May 9, 2013
Executives
Timothy J. Cope - President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Director Lyle A.
Berman - Executive Chairman and Chief Executive Officer
Analysts
Timothy O'Brien Carl Hanson Steven Chang
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Lakes Entertainment Earnings Conference Call. My name is Keith, and I'll be your operator for today.
[Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And with that, I'd now like to turn the conference over to your host for today, Mr.
Tim Cope, President of Lakes Entertainment. Please go ahead, sir.
Timothy J. Cope
Thank you, Keith. Good afternoon, and welcome to Lakes Entertainment's first quarter 2013 earnings conference call.
On the call with me is Mr. Lyle Berman, Lakes' Chairman of the Board and Chief Executive Officer.
As we begin our prepared remarks, I would like to remind everyone that this call may contain forward-looking statements, including statements concerning business strategies and their intended results and similar statements concerning anticipated future events. These statements are subject to risks and uncertainties, including those risks described in our filings with the SEC, and actual results may differ materially.
Lyle will begin our discussion today with the general overview and update on our casino projects. I'll then discuss the first quarter financial results and recent business events, and then we'll conduct a question-and-answer session.
Now I'll turn the call over to Lyle Berman.
Lyle A. Berman
Thank you, Tim, and welcome everyone to Lakes' first quarter 2013 earnings call. The completion of the renovation project at our Rocky Gap Casino located near Cumberland, Maryland is almost complete.
We expect the renovations to be completed in time for the May 20, 2013, controlled casino demonstration when our casino processes will be observed by the Maryland Lottery and Gaming Control Agency. We expect to receive approval from the agency to officially open the new casino to the public as soon as May 22.
The Rocky Gap Casino Resort is a AAA 4-diamond resort that will include a casino, hotel, spa, 4 restaurants and the only Jack Nicklaus signature golf course in Maryland. The new gaming facility will feature approximately 550 slot machines, 10 table games, a casino center bar and a new hotel lobby bar and food outlet.
We have also commenced construction at an event center and conference space at Rocky Gap and expect it to open during the fourth quarter of this year. The total cost of the Rocky Gap project is currently expected to be approximately $35 million.
During the fourth quarter of 2012, we closed on at $17.5 million financing facility that will be used to finance a portion of the Rocky Gap renovation project. At the end of the first quarter, we had invested approximately $20 million in the project, including the $6.8 million purchase price and the $2.1 million VLT license fee.
During April 2013, we made an initial $3 million draw on the financing facility. The Red Hawk Casino located near Sacramento, California again showed improvements in both top and bottom line financial resort -- results during the first quarter of this year compared to the first quarter of 2012.
Increases in key business indicators such as guest visits, gaming revenue per guest and the number of food covers, combined with improved operating margins, contributed to an increase in management fees from the Red Hawk Casino compared to the prior year first quarter. We continue to work closely with Red Hawk's executive team, as well as the Shingle Springs Tribal Gaming Authority to manage this property as efficiently as possible.
Lakes previously had an agreement with the Jamul Indian Village to develop a casino on the tribe's trust land near San Diego, California, but terminated the agreement in March of 2012. Lakes had loaned the Jamul tribe approximately $57.5 million including accrued interest under the agreement which were previously written off.
As we previously announced, the wholly-owned subsidiary of Penn National Gaming recently entered into a definitive agreement with the Jamul Indian Village to jointly develop a Hollywood-branded casino and resort on the same trust land. Pursuant to a subordination and inter-creditor agreement, Lakes entered into with the Jamul and Penn related to the proposed casino, Lakes agreed to modify the terms of its outstanding dip with Jamul to reflect that the total debt outstanding is currently $60 million and that interest on the debt will accrue at 4.25% after the Penn Casino opens.
Lakes has agreed that it will subordinate repayment of its debt until the senior financing is paid in full. But that current interest on the subordinated debt will be paid to Lakes on a quarterly basis when the casino opens, so long as there's no default under the senior financing agreement.
When the senior financing is paid in full, Lakes will receive repayment of its outstanding principal and interest. Lakes has also entered into a 10-year option agreement with Penn that grants Penn the right to purchase approximately 98 acres of land, which Lakes owns adjacent to Jamul's trust land.
The purchase price for the land is $7 million and increases annually by 1%. We believe this is good news for Lakes as it provides for the potential opportunity for Lakes to recover its financial investment in the Jamul project.
We continue to maintain a 10% ownership interest in Rock Ohio Ventures, 80% ownership in the Horseshoe Casino Cleveland, the Horseshoe Casino Cincinnati, which opened March 4 and the Thistledown's Racino, which introduced video lottery terminals last month. The Horseshoe Casino in Cleveland opened during May of last year and features approximately 2,100 slot machines, 89 table games, a 30-table poker room and multiple food and beverage outlets.
Horseshoe Casino in Cincinnati features approximately 2,000 slot machines, 87 tables, a 31-table World Series of poker room, several food and beverage outlets and a parking structure. The Thistledown's Racino in North Randall, Ohio features its existing racetrack, 1,100 video lottery terminals and new dining and nightlife options.
With that, I'll turn the call back over to Tim to provide an overview of recent business and financial results. Thank you.
Timothy J. Cope
Thank you, Lyle. Net loss for the first quarter of 2013 was $0.3 million compared to net earnings of $1.8 million in the first quarter of 2012.
Loss from operations was $1.9 million for the first quarter of 2013 compared to $1.6 million for the first quarter of 2012. Basic and diluted losses were $0.01 per share for the first quarter of 2013 compared to earnings of $0.07 per share for the first quarter of 2012.
First quarter 2013 revenues were $3.3 million compared to prior year first quarter revenues of $2 million. The increase in revenues was due to an additional $0.8 million in management fees earned during the first quarter of 2013 compared to the first quarter of 2012 related to the Red Hawk Casino.
Also contributing to the increase was the addition of $0.6 million in revenue related to the operation of our Rocky Gap property, which was acquired on August 3, 2012. During the first quarter of 2013, property operating expenses for the Rocky Gap Casino or Lodge, which primarily related to room, food and beverage and golf, were $0.6 million.
For the first quarter of 2013, selling, general and administrative expenses were $3.8 million compared to $2.3 million in the first quarter of 2012. Included in these amounts were Lakes' corporate selling, general and administrative expenses of $2 million during each of the first quarters of 2013 and 2012, and Rocky Gap selling, general and administrative expenses of $1.8 million during the first quarter of 2013.
Lakes' expenses, certain projects preopening costs as incurred, during the first quarter of 2013, Lakes recognized preopening expenses of $0.3 million related to the Rocky Gap project. There were no impairments and other losses during the first quarter of 2013.
Lakes recognized impairments and other losses of $0.9 million during the first quarter of 2012, which were the result of the March 2012 determination that Lakes would not continue to move forward with the casino project with the Jamul Tribe and the termination of its agreement with Jamul Tribe. Amortization of intangible assets related to the operating casinos was $0.3 million for each of the first quarters of 2013 and 2012.
Other income net was $1.5 million for the first quarter of 2013 compared to $1.3 million for the first quarter of 2012, a significant portion of which relates to noncash accretion of interest on notes receivable. There is no income tax benefit for the first quarter of 2013 because the company has utilized all carryback potential.
The income tax benefit for the first quarter of 2012 was $2 million and resulted from the company's ability to carry back its taxable losses to a prior year and receive a refund of taxes previously paid. In summary, we continue to move forward with the renovation of our AAA 4-diamond award-winning Rocky Gap Casino Resort.
We're looking forward to a successful control demonstration of gaming on the 20th of this month, which we expect will allow us to officially open for gaming shortly thereafter. We continue to have a stable balance sheet, which reflects a book value of approximately of $4.25 per share.
We will continue to focus on operating in our existing businesses as effectively as possible while we consider new investments in order to increase shareholder value. Now I'll turn the call over to the operator for questions.
Operator
[Operator Instructions] And our first question is from the line of Roy Barry, a private investor.
Unknown Attendee
Okay. Tim, I have a question on Rock Ohio Ventures, which I understand is a partnership that you have.
Have you gotten a K-1 on your partnership? And also, I've been away from accounting for a long time but I thought partnership income had to be reported, both the income or loss.
Timothy J. Cope
No, what we have is an equity investment of 10% of whatever Rock and Ohio owns, they're 80%. So we're an 8% investor.
As such, on our balance sheet, we reflect our -- the dollar value of our investment and it doesn't change after that point.
Unknown Attendee
So there's no reflection of income or loss whatsoever until there's a dividend received?
Timothy J. Cope
That's correct.
Unknown Attendee
Okay. About 3 quarters ago on the conference call, Lyle discussed a monetized bonding arrangement for the Rock Ohio ventures and that was the last I heard of that item.
Is Ohio -- is the senior partner still interested in some type of a monetized interest paying situation? Or did that just -- one of those discussions that died?
Lyle A. Berman
I think maybe to refresh what I said was that we were talking about -- I think, the question was asked is how can we monetize our investment and the answer was a multiple ways. One, we can certainly just sit back and wait for dividends.
We have both an equity interest as well as a loan interest. The loan will probably be paid back within just before the equity distributes anything.
It's possible that we could sell our interest to Rock Gaming or Caesar's at some point in the future after the business is stabilized a little, we know what we have. We're clearly at the mercy of Rock Gaming and how they monetize theirs or pretty much so.
But the bottom line is that I think Rock would like to monetize some -- get some cash flow from them and we certainly know Caesar's would like to. So we think ourselves, as well as our 2 partners, are certainly motivated on the same page.
Unknown Shareholder
Okay. So there's possibility of a dividend if you can get your cash flow up to where you can pay a dividend.
Lyle A. Berman
That is very possible, yes.
Unknown Attendee
Okay. And the last question I have, Lyle, is the California tax rates on slot play, from 1912 to 1950.
And I've heard about, read about 3 different versions on want you put out. Just basically, what is the California tax percentage on slot play from, say, 1912 to 1950?
Lyle A. Berman
From 1912 to 1950?
Unknown Shareholder
I mean, 2012 to 2015.
Lyle A. Berman
And are you asking what is the tax rate in California for slot machines runs tribe -- it varies by tribe because it has to do with what compact, the agreement, the tribe signed with the state and at what point in time they signed it.
Unknown Attendee
Okay. And then recently, the compact changed recently and I've read about 3 different versions on basically what the rate changed to.
Lyle A. Berman
Okay. Well, are you specifically talking about Shingle Springs?
Unknown Shareholder
Yes.
Lyle A. Berman
Shingle Springs has entered into a tentative agreement with the state to change the terms of the compact and yet -- and it has to be approved, both -- it has to be approved by the legislative process. The rate -- Tim, can you tell us -- are we at liberty to say exactly what the rate is?
I'm not sure, I know the state has given the tribe a very good benefit, but...
Unknown Attendee
But it doesn't get passed on monetarily until it's approved by the state?
Lyle A. Berman
Approved by the state and then approved again by the Governor's office. It won't take effect at the very earliest until 2014.
Unknown Attendee
Then if it's a retroactive rate situation, would they get a refund then? Or how would that work?
Lyle A. Berman
I don't believe they get any refund.
Unknown Attendee
Okay. They just put [ph] whatever it is and catch up.
Lyle A. Berman
Yes.
Operator
Your next question comes the line of Tim O'Brien with DG Capital.
Timothy O'Brien
First, just on Rocky Gap, do you expect to use the debt to finance the rest of the spend there, I guess, the extra $15 million?
Timothy J. Cope
Yes, we do.
Timothy O'Brien
Okay. And with Rock Ohio, do you guys expect to have to make any payments there either for that new sky bridge or for potential second casino they're talking about down the road?
Lyle A. Berman
We have -- when we entered into the loan agreement, Rock was responsible for putting up to $222 million and we agreed that we would put up to a maximum of 10% of that or $22 million. We have put up to date, I think around $18 million.
They still have the ability to call for more but that's all. But we don't expect to contribute any more than that.
And when they do the second casino, which is probably another year or 2 off, I'm not sure, I'm not privy to their plans. But I know they're working on them.
I believe they're planning to take the cash flow from the 3 casinos and probably leverage that to finance that one.
Timothy O'Brien
Got it. All right, great.
Is there anything you can say on sort of any discussions with the tribe in Shingle regarding any kind of restructuring of your debt there?
Lyle A. Berman
I think all we can see at this point is we're still continuing to have conversations with them. We have nothing to report at this time.
Timothy O'Brien
Okay. And then SG&A, it looks like at least nominally, it's been ticking up over the last couple of quarters as you brought on Rocky Gap.
Is there a sort of level where that sort of a leveling off of that amount?
Timothy J. Cope
I think actually it had peaked previously. What's happened is we have some I would call them one-off type of professional fees expenses, primarily legal fees related to getting through the licensing approval at Rocky Gap or some one-off type of help in the state of Maryland.
But not consistent, there's not a consistent increase in G&A.
Timothy O'Brien
Okay. Will that be broken out in your, I guess, Q?
What those...?
Timothy J. Cope
Well, we'll discuss it somewhat more in the MD&A section. Yes.
Operator
Your next question is from the line of Carl Hansen wit Feltl.
Carl Hanson
Tim and Lyle. It's a -- you guys are pretty modest about all the progress you've been making.
It's been a tremendous quarter from my perspective and got a couple of questions here, one on the Jamul Tribe matter. Did Ken get all the -- or pass the hurdles that were holding you up?
Lyle A. Berman
We don't know. We're not privy at this point to their discussions.
They have announced that they plan to start construction by the end of the year. Again, I'm repeating what I read in the newspaper -- I mean what we read in the newspaper, whether they plan to start construction without all of the hurdles or not, that I don't know.
Carl Hanson
I noticed that Penn had a press release a couple of days before your press release, so they look pretty favorable.
Lyle A. Berman
Yes, we agree. But again, we don't have private conversations.
We're not privy to any more than what we read in their press release although we kind of parrot what they say.
Carl Hanson
Yes. Anyway, as far as the value of that $60 million note, I would assume that at some point, they're going to -- a lot of [ph] benchmarks that would have some salable value if you had a better use for your money.
Lyle A. Berman
Well, we agree with that and of course, the more certain the casino is that it's under construction and/or even results opening, it would accrue in value all that way. So the first step would be to see it start construction.
At that point, it has value and of course, because it pays current interest, it's not insignificant. I think once it opened, depending on what -- we think it's a marvelous site, it's one of the best sites in the San Diego market.
And we think with Penn behind them, they're going to do wonderful. We only hope that they get it -- we want them to get started every bit as quickly as they do.
Carl Hanson
I see the interest starts when the casino opens. And Penn is quite a bit larger entity than Lakes, I gather.
Lyle A. Berman
Oh, yes. Penn Gaming is quite a bit larger and has substantially more resources than we do.
Carl Hanson
So I would say, once construction starts, there will be a value and then a casino opening would be an additional and plus 1 year of success would be even more.
Lyle A. Berman
I agree with all of it both. And of course, we carry that in our books at no -- it's not reflected in our book value.
Carl Hanson
And also the land, that they had a $7 million option on -- that's combined with a couple of other pieces of the land so it isn't set out separately, but it's pretty modest, $1 million or less.
Lyle A. Berman
No, no, no. It's 98 acres that are contiguous to the tribe's 7 acres.
And although the tribe cannot use that land for casino gaming because it's not in trust, they can use it for a hotel, they can use it for parking, they can use it for all other kinds of amenities they want with their casino.
Carl Hanson
Oh, they will want it. I was referring to a carrying value or book value, you're carrying the land very modestly.
In the 10-Q, I think it was -- or 10-K, it was lumped with a couple of other parcels for $1.3 million.
Lyle A. Berman
Yes, and yet we -- they have the option to buy it at $7 million.
Carl Hanson
You'll get that someday.
Lyle A. Berman
We agree with that too.
Carl Hanson
In Rock Ohio, who are some of the other owners? A guy by the name of Dan Gilbert, did I see that?
Lyle A. Berman
We're in a joint venture partnership or, I guess, it's not the partnership but it's a equity interest called Rock Ohio Ventures. And Dan Gilbert, who owns the Cleveland Cavaliers, as well as Quicken Loans, he is the majority owner of that entity.
Carl Hanson
Is it apt to become a public company?
Lyle A. Berman
I've not spoken to him in a couple of years, so I don't know the answer. I would agree and we would like to see it, though.
That would give us a monetization of our investments.
Carl Hanson
You'd spin that out, too, huh? Anyway, Rocky Gap annual meeting, any special arrangements for shareholders if they attend or is it pretty well booked up that time of year?
Lyle A. Berman
Tim, I'll defer to you on that.
Timothy J. Cope
It's going to be booked up, but as shareholders request, we can certainly work out an arrangement for them.
Lyle A. Berman
If you want to come, let us know. The sooner, the better.
Carl Hanson
It should be a good introduction to potential shareholders in the area.
Lyle A. Berman
I think so.
Operator
[Operator Instructions] And your next question is from the line of Steven Chang with Rudgear Capital.
Steven Chang
Could you clarify again the land, the 98 acres. Is it held on your books at 0 or at $1.1 million?
Timothy J. Cope
It's actually on our books for $960,000, that land in the Jamul area.
Steven Chang
And once the casino operations begin at Rocky Gap, could you talk about how much your operating costs might increase?
Timothy J. Cope
We don't expect the operating costs at the Lakes to increase at all. In fact, they may decrease.
Steven Chang
So compared to running the hotel currently, opening the casino, there's minimal increase in staffing needed?
Lyle A. Berman
I think what Tim was referring to is, at Lakes level, our G&A will not go up. Matter of fact, it will probably go down because some of our people moved there full-time to run the casino, if that was your question.
If your question is will we see more operating costs now that it's open, the casino, of course, because the hotel was running during the winter at very low occupancy, now we expect it to run at very high occupancy. And of course, we still have more -- we'll be serving more food, beverage and, of course, we have the casino.
Steven Chang
Could you give some idea of what kind of revenue you might need from Rocky Gap to be EBITDA breakeven, or any kind of metric like that for Rocky Gap?
Timothy J. Cope
We're not giving projections at this point in time. What we're guiding people to do is really there -- in Maryland, they publicly report win per units for slot machines and table games to state each month.
And we're guiding analysts to just take a look at what the market is producing and come to their own conclusions based on a 200-room hotel and a casino operation.
Operator
And gentlemen, there's no other questions at this time.
Lyle A. Berman
Okay. Well, we want to thank all of you for your questions, as well as your participating in the call.
We will be focusing and continuing to execute our strategy of generating shareholder value. Thank you once again for your interest in Lakes and we will speak with you again in our next earnings call.
Thank you.
Operator
And ladies and gentlemen, that will conclude today's call. Thank you very much for joining us, and you may now disconnect.
Have a great day.