some stocks in the period, is that going to be more sensitive to valuation on a go-forward basis? Or is taking in some incremental stock something we could expect over the next few quarters?

Steve Ducharme

Well, I'll take -- I guess I'll take both. The reasons behind going to the regional approach is pretty straightforward. We've got -- we're broken up into the 3 regions. We have regional ops people that are overseeing the groupings and properties, as laid out in the press release. The other reality is, quite simply, that 22 separate properties is becoming cumbersome and overwhelming in terms of the reporting requirements and the amount of details we're providing. And as we continue to grow, we could end up with just pages of individual store detail. Now -- excuse me, going forward, it also helps that quite candidly, I've had several or at least more than one public company CFO call me to ask me to better understand our corporate allocations, so they could do some property-by-property analysis comparing our individual properties against theirs, neither of which they had any kind of public information for us to assumingly do the same analysis. So quite candidly, from a competitive perspective, we've made the decision that giving that much detail is simply -- it's not in the best interest of our shareholders. We acknowledge that, obviously, the shareholders would like to see the detail, and we understand transparency. And it's clearly not on our indication, and I think we've led the way at almost all the time in terms of the amount of detail we have provided, either whether it's by property or within the detailed guidance that we give relative to other companies. It's not our intention to change those things, but on the balance, we made a value -- we just came to a value judgment that said this is really, in totality, in the best interest of our shareholders for us to do it this way. Relative to the stock buyback, clearly, we are always looking at different ways that we want to improve or enhance shareholder returns. And quite candidly, when the market gets to a point where the valuations are so compelling, we're going to step in and take advantage of that. Our view is -- we always look at potential acquisitions. We look at it and we compare it against internal purchases of our own stocks. I will tell you that we don't -- it's not -- they're not setting the same threshold. There's a spread. But when that spread gets too wide between what we think we can buy versus buying ourselves, we're going to step in to the market and buy the shares. So the answer to your question is, if the stock gets too low, you can expect us get -- to be there, and we'll be buying more shares if the stock drops again. So I guess that's the best answer I can give you for that one.

Operator

Our next question comes from the line of Joe Greff, JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

On the topic of the new reporting disclosures, will you guys highlight or break out revenues and cash flows from the Ohio and Kansas projects when they open and are up and running, generating revenues and EBITDA?

Peter M. Carlino

No. That's a pretty simple question, but no. The revenue -- I mean, revenues will be disclosed, obviously, from the state reporting requirement. So everybody will have access to the revenues. But no, we're not going to separately, as a practice, disclose that to the extent that is, obviously, there will be some disclosure, and we'll certainly disclose fluctuations in our regional operating performance, which undoubtedly require us to make some comments relative to how Ohio and Kansas are doing.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay. All right. And then what was, in the third quarter, what was the clean corporate expense result?

Peter M. Carlino

[ph] corporate overhead? [ph]

William J. Clifford

Corporate overhead in the third quarter, $18.8 million.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got you. All right, and then my final question here. I know the investment in Toledo went up by $20 million, which is not sizable, can you just talk about that a little bit. Was that just fine tuning? And then do you expect the cost for Columbus to change at all?

Timothy J. Wilmott

I would characterize Toledo as just fine tuning as we get down to completing that project, Joe. We're scheduled to open in early part of the second quarter, and I don't think it's anything more than that, as we are finalizing our GMP with our GC there. And we don't expect in Columbus, at this point, to have any changes to the $400 million figure. Just to refresh everyone's memory, there is a $50 million license fee that's included in these numbers per location and a minimum spend of $250 million per location as well. So that is -- that fine-tuning on the Toledo was to make sure we complied with a lot of the issues regarding the constitutional amendment that was passed in November of '09.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay. And Bill, if you could just give us at the end of the quarter, cash debt, what CapEx was in the quarter, that would be helpful and I'll let someone else ask questions.

William J. Clifford

Sure. Our cash at 9/30 was $207.8 million. Our bank debt was made up of: We have $200 million on the revolver; $691.2 million on the A; $748.1 million on the B, less, on a face value, less more basically less the OID. It gives a total bank debt of $1,637,600,000. The capital leases of $3.3 million and $1.9 million for the police work, police contract. And on top of that, $325 million for 8.75 bonds less our total debt at $1,967,800,000. CapEx expenditures for the quarter, where we spent $73.6 million on project CapEx and roughly $22.6 million on maintenance CapEx. That does not include the Hollywood Kansas Speedway. So our total for the quarter was $96.2 million. And at the Kansas Speedway, our CapEx for the quarter was roughly -- our share was roughly $20.2 million.

Operator

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

David B. Katz - Jefferies & Company, Inc., Research Division

I wanted to ask about -- and this may seem as an odd question, but with a lot of the growth going on outside of the United States and specifically in Asia, can you just talk about what strategy, if any, you might have looking internationally and what kind of structure and capital thoughts you might have around getting involved there?

Peter M. Carlino

Well, I mean, that's just a broad question. David, I think we have said publicly in numerous forums that we are at a scale today that there's no place on the planet that isn't open to our consideration that's kind of period. We cover coast-to-coast in the United States. We're pretty much in every nook and cranny looking for opportunity. That now applies to Asia. You might recall from earlier calls that we have over time spent a fair amount of time in Japan, when that looked a bit more promising than it does right now. Japan kind of moves glacially. We do spend some time in Korea, we spent time in, you name it, and I'll choose not to get too specific on this call. But look, our opportunities in Asia are limited. High-quality, safe, sensible opportunities are limited, but we are a constant presence there now. And that's, if anything is going to increase, I expect that before too much time goes by, we'll have a full-time person, not just an occasional but somebody on the ground, in an office that will work only for us pursuing the range of things we're currently looking at. So that is about as broad an answer as I can give you. But again, to emphasize, if there's gaming going on anywhere in the planet today and that makes sense, we need to be part of it. So...

David B. Katz - Jefferies & Company, Inc., Research Division

It definitely is. If I could just follow it up. They tend to be numerous and -- but few and far between at the same time. They're also very expensive, and I guess a part of my question was around your tolerance for capital investment outside the country, and would you be more inclined to be looking at partnerships rather than a direct capital investment?

Peter M. Carlino

All of the above. It depends on what's the country. Some countries are more stable, obviously, than others. It is unlikely, for example, that we would have pursued, however appealing and how ever good the result we know would have been. A $5 billion project in Singapore, you won't see us doing that, it's just beyond the scale of what we think is worth the risk of shareholders' money. We're looking for modest-sized projects. I mean, and there are some places where that may be possible. So look, I think you have to expect that Penn will continue to be Penn. I can't emphasize that enough. You've all heard that story time and time again. We move carefully. We move steadily. We move incrementally, and that may not be glamorous or flashy or a lot of stuff, but we have a very consistent track record of building value, finding the right projects by being patient. And so we shall be as we look at foreign stuff. We're not taking a leap off of any cliffs. So that's sort of my summary for that point, expect Penn to behave like Penn.

Operator

Our next question comes from the line of Dennis Forst, KeyBanc Capital Markets.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

I just have one simple question for Bill. I wanted to understand the other income items. You had a number of nonrecurring, both a gain and a loss, but other income was about $2.7 million in the quarter. What was included in that?

William J. Clifford

Other generally includes the currency translation gain we had, I believe, what that number is. So we had, obviously, the dollar actually gained against Canada for a change.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

And as I look at the top chart, $2.9 million currency gain. So that was in that line item. And where is preopening, is that in G&A?

William J. Clifford

Preopening is in other. It is in our other regions. It's also, yes. Well, it's going to be -- no, it's going to be in the operating expense line.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Which line, Bill, which line item in the income statement with preopening?

William J. Clifford

Page 7. That would be in your -- I'm sorry, which page are you on? You're not on Page 7. You're on page -- preopening expenses are above in the operating expense line items. It's going to be under G&A.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Yes, in G&A. Okay. So it's not broken out by property. So would we see it in the new presentation by region? It's included in the various regions.

William J. Clifford

Quite so.

Operator

Our next question comes from the line of Steven Wieczynski, Stifel, Nicolaus.

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

Tim, probably a question for you. It sounds like the rated play -- your rated players have been fairly stable, but can you talk more about the nonrated players. I mean, has that segment gotten softer or has that remained pretty stable as well?

Timothy J. Wilmott

Steve, actually the third quarter, and I think this is more a result of our marketing management of trying to continue to be more profitable with our rated database, especially at the low end. We actually saw an increase, a slight increase in our nonrated activity across the enterprise and actually saw a slight decline of rated activity. So I know as you think about large macroeconomic issues, you think your nonrated business would feel the effects of it first, but we actually saw the opposite, but I think that's more a result of the things we're doing in the marketing area to continue to be more profitable with our marketing reinvestment and converting rated business at the low end to unrated. So the good news is we think the business is still coming, but it's coming to us in a more profitable form.

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

Okay, got you. And then one more question. In terms of the way you guys are reporting now, I'm not looking for numbers or anything like that, but if you could maybe walk us through maybe your 2 biggest properties in the quarter, Charles Town and Lawrenceburg, just how they did relative to your expectations and where margins went and maybe also, what you're seeing so far in the first 20 days of October?

William J. Clifford

Sorry, I don't want to be flip about it, but that would obviously eliminate the whole idea of going through regional reporting.

William J. Clifford

On the broad question you can...

Peter M. Carlino

Yes, I mean, broadly third quarter we haven't seen anything that's causing us any noticeable change in what we're seeing in early October.

Operator

Our next question comes from the line of Joel Simkins, Crédit Suisse.

Joel H. Simkins - Crédit Suisse AG, Research Division

Obviously, a lot of investors tend to focus on Charles Town, the impact from Anne Arundel, but can you also spend some time with us talking about Baton Rouge and how you prepare for Pinnacle next year, as well as Lawrenceburg and Caesars in early '13?

Timothy J. Wilmott

Let me take, in Baton Rouge, we expect sometime in the third quarter Pinnacle to open a $350 million investment. And obviously, we think the market is not big enough to absorb that, and there's going to be loss of business at our Baton Rouge operation. We have prepared a number of different scenarios to revise our cost structure to a new level of business there. We are also going to be very focused on customers that are going to be in the fight zone to protect our profitable business and make it very, very difficult for Pinnacle to easily take our business away from us when they do open. But we do expect that there will be a hit in the third quarter next year. We're going to be fully prepared for that and react very quickly, as a new level of business volumes are realized there. In Lawrenceburg, we've got a little bit more time there. Spring of 2013 is what we're expecting to be the opening of Horseshoe Cincinnati. It will be interesting to see what that effect will have on Lawrenceburg. It certainly will have a noticeable effect. We still have the advantage that our customers will be able to smoke in our casino environment, where in Ohio it is a smoke-free casino, and we also have a suburban location that won't have the issues of congestion of a city. So that's going to be something we're going to watch very closely, given their location. There's a slide in downtown Cincinnati, how the customers are going to react to a urban location for a casino versus our suburban location. Clearly, there's going to be a lot of trial as people want to see the new property there. But like Baton Rouge, we're going to be prepared to react very quickly to our business volumes and amend our cost structure to be as profitable as we possibly can be when that new entrants come into the market in spring of '13.

Peter M. Carlino

Well and let me add. We've already provided the hedge for that. I mean, look, in Ohio, we say was inevitable as Texas is inevitable as these states are going to get gaming. We were proactive and stepped up and made sure that recognizing competition was there. So for us, that part of our whole regional strategy. This is not a one property. We kind of don't look at the world in terms of Charles Town or Lawrenceburg, we look at what the engine is doing, what the whole -- what the region is doing. So look, I'd rather all of our properties do nothing but go straight up. But the world being what world is, we recognize that there are competitive pressures. So the fact that Lawrenceburg is down, but we're overwhelmingly up in the end, that's fine. That really speaks more frankly to the question asked earlier about why we're taking the regional approach. We don't look at a single property any longer. We're about what this company is doing, and we just run faster and try to run faster than everybody else.

Joel H. Simkins - Crédit Suisse AG, Research Division

And one final question, Peter, for you. Obviously, you have a lot of organic -- or excuse me, a lot of external growth opportunities out there. How would you sort of rank once again M&A as sort of a priority for you, given that the company, much of it, was formed really through roll-ups.

Peter M. Carlino

Huge, it remains huge. If you see the right opportunity at the right price. Look, we're ready tomorrow morning at 9:00. And we're always looking at stuff. That has not changed one iota. So I'm optimistic that over the next couple of years, you'll see some pretty exciting things happening here. But look, this company is as motivated today as we were 15 years ago. In fact, we're on a tear, and to the best of our ability, the entire group you see represented here is committed to our continued growth. And I mean, look, you all have followed us over a period of time. We're a pretty rapacious cloud, I mean we're out there doing it. So M&A still high on the list.

Operator

Our next question comes from the line of Mark Strawn, Morgan Stanley.

Mark Strawn - Morgan Stanley, Research Division

Following up on the last question. Thinking about the properties where you're subject to new competition, we'll be able to track the revenue cannibalization by properties to the jurisdictions, but how should we think about it on the EBITDA side in aggregate? Are there things that you can do on the cost side to maybe keep the margin impact largely neutral? Any color there would be very helpful.

Timothy J. Wilmott

Well we certainly have the 2 biggest levers to work with, that being marketing and labor cost. And I think your question, Mark, will vary a bit jurisdiction-by-jurisdiction. When you have environments that have a very high tax environments, it's going to be a little easier to preserve the margins there, because a lot of that is being absorbed in places like Charles Town on the slot side, we're in the high 50s. So that will also be a variable of how the EBITDA margins are preserved at these businesses. But clearly, we're going to be fully prepared in marketing and labor to react accordingly as revenues in places like Baton Rouge and Lawrenceburg, as we expect to decline. Bill, do you have anything to add on that?

William J. Clifford

Yes. I would just comment that I think we're very cognizant of what's happening, looking forward, and this is something I rarely do, but I'm going to make a couple of comments relative to what I'm seeing on the Street guidance for '12 and '13. The reality is, I think what's happening is, and I don't know whether it's because there's too much ramp-up. Earlier, there was not enough recognition for cannibalization in '12. But clearly, some of the numbers, and I'm not going to say all, but some of the numbers are quite candidly a little bit too optimistic or too high. Having said that, as I look out at '13, and which is how we look at it, we're looking at the long term. As I look at '13, and there aren't many numbers published on '13. But I can tell you that I feel very comfortable that we're going to be significantly higher than the highest number on the Street in '12. Now obviously, that may not come as a huge surprise, but I can tell you that we're very comfortable that we're going to be growing EBITDA through '13. '12 is probably going to be closer to flat than what we're seeing in some of the estimates coming out for '12. So '12, I think, you can expect us to see guidance somewhere modestly to flat and then '13 is going to be an amazing year, as everything ramps up and as all the properties come online. So having said that, I'll take the next question.

Operator

Our next question comes from the line of Steven Kent, Goldman Sachs.

Steven Kent - Goldman Sachs Group Inc., Research Division

I was just wondering if you could just talk a little bit up again about the promotional environment. And I guess where I'm going is that in locals Las Vegas, we didn't see a lot of promotional activity, and then in the past 6 months or so, we started to see it tick up as things became more and more difficult. So I was just wondering whether you -- what's different about locals Las Vegas that you're not seeing in some of the regional environments? And I think it's partially just -- where locals Las Vegas you have a lot of competition but ultimately, you're going to see competition across much of the markets you're in. So I just wanted to understand that. And then secondarily, I mean, if I look at the returns of your company and look at the new properties you're putting on, those returns seem to be drifting lower due to either the need for more capital or due to cannibalization. So I'm wondering why buy stock when maybe a dividend is more appropriate and pushing the cash out [indiscernible] I'm not sure if there's some restriction or something else that makes you decide to buy stock versus pay a dividend.

Peter M. Carlino

Wow, there's a lot in that one.

Steven Kent - Goldman Sachs Group Inc., Research Division

Well, I like to have a comprehensive question.

Peter M. Carlino

Well, let's go back to the promotional side. Tim I think said earlier, we're not seeing anything unusual in promotional spend pretty much around the country.

Timothy J. Wilmott

Yes, I mean, Las Vegas locals is the most intensely competitive market out there that we're seeing. And obviously, I think with stations now reformed, they're still the 800-pound gorilla in the Las Vegas locals market, but we're trying to establish a different identity at M and market to customers at a certain quality level that aren't as promotionally sensitive as the rest of the market. We also have the advantage of being the first right-hand turn coming in from Southern California. So we're trying to stay out of the fray in Las Vegas, as we're going to tap into what we believe better, more lucrative consumer segments that feed the M. But beyond that, regionally, I think there's been a lot of experience by us and also our competitors in these regional markets going back to '08, '09 and '10, that right now, it's not wise to try to amend customer spending behaviors in these economic times, and I think everyone has learned that, and I think that's why we're seeing such a rational environment across the regional markets. Now I'll turn it over to Bill, I think, on the question on dividend versus share buybacks.

William J. Clifford

Look, I think the reality is, is that it's our view that stock buybacks are actually better for shareholders than dividends. I'm not quite sure where you come up with your analysis to indicate otherwise. Certainly, from our perspective, when we can buy back our shares, for one thing, you can always reissue shares, right? So in other words, if I issue a dividend, it's gone forever. If I buy back shares, theoretically, I can turn around, and if I need to the future, at some point, reissue the shares. It's very difficult to call back a dividend now. And having said that, I think, listen, I think we are open to any and all structures that would add shareholder value. If we believe that dividends were the best way to go, I think you'd see our chairman, who's sitting right next to me, heartily endorse issuing dividends. And since he's got a significant stake with the number of shares in the company, but that's pretty much our thought process.

Steve Ducharme

It's not tax-effective. I mean, frankly, it is not tax-effective. When the government launches up and gets a rational tax policy, you might see us thinking about dividends. But paying out dividends on top of our egregious unlike GE corporate tax rates, because we actually pay the full boat in our industry, then we might talk about it. But frankly, by the time it gets down to individual shareholder, there are more effective ways for us to use our cash. So don't count on a dividend any time soon, in short of a change in tax policy.

Steven Kent - Goldman Sachs Group Inc., Research Division

Yes. I guess I was just struggling with it. You're buying stock, admittedly at a low multiple or lower multiple, but you're also investing where your returns seem to be going a little bit low and your overall corporate ROIC seem to be going...

Peter M. Carlino

I'm not sure we're buying that either, by the way. We're not buying that premise either. Yes, help us with that? Tell us...

Timothy J. Wilmott

Yes, I don't get the lower return concept there.

Steven Kent - Goldman Sachs Group Inc., Research Division

Well, I mean, every new project seems to cost more and you face cannibalization in many of those markets. So even the ones you've said you're building, you're building them and you know that they're going to cannibalize your existing business. So inherently, those things create some decline in return.

Timothy J. Wilmott

So your proposal would be, so we should just let someone else build a casino, and take the cannibalization and not hit from the new opportunity?

Steven Kent - Goldman Sachs Group Inc., Research Division

No, that's why I'm suggesting that maybe you'd pay out a dividend, so that the investor base might be able to decide where to allocate capital.

Timothy J. Wilmott

Well, they can sell their shares, if they don't like where they're we're at. I mean, let's face it, if they don't think we're in good shape here, everybody's got the option to sell shares and reinvest their capital wherever they feel appropriate.

Peter M. Carlino

That's why we're only too happy to relieve some of our shareholders at a price, shares that they'd like to part with at a price.

Timothy J. Wilmott

And as Peter said before, Steve, if you look at the, in totality, the opportunity we have in Ohio versus the impact in Lawrenceburg, that's going to be a very accretive opportunity for us to realize once these properties open in 2012, even with the impact of Lawrenceburg.

Peter M. Carlino

And that return on cash is going to be very impressive. So again, we're looking at this in a large organic way. We are just no longer going to focus property-to-property.

Operator

[Operator Instructions] Our next question comes from the line of Shaun Kelley, Bank of America Merrill Lynch.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

I just wanted to go back to your comment, Bill, about kind of 2012. Just trying to get a little bit of a better sense, I think you guys have already touched on Louisiana and Maryland a little bit. But specifically, as it relates to Maryland, I know there's been another proposal as it relates to a potential facility in Baltimore. So I kind of wanted to get your thoughts a little bit more clearly on the impact in that market, and specifically, is Baltimore kind of contemplated in how you guys are thinking about competition in '12 and '13?

William J. Clifford

Yes, I mean, we fully expect Baltimore to be on line. Not by '12, but certainly, we expect Baltimore to come on line. My understanding is that there's an entity with significant capital behind them that decided to support the project from downtown Baltimore. So we would expect that, that will get built. Just to be clear on what I'm saying, I think '13 is a great year. And again, I will reiterate that it will be significantly higher than the highest numbers anybody has on the Street for '12. Relative -- obviously for '12, we have -- we're very pragmatic about it. First of all, new properties do not open at full strength. So I think one of the things that is probably happening, and I don't know everybody's number and analyst estimates, but I do believe that what's probably happening is that there's an expectation that the properties are going to open pretty much at a full run rate. Typically, that's where when we've seen other people's numbers, that seems to be where we have a difference of opinion, or it could be on the cannibalization side. I'm not going to -- because I haven't again gone through those numbers, but I think people need to be a little more practical relative to how they expect the numbers of the properties to ramp in '12, the new stuff coming online. It's probably where I think the bulk of the difference is.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

That's helpful. And then I guess I just wanted to follow up on one other market, which was the competition you've seen in Illinois. So far, I'd actually think that between the numbers coming out of Rivers and what you guys have actually seen from an impact standpoint, it's been probably a pleasant surprise there. I'm just kind of trying to get your thoughts on the market though, because other people look like they have been impacted negatively. Is that a -- or are you kind of expecting any change in activity in that market? And how are you guys seeing that hold up?

Timothy J. Wilmott

Shaun, this is Tim. You're right. Through the third quarter, we're actually pleased with the impact we're seeing in Aurora and Joliet with the opening of the Des Plaines license. It has been less than we anticipated, but clearly, the 2 licensees that have been most impacted, and we did expect this, is the Elgin license and also the Hamlin license in Northwest Indiana. We're watching it very closely. We obviously see the business levels that are being reported by Rivers. And it certainly seems to be coming more from the Lake, McHenry County areas and also downtown Chicago then out versus the feeder markets that feed both Joliet and Aurora. So it is better than we've anticipated, watching it very closely, and hopefully, it will sustain itself going forward.

Operator

Our next question comes from the line of Brian Egger, Forecastle Research.

Brian Egger - Harris Nesbitt

Could you share your sense of the status and the outlook for the Illinois gaming bill since you're talking about Illinois and the impact it especially impends Chicago region facilities. It seems the Governor Quinn has obviously pushed back pretty hard against the provisions for slots at the tracks and the airports?

Eric Schippers

Yes, this is Eric Schippers. So the Governor Quinn, as you said, came out strongly against the notion of racinos, and I think his is quote was something like, "Let's all be honest here, what you would be talking about would be 14 new casinos in the state, if tracks were included." The rub is the measure, the rub for those supporters of the gaming expansion is that the measure paths, the House and the Senate with a minimum number of votes, and some are claiming that taking the tracks out would lose more than a dozen votes than trying to put back together a proposal. The tracks are not going to go down easy. They're going to be fighting, in fact, we've heard that during a veto session there may be another bill that comes back with the tracks back in it. I think that is going to be a very high hurdle for them to try to get approved in veto session, but we expect the fight will continue, both in veto session which is from November 10 to January and then in the regular session in January. But the governor has been very unequivocal, both in the principles he has laid out and in the follow-up message points on this that he just see this as too expensive to include the tracks.

Operator

Our next question comes from the line of Ryan Worst, Brean Murray.

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Just a question on the relocation of race tracks in Ohio. Peter, could you shed any light on to the timing of moving those tracks and whether or not there needs to be local approval, and also whether or not there's been a fee structure set for moving the tracks?

Peter M. Carlino

Steve, I think, addressed that earlier. But Steve, why don't you kind of do a recap on that?

Steve Ducharme

Ryan, as I mentioned earlier, there'd been some constructive discussions with the administration through their financial adviser with respect to the approval of the relocation of both the Raceway and the Beulah facilities. There's no outcome. Obviously, the Racing Commission has now set the application forms and the application process for relocation. But as Peter mentioned earlier, in looking at the state of Ohio and maximizing VLT revenues, we think and I believe most in the state agree that relocating some of these facilities to underserved markets makes sense. What the outcome of those negotiations will be and when there will be an outcome is unclear to us, but the administration is certainly motivated to get to a conclusion as quickly as possible. So I don't know if it's next week or next month, but we'll see.

Unknown Executive

[ph]

And the costs. Maybe you want to...

Steve Ducharme

Yes, you would also I guess ask the question of the cost of relocation, and there will be -- it's expected that there will be a premium license fee that will be paid for the relocation of those facilities. But suffice it to say, as we as a company look at the overall allocation of capital around the state of Ohio, we can certainly get comfortable with a premium well in excess potentially of the $50 million license fee. But again, that is all contingent on the outcome of these discussions.

Brian Egger - Harris Nesbitt

Sure. And then Steve, what about the local referendums, is that going to be necessary?

Steve Ducharme

We don't expect to be subject to any local referendum, but we certainly will be subject to all local zoning and planning requirements. And based on the receptions that we've gotten from the communities which we've identified, we expect that to be relatively smooth sailing, both North Dayton as well as Austintown in the Mahoning Valley have been very supportive, and they've been asking questions very similar to you when we will we know and when can we start. They're anxious to roll up their sleeves as we are to bring this investment and these jobs to their communities.

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

And then, Bill, just a couple of quick questions. What was the normalized tax rate or what will that be in the fourth quarter and going forward? And then, can you talk about how much you have remaining on your share repurchase authorization?

William J. Clifford

Yes. We have -- the normalized tax rate, which is in our outline of our estimates here, I mean, it's going to be roughly between 37.5%, 38% will be the normalized tax run rate. Relative to the authorization on the stock buyback, I believe we've got to 230 million or 240 million remaining, 240 million.

Operator

Our next question comes from the line of Adam Steinberg, FBR Capital Markets.

Adam Steinberg - Morgan Joseph

Yes, Bill, this question is for you. Normally, you guys, you got a fair amount of lobbying expenses in your corporate overhead. Was there any noise like that in the quarter? And how should we look at that going forward?

William J. Clifford

No. There's -- listen, we certainly in prior years had some rather outside lobbying expenses. No offense to Eric.

Eric Schippers

I think Ohio was worth it.

William J. Clifford

Just to be clear with fantastic results, and that clearly had an impact not only on the corporate overhead numbers, but also had an impact on our tax rate because those efforts were not divestible for tax purposes. So that clearly and historically driven the tax rate higher than normal. We also did do though a reorganization of converting some of our subsidiaries from one legal entity form to another, which is allowing us to do a better job of spreading the tax burden across multiple states, which is allowing us to take advantage of some of the states, which has some higher operating expenses and blending those across other states. In any event, that's picking up probably about $4 million a year. It's doing that.

Adam Steinberg - Morgan Joseph

I'm sorry, can you repeat that?

William J. Clifford

The reorganization basically is saving us roughly $4 million a year in tax that we just completed in the third quarter.

Adam Steinberg - Morgan Joseph

Okay. If I recall from your agreement with your partners in Texas, you are required to spend some money in this year on lobbying in the Texas Legislature, and that ended basically sometime this quarter. Was there any expenditures on that this quarter?

William J. Clifford

Nothing that was material, but I'm sure we spent a little something here and there, but nothing that would be worthwhile mentioning. The fact that we had a requirement, it was -- obviously, it was mutually agreeable. We certainly feel obligated to spend money in an effort to and would, in any event, spend the money trying to get gaming passed in Texas. Why don't I let Eric add more color to that issue.

Eric Schippers

Yes. The big-ticket item there would be if we were successful in getting to a state-wide referendum, and we were not. So really, what you were looking at were just some consulting fees, lobbyist fees, nothing worth mentioning.

Adam Steinberg - Morgan Joseph

Okay. And I'm sure I've gotten this answer from you in the past, but I can't find it in my notes. When do you pay the $50 million licensing fee in Ohio? Is that once you open? Or is that -- is it kind of like part now part later?

Timothy J. Wilmott

We -- it's per location, Adam, and it's paid when we are licensed as an owner-operator.

Adam Steinberg - Morgan Joseph

So basically, the quarter you open.

Timothy J. Wilmott

Probably, maybe a little bit before then, but not much time before then.

Adam Steinberg - Morgan Joseph

Not much time before then, okay. And then last question and this one goes back to you Tim. When you were talking about your rated play versus your nonrated play, and I can understand, you rejiggered kind of your promotion and you're pushing some people into nonrated, could you also look at this as perhaps, if I look at the other gaming commission numbers, it looks like you're taking some market share. Could you also look at it as you're taking market share from some of your other competitors?

Timothy J. Wilmott

In a number of markets where we are seeing a pick-up in share, I think it's more a reflection back this time, third quarter 2010, we had a higher rate of promotional activity from our competitors in certain markets in the Midwest and a couple of other places. Now that they pulled back, I think you're seeing the share come our way because there's not the buying of business that occurred year ago. So I think it's more of a reflection of the rational spending in these markets today versus a more aggressive spend that occurred a year ago.

Adam Steinberg - Morgan Joseph

Okay. And I guess coming at this from a different angle then, could it be -- I mean, is that some of your rated players coming back to you and then can I look at this maybe your rated players are spending less per visit, but you're picking up in the lower end for the retail customers?

Timothy J. Wilmott

No. I think we're losing the low-end retail-rated play because they're finding it from a reward standpoint less appealing to them. And I think as you look at the overall rated player based on a per-trip basis, we are seeing the quality of the rated customer up, but the amount of trips, especially at the low end, down.

Operator

We have a follow-up question from Dennis Forst of KeyBanc Capital Markets.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Yes. Tim, I wanted to nitpick about the promotional allowances. In the third quarter it looks like they ticked up a little bit to about $40 million, up 16% year-over-year on a 9% increase in gaming. That's something that hasn't been happening. You've actually been, the previous few quarters, showing absolute declines in promotional allowances. It also kind of on a percentage of casino revenues or gross revenues or however you want to spread it, it seems higher than I was expecting, particularly, in this benign environment. Can you explain that to us?

Timothy J. Wilmott

Stand by a second. One second as I'm trying to refer to where you're seeing this.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Promotional allowances were $39.6 million in the quarter.

Timothy J. Wilmott

Yes, I think this year's numbers compared to last year's numbers now include the M and Perryville as well. And so you have to look at the M and Perryville in these numbers, especially as we've inherited the M, that more so given the environment in the Las Vegas locals is now new to the mix.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Yes, just sequentially from the second quarter, I don't think you owned M the whole second quarter but --

Timothy J. Wilmott

Only one month Dennis in the second quarter.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

But it was $6 million. And additionally, as a percentage of gross revenue, it was up around 60 basis points. And as a percentage of casino revenue, it was up almost 100 basis points. So it just seems like promotional allowances were higher, certainly higher than we were expecting and higher than recent trends, too. So I just wanted to understand that better. Anything other than M?

Timothy J. Wilmott

No. I mean if we look at [indiscernible]

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

[indiscernible] an apples-to-apples comparison.

Timothy J. Wilmott

Perryville is new, too, because we didn't open Perryville until late September of '10, but it was on a full quarter to full quarter sequentially, you're correct. In almost all the cases of our existing business is year-over-year, Dennis, we are showing improvements in our marketing reinvestment across all those businesses.

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Okay. Good. I just wanted to deal with that.

Operator

Mr. Carlino, there are no further question at this time. Please continue with your presentation or closing remarks.

Peter M. Carlino

Okay. We'll say thank you all very much for joining us at the end of this quarter. I look forward to talking with you in the early part of next year. Thanks, again.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.

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