Full House Resorts Wall Street Analyst Forum Transcript

Full House Resorts Inc. (FLL)

Wall Street Analyst Forum

March 27, 2008 1:20 pm ET

Executives

Andre Hilliou - Chief Executive Officer

Mark Miller - Chief Financial Officer

Presentation

Operator

Good afternoon everybody. If you could, please as a reminder if you have cell phones or pagers if you could turn them off or to vibrate, so as not to interrupt the presentation. The next company presenting this afternoon is Full House Resorts. Full House owns, develops and manages gaming facilities. Full House owns the Stockman's Casino in Fallon, Nevada, which has 8,400 square feet of gaming space, with approximately 260 gaming machines, four table games and a keno game. The casino has a bar, a fine dining restaurant and a coffee shop. Full House also receives a guaranteed fee from the operation of Harrington Raceway and Casino, formerly Midway Slots and Simulcast at the Delaware State Fairgrounds in Harrington, Delaware.

Harrington Raceway and Casino recently completed an expansion encompassing approximately 2,100 gaming devices, a buffet, a gourmet steak house, other food and beverage outlets and an entertainment lounge.

In addition, Full House has a management agreement with the Nottawaseppi Huron Band of Potawatomi Indians for the development and management of a first-class casino/resort with 2,500 gaming devices, 90 table games and 20 poker tables in the Battle Creek, Michigan area, which is currently in development. Further information about Full House can be viewed on its website at www.fullhouseresorts.com.

Presenting to you this afternoon is Andre Hilliou, the Chief Executive Officer and Mark Miller, the Chief Financial Officer.

Andre Hilliou

Good Afternoon. My name is Andre Hilliou and I am the CEO of Full House Resorts, and with me today is Mark Miller, our CFO. We are going to make a presentation and at the end of the presentation, we will take questions.

We have the usual Safe Harbor statement. And now, we're going to talk a little bit about our operation. As you can see from the map, managed properties are allocated in Michigan, Delaware and Montana. We own the Stockman’s Casino located in Fallon, Nevada, and we are focusing our effort in finding additional acquisition opportunities also in Northern Nevada.

Let me just give you a little bit of a company overview. We incorporated Delaware in 1987. The current management joined the company in '04 to really refocus Full House's business plan. We are a regional casino company, with established gaming operations in Nevada and Delaware, and hopefully soon in Michigan.

We also have, as we have said, the development and management agreement with the Huron Band of Potawatomi, to develop and manage the FireKeepers Casinos near Battle Creek, Michigan. We also have a management agreement with the Northern Cheyenne Tribe of Montana to develop and manage a casino project.

Now onto our business strategy, our top priority of course is to get the Michigan project underway. And number two is to pursue acquisition opportunities that meet our criteria. We have seen plenty of opportunities in the marketplace, and yet we haven't found the right fit, but we continue to look at the casino with a [better] business strategy. Small, local, regional casinos that have somewhat of a market leadership or the possibility to become a market leader and a management that is willing to stay in place.

Our management team is experienced. As you can see, we have assembled a senior management team with many years of experience in developing, opening and operating casinos. In addition, we have recently announced the recruitment of Bruce McKee as a General Manager for Michigan. Of course, the recruitment is pending financing. So it's all we are. Mark in on my right, myself and we have three other senior members of our team there, and we have worked together as a team in the past. So we know each other well and we understand what it takes to make a company successful.

Now, we are going to talk about the FireKeepers Casino in Michigan that we will manage on behalf of the Huron Potawatomi Tribe. What you see is an office rendering of the [Puerto Costa] of the Casino. The property is located between Chicago and Detroit on over 78 acres of land right at Exit 103 flaunting Interstate 94 with over 3000 gaming positions, restaurant, and a 2078 space covered parking garage. As you well know location and easy accessibility as well as a great product and a great management team are the main ingredients for success and that casino there has it all.

Now you have an overview of the construction site. That piece of land, they have 78 acres of land, it's actually 79 acres, but only 78 acres are really in tribal land, that piece of ground there right off the Exit.

I-94 is a main freeway running between Chicago and Detroit, and it's a [XE]. A very, very easy on and off interchange is already in place providing convenient access directly to the site. We have excellent visibility from the freeway in both directions, so the site is located just about four miles west of the I-64, I-94 junction. So it's a great location.

Again as I've said the location is close to Kalamazoo, Grand Rapids and Lansing Michigan. Within 50 miles of the casino, you have about 1 million adults and the mean household income of those 1 million adults is slightly over $61,000. So, a primary market of 1 million adults, a secondary market of 5.1 million adults within a one to two hour drive, and that includes Ann Arbor, Birmingham, Brighton, Grand Haven and Fort Wayne.

There are only really two gaming casinos within a 75 mile radius. So we really would have a, I wouldn't want to use the word monopoly, but hardly any competition within 50 miles. And keeping in mind that accessibility also is very important in gaming and if you look at where the casino is located in the previous slide it is very, very easy to get in. There is also over a 1 million visitors a year in Calhoun County, so it's a great location.

The Michigan gaming market, as you can see from the slide is a well-established market and really despite the economic challenges in Michigan, the market has continued to grow. Just as a side note, the other tribal casinos really seriously know of us. So if you look at Michigan, the market has kept on growing despite the challenges that the economy has presented to Michigan.

The casino itself is a first-class, really a first-class facility. We have again 2,500 slot machines, 90 tables, 20 poker, five restaurants and three bars and a covered parking garage. We also have made a lot of progress in the last four to six months in Michigan. The NIGC has approved our management agreement with the tribe in December, meaning we cleared the last legal and regulatory hurdle to the project. The tribe has engaged the construction manager. The design of the casino is complete; just about the completed contract and the GMPs have been executed.

Steel orders have been placed to secure long lead items as we know how construction is going on the world over, you'll have to ensure that steel is available when you need it. We also, as I said, identified the GM and he will join our team as soon as financing is obtained. And as we've said several times this morning, we really cannot discuss financing at this time.

The other casino there is really the Tongue River casino. We continue to pursue the Montana casino. However, the process is slower than expected and to be very honest with you, the casino in Michigan is really our principal focus at this time. As you know from the press release that we have put out this morning, we are really [not involved] in the Nambe casino in New Mexico. We took an impairment charge of $200,000 on contract rights, but we expect to recuperate and Mark will touch based on that later on.

We were also holding land for a potential project with the Chapters of the Navajo Nation and we are now looking at setting the [MAN] as well in New Mexico. Our acquisition strategy is simple. We really are looking at other opportunities to purchase casinos and meet our standards. Our criteria includes the ability to purchase at the right multiple, good management that is willing to stay and will remain with the property, a market leading position with the ability to become a market leader.

We believe financing on favorable terms will be available for well-established and moderately priced properties. There are many properties to look at and currently, the current turmoil in the credit market is clearly an advantage for well-financed buyers like ourselves.

The Stockman's, I'm actually going to have Mark going over the Stockman's and some of the financials. Mark?

Mark Miller

Thank you, Andre. As Andre indicated, we own a casino in Fallon, Nevada which is just about an hour east of Reno. We acquired the Stockman's casino in January of 2007, so we've owned it just little over a year. It is Fallon's home to the Fallon Naval Air Station, which is a major training facility for the navy and brings in a substantial number of military personnel on a rotating basis each year. So that provides a significant part of the business there as well as just the local market.

This is a picture of the Stockman's casino. The facility has approximately 8,400 square feet of gaming space. It's the only full-service casino in Fallon, offering 260 slot machines, four table games and a live keno game, has a coffee shop and a fine dining Steakhouse. It also is the only casino in town that has a rating system in a player's club. You also see in the background, there is the Holiday Inn Express which we acquired as part of the Stockman's. It has 98 rooms. We recently sold that facility, which I will talk about a little bit more.

So, here we acquired the Stockman's in January. In October, we announced the sale of the Holiday Inn Express for $7.2 million. In December, we did a significant renovation of the coffee shop. In January, we renovated and reopened the Steakhouse. And in February of this year, 2008, just recently, we closed on the sale of the Holiday Inn Express. We applied the net proceeds of approximately $7 million to reduce our indebtedness.

It should be noted here that we bought the Stockman's at a multiple that was just probably a little above six times. We sold the hotel for about 10 times and effectively reduced the purchase multiple for the casino to somewhere close to 5.5 times. Stockman's is the market leader in Fallon. We have about 23% of the slot units in the market. Our market share in 2006 before we acquired the facility was 34.8%. And for the full year 2007, we increased the market share to 36.2% and that was despite the disruptions of the coffee shop for renovations during the fourth quarter.

Let's see here, this is Harrington in south Delaware. This is a managed facility. We own 50% of a management company that manages the casino operation here. During 2007, we entered into an agreement with Harrington Raceway who is the owner of the facility and the other 50% to managers to allow them to take over most of the day-to-day operations. In return for that, we got a guaranteed increase in our share of the management stake, 5% in 2007, 8% in 2008 and 5% thereafter each year through the termination of the contract in 2011.

Harrington recently completed a significant expansion and renovation project that was still ongoing during the fourth quarter but was completed and opened in February of 2008, and the facility now has approximately 21,000 slot machines.

I see here, we probably covered everything on this slide already. So we'll skip through that. Just a quick financial snapshot for Full House, we are listed on the American Stock Exchange. We have about $19.3 million shares outstanding. This revenue number here of $13.8 million includes the equity income from our Delaware property. When you look on the income statement this is classified separately below operating expenses and is classified as equity income, but in terms of true cash flow revenue, we have about $13.8 million a year. Our EBITDA in 2007 was just around $2.6 million.

At the end of December we had a little over $7 million in cash. Debt outstanding does not include the Green Acres obligation which I'll talk about in a few minutes. Debt outstanding is of about $6 million available on our line of credit 4.8 and a pretty low debt-to-EBITDA ratio. You can see here there is significant change in the financial profile of the company in 2007 driven principally by the acquisition of the Stockman's Casino.

This is a look at our 2007 financials. This morning we released our 10-K for 2007, so that's now available. You can see here $9.5 million of revenue in 2007, none in 2006. This is all from Stockman's and this is after removing the hotel. The hotel is classified as a discontinued operation since we were selling it and closed down in February. Actual revenues from the Stockman facility were a little over $11 million including the hotel. Operating cost; again a significant increase here, again driven primarily by the Stockman's facility being included in our results.

Let's see here, the equity income, you see this right below the operating gains and losses. Equity income of unconsolidated joint ventures, that's the management fee from the Delaware property. You see a pretty significant increase here about 10% year-over-year, most of that driven by our guarantee, a 5% guarantee that kicked in about halfway through the year as well as some timing differences relative to rebates, but with that we would be building off of this base of $4.3 million. The 8% guarantee for 2008 is actually applied to the cash payments, which is about $4.1 million.

Unrealized gains on notes receivable tribal government, these are the changes in the fair market valuation of the receivables that we have from our Native American projects, the largest and most significant of which is the Michigan project. We have a tribal receivable that is about $14.2 million that's owed to us by the tribe for advances. That note is carried on our books at its fair market value and that fair market value fluctuates fairly significantly based on certain assumptions that we make, most predominantly the discount rate and the expected opening date. And then the changes in fair market valuation run through this line on our income statement.

So this can be pretty volatile depending on how things are going with that project. We'll look at it a little bit more when we turn to balance sheet. And then as Andre indicated, we had in 2007 some impairment losses of $407,000, $200,000 of this related to the Manuelito project, which we discontinued in New Mexico and a little over $200,000 related to the Nambe project in New Mexico which we also have just discontinued and taken the impairment costs.

Then as you move down the income statement you see your income from discontinued operations; that's the Holiday Inn Express in Fallon, Nevada and that's the impact on the net income $286,000 and about 5% in earnings per share. If you back out the impairment loss in 2007, our net income would increase by about $277,000 and earnings per share would increase by not quite a penny and a half.

On the balance sheet, at the end of December we had about $8 million in cash. Again you see a pretty significant change in our balance sheet, driven primarily by Stockman's, via Stockman's acquisition. Assets held for sale here is about $7 million; that's the Holiday Inn Express, again which we closed in February. Notes receivable from tribal projects, this is the amount that I was talking about before; most of that is related to the Michigan project carried at fair market value about $3 million less than its gross value.

Let see what else we have here anything else in particular, long-term debt $23 million, this includes $9.5 million of debt that we recorded in the fourth quarter related to our previous announcement that we were buying out certain rights in the Michigan management contract, which we refer to as the Green Acres rights. We entered into that agreement quite sometime ago and announced it, but we did not record the $9.5 million obligation, because there were some significant contingencies in that agreement. The most predominant of which was that the NIGC had to approve our seven year management agreement. And there were some questions as to whether they would approve the full seven years as apposed to a five year agreement.

The NIGC approved that agreement for the full seven years in December and with the removal of that significant contingency we recorded the liability of $9.5 million. That liability is shared 50-50 between us and our management partner RAM, but because the GEM is the management company and is a consolidated entity for us, the full value of that obligation shows up on our balance sheet here.

Again, that $9.5 million is expected to be funded from either separate financing or from a return of the money that the tribe owes us. They owe us about $14.2 million, so we have the option of either separately financing the $9.5 million or using the proceeds from the tribal receivable to ultimately pay that off. In either case that obligation will not be paid until we have financed or the Tribe has financed the construction of the Michigan project. But it is carried here as long-term debt.

Couple of other things, probably should be noted. We did close on the Holiday Inn Express transaction in February. We realized about $7 million in proceeds from that sale which we applied to our debt. We paid down our Nevada state bank loan, that loan is now only about $4 million. We have about $4.8 million of availability on it. We have no scheduled or required amortization payments until 2016.

So our debt service requirements going forward are very low, have been substantially reduced. And of course, if you look at this balance sheet, the assets held for sale are gone and about $7 million worth of the debt is gone and so that changes things fairly significantly. The hotel sale again allowed us to delever. It allowed us to increase availability liquidity, so that we are better positioned to pursue another acquisition.

Just to cover a couple of other points, when we acquired this Stockman's Casino. We acquired it on an EBIDTA, a full year EBIDTA run rate of about $4.5 million and we owned it for 11 months in 2007, if you include the hotel operations, that's about where it performed. About $4.5 million to $4.6 million EBITDA and so that acquisition has worked out pretty much as we expected.

Ongoing development expenses, just if you go back to the income statement, ongoing development expenses are a little bit lower in 2007 and this is principally due to the fact that the tribe acquired a bridge amount from IGT, back in the second quarter of 2007 and most of the development expenses related to Michigan have been funded from that bridge loan. Since that time, this relieved us of some of the expenditures that we had been carrying up until that point in time.

The one other thing that I'd just mention is, our results are substantially impacted by these unrealized valuation allowances on our tribal receivables. The calculation is pretty extensive. There is a fair amount of volatility involved in that calculation. We've very extensive disclosures regarding those in our 10-K and so anybody who is interested in knowing more about that and understanding it more fully, I would refer you to our 10-K and then obviously if you have questions after that we would be happy to answer those questions.

I think that pretty much covers the point that I wanted to make and with that we would be happy to answer any questions that you might have.

Any questions?

Question-and-Answer Session

Unidentified Audience Member

I wasn’t here, but in Power Point though I will ask. How long is the Michigan financing right now? Is the debt market impacting that?

Mark Miller

We made this comment earlier because of where we are in the process, we are not permitted to talk about the Michigan financing at this point in time. So, really that's about all I can say. That is with the project which is frustrating, I know. Its frustrating for us, it's frustrating for other people. But the project has advanced to the point where we are prepared to break ground and begin construction. So we are at the point in time where we are ready to finance the project and we are at the point in time where we can't talk about it. So, hopefully that gives you some indication of where we are.

Unidentified Audience Member

[Not only things] that is fully operational on a provisional basis and then fully operational.

Mark Miller

We estimate that from the time we break ground until opening is somewhere between 14 months and 15 months.

Unidentified Audience Member

Okay.

Andre Hilliou

(inaudible) we spoke a lot about the property and the property design, we have recruited the GM pending financing. We put the orders through for the steel. So a lot of work has been ongoing over the last three to four months. So once the financing comes true we can move very, very quickly. Is that true, Mark?

Mark Miller

Right, we made a lot of progress. We've reached the point where the tribe has engaged the construction manager. They have executed a guaranteed maximum price contract. So, a lot of the estimates that we had about, how much was it going to cost, how long will it take to build are now more informed because we have executed actual contracts for those and we have committed a small amount of capital. When I say we, it's primarily the tribe, have committed a small amount of capital to start securing long lead items.

So really in some senses, the construction process has already started. At this point, the ground is still frozen. So, we couldn't be in there working yet anyway, but mobilization planning, some of those kinds of things that are part of our construction schedule are actually underway right now while we work on the financing.

Unidentified Audience Member

One other question. Which (inaudible) did you get involved in any of the seven-day auction paper?

Mark Miller

No.

Unidentified Audience Member

You are familiar that a lot of companies have the seven-day auction paper?

Mark Miller

Yes. We are not involved in the seven-day auction paper. Any other questions?

Okay, well, we thank you for your attendance today.

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