Ameristar Casinos' CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Ameristar Casinos, (ASCA)

Ameristar Casinos, Inc. (NASDAQ:ASCA)

Q3 2012 Earnings Call

October 31, 2012 10:00 AM ET

Executives

Gordon Kanofsky – CEO

Tom Steinbauer – SVP, CFO, Secretary and Treasurer

Analysts

Shaun Kelley – Bank of America

Brian Egger – Topeka Capital Markets

Carlo Santarelli – Deutsche Bank

Steve Kent – Goldman Sachs

Operator

Good morning, ladies and gentlemen. Welcome to Ameristar’s Third Quarter 2012 Financial Results and Earnings Conference Call. I would like to remind you that today’s call is being recorded. All participants have been placed in a listen-only mode and the floor will be open for questions following the presentation.

Before we get started, I would like to remind you that a slide presentation is available on Ameristar’s website, www.ameristar.com. It can be located by clicking on the “About Ameristar” link on the home page, then clicking on the Investor Relations link in the left-hand column, then clicking on the “Presentation Slideshow” link under the “Quarterly Results Conference Call” section. This presentation corresponds with comments that will be made in the call and provides additional useful information with regard to financial results.

During the course of this conference call, the company will state beliefs and make projections or other forward-looking statements regarding 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 results or events may differ materially.

I refer you to the forward-looking statements sections in both the slide presentation and the news release issued earlier today about the company’s third quarter financial results, the latter of which is available on the company’s website.

In addition, the company will discuss adjusted EBITDA and adjusted EPS, which are non-GAAP financial measures. A definition and reconciliation of these measures to the most comparable GAAP financial measures are included in both the news release and the slide presentation.

It is now my pleasure to turn the call over to Mr. Gordon Kanofsky, Ameristar’s Chief Executive Officer. Please go ahead sir.

Gordon Kanofsky

Thank you, and thank you all for joining us today. With me as usual is Tom Steinbauer, our Chief Financial Officer. Slide two, list of the areas of conversation that we’ll cover today, and quickly getting into slide three and getting us going is a summary of our third quarter. It was one of our most profitable quarters in our history, generally a continuation of our recent operating performances.

If you will recall, last year’s third quarter was a record-breaking quarter, and we knew that we would face a difficult comparison in this year’s third quarter. But despite the high comparison hurdle, we’re pleased and proud that a majority of our properties were able to increase their adjusted EBITDA year-over-year. Black Hawk and Council Bluffs in particular continue to show strength. Black Hawk did it primarily with revenues and margin improvement. Council Bluffs did a little bit harder with mostly margin improvement. Black Hawk, in fact, had the best quarter in its history. It’s the third consecutive quarter with year-over-year growth in all of its key financial metrics.

St. Charles and Jackpot had good results despite construction disruption that affected each of those properties. Two of our properties had challenging quarters year-over-year but they were anticipated. Kansas City, we had new competition that opened in Kansas in February 2012, and in East Chicago there was also heightened competition in Chicago land, but we also had some impact from an ineffective promotional program that attempted to counter of the competitive challenges that have since been dialed back. We also had some table game hold challenges in East Chicago.

Our adjusted EBITDA margin held steady at a strong 29.6%. That’s the same as last year’s third quarter record-breaking level, and this was achieved despite some revenue declines and $1.1 million increases in non-capitalizable development expenses year-over-year.

So the bottom lines are that once again the third quarter proved that Ameristar is highly effective with its operating model in generating highly efficient profitability. The third quarter also reflected the benefits of diversification as we produced solid results on a consolidated basis while facing some discrete challenges at a couple of properties. And when completed, we expect Ameristar Casino Resort Spa Lake Charles to provide accretive growth as well as additional geographical and financial diversity to reduce volatility of operating results. Construction on the project commenced in July and is progressing smoothly. We will cover Lake Charles a little bit in more detail later.

Ameristar will continue to pursue accretive acquisitions and development projects in North America that meet or exceed our return on investment hurdles and are within our risk tolerance. We will also continue to look at other means of maximizing long-term value to our shareholders including debt reduction, dividends and stock buybacks.

Now turning over to slide four, we’ve got our usual favorite slide, our key financial metrics, and as a remainder, as the operator said, there’s definitions and reconciliations of adjusted EBITDA and adjusted EPS in the appendices to our slide presentation.

For the third quarter year-over-year, our net revenues declined 2.1% to $298 million. Net revenues remained flat or improved at three of our properties. Black Hawk’s net revenues were up year-over-year by $2.3 million or 5.7%. Black Hawk set its all time quarterly revenue record and continued its streak of strong topline performances.

St. Charles overcame road disruption on Main Street near the property for most of the quarter and preparatory work for the Interstate 70 bridge project. And Jackpot rebounded on a sequential quarterly basis after the Highway 93 repaving project concluded and construction disruption ended from a hotel renovation at our property that was completed in July.

With the new competition, Kansas City’s net revenues declined year-over-year by $4 million or 7.1%, and East Chicago’s net revenues declined year-over-year by $4.6 million or 8.5%.

There is a bit of good news though for East Chicago coming up. The Cline Avenue Bridge is being rebuilt within the next 2.5 years to 3 years. The old bridge is currently being demolished. There’s no costs to the bridge replacement to Ameristar. It’s being done by the city through a private developer. It will be a toll road, and we would expect to assist our guests with the tolls as appropriate within our marketing programs.

Adjusted EBITDA declined year-over-year 2.4% to $88.1 million. As a reminder, the current year includes $1.1 million related to Lake Charles of Springfield non-capitalizable costs that were not incurred in the prior year quarter.

The third quarter benefited from Black Hawk again setting its all-time quarterly record with $16.1 million in adjusted EBITDA. Council Bluffs increased year-over-year by about $800,000 or 5.1% due to the strength of its market and the extreme efficiency of its operations.

East Chicago was down $2 million or 21.6%. About half of that we attribute to low table games hold, the other half is attributable to increased competition and the promotional campaign, but as I said, it’s since been dialed back. That promotional campaign contributed to consolidated promotional allowances increasing $600,000 year-over-year. And Kansas City was down $1.6 million or about 7.8%. The combined impact of East Chicago and Kansas City was a negative $3.5 million, that’s 165% of the consolidated adjusted EBITDA decline.

We think it really demonstrates the overall strength of Ameristar’s operating capabilities, and we’re confident that net revenues and adjusted EBITDA would have shown year-over-year growth against last year’s record-breaking performance, but for the enhanced competitive conditions in those two markets. In fact, the operating results for our six properties with stable competitive conditions reflect increases in net revenues and adjusted EBITDA year-over-year of $2.1 million and $2.2 million. Thus for those six properties we had a flow through rate in excess of a 100%.

Although the competitive changes at Kansas City and East Chicago are permanent, Ameristar’s business model has demonstrated consistent long-term strength as we’ll discuss in a couple of minutes on the next few slides. This is also evidenced by our adjusted EBITDA margin remaining stable at 29.6%. As I said, this is equal to last year’s third quarter record-breaking performance. Notably, Vicksburg with a 45.7% margin and Council Bluffs with a 42.7% margin were shining stars in our portfolio, and Black Hawk also was extremely strong with a margin of 37.9%. Although adjusted EPS declined $0.09 year-over-year to $0.48, this was our second best adjusted EPS for – ever for our third quarter. It’s a runner up, of course, to last year’s record-breaking performance.

On the nine-month data, net revenues were down $11.9 million or 1.3% year-over-year. Kansas City and East Chicago combined to be down $19.2 million or 161% of the total decline. Black Hawk was up $6.5 million or 5.7%. Consolidated promotional expenses are down $2.9 million year-over-year or 1.4%. Adjusted EBITDA was down 0.2% year-over-year to $280.3 million. Through the nine months it’s the second best adjusted EBITDA in our history, runner up again only to last year’s nine month period. Three properties improved adjusted EBITDA year-over-year; Black Hawk, Council Bluffs, and Vicksburg. The biggest increase was Black Hawk, with a 9.9% increase or $4.1 million.

We have set – nine months records were set for adjusted EBITDA margin and for adjusted EPS. The adjusted EBITDA margin grew from 30.6% in last year’s period to 30.9% in this year. The efficiency of our operations is obviously evident through the first nine months, a majority of our properties increased their adjusted EBITDA margin year-over-year.

Adjusted EPS was up 19.7% from $1.47 to $1.76. The weighted average share count went down to $33.9 million in this year from $43.9 million in 2011. The EPS improvement is due mostly to the share repurchases that were accomplished, efficient revenue flow through, and a lower effective income tax rate.

Now let’s look at slides five through seven for a breakdown of our quarterly trends over a longer time period.

On slide five, is our long-term trends for adjusted EBITDA since the first quarter of 2008. Despite the drop-off from the prior year third quarter and last quarter, the third quarter of this year was still one of our best quarters historically speaking over this period and for all-time.

On slide six, adjusted EBITDA margin, again, one of our best quarters ever. We’re once again in the neighborhood of 30% for a consolidated margin.

Looking at both slides five and six, you can clearly see the adjustments that we’re made in 2008 to 2010 to reposition Ameristar as we increased deficits on profitability over market share and enhanced efficiency to overcome the impact of the recession. Those efforts gained traction over that time period and have shown great resiliency over 2011 and 2012.

Slide seven shows our adjusted EPS. And as I said, adjusted EPS was $0.48 in our third quarter. We’re generating strong earnings per share for our shareholders. This is in part due to the reduced number of outstanding shares and also due to the efficiency of flow through. The adjusted EPS for the first nine months of 2012 surpasses any full year adjusted EPS in Ameristar’s history.

Now let’s turn over to slide eight and cover Ameristar Lake Charles. As I said, construction started in July, on July 20 to be exact. So far construction’s on schedule, although, of course, its early days. Including the purchase price, we expect to spend approximately $560 million to $580 million on Ameristar Lake Charles. This excludes capitalized interest and pre-opening expenses.

Our budget factors in the rightsizing of the food and beverage outlets to satisfy demand in the market and maximize the return on investment. There is a fair amount of fixed development cost, and the increased size and scope allow us to meet demand at peak times and enhance both EBITDA and return on investment.

We have the flexibility to add a second hotel tower at later day should market conditions warrant, and it’s certainly is cheaper to right size now the rest of the facility than to do it later.

We do anticipate a 15% return on investment on Ameristar Lake Charles following an initial ramp up period. In the third quarter our CapEx on the project excluding the purchase price to acquire was $12.5 million. We expect to complete the project with funding through cash from operations and availability under our $500 million revolver, all of which is available today.

When completed Ameristar Lake Charles will cater to nearby Louisiana and Texas communities, including Houston, which is 142 miles away, and there are 6.1 million adults in the market area from which Ameristar Lake Charles can serve. We believe the legalization of gaming in Texas is not a risk that we expect to see in the foreseeable future. It has never passed out of either chamber of the legislature, nor has it gotten out of any committee of the Texas legislature.

The Texas legislature meets every other year, it will meet in 2013. If the measure were to pass both chambers and get signed by the governor, then a ballot initiative must occur, and we think it’s most likely, if anybody were going to try to run that, they would want to do it on a Presidential year. And the first one for that would be 2016. Then there has to be a period, for the creation of a gaming commission and regulations of licensing and project development, all of which will take considerable time, and there is significant lobbying from Oklahoma tribes against Texas legalization, and those tribes obviously have extremely deep pockets.

Now we’ve got some a new fresh photo here on slide 9. This was taken about 10 days ago. It’s showing the construction. You can see where now we are doing a lot of pile driving. This is a pretty swampy environment, but the piles are going in, and the ground conditions are exactly as our engineers had expected. So we haven’t seen any need for contingencies associated with that, and you can see a lot of clearing beyond the actual facility development site, which is where the golf course will be.

Then we’ve got some fresh renderings, we would like to show you. Slide 10, although at a slightly different angle from the photo on slide 9, gives you a representative feel of what is going to look like in less than 2 years with a great looking facility with a bright red group for people to see as they come across the Interstate 210 Bridge.

Then to our front door on slide 11, you see the porte cochere and the entry there, and on slide 12, a little bit closer up look from the backside. You can see the lazy river that will be part of our pool facilities behind the hotel tower; it looks pretty inviting. I actually think I’d rather been there today than on an earnings call, but I am happy to be with you all nonetheless.

Now let’s get into looking at what Lake Charles will do for us. On slide 13, it shows an example of what the diversification will do for us. It shows on a left side each property’s adjusted EBITDA as a percentage of our total property adjusted EBITDA for the last 12 months. It does exclude corporate. It shows the diversification with relatively good balance, although Missouri does have 42% of our LTM adjusted EBITDA.

The chart on the right shows how Lake Charles could further benefit our diversification. It provides a 17.1% reduction in dependence on Missouri, our largest state currently. The assumptions behind this pie chart on the right include a 15% return on investment for Lake Charles, which, as I said, is our post ramp up hurdle rate when we decide whether we are going to move forward with a project or not. And it also assumes a full year estimated performance by Lake Charles. We understand the importance of diversification to our company, and we’ll continue to pursue development opportunities that meet or exceed our hurdle return on investment and have an acceptable risk profile.

Now let’s talk about Springfield. We gave a presentation last week to the community and announced some more specific plans for our project including a $910 million project proposal. Now that does include capitalized interest of about $60 million and pre-opening expenses of about $10 million and a license fee of $85 million.

We believe our proposal is superior to the other proposals that have been submitted, because we have more casino games; we’ll have 3,300 slots and a 110 table games. We’ll have more hotel rooms, 500 rooms, of which 50 will be suites, and more resort amenities. We’ll have multiple pools, a spa, a fitness center and retail. We’ll also have a conference and entertainment center, and we’ve designed great restaurant concepts with commitments already from a number of nationally recognized restaurant tourism brands like Wolfgang Puck, Martin Yan and Blue Martini, and we’ll also have some great local favorites including a sports bar & grill operated by Jerry Remy, the former Red Sox star, Frigo’s Market and Deli, Schermerhorn’s Seafood; and in that part of the country you’ve got to have Dunkin’ Donuts. And we anticipate, we’ll be adding more restaurant concepts over time. This property also has master plan for significant expansion of the casino, hotel and parking as warranted.

Our proposal is intended to give us a strong competitive edge to win the license and allow us to address peak demand in the market, which has 2.5 million adults within 50 miles, while at the same time maximizing our return on investment. The license fees, site and traffic plans represent fixed costs of $160 million, and though that’s a lot less than we expect for either competing proposal at Springfield, it’s a fair amount of money that is more efficiently absorbed in a project of our proposed scale and scope.

The licensing timeline for Springfield anticipates that there won’t be final decisions made until the first quarter of 2014. The city is currently running a two-stage RFP process. We were recently accepted into the second phase, and we expect that will go into mid 2013, before the city makes its final selections about which properties to put up to the voters and ultimately to the gaming commission for its consideration.

And the gaming commission is also running a two-step process. The first stage in that process will determine financial suitability and regulatory suitability, and then individual projects will be considered in a second phase. As I said, we don’t expect any licensing decisions to be finally made by the gaming commission until early 2014, and that dovetails extremely nicely with the schedule for our Lake Charles project being completed and opening.

The differentiators for Ameristar’s proposal in Springfield are that we already own a large parcel of land. It’s 40 acres, it’s minutes from downtown, near the Mass Pike and the Interstate 291 interchange. We will easy access, it will be very convenient with the least amount of traffic impact on local communities. We’ll fund the entirety of the I-291 interchange improvements to ease the already existing traffic conditions.

Our site is construction ready today. There’s no displacement of existing residents or businesses. This will result in more money being devoted to creating a world-class resort instead of paying for initial infrastructure cost. We also think this gives us at least a 12 month to 18-month head start on other proposals. This will lead to faster job creation, more tax revenues, and faster economic impact into the community.

We shared some renderings with the community last week, and I want to share them with you now. On slide 15 is an elevated rendering from Interstate 291. You can see the pool in the back there. There’s actually multiple pools. The hotel tower is surrounding it, and there is parking garages on either side.

Looking over to slide 16 is our front entrance off of Interstate 291, and we got the porte cochere, casino on the left, the hotel lobby on the right, and one of the lower rise hotel structures on the far right.

We also want to have a second front door at Ameristar’s Springfield, and that’s shown on slide 17. This just faces out on the opposite side away from Interstate 291 on Page Boulevard, a major thoroughfare through East Springfield today. We’ll have restaurants and other features that face out. We’ll have an urban courtyard with seating and make it a really inviting comfortable place for the locals. As I said, it will be a second front door for Ameristar and soften the impact that the project like that could have on the local community. We’ve listened very carefully to the residents in the area, and we’re focusing on reading their needs.

Then over on slide 18 is a overhead look of the overall look of the facility. As you can see, there is a new overpass across Interstate 291 and a series of frontage roads between the two exits at Page and St. James. This will get, we think, an overwhelming majority of traffic into our facility without impacting Page Boulevard at all. It also provides access off to one of the side streets there called Stevens Street that will also relieve pressure in the local community. As you can see, we’ll have parking on both sides making it extremely convenient for guests to be able to get to wherever they want to get to on the property without having to walk a long distance, and the urban courtyard, again, provides a great interface to the local community, and we’ll also have a intermodal mass transit facility on that side of the property to tie into Union Station and the rest of the Northeast region.

With that, I will turn it over to Tom to cover some balance sheet information and outlook.

Thomas M. Steinbauer, SVP of Finance, CFO, Secretary, Treasurer and Director

Thank you, Gordy. Good morning everyone. As everyone might expect, the balance sheet statistics are a reflection of the strong performance that the company continues to generate from operations. At September 30, we had a bank balance of $116 million, which is up about $31 million compared to December 31, 2011. In the third quarter, we made a $31.5 million payment to acquire Creative Casinos. We also placed $25 million in construction escrow account for the Lake Charles project in the Louisiana. It would – and that $25 million is not included in the $116 million.

In October, we made our $39 million semiannual interest payment related to the $1.4 billion 7.5% notes, and to date no borrowings related to Lake Charles construction project have been necessary. We don’t anticipate, probably, having to borrow any money related to Lake Charles until sometime in the second quarter of 2013.

Debt balance, basically, the face amount went down $12.4 million from December 31, 2011. It remains in the range of $1.9 billion, again, a reflection of the significant cash flow the company is producing, and our unique tax situation this year, which continues from last year where we had a substantial write off when we took out the old debt at the same time we purchased – bought back the stock. At September 30, we still have $496 million of the revolver outstanding, plus there is still a $200 million accordion available through the B term loan.

From a treasury stock perspective, we saw an increase of $14.3 million from the balance of December 31, 2011 due to continued share repurchases under our repurchase program announced last year. In Q3 we repurchased 456,000 shares at an average price of $16.84 a share.

Today, we have acquired 1 million shares or 3% of our outstanding shares since the inception of the program just a little over a year ago, at which time we had a – the Board approved a $75 million bucket for stock repurchases. Since the initiation of the repurchase program, the average price of the repurchases have been $16.67. We’ll continue to be opportunistic in repurchases as we move into 2013.

Equity increased $65 million from December 31, 2011 due to strong profitability in the nine months’ performance and certain tax elections that we made in the first quarter of this year. We expect or we anticipate, we should return to positive equity, for those of you interested in that particular statistic, by the end of Q1. Obviously, initial projections were that we would return by the end of the third quarter of this year, but that was prior to expenditures related to acquiring Creative Casinos and may not – and the fact that we did buy back some additional stock.

We continue to have very strong debt ratios. As you might expect, we exceed the minimums required by the credit facility from – anywhere from 150 basis points on the total net leverage, 285 basis points on the senior secured net leverage, and on the interest coverage, we have 160 basis point cushion at the end of the third quarter.

Moving on to slide 20, fourth quarter and full year 2012 financial estimates. Q4, we expect probably will continue to be challenging with the closure of the I-70 bridge in St. Charles in the first part of November along with continued year-over-year increased competition that exists in Kansas City and continued weakness, apparently, in discretionary consumer spending that we saw in the third quarter. From our perspective, it doesn’t look like that will change in the fourth quarter.

Our Q4 2012 estimate for non-cash stock-based compensation expense will be in the range of $3.3 million to $4.3 million. For the year, we anticipate the total to end up somewhere between $16 million and $17 million.

On a blended federal and state tax rate, we’re projecting a 40% to 42% rate for the fourth quarter and between 27% and 29% for the year. As you remember, we made some certain state tax elections in the first quarter that created that yearend tax rate to be in the – which will create the yearend tax rate to be in the 27% to 29% rate, but moving into 2013, we would expect the rate to still be somewhere in the low 40% range quarterly and on an annual basis.

Capital spending for the remainder of 2012 is expected to be in the range of $31.5 million to $36.5 million. We anticipate that we’ll spend approximately $17 million in the fourth quarter on Lake Charles with construction and additional design costs. One comment, as Gordy indicated, we had about a $12.5 million cap expenditure in Lake Charles in the third quarter, and you’ll notice that that number is a little over $15 million in the earnings release. The difference is from the purchase price, we booked about $2.7 million into construction in progress. The balance is – of the purchase price is going to be going into intangible assets as value that we’ll have to book for the license.

Net interest expense in Q4 will be near $29.5 million. There’s going to be approximately $1.1 million to $1.6 million of non-cash interest expense in the fourth quarter. Corporate expenses should range, excluding the portion of stock based comp, should range in the $13 million area and anticipated diluted weighted average shares outstanding for Q4 2012 will be about approximately 33.5 million for the year to – and for the year to be about 33.8 million. I’m sorry, excuse me.

And this third quarter was actually the first quarter since we did the stock buyback where shares – outstanding shares are going to be – were comparable and will be comparable going forward. The board did declare also a $0.125 per share dividend, payable in mid December for our fourth quarter dividend.

As we look forward, I mean, as far as the November elections are concerned, for all of our jurisdictions, there are no ballot initiatives next Tuesday that will have any impact on our operations.

That concludes the presentation, I’ll now turn it back to the operator for questions. Thank you.

Question-and-answer Session

Operator

(Operator Instructions). We’ll take our first question from Shaun Kelley with Bank of America.

Gordon Kanofsky

Good morning, Shaun.

Shaun Kelley – Bank of America

Can you guys hear me okay?

Tom Steinbauer

Yes, sir.

Gordon Kanofsky

Now we can, yes.

Shaun Kelley – Bank of America

Perfect, sorry. A little bit of phone issues here in New York this morning. So just wanted to ask real quickly, Gordy, in the prepared remarks, you talked a little bit about some promotional challenges in East Chicago. But I guess at this point, we were getting pretty close to at least having lapped the new competition in that market. So could you just give us a little bit more color on kind of what you’re seeing there and how you think about the fourth quarter and next year in Chicago?

Gordon Kanofsky

Yeah, I think the new property in Des Plaines certainly ramped up over the course of its first year of operations. The first quarter of its operations was not quite as strong as the fourth quarter of its operations, meaning that not necessarily the quarter of the year, but the quarters in which – since its been opened. And the sort of penetration into the market has been a little bit more extensive as that period has gone on. Now, that said, Ameristar Lake Charles market share within the three competitors in its market is relatively stable, I’m sorry, East Chicago – yeah, thank you, Tom – is relatively stable, so it seems to be a broad market impact, impacting the totality of the area and the sort of things that go on among the immediate competitors is actually relatively stable.

Tom Steinbauer

Yeah, I think, Shaun probably a little bit what you’ve seen is some trickledown effect as that property opened and the other properties in the Chicago side of the market upped their promotional costs – or promotional spend to try and recoup some of their lost revenue, and that trickled down over into northwest Indiana. But as Gordy indicated, we tried to be a little bit aggressive in the third quarter on some promotional attempts and backed off those as soon as we saw that they weren’t benefiting the bottom line.

Shaun Kelley – Bank of America

Okay, got it. That’s really helpful color. And then secondarily, I just wanted to ask a little bit about Massachusetts since that proposal just came out. Either, the question that I had was, you mentioned there’s a two-phase process first for Springfield, and then for Massachusetts over at the state level for the Gaming Commission. So when do you expect the two phase process for Springfield to, I guess, be decided? And is there only to be one proposal in Springfield that’s going to go through from there or is there a chance that more than one gets through to the final round at the Massachusetts level?

Gordon Kanofsky

Initially, out of Springfield, there was talk of just a single proposal. The more recent talk in Springfield has been one or more proposals going up to the state level. So it’s a little unclear on exactly what they’re going to do. Right now, there’s a little bit of a disconnect in the schedule in that Springfield is set to be making some of its decisions prior to the state having ruled on the phase 1 of its process. I don’t know if that’s going to change. I think that Springfield came out with this proposal for its process timeline a little ahead of, before the state announced it.

I don’t know if the city is going to adjust theirs or not. But the expectation is that by, I think, late January, early February would be a timeframe that the city, at least under its current timeline, would be making the selections of which proposals to – that they would negotiate host community agreements with. And then if they are successful in completing all of those negotiations, there may be some that fall out, I guess, over that time, then within a short period of time after those agreements are completed, they would go to the voters either in a citywide or ward vote.

My expectation is it will ultimately end up being a citywide vote for all of them that would approve the terms of the host community agreement and the location and overall project proposal of the various operators. And then with those endorsements, qualifies you in order to finish up with the state processes, because we have to have a host community agreement in order to qualify for the state gaming license.

Shaun Kelley – Bank of America

Perfect, that’s very clear. And I guess my last question, which will be also in Massachusetts, which is just sources and uses, could you give us a little bit of color on? I know it’s probably premature, and the assumption is that the bulk of the cash flows here will probably be after Ameristar Lake Charles is up and running, so you’ll have another source of capital there. But do you think committed financing is required for the Massachusetts level bidding, and how would that change the process for you guys if it was?

Gordon Kanofsky

I think you’re certainly going to need to demonstrate the ability to finance. Whether you need to have committed financing, they haven’t really said yet. But we’ve got a strong balance sheet, and I’m fully confident that we will be able to have whatever we need in order to carry that process through.

Now, sources and uses, everybody – all the applicants had to provide some detail on that in their phase 1 submissions to the city. Everybody had requested confidential treatment on that, so when the city made them available, those line items aren’t there, so we don’t really know what all is embedded in our competitors’ proposals. We do know what is embedded in ours, but we’re not yet prepared to discuss it on a line item-by-line item basis.

But one thing I do know is that we have proposed a very specific traffic plan to provide access to our facility as well as to make sure that we don’t have a negative impact on the local community, and, in fact, our project will have a positive impact on the local community from a traffic perspective. Excuse me. Ours is a $58 million cost. We’re prepared to pay that, not the taxpayers.

I haven’t heard anything out of any of the other proposals as to what their traffic plans are, and I don’t know if their numbers that they have published include an estimate for what their traffic fix would be. I don’t know, I mean I know that our site cost us $16 million, it’s construction ready. As I said, I don’t know from anything that the other proposals have said as to what their acquisition costs are or whether their budgets include things that are necessary for demolition and relocation of businesses and homes as well as the vacation of streets and the relocation of underground utilities. So I’m not really certain that all of the proposals are on an apples-to-apples basis yet, but I expect that will be a little clearer as time goes on.

Tom Steinbauer

Shaun, based on the timing that the state is talking about for their final approval on licensing, as you said, we’ll have a short order after that cash flow coming from Lake Charles. I don’t anticipate any problem with the bank group we have obtaining the financing we need to do Springfield if we’re lucky enough to win the opportunity.

Shaun Kelley – Bank of America

Great, thanks very much, guys.

Tom Steinbauer

You’re welcome.

Operator

And we’ll take our next question from Brian Egger with Topeka Capital Markets.

Gordon Kanofsky

Hi, Brian.

Brian Egger – Topeka Capital Markets

Good morning, can you hear me?

Gordon Kanofsky

Yes, thank you.

Brian Egger – Topeka Capital Markets

Yeah, just a quick question. I know that now we are beginning to lap in February, the opening of the Kansas City property, just wondering, similar to the other question, whether or not we are going to start to see different competitive dynamics in terms of the impact on your property in Kansas City? And then also, just if you could comment at all, if you expect to see any revival of the attempts towards gaming legislation in Illinois?

Tom Steinbauer

Related to Kansas City, I think when it laps, we’ll see somewhat the same environment that we saw in St. Louis after you saw the downtown facility open, and then South County open. I think things will stabilize. I think the promotional environment in Kansas City will probably not be as aggressive considering one of the operators in that market, the more aggressive they get, the more they hurt themselves. So I think that that environment will be – the stability in that environment will be greater than what we’ve seen in the Chicago metropolitan area.

Gordon Kanofsky

As for Illinois, I think it’s a little bit like a nine year old asking for an iPhone. It’s something that’s just going to keep coming up and up at the dinner table. The Governor has seemingly indicated some greater willingness to consider some level of expansion, not clear if that has to dial back some of the stakeholders that are currently interested in it, and whether the votes stay for that. I also know that they have massive public pension issues in Illinois, and they need to solve those problems whether there’s a package that comes together or not, I don’t know.

The Governor has insisted on regulatory reforms in the state as a condition of moving forward with increased licensure. Whether it’s just a downtown casino and they allow – existing casinos are allowed to expand, or whether it’s broader than that, so what’s in the works, I really don’t know. A lot of those things are going on behind closed doors. But I expect we’ll hear more about it come January when the legislature comes back.

Brian Egger – Topeka Capital Markets

Okay, thank you very much.

Gordon Kanofsky

You’re welcome.

Operator

And we’ll take our next question from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli – Deutsche Bank

Good morning, you hear me, okay?

Gordon Kanofsky

We can hear you great, thank you.

Carlo Santarelli – Deutsche Bank

Great. I just – you mentioned earlier, Gordy, in some of the prepared remarks as you were talking about your views on, obviously, capital expenditures and projects. Could you kind of talk us through the difference between your return thresholds for, say, a greenfield development like a Lake Charles, sorry, like a Massachusetts, or a Lake Charles and one-off asset acquisitions. Is that pretty much uniform across the board, the way you’re looking at things, or is there a little tweak in that?

Gordon Kanofsky

Yeah, I mean we try to look at capital allocation in a fairly uniform way. Looking at greenfield, though, is a little different than looking at an existing property. In an existing property, you’ve got a run rate of EBITDA that you can work from, but we then have to evaluate a variety of things, such as are the bones there good, how much re-skinning do we need to do, do we need to actually go in and reposition bones, and what are the operating margins, what’s the strength of the market?

The ideal thing for us, as you can see, we’ve demonstrated the ability to operate at peak performance with peak margins in virtually all of our locations, and we’re pretty far ahead of a number of our competitors.

So if we can find a one-off that’s trailing in margin by 6 or 7 percentage points, given the same effective gaming tax rate, there is a terrific upside opportunity for us, but there could be factors that impair the ability if we get that. If the property is too small or in a fairly monopolistic market and it’s pretty much getting what it’s going to get and you can’t generally squeeze more out of it, those could be factors that weigh are against it, as could expanded legalization of the competitive set in adjoining or the existing jurisdictions, and then there is the level of tax rates and whether we can maximize the return on investment through further investment in the property, or whether that’s just benefiting the state a lot more than us.

So it is a myriad of factors. We try to be dynamic about it, but we also look at other things, besides just growth of the company, which we think is valuable from the diversification standpoint of the scale and scope, but we also recognize that sometimes it is better to pay down debt. And we do need to maintain and preserve a healthy balance sheet and sometimes it’s better to buy back stock and sometimes it’s better to pay dividends. So it’s – I wouldn’t say it’s a shotgun approach, but we do have a lot of bullets in the gun that we can fire.

Carlo Santarelli – Deutsche Bank

Great. Thank you, Gordy, that’s helpful.

Gordon Kanofsky

Thank you.

Operator

(Operator Instructions) We’ll take our next question from Steven Kent with Goldman Sachs.

Steve Kent – Goldman Sachs

Hi, good morning. Two questions. One, you mentioned something about you were seeing some impact of discretionary spend. Could you just talk about tiered versus untiered. I’m not sure if you specifically discuss that. And then just on the opportunity in Massachusetts, the roughly $900 million spend, do you have a specific hurdle rate that you are targeting, and how does that change if any other states or other properties open up, or how do you think about that?

Tom Steinbauer

We didn’t really say anything specific about discretionary spend, and we don’t talk about our players club levels and what we’re seeing specifically there. The third quarter was somewhat soft, and I think public numbers, gaming numbers reflect that, and we basically said that we don’t believe we’ll see any change in the fourth quarter at this point in time.

If you want to talk about economic statistics, it appears the savings rate from the consumer is staying flat. It appears that July and August, they increased their non-revolver credit card or credit balances at a pretty good rate, which obviously means they are going to be stuck with fixed payments who knows for how many months, which could affect their disposable income, since their actual income grows very little in the third quarter. And when you add back food and power and gas, the cost of living actually probably increased greater than what their per capita income increased, so there is only so much in the goddamn piggybank, so they probably have a little less discretionary spend. But you guys can do that math better than me.

Gordon Kanofsky

As for Springfield and the hurdle rate, as we said in the prepared remarks a couple of times, we have a 15% return on investment hurdle rate that we apply, and we think that we can achieve that with our Springfield proposal. If it turns out based upon some competitive conditions that develop that we can’t, we obviously would take a fresh look at that. I do know that one of our – the other proposal for Springfield, it said that if they want to win the license, they will, and if they choose not to, they’ll let it pass, they’re not going to spend at an insane rate to do it. Now, I’m not going to say that (inaudible) would guarantee that if we want to win this license that we will, but I will tell you that if we decide we don’t want to win the license because we can’t get an acceptable return on investment, we will not win the license.

Steve Kent – Goldman Sachs

Okay, thanks for that.

Gordon Kanofsky

You’re welcome.

Tom Steinbauer

You’re welcome.

Operator

That appears we have no further questions at this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Gordon Kanofsky

I just want to thank everybody for participating. I know a number of you on the East Coast have had challenges over the last several days, and I’m sure that there are some that are not on this call that would have liked to have been, and Ameristar is a caring and compassionate company, and our hearts go out to everybody who has been impacted by this horrible storm on the East Coast. And we thank you for joining us today.

Tom Steinbauer

Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. We appreciate your participation.

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