Nov 9, 2013
Executives
William Schmitt – IR Andre Hilliou – Chairman and CEO Mark Miller – COO Deborah Pierce – CFO
Analysts
Justin Sebastiano – Brean Capital Chad Beynon – Macquarie
Operator
Good day everyone and welcome to the Full House Resorts Incorporated Third Quarter 2013 Earnings Conference Call. Today’s call is being recorded.
And at this time, I would like to turn the conference over to Mr. William Schmitt of ICR.
Please go ahead sir.
William Schmitt
Thank you, Vicky and good morning everyone. By now you should have access to our earnings announcement and Form 10-Q, which was filed with the SEC this morning.
These may also be found on our website at fullhouseresorts.com under the Investor Relations section. Before we begin our formal remarks, I would like to remind everyone that part of our discussion today may include forward-looking statements.
These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.
I would now like to introduce Andre Hilliou, Chairman and CEO of Full House. Andre?
Andre Hilliou
Thank you, Bill. With me today on the call is Mark Miller, our Chief Operating Officer; and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our third quarter results.
Similar to other regional gaming companies, we encountered a challenge economy across most of our properties in addition to increase competition at the Rising Star from the new Ohio casinos. Despite the challenging operating environment across our markets, we do have some positive highlights to speak about.
First, our new 104-room hotel at Rising Star is scheduled to open next week. Occupancy as a property continues to be very strong 97% for the quarter.
So, we expect the new hotel to be very well received and to boost to our competitive position with a suburban customer base especially during weekend and other peak period. It would increase capacity by approximately 50%.
Also we expect next year to begin realizing additional gaming tax saving to add on $1.3 million for [indiscernible] at the Rising Star Resort. As the State of Indiana continues to work with the casino industry to help offset a competitive situation created in Ohio.
A gaming tax savings should double for the following year to $2.5 million. Further we have amended the First Lien Credit Agreement to provide an additional $10 million to help finance our 142-room hotel at the Silver Slipper Casino which we have started construction and expect to have open during the first quarter of next year.
We are excited about the hotels coming in line this year and next year, they would help us respond to a need that our customers have, to make their trips a memorable experience and therefore expanding display. We feel very strongly that regional gaming markets are changing and hotel rooms are becoming extremely increasingly important and necessary to meet the need of our customers and to increase profitability.
I would now turn the call over to Mark to go into more details about our financial results for the quarter. And I would close later with a few additional comments.
Mark?
Mark Miller
Thank you, Andre. Deborah and I will review a few highlights of our third quarter 2013 financial performance and condition before we respond to questions you may have.
I will be discussing operations and financial results at our properties and Deborah will follow up with our consolidated Full House Resorts’ financial results and financial position. In the third quarter of 2013, our Silver Slipper Casino generated revenue of $13 million and adjusted EBITDA of $2.5 million.
These results were significantly stronger than last year’s $1.8 million prior to our ownership and due to no significant storm disruption this year, are a little lower than we had hoped for as the Gulf Coast market continues to be weak as the result of high unemployment, increased economic uncertainty driven by the government shutdown and a continuous failure to establish a long-term fiscal policy. Concern over increasing cost of healthcare benefits as well as declining discretionary income in our primary customer demographic.
We are pleased with the management team’s aggressive effort to reduce cost and believe that we are well positioned when we begin to see an economic rebound. Rising Star generated revenue of $17 million in the third quarter of 2013 compared to $22.3 million in the prior year period, due to the increased competition from Ohio and continuing irrational promotional marketing by some of our competitors.
We believe this market has also been affected by the same macroeconomic weakness as seen in other jurisdictions as growth is slowing despite the increased capacity and high rate of promotion. These results were similar to our second quarter results and we expect results to be choppy for the foreseeable future as additional competitors enter the market.
As we gradually see tax and other forms of relief from the State of Indiana and our new hotel comes on board, we will make additional adjustments to our business model to drive revenue and profitability. As mentioned previously, next week we will open an additional 104-room hotel which will help us satisfy existing weekend and peak demand as well as for the first time permit us to pursue other forms of business.
EBITDA for the third quarter of 2013 was $1.1 million versus $2.7 million in the prior year quarter. Lower gaming taxes from new legislation, help to mitigate some of the revenue decline and we expect to begin realizing further tax savings in 2014 and 2015.
Our Northern Nevada operations, consisting of Stockman’s and Grand Lodge Casinos, contributed approximately $7.2 million in revenue and adjusted EBITDA of $2.3 million for the three-month period ended September 30th versus revenue of $7.4 million and adjusted EBITDA of $2.6 million in the prior year period. As you saw in the earning release, we have taken an impairment on goodwill of $4 million related to Stockman’s Casino due to continued weakness of the property, approximately $1.8 million of the goodwill for Stockman’s remains on our balance sheet.
Buffalo Thunder recorded management fees in the third quarter of $0.3 million consistent with the prior year. I will now turn the discussion over to Deb Pierce to discuss our quarterly results and liquidity.
Deb?
Deborah Pierce
Thank you Mark. For the third quarter 2013, the company recorded a net operating loss of $1.2 million compared to operating income of $3 million in the same quarter last year.
Adjusting for the $4 million non-cash goodwill impairment charge, operating income was $2.8 versus $3 million. The company recorded a net loss for third quarter of 2013 of $2.2 million or a $0.11 loss per share compared to net income of $2.1 million or earnings per share of a $0.11 in the prior year period.
Excluding the $4 million goodwill impairment charge, net of the tax effect, net income and earnings per share would have been $0.5 million and $0.02 per share. Third quarter 2013 and 2012 earnings both – earnings per share are both based on weighted average common share outstanding of approximately $18.7 million.
For the three months ended September 30, 2013, total revenue was $37.4 million or a 24% increase from the prior year period, due to a $13 million addition to revenue from Silver Slipper, which was purchased on October 1, 2012, and partially offset by a $5.3 million in reduced revenue from the Rising Star. Operating expenses of $34.7 million in the third quarter of 2013 were up 28% or $7.6 million from the prior year period due to the addition of the Silver Slipper operating expenses of $12 million and partially offset by $4 million in operating expense reductions at Rising Star.
Adjusted EBITDA was approximately $5.3 million versus $4.7 million in the third quarter of last year. Our interest expense increased in the third quarter of 2012 as a result of the Silver Slipper Casino acquisition.
For the quarter, we had $1.8 million in interest expense, compared to essentially no interest expense in the prior year quarter. Interest expense in the third quarter of 2013 consisted of interest payments of approximately $1.4 million and amortization of debt costs of approximately $0.4 million.
Our effective income tax rate for the third quarter of 2013 was 30% versus an effective rate of 29% in the prior year quarter. I refer you to our 10-Q for a more complete discussion of our tax rates.
Our tax rate is very dependent on the amount and the distribution of our pre-tax income across our portfolio and can vary significantly from quarter to quarter. As of September 30, we had a cash balance of $25.4 million, of which approximately $14 million is needed to fund operations.
And we had $66.3 million of debt on our balance sheet. On November 1, the company voluntarily prepaid the next two amortization payments due under the first three credit agreement on January 1 and April 1, 2014 in the total amount of $2.5 million keeping us two quarters ahead of our required paydown schedule.
This continues our long-term policy of using excess cash to reduce debt ahead of schedules reducing our interest cost and maintaining a conservative balance sheet. As Andre, mentioned we amended our First Lien Credit Agreement to help fund the much needed Silver Slipper Hotel and we have begun construction.
The 142-room hotel is expected to cost $17.7 million and we anticipate a fourth quarter 2014 openings. We’re very excited about the opportunity this hotel will give us will give the property to attract and retain customers.
We will be saying more on this as it progresses. As of August 26, 2013 the company closed on the amendment to the First Lien Credit Agreement to provide for the $10 million loan from its First Lien credit facility lenders.
The terms and conditions of the amendment to the First Lien Credit Agreement include one, the term loan portion of the First Lien Credit Agreement was increased by $10 million. Two, the interest rate was lower by 1%.
Three, the maturity date was extended to June 29, 2016. And four, the certain financial covenant ratios were revised to accommodate the additional extension of credit.
Capital expenditures, for to-date were approximately $3.3 million which includes $0.4 million spent on our Silver Slipper Hotel project. We continue to anticipate spending about $6 million on our 2013 maintenance CapEx program, including a new casino management system at the Grand Lodge, which went live a couple of weeks ago.
As previously discussed, we will be spending approximately $17.7 million on the Silver Slipper Hotel construction over the next year. About $7.7 million has been or will be funded from cash which – with the remaining $10 million coming from our expanded First Lien debt facility.
With that, I will turn it back over to Andre for a few final comments before we open it up for questions.
Andre Hilliou
Thank you, Deborah. We continue to focus on providing the best service to our customers in this challenging environment.
We are very excited about the new Rising Star Hotel scheduled to open next week. Our Silver Slipper Hotel which would provide enormous leverage to our Casino well it opens late next year and we would continue to look for growth opportunities.
Thank you. And I will now open up the call for questions.
Operator
Thank you. (Operator Instructions) And we will take the first question today from Justin Sebastiano from Brean Capital.
Please go ahead.
Justin Sebastiano – Brean Capital
Thanks. Good morning everyone.
Andre Hilliou
Good morning, Justin.
Justin Sebastiano – Brean Capital
What exactly happened differently this quarter at Rising Star than previous quarters? It seems like the promotional environment remains pretty high but did you I mean did anything change for this quarter to show EBITDA get down to $1.1 million and were there any hold issues I mean that I know the table games are small there.
But, what – if there is any sort of difference or change that happened versus past couple of quarters?
Mark Miller
Well, Justin, there weren’t any significant hold percentage differences, I mean there is always a few little ones but nothing of significance. So, I think it really the revenue growth in the markets slowed down significantly, and as a result, I mean our market share has remained relatively constant since Horseshoe opened in Cincinnati.
Btu the market slowed down substantially especially in August and September. And it was really just a very, very weak revenue quarter relative to obviously to the prior year but also relative to growth rates that we saw in earlier quarters in the overall Cincinnati and Southeast Indiana markets.
I think the management team has done a really good job of controlling cost there but there is only so much it can do so quickly. And I think that the declining revenue growth is the biggest copper.
Justin Sebastiano – Brean Capital
Okay. And I mean is the 6.5% margin there, is that – should we be thinking about that going forward on Rising Star I mean it were – I know you guys in that actually so I guess that helps pick it up for sure but how should we think about that going forward?
And maybe talk a little bit more about the tax savings, there you said $1.3 million in fiscal 2014 and $2.5 million in the 2015, is that surely based on the free play write-off or is it the other benefit that you potentially can get if your GGR stays below a certain amount in any given year?
Mark Miller
So, let’s take the tax question first. I think the $1.3 million and the $2.5 million they were referred to in our presentation relate to the $75 million of GGR.
That the free play deduction is pretty much been absorbed now in our numbers but we will – that second tax relief provision will start to kick in next year and we expect that we will qualify for it and get half the value in next year and the full value in the following year. I think that would relate as your question about margin Justin, I think that our margin is going to remain low until after the hotel is been opened for a little bit and the promotional environment returns to a bit more of a rational situation.
Now, we did see some improvement in the promotional environment late in the third quarter. In September, the amount spent on free play by some of our competitors declined.
So, we’re watching very carefully to see if that’s a continuing trend and we start to see some indication that things are beginning to get back to normal. But I would say that that’s early.
I think Justin, as I said before, we bought the Rising Star property for $43 million to – more than two years ago. And our original investment pieces was that once the Ohio environment is completely settled which is – it’s not yet and won’t be for probably at least in another year or two.
And all of the other things that happened in Indiana with regard to relief whether it’s tax relief or other forms of relief when all of those pieces are in place and the dust-off settles, we believe that Rising Star will continue to produce EBITDA somewhere in the $8 million to $9 million range, that was our original investment pieces, we knew that it was going to be a bumpy ride as we move through all of these various processes that are going on and it’s going to take sometime. But we remain confident in that investment pieces but we – as we told people before it’s going to be a bumpy ride for the next little while and we’re just going to have to continue to make adjustments as we go.
Justin Sebastiano – Brean Capital
Okay. And maybe this is for Debbie.
The $3.3 million in CapEx just $0.4 is for the hotel Silver Slipper, is that the only development CapEx within that number?
Deborah Pierce
That’s yeah, that’s the only development CapEx in that number.
Justin Sebastiano – Brean Capital
Okay.
Deborah Pierce
Than is Silver Slipper.
Justin Sebastiano – Brean Capital
And then, how do you – how should we model sort of the cadence of the $7.7 million I guess now the $7.3 million remaining in the Silver Slipper for the quarters going on, I mean that is – I guess it gets a little bit more concentrated towards the end of the year as we get close to opening. Is that a good way to think about it?
Deborah Pierce
I think that’s the good way to think about it. We really won’t see any significant expenditures on that project until possibly January and February is that really when things are going to start heating up as far as expenditures on that project.
Mark Miller
But, just to be clear Justin, our $7.7 million will all go in on the front-end of the project. So, it’s by probably by the end of the second quarter of next year, we will have funded all of our cash contributions and we’ll then be drawing on the $10 million loan.
Justin Sebastiano – Brean Capital
Okay. Understood.
And then so as maintenance still going to be in that $6 million range or does it pick up unless you’re going to have the two hotels?
Mark Miller
Well, I don’t think it will pick up next year, Justin. I think we’ll continue to be somewhere in the $5 million to $6 million range somewhere in between those two.
And then once the hotels have been opened for a little while we’ll probably see a tick up but it won’t tick up next year, Silver Slipper won’t be open yet, the Rising Star Hotel will be brand new. So, I think we’re at least a year or maybe two years before we start seeing them have an impact on our CapEx spending.
Justin Sebastiano – Brean Capital
Okay.
Mark Miller
From a maintenance perspective.
Justin Sebastiano – Brean Capital
Sure. And then I guess lastly I know Andre, you’re always looking at potential growth opportunities externally.
What are you seeing as far as on the M&A front. As far as buyers and sellers, I mean are they a part on – are the multiples to [high now] as far as are the sellers asking for too much based on sort of how multiples have gone since I guess kind of announce their REIT status.
What do you seeing out there, are there more willing sellers or people holding on a little longer, what’s your take on sort of the M&A environment right now?
Andre Hilliou
Well, I think Justin the M&A environment is not of a genius. I think that you see some – there has been an uptake in market pull for the last year and a half.
But I think the EBITDA is starting to stabilize in some markets. So, it’s really three factors Justin, it’s the EBITDA could be right behind – around the EBITDA it’s a multiple.
And it’s also the CapEx needed to maintain or improve their properties. So, every property that we do look at those are the three factors that we looked at plus of course looking at the expenditure we see in those existing markets.
But there are some properties, we are always looking at companies and if we can wrap our arms around those four factors there, we surely would go hold.
Justin Sebastiano – Brean Capital
Okay. And then just lastly, in your EBITDA reconciliation table there is a line there it’s a pretty insignificant number but you mentioned that Kentucky project costs expense.
Can you talk little bit about what that is and I guess where you’re headed there as far as Kentucky right now as far as legal [indiscernible].
Andre Hilliou
Yeah, this probably hasn’t change in Kentucky, Justin you know there is some legislation in front of the Supreme Court and we try not to predict cost, anyone has done that in the past hasn’t been very successful. We hope to get some judgment in the first or second quarter of next year and frankly until we hear from the court, I think any conversation would be really premature.
Justin Sebastiano – Brean Capital
Got you. Okay.
Thanks guys.
Andre Hilliou
You’re welcome.
Operator
And at this time, there is one name remaining on the roaster. (Operator Instructions) And we will now go to Chad Beynon with Macquarie.
Please go ahead.
Chad Beynon – Macquarie
Hi, good morning guys.
Andre Hilliou
Good morning Chad.
Deborah Pierce
Good morning.
Chad Beynon – Macquarie
Few questions for you, first maybe just to kind of ask the M&A question in a different way. Just thinking about your sources and uses, Mark you and Debbie kind of talked about the $7.7 million needed for Silver Slipper the $6 million of maintenance CapEx.
We’re obviously in kind of a difficult environment right now, there is no competition coming on in the Ohio, in the second quarter. How do you kind of balance your story as more of a blocking and tackling story right now versus actually targeting acquisitions within the $10 million $15 million range.
And given everything that’s going on in some of the additional cost this year, is that as big of a priority in the first half of the year or even 2014 as it has than in prior years.
Mark Miller
Well, I think Chad that for the first time, we have internal growth opportunities that are significant to the company and those are the two hotel projects that we have been pursuing. And we clearly have to focus on those, we need to make sure that they are built on time and on budget and that they are integrated into our operation seamlessly and all that blocking and tackling as you say.
And we certainly are focused on that but we have reorganized ourselves from an corporate perspective several months ago to make ourselves a little bit more efficient and able to focus both on our internal opportunities and tasks. And then Andre is focused more on driving external growth opportunities and looking for M&A.
So, I think that you’re right that there is a different balance today than there has been in the past. But we continue to look at both as very important to us and we are working on both actively.
And I would say we’re working on the external growth opportunities as actively as we ever have. But we also are very focused on trying to drive some internal growth opportunities as well.
Chad Beynon – Macquarie
Okay. Thank you.
And then September proves to be extremely problematic, you kind of mentioned some of the reasons there obviously the government shutdown didn’t help their consumers get out of their homes and frivolously. Others in your space have been kind enough to provide some comments around I guess the trends October versus September after the government went back to work.
Not sure if you be willing so kind to do so as well but wanted to toss that question on.
Mark Miller
Well I have read some of those reports Chad and I think generally what I’ve read is that people think that things are improving out little bit in October. I would tell you that we haven’t seen a significant improvement in our two primary markets, Mississippi and Indiana they’ve maybe slightly better but I would say not better enough to get very optimistic about it.
I think people continue to be – our customers continue to be affected by these macroeconomic issues, I think a lot of them are very concerned about Washington’s inability to solve sort of the longer term problem kind of establish a longer term stability to our financial policy. So, I think a lot of them continue to be very conservative.
I think we did see a little bit of improvement in October but not a lot.
Chad Beynon – Macquarie
Okay. Thanks.
One last one from me if I may. Buffalo Thunder agreement ends in I believe September, October of next year.
Just wanted to – if you can provide some color around how that negotiation works, how the relationship is there, we obviously see the numbers. Just a little color around how that process works out.
Andre Hilliou
I think the relationship with them really it’s an excellent relationship. The management contract is going forward and when the timing comes, we would talk to the council to see whether or not they want to expand the contract I mean it is very privilege sure to talk about it as well, Chad.
Chad Beynon – Macquarie
Okay.
Andre Hilliou
But relationship is an excellent relationship.
Chad Beynon – Macquarie
Okay. Thank you guys very much.
Operator
(Operator Instructions) And there are no more questions. So, I would like to turn the call back over to Andre Hilliou, for any additional or closing remarks.
Andre Hilliou
Well, we like to thank everyone for being with this today. With that, we will end the call, and wish all of you a great rest of the week.
And thank you for joining us today.
Operator
Thank you, very much. And that does conclude our conference for today.
I’d like to thank everyone for your participation. And you may now disconnect.