Isle of Capri Casinos' (ISLE) CEO Virginia McDowell on Q3 2016 Results - Earnings Call Transcript

| About: Isle of (ISLE)

Call Start: 11:00

Call End: 11:44

Isle of Capri Casinos, Inc. (NASDAQ:ISLE)

Q3 2016 Earnings Conference Call

February 23, 2016, 11:00 ET


Jill Alexander - Director, Corporate Communications

Virginia McDowell - President & CEO

Eric Hausler - SVP & CFO

Arnold Block - COO


Brian Egger - Bloomberg Intelligence

Chad Beynon - Macquarie Research Equities

David Katz - Telsey Advisory Group

Carlo Santarelli - Deutsche Bank

Susan Berliner - JPMorgan

Adam Trivison - Gabelli & Company

Howard Bryerman - PENN Capital Management

Kevin Coyne - Goldman Sachs

Tom O'Shea - Castle Hill Asset Management


Welcome to Isle of Capri Casinos' FY '16 Third Quarter Conference Call. [Operator Instructions]. I will now turn the conference over to Jill Alexander. Please go ahead.

Jill Alexander

Good morning. All statements made during this call that relate to future result and events are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of risks and uncertainties which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release.

We assume no obligation to update our forward-looking statements. We're joined on the call today by Virginia McDowell, President and Chief Executive Officer; Eric Hausler, Chief Financial Officer; and Arnold Block, Chief Operating Officer. We're also joined by Mike Hart, Vice President of Treasury and Risk, who will not speaking on the call today. With that I would like to turn the call over to Virginia McDowell.

Virginia McDowell

Good morning everybody and thank you, Jill. One of my favorite quotes is that the windshield is bigger than the rear view mirror because you should be always be looking forward. As I was drafting comments from our last conference call; however, I did want to start with a glance back.

A year ago when we reported the third quarter our trailing 12 months adjusted EBITDA was $193 million. It is now $211 million through the end of this quarter over a 9% increase. Our debt balance a year ago just over $1 billion. It is now $952 million. Our debt to adjusted EBITDA was 5.3 times. It is now for 4.5 times. And our interest expense was $85 million. It is now $72 million trailing. Clearly we're a much stronger and a more focused Company than we were a year ago.

We have continued to improve and invest in our operations to build stronger relationships with our customers and strategically deploy capital. So as I shift my focus now to the future I believe that the Company is well-positioned to create even more value. I'm succeeded by an entire team of consummate professionals led by two extraordinary colleagues that I have worked with for two and a half decades combined and through three publicly traded gaming companies.

Eric Hausler has been the architect of impressive restructuring of our balance sheet over the last couple of years and brings a wealth of knowledge of the gaming industry dating back to his years on Wall Street. He will be a strong CEO who will leverage his talent for developing strategic initiatives for the benefit of our stakeholders and he will share some of his thoughts for the future a little later on the call.

Arnold Block has been the architect of the equally impressive improvement in our operations and leads a team of industry veterans who have worked in regional destination and resort casinos across the United States. Between Arnie and just his three regional Vice Presidents they have nearly 100 years of combined gaming experience.

I'm confident that I leave Isle of Capri in the most capable hands for the future. While I'm retiring from Isle I'm pleased that I will continue to be extremely involved in the industry I have known and loved for over three decades as the board chair and president of Global Gaming Women. Last week we announced that our organization had launched as a nonprofit separate from the American gaming Association with nearly $1.5 million in committed multiyear funding from a broad coalition of industry suppliers, operating companies and private individuals.

Our strategic plan includes high impact programs, conferences and events designed to change the face of gaming and I thank those of you who are listening to this call who have already offered your ideas and your support. We have hit the ground running and are planning on enhanced Global Gaming Women present at major industry conferences and I look forward to seeing you all on the circuit.

And finally I want to express my heartfelt thanks and appreciation for the support that I have personally received from the Isle board of directors and from my extraordinary Isle of Capri colleagues across the enterprise. To the extent that we have transformed this Company during my tenure, it is because of their collective professionalism and commitment to shareholders, to our team members and to our communities.

And with that and for the last time I will turn the call over to incoming CEO, Eric Hausler and incoming President and Chief Operating Officer, Arnold block. Gentleman the call is yours.

Eric Hausler

Thank you, Virginia. Virginia and I have worked together for many years and she has been a great mentor to me. On behalf of all of our stakeholders and employees and colleagues, I would like to thank her for leadership of Isle and the countless contributions she is made to the Company's success.

Our properties and balance sheet are in great shape and our Management teams up and down the organization are full of smart and thoughtful leaders as result of her stewardship. I'm going to provide a general overview then turn the call over to Arnie Block who will provide some additional color on our individual property results. Then I will close out the prepared comments.

In the third quarter we were faced with more challenging weather comparisons which affected several of our markets. If you recall last year every property in our portfolio reported year over year increase in EBITDA and our overall EBITDA was up 28%, so we were facing tougher comparisons this year. Most notably we experienced near record flooding along the Mississippi River in late December and early January.

Fortunately we did not have to close any of our properties along the Mississippi and I applaud our local management teams for their untiring efforts to protect our assets during that time. In the month of January severe winter affected the last week of our quarter from the storm system that moved west to east and eventually came to be known as Jonas. Prior to the last week of the quarter our property net revenues were up for the month of January. After the final week of the quarter the month of January registered a year over year decline in net revenues.

While we can't control the weather, we did continue to execute against our plan to be smarter about targeting our marketing dollars. Gross revenues declined approximately 3.9% with F&B and hotel revenues down and 5.3% and 5.2% respectively largely as a result of our strategic decision to reduce comps similar to what we reported in our fiscal second quarter. The decline in gross revenues was partially offset by a reduction in promotional allowances of 10%. As a result net revenues for continuing operations for the quarter were to $230.5 million a decrease of 2.5%. Adjusted EBITDA for the quarter was $45.9 million a decline of 3.2%.

Adjusted EBITDA margin was nearly flat at 19.9% relative to 20% in the year ago quarter. There a few items to note in the quarter. Our experience in our captive insurance company and our health insurance experience had a negative variance of $1.7 million combined year over year. While there is some volatility in both of these areas on a quarterly basis, last year was simply more favorable than this year.

During the quarter three properties reported record third quarter adjusted EBITDA and four properties reported their second best third quarter adjusted EBITDA. Four properties reported double-digit EBITDA percentage increases led by Vicksburg where EBITDA increased over 42% and Caruthersville which increased [Technical Difficulty]. On the corporate side cash corporate expenses increased about $190,000 largely as a result of timing of some expenses.

We expect corporate expense for FY '16 to be on the lower side of our previous guidance of $28 million to $30 million inclusive of stock compensation expense. Income from continuing operations was $7 million or $0.17 per share compared to $5.9 million or $0.15 per share or an increase of 18.4% and 13.3% respectively both quarters reflect Natchez and discontinued operations. I'm now going to turn the call over to Arnie to provide additional information on property results.

Arnold Block

Thank you, Eric. I would like to discuss performance highlights from the quarter for key properties. During the quarter six properties exceeded prior year EBITDA and three others were within $75,000 of prior year.

Unfortunately three of our property struggled during Q3 versus prior year results. Pompano experienced a decline in revenue during the quarter caused in part by lower visitation from Snowbird guests than seen during the prior year. The property also operates in a highly competitive environment and we saw sustained increased competitive spend during the quarter.

Lake Charles experienced lower business volumes early in the quarter due to the presence of Golden Nugget. However, our efforts to optimize our marketing and operating model led to improved performance late in the quarter as the one-year anniversary of the opening of Golden Nugget past in early December. As we noted in the press release adjusted EBITDA increased slightly in December and January.

Willis decline is related to the expansion project of Arkansas Racino [ph] Competitors who increased revenue $13.6 million versus prior year in the quarter. Lula continues to outperform its area competitors in Tunica and the property continues to optimize its expense structure for current levels of business volumes. Lula also experienced high river levels and inclement weather including a tornado during the Christmas to early January time period which negatively impacted results.

Despite the challenges that we experienced at those properties the Company achieved positive results at a number of our locations. Bettendorf grew EBITDA versus prior year in spite of disruption at the property caused by the land-based casino project and continued VGT revenue growth in Illinois. The property grew market share during all three months of the quarter positioning itself well in the Quad cities area for the opening of the land-based project later this calendar year.

In addition to Bettendorf's results several other properties performed well especially in light of the large growth achievements from the prior year. Our other Iowa properties, Blackhawk properties and Nemacolin either grew EBITDA or came within $100,000 of prior year when excluding a one-time expense.

Lastly a number of our properties experienced significant growth and even set EBITDA records in some instances. At Vicksburg our improvements in the operating model and marketing spending continued to boost net revenues in EBITDA. Efficiency and marketing were a key driver of results during this quarter and we will continue to play a key role in the property's success moving forward.

Lastly our Missouri properties experience positive results despite adverse winter weather impact in the area compared to prior year and Mississippi River flooding in early January. Boonville, Cape Girardeau and Caruthersville all experienced record EBITDA for the quarter due to marketing driven increases in revenue and operational improvements to expense structures. The Kansas City property was able to hold results relatively flat to prior year despite eight weeks of disruption on the casino floor from a carpet replacement, casino floor painting project during the quarter.

I will now turn the call back to Eric to discuss capital and our balance sheet.

Eric Hausler

Thanks Arnie. Turning to capital spending and the balance sheet we spent $19.5 million in capital in fiscal Q3 which included $15.5 million related to maintenance and equipment purchases.

During the quarter we completed the approximately $5 million renovation of our hotel in Boonville and completed renovation work on the casino floor at Kansas City including new carpeting and painting. We started construction on the Bettendorf land-based facility in mid-May 2015. Since the start of the project we have spent approximately $10.6 million including $4 million during the third quarter.

We're projecting to spend up to $60 million on this project with a 12 to 14 month build time opening in early summer 2016. The project remains on time and on budget. We expect to spend approximately $20 million in Bettendorf in our fourth quarter 2016 with the remainder carrying over to FY '17.

Through the first nine months of FY '16 we have spent $52.7 million in capital and expect to spend $85 million to $90 million inclusive of the aforementioned spending in Bettendorf. At the end of the quarter we had $952 million in total debt down from $993 million at the end of FY '15. We paid approximately $7 million in debt off during the third quarter and our revolver balance was about $96 million at the end of the third quarter.

Our gross leverage was approximately 4.5 times based on adjusted trailing 12 months EBITDA relative to 5.3 times a year ago and our leverage compares favorably to many in our peer group. Over the last 12 months we have generated free cash flow of approximately $90 million excluding the project spending at Bettendorf or $2.21 per share.

Our leverage for covenant purposes in our bank facility was just under 4.5 times and we had $195 million in available capacity on our revolver. Excluding what is currently outstanding and letters of credit we have full availability of our $300 million bank facility. In addition to our bank facility with $850 million of fixed rate debt with the nearest maturity on our bonds in mid 2020.

With that I'm going to shift gift gears for a moment and I think talking about the strength of our balance sheet is a good jumping off place for me to spend a few minutes to address some of the questions I have received about how I see the Company going forward. So I'm going to remove my CFO hat and put on the CEO hat for a few minutes.

I'm honored to be assuming the role of CEO as this is a very exciting time for Isle. During the transition period through the end of April I'm revisiting our properties to meet with our senior leaders to discuss their businesses, market dynamics, operations and physical plants. I'm really focused on four areas right now.

First the operations and culture. Throughout our organization we have excellent leaders, general managers, regional operating and marketing teams and line level employees. We have a customer first service-oriented culture here at Isle.

Our relentless focus on operational improvement will remain job number one as that underpins everything we do. Arnie Block has been our chief operating officer for several years now and I'm excited that he will assume the title of president. Many of the positive changes you have seen roll across this Company over the past few years are the direct result of Arnie's thoughtful leadership and attention to detail. Second internal allocation of capital.

We're developing a long term allocation plans for each of our properties. We've been steadily improving the quality of our asset portfolio for several years now through divestiture, new builds and reinvestment into our existing properties and we really are at an inflection point. Our significant free cash flow and strong balance sheet allows us to take a fresh look at our portfolio to develop targeted non-gaming and gaming projects which we believe will generate good returns on investment.

Third external allocation of capital. Today our balance sheet compares favorably to many of our regional gaming competitors and puts us in a position of strength to look at external opportunities like acquisitions and new builds to the extent they make sense and are available.

In the near term we will continue to focus using our free cash flow to complete Bettendorf and further deleverage our balance sheet. Over the mid to longer term we will also consider returning capital in some way to our shareholders as part of an overall capital allocation strategy. Finally, we're focused on technology. We're continuing to enhance our technology staff including upgrading many of our legacy systems to help our employees do their jobs better and enhance our guest experience.

I'm particularly excited that this calendar year we will rollout our first social gaming initiative under the Lady Luck brand which as our head of interactive says Lady Luck is the ubiquitous gaming brand you have already heard of even if you haven't. As our plans unfold over the next several months I look forward to sharing them with you in more detail.

With that, Operator, we can open the call for questions.

Question-and-Answer Session


[Operator Instructions]. Our first question comes today from Brian Egger with Bloomberg Intelligence. Please go ahead.

Brian Egger

I just had a question about this observation which we've heard in the prior quarter about fewer snowbird trips compared to last year and I'm just wondering if this in any way might be a collateral function of the kind of weather we have seen in the Northeast or just something that's economically independent of that or if you have any thoughts at all about what might be driving snowbird visitation habits this winter

Eric Hausler

We had mentioned it on the previous conference call the second quarter that we had seen lower snowbird visitation in November. I believe, we're in the Midwest, but I believe it was 70 degrees on Christmas Day in New York this year. So for sure I think that affected some of the inbound visitation and then after a certain point it seems like that's carried through the rest of the snowbird season. Overall I think people just not as many people are in the area. Arnie has some pretty good direct statistics on that.

Arnold Block

We keep close track of what snowbirds we mail to. We did a preseason mail and we saw the year over year snowbirds folks that came and visited us in November, December and January and came at least three times were off about 15%. We know from a data retrieval standpoint where we fell short with the snowbirds.


The next question is from Chad Beynon with Macquarie. Please go ahead.

Chad Beynon

Thanks for taking my questions and congratulations for all your accomplishments, Virginia and congrats, Eric and Arnie, for your newly appointed titles. First question just on the allocation of capital, Eric. You finished your closing remarks with that. I think that's probably the most important question we're getting from investors.

Given where your leverage is and the current status of the business, are these goals that you mentioned internal, external, short, medium or long term and are you prohibited in terms of doing anything until you open up Bettendorf and get past that CapEx> And then I have a follow-up. Thanks.

Eric Hausler

Sure. It's a good question and thank you. Over the near term we're going to finish Bettendorf. As you saw the spend is rolling there but the bulk of it at this point will hit FY '17, the first part of FY '17. So over the very near term our focus is going to be to complete Bettendorf out of our free cash flow and then whatever is left we will continue to put toward deleveraging.

Once we get beyond Bettendorf I think what we will do is and we will share more information on this as we get forward, is we will be looking at what internal projects are on the docket, where's internal projects that we can add to the properties that make sense that improve the guest experience and then the external allocation of capital will fall out of what's left of our free cash flow.

I can tell you I think we believe very strongly that maintaining a prudently levered balance sheet gives us a competitive in any operating environment and so that will remain a key focus of ours. But as I said $90 million of free cash flow we really have some interesting choices to make.

Chad Beynon

And then my follow-up last quarter I believe that was the first quarter when you really pushed forward some of these reduced marketing spending initiatives and the EBITDA flow through was pretty strong. This quarter the initiatives showed through, but the EBITDA flow through was a little bit lower. You mentioned some of the reasons.

What's the response then from your customers? I know, Arnie, you mentioned that win per visit was up, but any other color in terms of how your guests have reacted to the change in marketing spends amongst different tiers?

Arnold Block

We have really protected our A segment, our top of our segment and tried to grow profitable revenue streams by yielding the properties on the lower end. So it makes sense that some of our rated players in the lower segments would have fallen out into retail and retail is up. So I think in general they understand it and we're addressing this strictly from a profitability standpoint in terms of how we reinvest in them.


Our next question is from David Katz with Telsey Advisory Group. Please go ahead.

David Katz

I wanted to ask two questions one short one and make sure that I heard correctly particularly with Pompano. Did you say that there's -- you expect there is some carried through of kind of the down snowbird trend as we look through this coming quarter and this coming season? Is that something we should be contemplating in our model? And what exactly I'm not sure Blackhawk-wise I suppose it is on us we may have gotten a bit carried away with ourselves, but we see that as a very powerful one of the strongest economies in the country, if you could give us a little more color on what's going on there

Eric Hausler

Sure. On Pompano. Yes the snowbird visitation is off and we're now in late February, so there really isn't there's another month or so of the season. We have changed our marketing calendars and are adjusting our business levels and adjusting up and down across the enterprise for that dynamic. But I still would expect that that carries into February and likely into March at this point.

Arnold Block

In the Black Hawk market most of what we saw there was weather-related. We had seven weeks prior to Christmas that were impacted by weather most of which were on the weekends. We had a little bit of disruption from the Monarch construction on our main street and a very aggressive promotional calendar from Ameristar. So I would say most of what we saw was weather-related.

David Katz

Understood. And one last question. I think you finished up by talking about some of your interactive initiatives. Could you give us a sense for what the order of magnitude spending wise might be on that and how we measure that going forward whether it's revenue or profit wise as you roll that out?

Eric Hausler

Sure. I think it is a mid 2016 initiative. We're going to launch very slowly and deliberately to make sure that we have -- that we get the product rate and then over time we will ramp into it. So job number one is to make sure that we get the product launched, get it launched correctly, build the brand. And then we will from there start to ramp it up.

I would assume at this point, David, that is more of a FY '17, mid to late FY '17, before we start to seeing a meaningful -- any meaningful impact to either cost or revenue. And as we get more into it we will provide some more color around that. We just signed recently, I think it was December, we signed a deal with BM account network to be our provider and they are in the process of developing our product.


Our next question is from Carlo Santarelli with Deutsche Bank. Please go ahead.

Carlo Santarelli

Virginia, congratulations and best of luck. Eric, if I could, as you think about the capital returns and you obviously you mentioned looking at potential acquisitions looking at potential Greenfield developments and obviously looking at each of the properties here and how you plan to invest in them going forward. Could you talk a little bit about return thresholds for any kind of CapEx that goes towards growth and/or enhanced maintenance or amenities and maybe balance that with possible buybacks and or any other kind of capital returns you be thinking about and maybe within their comment a little bit how you think about stock liquidity within that context?

Eric Hausler

There is a lot in there. All right so historically we've always said we look for kind of a 15% EBITDA return on projects. Some of the projects we're doing it's very hard to tie off the exact EBITDA returns, so for instance we spent a few hundred thousand improving the parking in Caruthersville and the slot product and I think we've gotten a few million of EBITDA out of that.

So some of the projects are really more focused on how do we improve the guest experience, invest in the guest experience, make it easier for the guest to get into our facilities have better food, better slots and a better experience in our hotels. I think it's hard to tie them off individually on a return. What we do know is that our customer sells the products better and they are telling it to us with their wallets.

And so some of those projects may be parking garages at a few properties where we think it would be better to have structured parking than surface, continuing to renovate hotel rooms across the enterprise, we're doing some work at Blackhawk this quarter. We need to get in and do bathrooms there at the Isle Hotel. Making sure that the product that we put forth in our assets are in the best shape possible.

When we're looking at standalone return projects like a hotel at Cape Girardeau or a hotel in Kansas City or Pompano or some of the things we've talked about in the past, then I think we take a pretty rigorous approach to it and say this has to meet our return thresholds and candidly if it doesn't then we should be returning that capital to shareholders in some way.

We're concerned about liquidity and flow and we watch that pretty closely, but I think we'd all agree that even the companies in our sector that have significantly more liquidity than us see significant amounts of volatility in their stock price. And so I think the key for us is to make sure that we're not just wasting money for the sake of wasting money.

We want to make sure there is a good return associated with it not only for the customers but also for the shareholders. Did I miss anything in your question?

Carlo Santarelli

I think you caught it all. Thanks. That was very helpful. And if I could just with one follow-up. As you guys think about maybe not necessarily the margin story per se because then we have to get into revenues and everything else, but as you think about the cost medication whether it's through better promotions whether it's through refining the operations here and there, where do you think we're in that? If we were to look at a flat overall same-store revenue environment for FY '17 how should we think or how can we think about EBITDA growth in that type of top line environment

Eric Hausler

So in a flat environment I'd like to think that we can put a small measure of EBITDA through. You've seen in places like Vicksburg where revenues aren't really growing significantly, but we're seeing a pretty good uptick in EBITDA. There's still some of those opportunities across the portfolio.

They require a lot of time and Management resources to really dig into those initiatives and we're obviously spending time to do that. That is what we do. And I think in a flat revenue environment notwithstanding changes in promotional allowances and everything else, we're not seeing a big upswing in labor costs except in one or two markets.

Healthcare costs obviously are up and so that's the big drag, but we're not seeing a big inflation of costs across the enterprise. And so I'd like to think we could keep our cost structure balanced. We're continuing to look for ways to run not only the properties more efficiently but the corporate office more efficiently.

All the changes we're putting through with all the Management changes will also allow us to be a little more efficient there as well.


Our next question is from Susan with JPMorgan. Please go ahead.

Susan Berliner

So I guess I just want to start in Lake Charles. If you guys could update what you're seeing in the market not just from the competition but also are you hearing from any of your customers about more cautious spending with oil prices lower?

Eric Hausler

So what we said in Lake Charles is November was tough and we had said that on the call back in December. November was a rough month for us. January -- sorry, December and January at Lake Charles EBITDA was up slightly, so we're seeing some stabilization there. And February we don't have February wrapped yet, but so far it looks to me to be relatively flattish as well to slightly up.

And so overall I think we're seeing with the anniversary of the Nugget we're seeing -- it appears to be stabilizing some. We've retooled the marketing programs down there. If you recall last year we had a lot of coin coupons in the mail and so some of that has fallen off which is allowing us to manage the profitability.

As far as the economy there it's a drag for sure. I think you've seen the growth rates decelerate in Lake Charles, but again that's partially offset in our case by the fact that we're running through some easier comparisons.

Susan Berliner

And is there any way to provide an impact the weather and renovations that occurred this quarter in terms of EBITDA?

Eric Hausler

On the weather side I can tell you anecdotally through the first three weeks of January I think revenues were -- net revenues across the enterprise were up about a little over 1% even with lower marketing costs within that. And after the last quarter I want to say they were down about 2.5%.

So from an EBITDA standpoint the last week in the quarter if you assume there's a 50% to 60% flow-through on that, that probably translates to $1.5 million ballpark EBITDA just for that week alone. Unfortunately because our calendar ended January 24, we didn't have time to make that back up before the end of the calendar January like what you saw in some of the monthly numbers that came out.

Susan Berliner

And then my only other question with regard to what's going on in Florida with all the various gaming proposals can you update us your thoughts and if there's any impact to your property potentially?

Eric Hausler

Sure. There is an impact for sure. We don't know whether it is on balance positive or negative. A bill came out of the house committee and the Senate committee. Those bills are not the same and the Senate bill allows different things what compact the governor negotiated with Seminole tribe allows.

So there's a whole lot of work to be done there in Florida before the end of the session. So, I think I'll tell you the positives. The positives for us are a tax reduction of course. There's talk about decoupling us from horse racing. That would be obviously positive as well.

The negatives would be slots at Palm Beach would certainly impact our results and so it's a bit of a mixed tag depending on what ultimately shows up in the final bill. We spend a tremendous amount of time in Florida and our team spends a lot of time there making sure that our opinions and needs are well heard by the legislature.


Our next question is from Adam Trivison with Gabelli and Company. Please go ahead.

Adam Trivison

Can you provide some color on the competitive pressure you mentioned in Florida. I know there was a competitive reopening just south of you there during January I believe. Was that the majority of it or was it something else?

Eric Hausler

No, Dania did open mid-January, but what we saw from a pressure standpoint was the Seminoles increase their promotional spend. We have seen that in the past approaching the end of the calendar year. What we haven't seen is that they sustained it past the end of the calendar year.

We have adjusted our calendars, our promotions, our mail accordingly. Labor hours of operation and so as the snowbirds wind down and we battle the Seminoles we're prepared to deal with whatever the promotional spend is that they have in the market.

Adam Trivison

Okay. Do you have an assessment of how much Dania may impact you guys if there's any database overlap?

Eric Hausler

Dania typically has not impacted us in the past. They have a $60 million renovation and they were only open for two weeks during January, so it remains to be seen, but in the past we have not seen a big effect from them.

Adam Trivison

Okay and then just as a follow-up do you have any color results out of Boonville post the hotel reopening?

Eric Hausler

Room rates are up. Occupancy is steady. We're yielding the hotel to our better customers. We still have some pressure from St. Louis and Kansas City. But all the early reports are very positive that the room renovation is well accepted by our customers. They like it and we were able to raise room rates


Our next question is from Howard Bryerman with PENN Capital. Please go ahead.

Howard Bryerman

Eric if I may just ask you to put your old Wall Street hat back on again. I was curious to see how you were thinking about your two fixed income securities. Obviously, you are well aware of the fact that both of them are callable this year and if we look at where the 5.875s are trading they are certainly, even though the high-yield market has widened considerably, if we look at the 5.875s there's probably a considerable amount savings you can get on the 8.875s each point being worth about $3.5 million in free cash flow to yourself. Can you just comment on how you're thinking about these two securities?

Eric Hausler

I think you summed it up very well. Notwithstanding what's happening in the capital markets, both of our debt securities have held in very well. I think that's a testament to the deleveraging we've done as a Company and the strength of the balance sheet.

We're not a huge fan of testing the capital markets when they are extremely volatile for a -- what is a voluntary refinancing. But should the market stabilize and we see a good opportunity to go we will certainly consider it. The 8.875s are obviously in the wheelhouse there and as you correctly pointed out where the 8.875s trade would imply there's quite a bit of interest expense potential savings there even in a somewhat weaker market than we have seen.

So we're watching the capital markets we're also looking at our revolver along the way which is an 18. We're getting to a point where we're less than a half turn of secured leverage so it's not something we particularly worry about, but we're talking about -- we're talking to our bank group about both of those pieces of the structure at this point.

And with the bank facility where it is and our leverage where it is despite the volatility in the capital markets I think we've seen -- we haven't seen we have had several banks approach us about joining our bank group who otherwise would not have been interested a few years ago.


Our next question is from Kevin Coyne with Goldman Sachs. Please go ahead.

Kevin Coyne

Most have been asked and answered. But just one follow-up on your M&A comments. As you're doing work and considering options, the deals that you are looking at or have looked at, would you say the price or the multiples are reasonable today or are they still coming with somewhat of a REIT premium built into them?

Eric Hausler

I would say multiples -- I think it's a fact that multiples have come down quite a bit. If you look where we're trading for instance in our peer groups not just us the entire the sector's multiples have come in. I'm not sure there has been enough M&A data points in order to really judge what the individual multiples are on assets.

When we look at assets we don't focus so much on -- obviously we're sensitive to what multiple we're paying, really what we're focused on is how does the free cash flow of that asset after we finance it generate the return for us so the multiple kind of falls out of what we think the long term cash flow generating capabilities of those assets are.

And the multiple becomes a product of the NPV of the transaction for lack of a better term. And so when we're looking at it we're more focused on what can we pay for the stream of cash flows not necessarily what the multiple is. That said multiples in general appear to be lower than they have been in the past 18 months.

Kevin Coyne

Maybe just a follow-up along those lines, somewhat related. When you are considering options do you want to think of building out in an existing market are creating a cluster to leverage back office synergies and drive those free cash flows that you mentioned or would you look to broaden your reach and go into jurisdictions -- new jurisdictions such as Nevada?

Eric Hausler

I think depending on what the portfolio or assets are there are certain places that I don't -- look I think we're a very good regional operating Company and we run regional assets very well. And so as we're looking at potential opportunities, we would look for places that we're not currently in. Places that have a stable regulatory environment, a stable stream of cash flows, that are accretive to free cash flow and are assets that we think we can run as well or better than the current Management team. So from a criteria standpoint that's sort of the broad-based criteria for things we would look at but that said it isn't necessarily market specific


Our next question is from Tom O'Shea with Castle Hill. Please go ahead.

Tom O'Shea

Did you guys say that you are quarter to date on EBITDA so far?

Eric Hausler

We did not provide any guidance on where we're quarter to date

Tom O'Shea

Okay. And are there any restrictions in your bank agreement or bond indenture's from buying back stock or paying a dividend today?

Eric Hausler

Well, we have a restricted payments test in both the bank agreement and the senior notes and the sub notes and so based on restrictive payment availability which are fairly customary those are the outside governors. They're I believe each more than $100 million at this point.

I don't have the exact numbers in front of me, but they're substantially more than $100 million in each piece of.

Tom O'Shea

So your RP is $100 million you could pay out $100 million if you wanted to today?

Eric Hausler

It's well north of $100 million. It's well north -- it's a little under $200 million in the bank facility, because we're under five times leverage it's a blanket $200 million in the blank facility. I believe on the seniors it's in the $160 million and then the subs are a little more than $100 million. The subs actually have the least amount of restrictive payments

Tom O'Shea

Yes. Have you thought about just terming out the notes that are callable with bank debt?

Eric Hausler

Well so as that not there is a restriction against taking out junior debt with bank debt, so we couldn't necessarily do that around the senior notes. Again that would be under the senior notes in the credit facility would be restricted payment to take out of the sub note.


This concludes our question and answer session. I would like to turn the conference back over to Eric Hausler for any closing remarks.

Eric Hausler

I want to thank you all for joining us today and we look forward to talking to you in a few months.


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