Pinnacle Entertainment Inc. Q2 2008 Earnings Call Transcript

| About: Pinnacle Entertainment, (PNK)

Pinnacle Entertainment Inc. (NYSE:PNK)

Q2 2008 Earnings Call

August 6, 2008 11:00 am ET


Chris Plant - VP and Treasurer

Dan Lee - Chairman and CEO

Alain Uboldi - COO

Steve Capp - CFO


Joe Greff - JPMorgan

Anthony Powell - Lehman Brothers

Celeste Brown - Morgan Stanley

Justin Sebastiano - Morgan Joseph

David Katz - Oppenheimer

Michael Friedman - Noble Financial Group


At this time, I would like to welcome everyone to the Pinnacle second quarter 2008 earnings conference call. (Operator Instructions).

I would now like to turn the call to Mr. Chris Plant, Vice President and Treasurer. Mr. Plant, you may begin your conference.

Chris Plant

Thanks Marcie. Good morning everyone and welcome to our second quarter 2008 earnings conference call. Earlier this morning, we released our second quarter and year-to-date 2008 financial results. If you do not have a copy of the announcement and would like one sent to you, please contact us at 702-784-7777, or at

In a few moments, you will hear from and have an opportunity to ask questions to our Chairman and CEO, Dan Lee; Chief Financial Officer, Steve Capp; and Chief Operating Officer, Alain Uboldi.

Now let me remind you that during the course of this conference call, management may state beliefs and make projections or other forward-looking statements regarding the future events and future financial performance of the company. We wish to caution you that such statements are just projections and expectations, and that actual events or results may differ materially. I refer you to the Safe Harbor statement that is included in today's press release, and to our annual report on Form 10-K, quarterly reports on Form 10-Q, and to our press releases and documents that are filed with the SEC.

With that said, I will turn the call over to our Chairman and CEO, Dan Lee.

Dan Lee

I am going to turn it over to our Chief Operating Officer, Alain Uboldi, who has a strong French accent, but grew up in Monte Carlo and knows a lot about casinos and I am going to let him address that. Thanks.

Alain Uboldi

Thank you. Ladies and gentlemen, good morning. The revenue and EBITDA of the company for the second quarter 2008 were $267 million and $37.4 million comparing to $233 million and $46 million for the second quarter 2007.

Included in the corporate expense was a charge of $1.5 million related to the resignation of a company officer. Our largest property, L'Auberge, has reached close to 50% market share in the region, and the hotel, including the new 252 room opened in January was over 90% occupied.

This property broke several records, with revenue reaching $90.2 million, a 10.3% increase over the $81.8 million that it had in 2007, and an EBITDA of $23.4 million, another record, compared to $20.9 million in 2007.

Note that the second quarter results multiplied by four is greater than the $85 million goal that we set for the property when we built the $60 million expansion. L'Auberge earned approximately $75 million [of EBIT] in each 2006 and 2007, so an increase of $10 million represents a return on the $60 million that is in the high-teens and almost 20%.

Seasonally, the second quarter in Lake Charles is a pretty average quarter. Based on the EBITDA of the second quarter, we are confident that L'Auberge will reach to $85 million for at least the 12 months ending March 31, 2009 and there is a chance it will achieve that result for calendar 2008.

The revenue in New Orleans has gone from $41 million in 2007 to $39 million in 2008. The difficult economy has affected our customer and the building of the levee on the road in front of our casino has created more difficulty for them to come to our place.

The EBITDA for 2008 was $13.5 million, compared to $14.3 million in 2007. However, we feel that the EBITDA has been very stable for several quarters, and we expect the properties to remain with the yearly EBITDA in the $50 million in the foreseeable future.

We opened a new Asian restaurant about a month ago, which is doing very well. Asian games are quite important in Lake Charles and are becoming increasingly important to our casino in New Orleans since Hurricane Katrina. So the new restaurant allows us to cater better to this important clientele. We also added a new retail store in mychoice center.

At Lumiere Place in St. Louis, the revenue for the second quarter 2008 were $49.5 million. As expected in an opening place, the result of the quarter was a small loss of $263,000. That is pretty typical in a new facility as the revenue are climbing and expense is normalizing.

You will recall, for example, that L'Auberge opened in May of 2005 and earned essentially nothing in the first seven months of operation. We expect to begin showing some profit in the third quarter in St. Louis and which has normalized potential in 2009.

Results in the second quarter probably would have also shown a profit except that The Admiral was closed from June 11 because of the flooding, and reopened by mid-July, explaining most of the reason for the loss in the quarter.

We had most of the costs of operating The Admiral, but very little revenue. We didn't have much advance notice, so we were not able to promote Lumiere Casino to the Admiral customer. However, we are very encouraged by the result of Lumiere Casino and Hotel that have been profitable for the quarter, as well as the Four Seasons, which is very close to breaking even.

The hotel occupancy has gone up very steadily, reaching 90% of HoteLumiere and close to 50% at Four Seasons. At Bossier, in a very competitive environment, the revenue and EBITDA of our property in Bossier are $22 million and $4 million in 2008, compared to $22.2 million and $4.4 million in 2007.

The recent discovery of one of the largest shale of natural gas in the USA could bring back new money to the region and improve the result of the local casinos that have been in a very difficult competition with the Native American casino in Oklahoma, which are very close to Dallas and Fort Worth.

It may be helpful though, to forecast that the economies of South Texas and Louisiana may be doing better than the general US economies, as these regional economies are largely oil-based and the rise in the price of oil is not necessarily for them a negative.

Sometimes, it is good to be lucky, as over half of our earnings come from this area. The economy of the upper Midwest where Belterra is, in Northern California, which affects Reno, seems to be more challenged.

In Indiana, at the beginning of June, Indianapolis sustained the introduction of two racinos with about 2,000 machines each and Caesar was re-branded into Horseshoe. Harrah's became very promotional in promoting the new Horseshoe name in the market. Anticipating the arrival of new competition, we increased our marketing efforts and even gained market share in the region, where our market went from 12.4% in 2007 to 12.9% in 2008.

The revenue was $44.5 million in 2007, compared to $44.3 million in 2008. The EBITDA was reduced from $11.5 million in 2007 to $7.8 million in 2008. Resulting from the increase of the marketing expenses and an adjustment of the property tax from 2007 of $0.5 million, that's what explains the difference in EBITDA.

In Reno, the closing of the truck stop in 2007 combined with the closure for renovation of more than two-thirds of the room for more than six weeks has affected the property for the quarter. The revenue was $11.5 million with the loss of $1.3 million for 2008 compared to $19 million, which obviously at the time included the revenue of the truck stop compared to an EBITDA of $1.9 million in 2007.

Note these are the truck stop we sold a lot of fuel at very low margins as the much bigger and part of the revenues that are on income. The temporary closure of most of the hotel however had a significant impact on the profit.

The result, since the reopening of the renovated room in July, make us feel that the property should be able to breakeven for the second part of the year and return to profitability in 2009. In our international market, our luxury hotel in Neuquen was fully opened during the second quarter and the occupancy should reach about 70% towards the end of the year.

The revenue of both properties in Argentina and Bahamas reached $10.2 billion in 2008 from $9.3 billion in 2007. The EBITDA remains a standard 2007 due to the high inflation in Argentina as well as $600,000 in salary tax adjustments relating to 2007 and 2006.

The smoking ban in Argentina imposed by the Province of Neuquen has hurt our business significantly in 2008. However, the next phase has now imposed the same smoking ban beginning in October, so our direct competition that is across the river in the neighboring province. This should help our revenue in the first quarter in 2009.

I will let Dan address the Bahamas.

Dan Lee

First, I am going to turn it over to Steve to address the balance sheet.

Steve Capp

Okay, great. Alain, thank you. Well done. English, I think, is only your second language, or four; very pretty impressive. Okay, we have tried to do a thorough and transparent job of reporting a quarter that had a lot of ins and outs in activity.

Alain just went through the operational side of the quarter. There is a lot of other stuff you can see. I think we have tried to do a good job of that, but there is a lot. I will recap some of what is in the income statement and the balance sheet, and then let Dan talk about all the cool stuff.

As you saw, we did receive the $48 million in insurance proceeds from Allianz and that is reflected $31 million net of tax in disc ops on the income statement; we certainly have to get that liquidity in the door and take one more very large step toward resolving that entire insurance litigation around our former Biloxi property.

We did write-off a couple of assets, two boats that we acquired in Harrah's, the deal of '06. They are down in Texas that we just do not see ourselves using anytime soon, and some gaming equipment in warehouses around the company, 5.5 in total there.

If you take a look at corporate expenses and do the math on the adjustment for our former President, now departed, corporate expenses are down a little bit, which is great and something we are increasingly focused on and hope to have additional progress to report in future quarters.

On the tax side, our tax provision gymnastics rarely disappoint. This quarter was no exception. We registered about 5% effective tax rate, and there are probably a lot of raised brows out there. Although you look at the year-over-year last year's second quarter was 330%. So at least we are closer to the statutory federal tax rate this time.

In all seriousness, a lot of factors involved there as you can see as you read the prose in the earnings release, but a couple of them in particular. One, non-deductibility and this is an ongoing theme in our tax division.

Non-deductibility of certain items including gaming taxes paid in the state of Indiana, which are relatively significant, and even to the overall corporation, and then also certain expenditures of a political initiative nature that are generally not tax-deductible, and those two items threw off the tax provision somewhat significantly.

Secondly, a tax provision that we took against the loss recognition on the stock as discussed in the release. Basically that is a valuation reserve against the deferred tax asset associated with that realized loss.

There are other things in there. Those are the big ones. However, that is not a typical for us. On the interest expense side detailed in the release, the 19.4 if you do the quick math, that is not cash interest, but that would be aggregated interest expense if you did the math on capped interest, is very much inline with the approximately 19.1 we had in the first quarter.

That is because our overall borrowing with very similar rates did not move a whole lot. We had 125 drawn on the revolver, as mentioned in the release. I think today we are at 130, so a very static level there on a real-time basis. On the CapEx side, we spent an aggregate $90 million in the quarter. Approximately $13 million of that was at Lumiere Place to finalize that in Q2.

We had a fair amount of activity in the quarter there with the opening of the Pedestrian Tunnel. The Reader Board there, that if you have not seen it, is pretty darn impressive Vegas style, and very attractive. We did spend a little over $3 million to finish up the hotel that Alain mentioned, in Neuquen, which is a very pretty product.

Overall corporate of about $8.5 million or so that is for new initiatives, various initiatives, I should say, that are not operating profit as yet, and of that, about $57 million in Atlantic City, most of that for additional land parcels to continue to round out our very nice site there, so 90 in total.

Moving to the balance sheet quickly, we did have $129 million of cash in the quarter. We did have $125 million drawn on the revolving credit, as I mentioned; also about $22 million of letters of credit. So that some of those is approximately $150 million of total utilization.

Recall that we have $350 million of access to that bank deal which size the $625 million, the $350 million sub-limit is imposed by a covenant in our 8.75% bonds, which by the way, become callable in October of this year, which is nice. So we have about $200 million remaining under the bank deal in addition to the cash in the company, our overall liquidity position remains comfortable.

That is all I had. Dan, over to you.

Dan Lee

Okay, well, a number of things. Yesterday, the Secretary of State of the state of Missouri approved the initiative, the YES for Schools First Coalition. That is the initiative that would raise over $100 million a year in new funding for schools in the state of Missouri by eliminating the loss limits and tweaking the tax rate up by 1 percentage point, which is actually 5% approximately.

So that is a very good thing. I think there is 10 days for people to challenge that. It would be an uphill battle to challenge it, if they did. However, it would not surprise me if somebody did. It happens to be the Proposition A, which is a good thing, because as you are going down the ballot, it's the first one you come to, that's simply because we were the first to file.

But there is also a nice ring to it. A, is a good mark in school. And so, vote yes on A or A+ for schools or whatever, which from the voters' perspective is what this is all about. From our perspective, obviously, it would help us bring in customers from outside of Missouri. And frankly, reduce a lot of the administrative costs and a lot of the hassle for gamblers who we make lineup now to get their cards and try to get on the casino.

So the actual hassle factor with the cards is probably as important as being able to bet larger amounts, and sometimes it's pretty frustrating, we have people in our casino who we know are famous athletes or celebrities who we know have millions of dollars, and they hit $500 pretty quickly and we have to explain to them that they have to go away for two hours before they can come back, and you can imagine some of the looks we get from some of these celebrities who just can not understand this.

So anyway, that will be on the November ballot and we think the prospects are good for it. After all, who does not want more money for schools and $100 million plus; the state's actual number is $120 million a year, is pretty substantial even in a state the size of Missouri.

The second, we expect to sign today a construction agreement for River City. We had a rather lengthy RFQ process and a number of firms look at it. We had three actually bid. We wanted to build this with a guaranteed maximum price contract, try to make sure we do not run into the problems we ran into with the City. We want to bring this project in on budget at $375 million. We think that is the same number we have talked about for a long time. That is a big enough number that this will be really special casino and be a real complement to St. Louis County.

The best way to make sure that it is on budget is to build most of it to a guaranteed maximum price contract. Now, that contract is $148 million, so it is about 40% of the total of project budget. It is obviously the largest single component, but in any project budget, there are all sorts of stuff like pre-opening costs, which run about $25 million on a property like this, there is capitalization of interest, there is the furniture, which we buy ourselves, there is the slot equipment, which we buy ourselves.

So there are a lot of things the general contractor is not responsible for. However, the bulk of the building is in the $148 million. It is a guaranteed maximum price contract. There are penalties if it goes over that. Actually not penalties, if it goes over that, the contractor has to eat it up to a limit, which is a pretty good threshold of pain for that contractor.

So we are pretty sure they will work to keep it inside of that. There are also penalties if they run late, they have 18 months from when we sign it. So assuming we get it signed today that would tell them to turn it over to us by January of 2010. That was one of the disappointments in the process. We had hoped to be open sooner than that.

Frankly, all the different contractors we talked to said unless we were willing to fund copious amounts of overtime, it was going to take approximately that long to build. So it does end up being a little later than we thought. Now, recognize that is when we turn the building over. We still have to rush in and install the slot machines and the furniture, and train the employees. We can do some training outside of the building, but a lot of the training has to go on inside of the building, so we would open in few weeks after they turn the building over to us, but not a few months.

We do not have a date yet, but it would not be more than a few weeks after they turn it over to us. So we are proceeding with River City. We are reasonably confident that we have the money needed to complete it between cash we have and availability under the credit line and anticipated income between now and then.

In an era where lots of other projects are being canceled, or frankly, stopping midway, we are moving ahead. We do not like to get halfway into a project and not have the money to complete it. We are not sitting on the cash, but between the different resources we have, we think we are reasonably certain that we will have no problem running for the finish line and getting that open.

Yates, is a large contractor, has built quite a few significant casinos that happen to be based out of a small town in North Eastern Mississippi. So they actually built two large and quite prominent Indian casinos in that town, which I think is where they got their original expertise. One is called Silver Star and the other one something Moon or something like that, but they are Golden Moon and they were both quite nice.

They also built Beau Rivage in Biloxi, Mississippi, where they did a good job. Beau Rivage went over budget that frankly was not their fault. They built the Borgata in Atlantic City, which they also did a great job and built it at a very reasonable price.

They have paired up with a prominent local contractor by the name of Parrack, who knows the local building codes and conditions and the local unions, but has never built a casino. It is pretty smart of those two companies to pair up and put in their bid. We looked at it and said, okay, well, that works.

If Parrack would have done it on their own, we probably would have politely declined because they did not have any casino expertise; and if Yates had done it on their own, we probably would have politely declined because they did not have any St. Louis expertise. The other two bidders on it were both St. Louis-based companies.

Yates/Parrack was a most aggressive bidder, and so we are waiting for a couple of exhibits between the two general counsels to get resolved, but we do not think there will be any problem getting that resolved today and we expect to sign it today.

In the Bahamas, we have a very small casino on the Island of Exuma that is practically surrounded by a Four Seasons Hotel. It was an experiment; Four Seasons had asked us to look at it. We thought, well, gee, if the people staying in the Four Seasons Hotel gamble even a little bit per night, we can make money there, although not much. We did not invest much.

The game plan of the owner of that Four Seasons, because it is, like most Four Seasons Hotels, it is not actually owned by them; it is managed by them, but the owner of that hotel owns quite a bit of land and had plans to have development of additional hotels on the island. They had sold a lot of home lots along their beautiful golf course and they built a marina.

We thought, well, when the marina opens, we will have boats; when the houses get built along the golf course, we will have people vacationing in those houses, there will be other hotels and so on. Well, it opened two years ago, and we actually did not agree to pay a fixed rent for the facility we rented from the owner of the Four Seasons.

The rent is 50% of profits after we recoup all of our investment, so you can see we went into this rather cautiously. We found out that the average person that stays at that Four Seasons actually gambles very little bit. I think they spend all day golfing or at the beach and they are sunburned at night and then they go to bed.

When we bring gamblers down there, we find out that the Four Seasons wants to charge us retail, and sometimes we can negotiate a little better price, but ultimately we make more money with the high rollers if we bring them to L'Auberge than we do if we take them every month in Bahamas.

So, the casino has never really made money in any particular quarter. It did not lose much, but it did not make much. Of late, the numbers have gotten a bit worse. The actual owner of the hotel is in receivership and the other hotels and the other developments do not seem to be happening.

Then I think with the economy, and frankly, just looking around the pool, the Four Seasons, it seems like a large part of the customer base had one foot on Wall Street, if not two feet, and looked like a lot of people who worked long hours and were not afraid to spend $10,000 in a weekend with family.

This year, I saw an article in the New York Times, it said bonuses on Wall Street are going to be $20 billion below than what they were last year, all of which you are intimately familiar with. So the occupancy of the Four Seasons has slipped quite a bit in the last couple of months and we looked out and said you know what, we do not see any prospect of this thing turning profitable in the foreseeable future.

For us, it is a difficult thing to manage, because it is not easy to get to. Maybe, this more properly belongs to somebody who is based in the Bahamas. We are going to look to possibly sell it for whatever we can get for it, maybe to somebody local. However, if we cannot get it sold, we will probably simply liquidate it.

That decision was made in July. So under GAAP, that means that it will become a discontinued operation beginning in the third quarter, and I think our basis is about $3.5 million would be a charge of some size in the third quarter. I think it is a little representative of the time when you start examining everything and you say, well, this thing is not making money.

We do not think it is going to make money in the near future, so let's sell it for whatever we can get for it, or liquidate it. I do think perhaps somebody locally based might be able to make a go of it. I do not think they would be able to pay as much, but we will go and explore that. So, that is the Bahamas.

Now Ameristar, this is a situation where Ameristar is a fine company. It was essentially founded and built up by Craig Neilsen, who was an amazing man. If you did not get a chance to know this man, he had a car accident 25-30 years ago and was a quadriplegic. He was confined to his bed and he built a very fine company from his bed. He literally became a billionaire from his bed. He paid a lot of attention to the company and he built some very good assets and it was a very successful company. He passed away about a year and a half ago. He owned 55% of the stock and he left most of his stock to a charitable foundation.

We looked at it and federal law puts a requirement on charitable foundations to try to diversify their assets. Sometimes some charities have found ways to control a public company for a long period of time. For example, the Hershey Foundation I think has controlled the Hershey Chocolate Company for 100 years, I am not quite sure how.

I know Barron Hilton's control of Hilton Hotels for 20 odd years was through the Conrad Hilton Foundation, which owned 27% of that stock. However, most of the time when a large chunk of stock goes to a single purpose charity it is incumbent on the charity to try to diversify. So we jumped to the conclusion that maybe, there could be a chance for us to acquire or merge with Ameristar.

With hindsight, maybe our timing was not good, but we looked at it and said Ameristar has good assets, they are in good markets; very little overlap with us. Frankly, their executive offices are one building over from us in Las Vegas. Even in St. Louis, which is the one place where there is some overlap, our casinos are 20 miles from theirs.

So we are on different sides of town and it becomes almost like Green Valley Ranch and Red Rock Station, good properties, different sides of town, different markets. At the time, back in October, we have talked with some of our investment bankers, and one of them was at Bear Stearns and they thought it was in fact possible to get a deal done at that point in time. Even though the high yield market had already gotten a little bit rocky, it was still a possible thing. We went out and bought $40 million worth of the stock, about 1.25 million shares, average price was $32 a share.

Almost the moment we bought the stock, gaming stocks in general began their deep slide. Of course, that deep slide in part reflected tightening of the credit markets, which has brought us to where we are today.

Our stock is down roughly 60%, 65% since October. Theirs is as well; almost every gaming company is. So we ended up with a big loss in that stock. Now, it was disclosed by being in the comprehensive income statement, which is in accordance with GAAP and we said we had purchased securities of a hospitality company and that we had a loss and the magnitude of that loss was disclosed.

We had never disclosed who the company was or whether it was debt or equity securities, because frankly, we did not want to comment on M&A activity when we were still trying to figure out a way to try and do something that was in accordance with GAAP. It actually reached to a point where we kept thinking, when is somebody going to get to page 32 of the 10-K and give us a call and ask us about it.

I had a little statement on our desk ready to read, saying we do not comment on M&A activity, and nobody called for a long time. Finally, we started pointing out to people, please read page 35, or whatever it was, because we did not want people to be surprised.

Well, by the time we got to the end of the second quarter, we started looking at it and there is a concept in accounting, I forget what the FAS ruling is, but it basically calls for other than temporary investment in securities. Well, what is the word, about temporary…?

Steve Capp

Other than temporary impairment.

Dan Lee

Other than temporary impairment of securities, and I am not sure if that is the right title, actually. However, it says to look at four things, each of which is somewhat subjective. One is, how long have you held it, and it does not say that you have to write it down automatically if you have held it more than six months or anything.

It says you should take that into consideration. Another says, is there a big loss? Well, at this point, yes, it is a big loss. So that was the second one. The third one is, do you think it is going to recover? I do not know. I hope it recovers. I do not understand why their stock and our stock are down 65% in the last nine months.

I mean, at least our Companies continue to do just fine. I think theirs is too. Maybe we would be down some, but down 55% is a hell of a lot more than the market. So maybe it will recover and they are a fine company. Of course, over what timeframe will their stock go back to $32 a share today? I doubt it, but in the next 10 years, yes, probably.

The accounting rules are a little bit vague on what timeframe you are supposed to look at for their stock to recover. The last one is, are we able to hold the stock long enough for them to recover? Well, it is market value of that stock today is somewhere around $15 million. That is a significant number, but it is not something we are forced to sell today. I mean, we still have excess cash earning 1.5% or 2% somewhere.

We have a couple of hundred million dollars under our credit facility that we can borrow at about 4.5%. Now that capital plus our earnings from operations is going into River City. When I said earlier, I think we have the money to complete River City, those are the major components. The next layer of capital for us starts to get pretty expensive, because that would require refinancing the 8.75% bonds, which has a covenant in it that restricts our ability to borrow under the credit facility to $350 million.

If you look at our existing bonds are trading somewhere around the 12% or 13% yield, which is pretty ugly though not as ugly as some of our competition. Harrah's and Stations' bonds I think are trading at a 20% yield, which is certainly part of what is driving the yield in our bonds.

If you go and refinance those bonds today, it would obviously be pretty expensive, that would be offset to some extent, because we could borrow additional money under our credit facility, which is at 4.5%. You can see the next layer of capital gets more expensive and then at some point, you have got to refinance the 8.25% bonds, and then you are left with just the 7.5%.

Looking down the road there is probably a point in time where the incremental capital gets pretty expensive. You would say well, maybe we ought to sell that Ameristar stock. We do not have any imminent need to do so. I happened to think their stock is cheap. Then looking at it, frankly, we also think our stocks are actually cheaper.

We did analysis comparing our company to theirs; we have a lot of non-earning assets. I think the principal non-earning asset they have that I am aware of is their construction in progress and they have quite a bit of that. If you work through the numbers, at least in our opinion, our stock is even cheaper than theirs.

So that prompted us to look at it and say, well, maybe we should sell their stock and buy our stock. We thought about that. I thought it was funny the way the accounting policies work, if we had done what Jim Murren did at MGM and bought in a lot of our stock like that in October and then our stock went down, we would be feeling a little silly about it.

I mean, MGM bought in a lot of their stock that they bid $80 a share in March and their stock is somewhere in the high 20s today. I am sure they wish they had waited and bought in three times as much stock at $25 than buying the stock they did at $80. Of course, accounting does not require them to take a loss on the stock they bought in at $80 that would now be available at $25.

When we buy stock in Ameristar and it goes down, we end up taking a loss at some point. If you sold their stock and bought in a like amount of our stock with the proceeds, economically you would be in the same position MGM was, plus it would be nice to be able to buy in some of our stock at these prices.

Now some of the stock in Ameristar was purchased with funds we have outside of the restricted family. We have a certain amount of things we can do outside of the restrictions that are imposed in the bank agreement, but about half of the stock of that cash is a permitted purchase under the bank agreement. That money could not be used to buy in stock.

So if we did sell the Ameristar stock and try to turn around and buy in our own stock, unless you use different funds we have, you probably could only use part of the money. Frankly, it would not really move the needle. It would be a nice token to say we bought in a little bit of stock, but it does not move the needle.

So then you look ahead and say, well, we are trying to manage our liquidity to try to build those projects that we have that have the highest anticipated ROI. By sitting and holding Ameristar stock, that is a fairly liquid stock position, it could be sold at any time, but if we sold it and bought in our own stock, well, it is not that easy to just go issue stock again if you needed the money somewhere down the road.

That has put us in a position today where I think at least for the time being, we are just going to sit and hold the stock. They are a fine company. To some extent their stock is perhaps a proxy for our stock as well. We do not see any way to try to consummate a transaction in the capital markets the way it is today. So that's the good, the ugly on the Ameristar thing. It is what it is.

Accounting policies being what they are, and accountants are being conservative in nature. They ratchet things down, they never ratchet things up. So we've written it down to $11 or something a share and the stock is already up a little bit from where it was at the end of the quarter. If the stock were to go back to $32 tomorrow, we would not have an inning in the third quarter; we would only get a game when we actually sell the stock. And they actually make it worse than that, because some of what Steve was alluding to on the tax rate, recognize we do not get the tax loss until we actually sell it. We don't need the tax loss at this point, because we don't actually pay taxes. We have a lot of accelerated depreciation on the new buildings. That's particularly true on the hotel expansion we just added in Lake Charles, because in non-gaming investments made this year in Louisiana, you can deduct 50% of the investment in the year it is put in service.

So we get a very large tax depreciation out of that project. So when Alain said it's a ROI in the high teens, that's ignoring the tax edge if you look at the tax side of it, it's a very successful investment for us and so we do not need the tax loss currently. But on the income statement, we assume that we take this loss. You would normally get a tax credit on the loss, because this is a capital loss, you need a capital gain to offset it.

And so if we were to sell surplus land in Reno for example, or frankly if the stock were to recover, and then we were to sell it then you would have a taxable event then. But because we took a valuation reserve against the tax credit, that would have been created by the tax loss, then basically we really didn't take the tax credit. And so if the stock recovers and then we sell it, we wouldn't actually have a taxable charge. So if that all sounds like Pig Latin, welcome to the world of GAAP.

And then you switch over to the insurance side, where we collected insurance, and we end up with the gain on insurance for book purposes, we do take a tax charge on that, even though we did a tax-free swap between the assets in Biloxi and the land in Atlantic City. So the actual taxable gain on the insurance is deferred essentially indefinitely.

But nevertheless for book purposes, we did take that tax gain. We did not take the valuation reserve against the taxes, so we whipsawed on that. So it takes me about three hours to understand our tax provision. So do not feel bad if you can't figure it out. The real bottom line is, we don't pay taxes.

Okay, Ameristar, the gain on the insurance I mentioned, by the way, pretty proud of the fact that our attorneys, who kept getting very frustrated with Allianz Insurance Company and we were ready to really go to war with them, but ultimately reached a settlement with them. The settlement has been paying us $53 million for a $50 million layer of insurance.

The extra $3 million is basically insurance, an interest accrual for the fact that it took us so long to get the money. At the end of the day, the Allianz people turned out to be very fine and we have a happy resolution. So, but we are still at war with RSUI. We are bound and determined to get every dime they owe us and we think it is significantly more than the pari passu, the company settled.

They have a pari passu lawyer. They paid us 2, the other guy paid us 36.5. By that number you would think they owe us $34.5 million plus legal expenses, plus interest from the day that the other parties settled, plus they us 100, they solely own a $150 million layer which we think our losses are at least $50 million in June.

So there is a significant recovery that we expect to get in the courts, if necessary, from RSUI. That is the last piece of the insurance of the lawsuit. Steve mentioned the two boats in Orange, Texas. The mychoice Program which we rolled out to almost all the properties; it is not in Reno yet.

Alain Uboldi

Not in Reno.

Dan Lee

There is a little accounting nuance there. We have always tracked the gambling activity of players that choose to be tracked. Some of our properties we would tell people how many points they had and they could determine whether they were going to get a free meal or not. At Belterra and L'Auberge, we tracked it, but the casino host could look at it and determine whether to count them or not. We never actually showed the point totals to the player.

Well, under the mychoice program, similar to some of our competitors, we found that the customer likes to see what their point totals are. So we have made that available. I do not think it really changes anything. In fact, if anything, it helps the casino host control the comping better because you can just show the player, look, this is your points. If you get a few more points, I will buy dinner for you.

Part of the reason to do it is to help control the comping better. From an accounting perspective, once you show the people how many points they have accumulated, even though just like frequent player programs or frequent-flier programs like American Airlines now charges $50 to get your free ticket, which is not free any more.

We can change the program terms, obviously subject to approval of the regulators in each state. Once you show people the point liability, the accountants like to put the liability on the balance sheet. So we had a $1.4 million a non-cash charge to reflect the fact that at Belterra and L'Auberge we are now disclosing what the point totals are to people.

It is a charge and eventually it is cash or eventually they are going to get free food for it. So it is a free food charge that goes on the balance sheet to reflect that liability. Then the last thing I would mention, in Atlantic City, we have bought quite a bit of land in the last six months, which is really filling out the site, because the site had ragged edges on it.

I think we have reached the point where that is largely done. There is some streets that need to be widened and so there is going to be, in order to improve access to the site, and so there is a couple of little land purchases that will probably come out of that street widening, which is actually being done through the CRDA.

It will be funded by us but then we will get credit for it against our future taxes. I would expect that to be less than $10 million or $15 million over the next 18 months. There are two pockets of land that if you were to look at a map, you would say, well, would not it be nice to get rid of these?

The answer is, yes, it would. We have talked with every one of the landowners in those pockets and the prices are absurd. So we have concluded that we will just work around those. That is not unusual. I mean, there is an apartment complex behind Treasure Island that Steve Wynn worked around many, many years ago when he built the Mirage and then Treasure Island. In fact, he was nice enough to place the dumpsters of Treasure Island right next to the apartment building.

So you never really get the full footprint that you want; sometimes you just have to work around things. In terms of looking ahead, I would not look for any meaningful land purchases additionally in Atlantic City. We also are almost done with the conceptual design.

There are a few little tweaks we are doing, but the design fees should ratchet down. While we get into the next phase, which is a phase where you work at getting the streets closed and other streets widened. You get the various entitlements to go ahead and build, and you also start talking with potential restaurateurs and shops that might go into the building. That is a process that takes a couple of years.

Now as a practical matter, in these capital markets, we can not finance this thing today anyway. I do not think anybody can if you are trying to build a big property. We are going into a little bit of a holding pattern while we spend small amounts of money on legal fees and stuff like that to try to inch towards having a project that can be built when the capital markets recover.

The carrying costs, ignoring the capital side of it and you will recall, we did a large equity deal in the low 30s about the time we bought the land. So it is hard to know what the real capital costs are. The capital costs are the opportunity costs, but there are not buyers, because a buyer for a site like this would face the same problems we do.

So we are going into a period of time where we wait for the capital markets to open while we try to get the right entitlements and so on. So the ongoing costs are real estate taxes, which are about $4 million a year. It is $5 million, but we have some credits that we got in the acquisition that reduced to about $4 million.

There is one hotel that is leased for about another five years that we have to pay that lease on, no matter what happens. That is about $2 million a year. The payroll costs of the small staff we have back there is less than $1 million a year; just security and a handful of other people.

There would be some legal expenses and maybe a little bit of design fees as we design, like the specific stores which you might want to talk with a potential tenant about, so which is a very manageable number for us to carry that land really having it indefinitely, while we hope for the capital markets to improve and find a way to go ahead.

So that is it, happy to take any questions.

Question-and-Answer Session


(Operator Instructions). Your first question comes from Joe Greff with JPMorgan.

Joe Greff - JPMorgan

Good morning, guys.

Dan Lee

Morning, Joe.

Joe Greff - JPMorgan

Going back to the Ameristar stock purchase topic, if we go back to the mindset from October of last year, is it fair to infer from your comments and your analysis that the risk-adjusted returns for a combination with Ameristar was greater than the returns from developing in Sugarcane Bay, Atlantic City and some of the other developments that you have up in the air?

Dan Lee

Well, the analysis we did at the time, which wouldn't be pertinent today was that we could actually do all of it. That in effect, the cash flow of the combined company actually made it easier to go build all this stuff, because the construction that they had in the pipeline was nearing completion.

And the construction we had was ramping up. And so by putting the two companies together, you had significantly greater cash flows and it was actually easier to move ahead. So it wasn't in lieu of building these other projects, it was actually helped you get here.

Joe Greff - JPMorgan

And this is a big if the financing markets were to come back, would that combination still make sense, more returns?

Dan Lee

If you just look at a map, you can see it would make sense. And I think there is somewhat similar corporate cultures in that we both believe in building quality facilities in these regional markets. A lot of our competitors don't. A lot of our competitors clearly try to get in on the cheap and build something schlocky, and get their profit out as quickly as possible. And we and Ameristar have similar corporate strategies. So it actually is a pretty good fit.

But, at this point, the capital markets are so far away from being able to consummate this. It's hard to even envision that. I mean just to give you an idea that if you tried to put the two companies together. Suppose you just did a merger of equals, which for various reasons we probably wouldn't want to do and they probably wouldn't want to do.

But if you just did a merger of equals, it would require refinancing all of our debt and all of their debt. And at this point, the fact that we have bonds that; for example, 7.5% is really kind of an asset. And if you had to refinance those bonds at 14% or 15%, and you had to refinance their bank debt, I guess at today. I mean, we both have bank lines that are at LIBOR plus two. I don't recall exactly what theirs is, but ours is LIBOR plus two.

And in today's market, ours doesn't trade much, but when we look at comparable bank lines that do trade, you’d be at LIBOR plus six. And basically that would be moving so much value to bondholders. And I realize there is bondholders on here, probably thinking, do it, right?

And it would move so much value to the bondholders that I think it would eliminate the synergies what you would get from putting the two companies together. So we just concluded that they are a fine company; we're quite happy to be a shareholder and we hope their stock recovers. We hope our stock recovers.

But as a practical matter, we can't see a way to get a deal done. And just that’s all. So then those other companies have different situations. There may be other companies, I can think of one in particular that is sitting on $1.5 billion of cash and everybody is wondering what the hell they're going to buy. They don't have the same issues we do.

Joe Greff - JPMorgan

Can you give us an update on your thinking on the timing of Sugarcane Bay? And I'd imagine that recent announcements in the industry of delays probably help you in that regards, kind of going back to different gaming commissions to elongate the timeline in which you maybe have previously committed a construction timetable.

But do you think, and this maybe an interesting question for you to answer, Dan. I mean, do you think that the gaming commissions would look at the Ameristar stock purchase and say, well, how on one hand can you tell us that you want us to delay or defer a project development when just a few months ago, you were thinking about combining with a company and using your financing wherewithal. In that regard, can you talk about that big picture type of scenario?

Dan Lee

As I said to you a minute ago, we actually thought it was additive. I mean, if you combine the two companies, you end up with a company of an annual cash flow, EBDIT is something north of $500 million. So you double the size of the company and suddenly Sugarcane Bay becomes a smaller deal for us. The $40 million that we invested in their stock is slightly more than 10% of the cost of Sugarcane Bay. So it wasn't like, we bought that stock, we had a loss; therefore we can't build. And that's just not true.

And by the way, I do want to emphasize on Ameristar, I wouldn't take anything we have said here as implying that that company is for sale or is not for sale. The rules on charitable organizations actually give them many years to figure this out. So I'm not… I don't want people to mislead. I'm addressing us in our situation; talk to them about their situation, Okay?

But in terms of a place like Louisiana, and there are certain states, and Louisiana is one of them, Missouri is another and Kansas would be another, where there are either actual or perceived limitations on the number of licenses. Louisiana has an actual limitation. Missouri does not, although the referendum in November would create a cap on the number of licenses. But the gaming commission there has always acted as if there is essentially a cap. And they are very reticent to issue new licenses. While in those states, the state has a strong interest in seeing the license get put back to use. It's, after all, jobs and tax revenues and so on.

And so after the hurricane two years ago, destroyed the Harrah's facility, and Harrah's sold those two licenses to us. They want to see us get something built. And we’re working as quickly as possible, try to figure out how to do that. And in fact, when you look at how well the expansion has done at L'Auberge, it’s a pretty good indication that Sugarcane Bay, which is in effect, another expansion of L'Auberge, a large expansion of L'Auberge, but its adjoining L'Auberge, will be connected to L'Auberge. It's like adding 400 rooms and doubling the casino's capacity. A win per slot machine per day is now over $400 at L'Auberge. Okay? That’s an astounding number. The script does about $100. But that’s representative, but there is a cap of the size of the casino that you can have under one license. And part of the reason we bought those licenses from Harrah's was the ability to basically expand the casino at L'Auberge. And we figured out the best way to do it was to build an adjoining hotel with a different theme.

So we're as eager as anybody to build it. We think we have some of the resources and we're looking to try to find the rest of the resources to build Sugarcane Bay. Now at the same time, the Coast Guard basically threw us all for a loop by saying they weren't going to certify boats any more. And the state law in Louisiana said it had to be certified by the Coast Guard. So the Gaming Commission with the industry got the state law changed. And they're now using the American Bureau of Shipping; just not in the new rules for what a boat is. And so that's impeded some of the process. But we want to build Sugarcane Bay as fast as we can because we think we can make good money on it.

Now the Gaming Commission's recourse would be to take the license back and go have a request for proposals for somebody else and etcetera. If the state is interested in getting the casino open, we are going to be open faster than anybody else available, okay? And we're going as fast as we can. But I want to make sure we don't end up with an echelon problem. We don't want to have a building that's half done and we can't complete it. And so we're moving as quickly as we can on both Sugarcane Bay and Baton Rouge. We communicate rather constantly with the Gaming Commission. I think they appreciate that. We have been a very good corporation for the state of Louisiana. We built what we promised. We did a good job. L'Auberge has obviously been great for the state budget.

And in fact, I got a wonderful phone call a few months ago from Governor Jindal. I was literally riding my bicycle around Baton Rouge in the days of the referendum; very nice phone call from him. Usually when a Governor calls, it's because he wants something. It might be he wants you to pay for fireworks for the fourth of July or something. And he called simply to say he'd spent the night at L'Auberge and he thought it was the finest hotel in the state of Louisiana. And I said, that's the nicest phone call I ever got from Louisiana.

And that was the only reason for the phone call. And he's a remarkable young man. So I think he's going to be very successful. But, so we want to build Sugarcane Bay as quickly as possible and we're working on it. But right now, we just signed the construction contractor; hope to sign it today for River City and hopefully some time the next few months we're going to do something similar for Sugarcane Bay.

Joe Greff - Bear Stearns

Okay. And then thanks, Dan. And then one final question for Steve. What's your forecasted capital spend for the next couple of quarters? And if you can talk about how you're thinking about 2009, with the moving pieces are there? Thank you.

Steve Capp

Yes. Great, Joe. Dan mentioned purchases of land related to AC are going to fall off significantly. That was a big part of Q2 CapEx, as mentioned. Going forward, what we'll pick up is River City. Cliff is here. On a real-time basis, you sign the contract today or tomorrow and over the next six months, our cash spend on that is approximately $30 million to $40 to $50 million, Joe, on that. That's the one large project we have in the bin. Neuquen is finished the hotel there. We are continuing to renovate some rooms in Reno, but it’s not a lot of money. Other small projects here and there that are somewhere between $2 million and $6 million or $7 million each, but so you are talking about six months of CapEx, total CapEx of approximately $50 million to $60 million. And then obviously we will pick up River City in earnest, continuing in '09 through the completion.

Joe Greff - Bear Stearns

Thank you.


And your next question comes from Felicia Hendrix with Lehman Brothers.

Dan Lee

Good morning Felicia.

Anthony Powell - Lehman Brothers

Actually Felicia is not on. This is Anthony Powell, who works with her. How are you doing? Just a quick question on River City, I guess. So, now it's pushed towards the end of '09 or the beginning of 2010. Is there any issue with the state government, with this County government regarding your completion times and different penalties you may have to pay there?

Dan Lee

Under the agreement with the County, we lease the land from the County and we will have to start paying rent in August of '09. I think that rent is $4.5 million a year. So even if the casino is not open, we will start paying rent in August of '09. The agreements with the Gaming Commission don't have any deadline. But in the County, they'd like us to be open in mid '09 and we have to start paying rent even if we're not open beginning in August. And I think that's it. I think to some extent, and I've spoke with some of the people back there while we have always said we're building this, we're moving ahead as quickly as possible, we've been very resolute about it, all you have to do is look over your shoulder at Echelon and sit quite, is this going to get canceled? And so I think to some extent they're relieved that Pinnacle is, the type of company it is and we're moving ahead and that we planned our balance sheet to be able to do it. And we are all a little disappointed that we can't be open in mid-'09.

But it is what it is. I mean, it took us quite a bit longer to get some of the good men of approvals to build the entrance road. The remediation turned out to be a little more complicated and lengthy than they thought. And then we wanted to make sure we had a guaranteed maximum price contract because we didn't want to have the type of overruns we had in the city. And that meant taking the plans to complete working drawings and then sending them out to contractors and dealing with that process. So, we will be open as quickly as we can. And we will start paying rent, I think it's August 1, if I remember correctly.

Steve Capp


Anthony Powell - Lehman Brothers

And just regarding Kansas City, how do you see chances there with LBS dropping out?

Dan Lee

Well, that leaves four. So I guess it's 25%. We're also looking at the ways to project finance that; pretty complicated to do in today's market. But if you look at who the other three proposals are from, we're frankly, the only one that’s a significant public company. And I think we all face the same challenges in the capital market. And we are probably more qualified at resolving that than they are. But obviously, it's one that we would look to project finance just because of the strain on the balance sheet. And we think we have some ideas for how to get that done; we hope to resolve it in the next month.

Anthony Powell - Lehman Brothers


Dan Lee

And now they expect to make a decision on September 19.No, apart from being the biggest, most experienced company, in fact, I think we have developed more regional casinos than everybody else combined. And so if you are just looking at experience or capabilities, we would be chosen. If you were to look at sites, we have the most accessible site; you get off the freeway, right turn, right into the property. If you look at the synergy with other tourism facilities in the area, we have the best synergy with them, the best location for it. So, on the merits, we think we should be chosen. And we're scrambling to try to make sure that we have the resources to do it and we can answer that for them. But I have been surprised in these things before. So I'm not going to say that we're likely in a bit where, basically the odds are if you're one in four, you've got about 25%.

Anthony Powell - Lehman Brothers

Next on financing, yes I still look at some drawbacks for the market to redo the debt and your bonds later this year? Or is that pushed out to maybe next year?

Dan Lee

Well, if you tell me what the refinancing costs are. If you wanted to refinance our debt at 8.5% we can get it done this afternoon.

Anthony Powell - Lehman Brothers

All right. That's about it. Thanks a lot.

Dan Lee

Okay. Next question.


The next question comes from Celeste Brown with Morgan Stanley.

Celeste Brown - Morgan Stanley

Hi guys good morning.

Dan Lee

Good morning Celeste.

Celeste Brown - Morgan Stanley

Can you just discuss Belterra and how you're thinking about it with the new competition and the marketing dollars, particularly given the pressures on your customers or is like how profitable is it really for you to increase your marketing to make sense for that property to sort feel the pressures of the new competition? And then secondarily, where are you expensing the Missouri campaign? Is that the property level, the Missouri referendum; is that a property level or at the corporate level?

Dan Lee

On the campaign, we put it through preopening and development costs, which we also break out. If you noticed, we've now in the press release given the detail of where that money is spent. We thought about where to put it and we said, well, it's pretty much development costs. And so there it is. It arguably could have put it at property level, you could put it at corporate. There's even an argument that you could have capitalized it as a valuable license. But the Deloitte guys just fell off their chairs when I said that. So we decided to just expense it as incurred and put it through preopening and development.

Alain Uboldi

For Belterra funds, we have reached a certain level as I said in marketing. And we are now looking at the way to control, the way to control our marketing as we go towards the end of the year. Obviously we have now the competition is starting in Indianapolis and we’re waiting sometimes in 2009 for the new competition coming from Argosy with the new boat. That parking is done of the, I have been to it. But the boat obviously will be a much bigger boat than what they have now. One concept we have is we are a resort, probably the best resort in the southern part of Indiana. And therefore we feel we can bring top customer to our place with the same basis that we have at L'Auberge where we have a seaplane which can land. We can blow, I wouldn’t say land, we can come and go the river and come to our place with the seaplane we are about half and hour flight from places like Nashville, Columbus, and Dayton, which have Dayton and Columbus routes, is a very good place for us, because people come to our hotel and they do appreciate it.

Nashville, we have never been very successful because people have the tendency to go to Tunica. But with a seaplane, bringing the people right to our boats thus will make a difference.

Dan Lee

Recognize we had a seaplane that was Harrah's that was used very successfully.

Alain Uboldi

Very much so.

Dan Lee

And it can take off from any airport and land on the water at the hotel. And Belterra doesn't have an airport anywhere nearby. But we started looking at the operating costs of that seaplane, which is not very much actually, and the flexibility of it at L'Auberge and how much it's used, because it is used pretty extensively. And when you look at the people it brings in from Houston and even San Antonio and Austin, which are long ways in a seaplane, but it does go there once in awhile. And it's not nearly as fast as a jet, of course, but it lands on the water and it pulls up to the hotel, so you don't have that transfer time. Plus it's kind of a kick. Most people haven't been in a seaplane. So all of a sudden cities like in Indianapolis, Nashville, Columbus, Dayton, are half an hour from us; even Chicago and Pittsburgh and Cleveland are within the range of a seaplane. And we can buy a seaplane for about a couple of million bucks. And so, but it's not just about the seaplane, it’s about kind of a strategy. Yeah, we have the Tom Fazio golf course, we have the best suites in the market; with very attractive casino. And it is trying to be the best facility and get that top end. Because we know we are not the closest. We're never going to be the closest. So let's try to cater to the high-end. Just like L'Auberge. L'Auberge is not the closest; you have to drive those close to Dallas. And even Las Vegas is not the closest.

Celeste Brown - Morgan Stanley

So you are only increasing your marketing to the higher end, not to the lower end? That customer that might be feeling the most pressure.

Dan Lee

Well, this past six months, we do market to the lower end as well. And we will continue to do that. When you say, what are you going to try to do to?

Alain Uboldi

To be different from the rest, yes.

Dan Lee

Yes, to be different. And it's like, well, if bigger isn't better, better is better. Steve Wynne said that and he's actually right as he frequently is. And we have a very nice facility. We provide excellent service. We can focus. It’s easier to focus on the individual when you've got a relatively small casino. And when Penn brings in their giant casino that just allows you to have more of the masses and so, if we can characterize ourselves as being the Five Stars place down the road that's worth a little extra trip that is how we distinguish ourselves. Now, does that mean our income will be up despite the competition? Probably not. We're trying to hold our own.

Alain Uboldi

But we are in a better position to resist because of the place being by far the most beautiful in Southern Indiana.

Celeste Brown - Morgan Stanley

And how do you think about the quarterly EBITDA run rate, given the new competition, at least ahead of the Penn expansion?

Dan Lee

We don't expect to go back to $40 million overnight. But we would like to stay in the '30s. That’s the outlook

Celeste Brown - Morgan Stanley

Thank you.


Your next question comes from Justin Sebastiano with Morgan Joseph.

Justin Sebastiano - Morgan Joseph

That's the Spanish version. We're actually Morgan Joseph.

Dan Lee

I thought you changed the name, yes.

Justin Sebastiano - Morgan Joseph

Dan, you had said you seem reasonably confident about the funding for River City. Where is perhaps the slight uncertainty there? Is that just the cash flows from the operations based on the market over the next six months or?

Dan Lee

I'm choosing my words carefully looking at our general counsel because we are not actually sitting on the cash. As part of the math, we've got an assumption of earnings from operations and that fluctuates around. But we should be okay. You can crush the math yourself based on the availability under the credit line and the surplus cash we have. But could there be a scenario where we'd have to scramble a little bit and maybe line up a lease for the gaming equipment or something? I guess could be, but I think it's unlikely.

Justin Sebastiano - Morgan Joseph

And then, you mentioned you guys have bought a lot of land in Atlantic City in addition to just the Sands. What is the total cost of the land so far for what you own there?

Dan Lee

We've been capitalizing the interest on it. If we end up not moving quickly towards the… and with the including capitalized interest, it's for 441, if I remember correctly…

Steve Capp


Dan Lee


Steve Capp

That's for the businesses (inaudible).

Dan Lee

And related land. So we paid like, I think, 275 for the original Sands and related land and we've done about $75 million since then. Now on our books, we've capitalized some interest against it. But frankly at some point if you're not making concrete progress towards building, and with capital markets where they are now, it is hard to say how long you can continue to move towards it unless the capital markets improve. We were talking about it last night at dinner. At some point, we may have to stop capitalizing the interest on it. But including the capitalization of interest, I think we're up to 422. But in terms of actual land purchases, we are about 360.

Justin Sebastiano - Morgan Joseph

Okay. And how…

Dan Lee

And that it brings us up to 22 or 23 acres including the closure of the streets that we anticipates, so...

Justin Sebastiano - Morgan Joseph

Okay, thanks. How many active members are there in the Lumiere player database right now?

Alain Uboldi

In regard, 300.

Dan Lee

It depends on what your definition of active, but...

Alain Uboldi

300 the last time I looked, which was not so long ago. It was about 350,000.

Dan Lee

But that's people we see regularly, but the total number of names I think is 200,000 or something, but…

Alain Uboldi

There's a active members. Being in St. Louis with the loss limit, we are about 350,000 active members.

Justin Sebastiano - Morgan Joseph

Okay. And of those 350,000, how many are in zip codes, zip codes that are closer to the River City project, roughly?

Dan Lee

Well, are you talking about specifically St. Louis?

Justin Sebastiano - Morgan Joseph

Yes, well, basically…

Dan Lee

If you’re talking specifically St. Louis and Lumiere Place, roughly 20% to 25% of our customers are coming from the area south of the town where River City is being built.

Justin Sebastiano - Morgan Joseph

Okay. That is exactly what I wanted to know. Thanks. Thank you, guys.

Dan Lee

When you say the mychoice program, we're thinking nationally?

Alain Uboldi

We've got some coming…

Dan Lee

But the total mailing list that we have at Lumiere Place today is about 350,000. But that includes quite a few people who came at once and we haven't seen them again and we wouldn't consider that active.

Justin Sebastiano - Morgan Joseph



And your last question fro David Katz for Oppenheimer.

David Katz - Oppenheimer

Hi, good afternoon. And I just wanted to go back on an issue that Dan made some comments about and I wanted to make sure they're clear. In fact I hesitate to go back there because it sounded like we might be getting close to some more Pig Latin. But on the insurance proceeds, I just wanted to be and I'll make my own assumption about discounting it, but can you just go back over the total amount that's owed? And whatever color you can give us on timing would be helpful.

Dan Lee

Okay. I believed our last 10-Q said we estimate that our insurance losses including business interruption are in excess of $297 million, I think was the number, $297 million. And that's a number that grows each day with interest accrual and legal fees and so on, and business interruption. So, the insurance we had at the time of the hurricane was $400 million in total coverage and it is in layers. And we collected the first layer pretty quickly. The next layer, and that was $100 million, which was wholly-owned by Alliotts. In other words, they were the insurance company that took the risk between a loss of $100 million and $150 million and took some time to get that resolved. We insisted that because they didn't pay as promptly as we would have liked, we should get some interest accrual. And ultimately, the settlement reflected that. And so they paid $53 million for a $50 million layer.

The next layer from $150 million to $250 million was sold to us by two insurance companies who were pari passu within that layer. One of those insurance companies settled the claim with us in March, I believe, for $36.5 million. The other insurance company to date has provided us $2 million and even then, said it is only an advance and it's non-refundable, if you will. And that is the only outstanding issue is that insurance company which is RSUI.

Now RSUI also sold us, all by themselves, the layer from $250 million to $400 million. So if ultimately a court of law or through some other resolution, the total loss was deemed to be $300 million, they would owe us $50 million in the last layer and $50 million from the pari passu layer. So one could argue that their exposure is $100 million. And we’ll see where that goes.

Now, timing-wise, I mean, that's the exposure if we got everything. Their numbers in terms of the losses are smaller than that of what they think it is, and they would argue that the $2 million they sent us is what they think they owe us. And therein is the dispute.

Now usually these things get settled. Frequently they get settled on the courthouse steps. This is already in federal court. They have done some summary judgments that have been…for example, there is a claim that much of the damage was caused by a flood and there were different sub-limits in the flood. We won a summary judgment saying that guess what Hurricane Katrina was actually a hurricane. It wasn't called Flood Katrina, it was called Hurricane Katrina. And so, I think that ruling helped us get resolution with the other two insurance companies. So it's very hard to predict when RSUI gets serious.

I know the other two insurance companies made it look like they were going to fight us to the death for years and years and years. And then all of a sudden you got a phone call, and gee, can we have lunch? And that day we got a result. And in the one case, a guy flew in from Germany. And we had a pleasant lunch and had it resolved in about two hours. So it's very hard to predict when we get it resolved. From our perspective, we think $2 million is an insult. We intend to get what we think is owed to us. And we're waiting for them to call us.

David Katz

So it's not an unreasonable assumption to assume that that $2 million really becomes something similar to $36.5 million and then some discounted version from $250 million to $297 million plus, correct?

Dan Lee

That would be a reasonable guess.

David Katz


Dan Lee

From my perspective, I think it would be only fair if at a minimum, they paid what the pari passu insurance company paid plus the legal fees we've incurred since then, plus an interest accrual since then, plus something for the back layer.

David Katz

Got it.

Steve Capp

And on the timing front obviously, if we end up in litigation on this, it's going to take awhile.

Dan Lee

The ultimate resolution of the litigation with appeals could take years.

David Katz

All right. Timing-wise I'm on my own, but I think I have it. Perfect.

Dan Lee

How about one more question?


Your last question Michael Friedman with Noble Financial Group.

Michael Friedman - Noble Financial Group

Hi, guys. I had a couple of quick questions and maybe it is not so quick. Atlantic City, given the current environment, have your planned there changed at all? Have you changed the way you look at that property and that market in general? And I had a follow-up question about Ameristar stock.

Dan Lee

We're watching it pretty carefully. I mean, there is a lot of moving pieces. You had Borgata, just had a big expansion and give it a little while to mature. I think, for example, we did have an interesting regression, had to dust-off my business school skills on that foot.

We took the casino revenues of each casino in the last 15 years, adjusted them for inflation, and then looked at how many guest rooms they had during that year, and just plotted it. And when you plot it, you get a scatter chart that has a clear shape to it that shows more rooms are good. And we all knew that.

So then we threw in a regression line that said, how good are new rooms? And the math was interesting. If I recall correctly, it said, if you had a casino with no rooms at all, your revenue would be about $225 million a year. And now, bylaw you can't have that because you have to have 500 rooms in order to have a casino. But at least in theory, if you have no rooms at all, your revenue would be 225.

And then for every guest room you add, I think it added $220,000 in gaming revenue per year. And so, in fact, those that were bigger, I don't think any of them had ever shown less than $400 million in casino revenues in '07 dollars. And those that were smaller never did above a number.

And that correlation coefficient was 40%, meaning the number of guest rooms alone explained 40% of the variability in casino revenues. Now that's a significant correlation, it's not a huge correlation. So you shouldn't forecast it based solely on the number of rooms. There is so many other factors like location, strategy, and management and so on. But take that to the Borgata, and they just added 800 rooms? 800 rooms; that should add about $150 million to their casino revenues ones it matures, or more, actually a little more than, $170 million or $180 million. And then if you get normal margin on that, that should do pretty well.

And we're watching them avidly to see if that happens. And Harrah's just added a big room addition. We're watching that too. I think the evolution of Atlantic City is going to be very much like Las Vegas; they are not going to be the most convenient casinos anymore. I mean, the stuff was built back in the 1970s and 1980s, they were the only casinos in the Northeast. Now they are 30 years old. And there are casinos in Connecticut, of course, and New York has them, and Pennsylvania has them, and Delaware has them, Rhode Island has them, Maine has them. In fact, most states in the Northeast have them. But a lot of people live in the Northeast. And if you look at the gaming revenues relative to the population, there is still a lot of growth potential in the Northeastern U.S. Now where is that? Is it going to be in Maryland, where they have a proposal on the ballot for slot machines that might pass in November? Or is it the opportunity to go into Atlantic City where the tax rates are much lower and it allows you to build a Las Vegas-type property.

So in the west, people drive past the Indian casinos in Arizona and California to come to Las Vegas because it provides a more complete experience. And so if you look at the success of the Borgata, I think it's because they provided a more complete experience. But the fact that the capital markets are not open today, gives us the opportunity to watch this evolve a little more and get smarter about it because the stuff in Philadelphia is new.

Frankly, it was swiped together pretty quickly and the tax rate is pretty high. So, the stuff that is there now is doing huge revenues. But frankly, it is not very nice, and so after people go and look at it, well they go back to the Atlantic City, because some of the facilities in Atlantic City provide a much better experience than the casinos in Philadelphia. Not all of them, unfortunately, some of them in Atlantic City are no better than the things in Philadelphia and they are not as convenient. And so I think you're going to see Atlantic City have more of a diversion.

As people talk Atlantic City, they talk about fair share; you're getting your fair share. They never talked about that in Las Vegas, because the numbers get absolutely absurd. As you probably does, 1000% of its fair share. And the Riviera does 5% of its fair share. So the numbers are so wildly different because the quality of properties are so wildly different.

Well, I think you are getting to that in Atlantic City, from the quality of the Borgata compared to some of the older facilities, and some of… when I say older facilities some of those were built in 1904. So, you're really talking older facilities. And it's very fascinating to watch. And we will get smarter overtime about it. And by the time the capital markets open, I hope we have straighter answers.

Michael Friedman - Noble Financial Group

Just to follow-up on that. What if the Borgata and some of the other casinos don't hit the thresholds that one would expect, would that make you rethink that entire project?

Dan Lee

Look, at some point, when the capital markets are open, we're going to have to come to you guys and say, hey, we're trying to raise billions of dollars to go build in Atlantic City. And we're going to have to persuade you that we can build something that is going to make sense. And you're going to ask the same questions you're asking now, and we are going to have to have answers that people believe in for us to raise the money for us to build this.

So frankly, if the Borgata expansion doesn't do well and Maryland legalizes slot machines, and other casinos come in to Massachusetts or God knows where, the numbers aren't going to work and the thing is not going to get built. And that's true whether it's us or MGM, or Rebel or anybody else. We have to design something that we think works and we have to persuade the financial markets that it will work, or we won't be able to get the money nor will anyone else.

Michael Friedman - Noble Financial Group

Fair enough. One other quick question. What type of multiple, on a price that EBITDA multiple did the company pay for the Ameristar stock, did you ever say?

Dan Lee

We didn't, but the average price was about $32 a share. So you can do your own math.

Michael Friedman - Noble Financial Group

Okay, great. Thank you.

Dan Lee

By the way, that was at a time when the valuations were quite a bit different. So I think every gaming stock is probably trading significantly below what we paid for the Ameristar stock at that point in time. And so I wouldn't take that as any indication of anything, the current conditions are so much different than they were then. Filing costs are different and multiples are different. So I'm not sure it's a relevant number.

Okay. Well, thank you very much, everybody. And we'll continue to do the best we can. Thanks.


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

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