Jul 23, 2013
Executives
Joseph Jaffoni Peter M. Carlino - Chairman of the Board and Chief Executive Officer Timothy J.
Wilmott - President and Chief Operating Officer William J. Clifford - Chief Financial Officer and Senior Vice President of Finance Steven T.
Snyder - Senior Vice President of Corporate Development Jordan B. Savitch - Senior Vice President and General Counsel Eric Schippers - Senior Vice President, Public Affairs & Government Relations
Analysts
Joseph Greff - JP Morgan Chase & Co, Research Division Felicia R. Hendrix - Barclays Capital, Research Division Harry C.
Curtis - Nomura Securities Co. Ltd., Research Division Shaun C.
Kelley - BofA Merrill Lynch, Research Division Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division Thomas Allen - Morgan Stanley, Research Division Carlo Santarelli - Deutsche Bank AG, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Second Quarter Results Conference Call.
[Operator Instructions] I would now like to turn the conference over to Joe Jaffoni. Please go ahead, sir.
Joseph Jaffoni
Thanks, Benjamin, and good morning, everyone, and thank you for joining Penn National Gaming's 2013 second quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers.
But first, I'm going to need to read the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations.
The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.
In addition, today's call and webcast will include information regarding Gaming Leisure Properties, which is filed with an initial registration statement, including a prospectus with the Securities and Exchange Commission for the proposed transaction whereby Penn National will separate its operating assets from its real estate assets. You should read the registration statement because it contains more complete information about Gaming and Leisure Properties and its separation from the company, including financial information and disclosures regarding Gaming and Leisure Properties' capital structure, senior management and relationship with Penn National.
You may get the initial registration statement by visiting SEC's EDGAR website or you may request it by emailing [email protected] or by calling toll free (855) 505-8916. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G.
And when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures, calculated and presented in accordance with GAAP, will be found in today's news announcement, as well as on the company's website. With that, I'd like to turn the call over to Peter Carlino, the company's Chairman and CEO.
Peter?
Peter M. Carlino
Thanks, Joe. Good morning, everyone, and welcome to our second quarter conference call.
Sorry for the delay. We had an unusually large number of folks dialing in this morning.
So let's talk about the second quarter. It's obviously disappointing to us and I expect to some of you as well.
But I think it's important to take a moment to consider what the quarter is and what it is not. Yes, there is a general softness out there throughout the United States, and we felt it through most of our properties.
And we'll take some time to talk about that. But that's really not a dispositive factor for this quarter.
Yes, there has been a cannibalization effect that many of you have written about, but that was pretty well taken into account by our estimates. So that when you look at the quarter and try to figure out what has occurred and what is occurring, frankly, it's just an issue of missed expectations.
The issue has largely been that Ohio has not ramped up as quickly as we would have hoped, and that's where the bulk of all this is. However, I want to underscore that if you look at what we have produced in operating results in our higher properties, they're actually terrific, and the kind of returns on investment that most gaming companies in America would be thrilled to have.
And we do believe that, in the end, of course, these properties will do everything that we think they will. And we're going to take some time, I think, in this preamble, which we usually keep short, to talk about that.
So I think the focus is the performance in Ohio and the issues in Ohio. But let's not lose sight of the fact that Ohio is and will be a terrific investment for us and we're pleased to announce the returns as they are today.
We just thought we'd get there a little bit faster. So Tim, do you want to -- I'm going to -- Tim's going to make some comments and followed by Bill, who I think will help fill in the banks on this issue.
Timothy J. Wilmott
Thanks, Peter. Peter did mention that overall in the second quarter, we did see softness in the consumer and as we look at stable markets that were not impacted by infusion of new supply, clearly, there was softness.
Most of you saw that in the reported state results. And generally, the softness was in lower trip visitation across these stable businesses, which is something a little bit different than we've seen in the past, which in the past, softness has been more attributed to spend per visit.
This time, it was trip visitation. I wanted to highlight 5 properties regarding their second quarter performance and I'll end with Columbus.
But I'll start with where I was yesterday and that's in St. Louis.
The second quarter in St. Louis was impacted by a tornado that hit the property the last day of May and impacted significantly the first couple of days of June, which is the first weekend of the month.
The good news is that the facility had some damage with the tornado but nothing that's going to impact long term. What's more impactful for this year in 2013 is we continue to have significant construction disruption as we rebrand that property to a Hollywood second quarter.
And my estimation was probably the worst in terms of disruption with half of the public areas that provide access to the casinos shut down for most of the quarter. Unfortunately, we have about 5 more months of construction left to fulfill this $60 million project and deliver a much improved facility to the St.
Louis market. What's there today looks terrific, but there's much more to come over the next 5 months and we're going to do our best to manage the customer experience, but it's not going to be without frustration for the customer in that market as they try to find their slot machine or find their table game as the product gets moved to rebuild the area section by section.
The next property I wanted to talk about is Lawrenceburg. And Lawrenceburg had to sustain the first full quarter of Horseshoe Cincinnati's opening.
And clearly from the numbers we see out of Horseshoe Cincinnati, their strategy to significantly discount to create trials has caused us to fight and try to maintain as best of profitable share business as we possibly can. And I can't think in my almost 30 years in this business a new property opening that discounted their product, their brand new product, to these levels to try to create trial at the expense of profitability.
I wanted to read a letter that I got from a female customer from Dayton, Ohio, about why she hasn't visited Lawrenceburg and our Columbus property since Horseshoe Cincinnati has opened. I just want to read 3 sentences in this letter, verbatim.
"Horseshoe Cincinnati has kept me so busy with promo play giveaways that I don't get a day of my days off to get out to your place. I'm at a point where I can't even remember when I last used my own money to gamble there.
I won a $15,000 jackpot last week on a Triple Strike dollar machine on their money." So that's what we're experiencing right now in the Cincinnati market and we will continue to defend, especially our quality slot play there, but not chase this insanity and try to make sure that we look at our marketing reinvestment with a sustainable profitability in mind as we always do.
We're beginning year 2 in Toledo and the margins continue to get better there, but we have very high expectations for that property and they will continue to get better as we continue to grow the business and we expect year 2 to be better than year 1. The only concern we have is with the new ownership of Greektown and making sure that Detroit does not get Cincinnati like in their reinvestments.
So we're watching that very, very closely. The fourth property is Charles Town, and we are certainly experiencing the effect of Maryland Live!.
I think the results of Charles Town have been generally in line with our expectations. And the good news is the operators of Maryland Live!
continue to be very rational and obviously, they're enjoying the fruits of their location in between Baltimore and Washington and everything from a Charles Town standpoint, as I said, is fairly much in line with our expectations. The last property I wanted to talk about and really the one, if you look at our guidance in the second quarter, that represented the majority of our guidance miss is Columbus.
And clearly, the market has not met our expectations and our performance there, vis-à-vis, Scioto hasn't met my expectations. I expect ourselves to be the market leader there in net slot wins and we're, right now, at a 50/50 level with Scioto even though they're outspending us roughly 2:1.
We'll continue to reinvest wisely and garner more share, but that's the focus of the property to continue to grow our share of the business, and let that market mature as we fully expect it will. We recently did some market research that followed up, from 6 months ago, some research that we did post-opening.
And all of the indicators in terms of customer preferences and attitudes regarding Hollywood Columbus continue to move in the right direction, and we fully expect this business to build over the next couple of years and I would suggest to the audience there to look at the Indianapolis market when the racinos opened in 2008 and how that performance evolved into 2010 and 2011. Indianapolis is roughly the same size as Columbus.
And we expect this market to behave like Indianapolis did in that 3-year period as well. We -- as we open properties, we stay focused early on, on profitability and we don't take our eye off the ball on margins.
And it takes us a couple of years to build these businesses up to their full potential and that's going to be the strategy for both Toledo and Columbus as we continue to evolve in the Ohio markets. With that, I will turn it over to Bill.
William J. Clifford
Thanks, Tim. The -- obviously, people are, I'm sure, concerned about where we've taken guidance for the year and third and fourth quarter.
I just wanted to give people a little bit of perspective in terms of how we got to where we're at. When I look at the first quarter -- first of all, this was a ground-up analysis, starting over from scratch from a perspective of looking at it and saying, "Forget where we were.
Let's take a look to what [indiscernible] and go from there." Reality is, in the second quarter, once you kind of take out the noise and some of the stuff relative to the floods and the tornadoes and all the rest of it and offset that a bit, what we saw in terms of some onetime settlements that are running through EBITDA, second quarter really was a miss by about $15 million.
When we look at -- when I look back at the original guidance, quite candidly, I would have to say that it was a little bit back-end-loaded in the third and fourth quarter. In terms of expectations, they're getting better.
We have, quite candidly, now gone back and looked at how we've been doing over the last 12 months. More particularly, how we've been doing really since in the last 6 months.
And those trends are not supporting the level of guidance that we gave previously. We had particular focus and analysis on Columbus and Toledo.
I think recognizing both properties are generating a very reasonable return. In fact, I would point out there's a little bit more specificity based on our guidance.
Even as it stands today, we expect on a combined basis, Columbus and Toledo, that we're going to have slightly north of 20% cash-on-cash return in the first year. And by any stretch of imagination, we would do projects all day long forever if we can get projects with a 20% return in the first year because we are absolutely confident that those return metrics are going to improve over time.
Next year will be better. Year after that will be even better and -- so we are not at all, in any shape or form, panicked about our return.
Are they -- do they hit some of our -- at this point, look like fantasy expectations? No, but 20% returns are certainly well within the region of a good project.
The -- in our guidance, we had expected that the construction disruption, although we certainly plan for construction through the end of December, our expectations, as we now get a better understanding, the level of disruption in the second half of the year is higher than what we had originally anticipated. And so we have in fact brought those numbers down a bit.
I would summarize that cannibalization is not the problem when we look at all of the properties across our portfolio this year. And we've always known that this year was going to be a rough year in terms of new competition.
I will tell you that we are not -- we are well within the range of expectations from the beginning of the year relative to what we would see in cannibalization. And that cannibalization is in a number of locations.
Obviously, it's in Lawrenceburg. It made a lot of impact on Charles Town, Perryville.
Even Bangor has got some issues. Baton Rouge has got issues as well, a little cannibalization, but we are all -- all of those properties collectively are well within what we expected.
I think I'll just touch on just a couple of more points, which is Penn's strategy, both Peter and Tim talked about this, is to maximize our cash returns from the beginning. We believe that with rational marketing in the first year that we can generate better cash and cash returns out of the get-go, to the detriment of revenue.
Obviously, you can drive higher revenues if you do some of the stuff that we're seeing in the market today. But our belief is that you're going to get a better return and we can see that.
We clearly have seen that when our properties open up, we generate better EBITDA returns in the first year than almost any of our other competitors do. They'd start with higher revenues, more marketing, less EBITDA.
We all end up at the same place. It's not like one strategy is necessarily going to end and the end result is significantly different from ours or ours is going to be different than theirs on a mature basis.
It's just that our thought process is we take a little more different approach to that. And with that, I think I'll turn the call over to -- back to Peter.
Peter M. Carlino
Okay. I think it's time to open the call to questions.
So, operator, would you please do that?
Operator
[Operator Instructions] Our first question comes from the line of Joseph Greff from JP Morgan.
Joseph Greff - JP Morgan Chase & Co, Research Division
I'll start off with just kind of a broad-based question, and this is for Tim. Excluding some of the properties that are facing competition and cannibalization, I mean, the gaming consumer was particularly weak in June.
Can you talk about what you're seeing in July? And I guess just generally, Tim, what are you property guys telling you about this reduced trip dynamic or budget?
Are they spending more somewhere else or on their home? If you can help us understand maybe just the psyche of the regional gaming consumer over the last few months, that would be helpful in understanding your guidance as well.
Timothy J. Wilmott
All right, Joe. With regard to what we're seeing in July, it is looking very much like June did.
So that's the read for the first 20 days of July. With regard to what we're hearing from the operators out there in the regional markets, it's clearly more that the customer visitation patterns have lessened.
It's not spend per visit. That's held up quarter-over-quarter fairly well.
It's just that there's generally been less overall attendance in the facilities, down a couple of percentage points. And in markets where, in some cases, we're the only choice for casino visitation, given proximity, they're just seeing generally lower visitation.
And that's what the operators are saying out there. It's not that they're going to the competition, it's that they're -- the consumer is just being more conservative with their discretionary entertainment value.
Joseph Greff - JP Morgan Chase & Co, Research Division
Okay. If you guys are talking about a 20% cash-on-cash return in the first year for Columbus and Toledo, I guess, what -- and that figures sort of getting right now.
What were -- what was in your previous guidance for the 2 Ohio properties, Bill?
William J. Clifford
Higher. It was significantly higher.
Joseph Greff - JP Morgan Chase & Co, Research Division
Okay. So when I look at the $71 million of second half EBITDA reduction and if you can -- maybe you can help us understand, if you want to sort of itemize that for Ohio, but maybe you could also help us -- I'm sure it's not a lot, but the severance accruals and legal fees for Sioux City and maybe you can also just sort of quantify the magnitude of that disruption in St.
Louis in the second half?
William J. Clifford
Yes, the -- how would I describe that? I think the -- if we look at the Columbus and Toledo -- well, first of all, the $15 million in the second quarter is part of the overall year's reduction, right?
So slowly, we're reflecting actual results. You then can -- I mean, this is only a simplistic way of looking at it, but you can then take that run rate, assume that, that applies in the third and fourth quarter.
So that gives you the roughly $45 million. The rest of it is spread on -- there are some expectations for additional legal and employee, not the -- sorry, severance cost, the bonus cost of Sioux City.
There are probably not an enormous number, a couple of million. We've got -- I'm not sure.
I mean, St. Louis, we certainly brought that down within reasonable expectations.
We really don't -- quite candidly, we don't comment, and I know we've got it much more granular this time relative to guidance in terms of discussing particular returns, especially in Columbus and Toledo, but we're sticking with our regional concept. So I'm not going to really get to talking specifics.
I think the concept of helping people understand Columbus and Toledo was to help around people, help them realize that somehow now that we've all gotten ourselves into the framework, that Columbus and Toledo is a disaster, and it's anything but a disaster. It's really why we've made a point to talk about what our cash-on-cash return in the first year and the fact that we do expect to get better.
We had some, quite candidly, what would now look like "excessive, irrational exuberance" relative to what our expectations were in Columbus and Toledo. I will say that the guidance was not assumed that we improved our Columbus and Toledo trend.
I think, from a market share perspective, we're assuming the same. I know we're going to work diligently and the guys are highly focused on bringing out how to do that in a profitable way.
The guidance does not reflect that. The guidance also doesn't reflect that there's going to be significant improvements in the margins of both properties.
And we do think, quite candidly, both properties have got some room for improvement there. That's not reflected in the guidance because we haven't -- it's kind of like it's very close to the concept of "It hasn't happened yet.
I'm not going to put it in the guidance." And quite candidly, the guidance is not based on [indiscernible].
It's based on what we're seeing on the trend and significantly looking at where we see the business levels at. I can tell you the guidance is across the board.
In other words, almost all properties across the entire portfolio have come down from the previous guidance based on the trends that we've seen. So certainly, it does not assume that the economy is willing to significantly improve.
It also doesn't assume that the economy is going to get any worse. So that's the best color I can give you with the guidance.
Joseph Greff - JP Morgan Chase & Co, Research Division
Okay. And then I have a couple of questions on the proposed transaction.
You put a lot of information in the press release, thank you, with respect to regulatory approvals. Based on what you've already secured in anticipation based on what you believe to be the timing dynamics to the proposed transaction, will this be the last quarter that you're reporting at Penn National?
So when we fast forward, as you're reporting your third quarter results. And then related to the transaction, a separate question, given the new guidance, do you anticipate any changes to your borrowing costs for PropCo or OpCo?
Peter M. Carlino
Well, let me address -- well, certainly Penn National will continue to exist and we'll have a third quarter. So regardless of when we close, Penn National will report third quarter results.
On the borrowing costs, we have not changed those. As you recall on previous calls, everybody won and rightly so, pointing out that our borrowing costs or our assumptions on debt were probably a little conservative in terms of [indiscernible] are a little higher.
Well the present markets have since backed up and I think we are much closer now to where actual expectations are relative to interest expense. Although, listening to my trusted bankers, they still feel like we're going to be -- that we're well within the range of where we're going to end up with final borrowing costs.
So -- but obviously, we've got a period of time here before we actually hit the market on that. So we're going to try to hold off on anymore -- any updates, given the fact that I just don't have a crystal ball on where the credit markets are going.
Joseph Greff - JP Morgan Chase & Co, Research Division
Okay, great. And then my last question, Bill, if you can provide cash debt at the end of the quarter and CapEx from the quarter and CapEx for the balance of the year?
William J. Clifford
Sure. Cash at June 30 was $235 million; bank debt was $2,137,000,000; between capital leases and another M Resort loan, there's roughly $13 million; bonds, $325 million; gives us total debt of $2,476,000,000 at the end of the quarter.
CapEx for the quarter was $53.9 million, broken out roughly between $23.9 million for payments CapEx and $30 million in projects. Project is made up of closeouts on Columbus.
It's probably about half or a little less than half the balance and efficient closeouts on Toledo, as well as we're starting to ramp up now with Dayton and Youngstown. And then the last piece of the significant CapEx, the project CapEx is Hollywood St.
Louis, where we spent roughly $9.4 million. For the year, we're expecting maintenance CapEx to total $96 million, project CapEx is to be roughly $196 million.
Operator
Our next question comes from the line of Felicia Hendrix from Barclays Capital.
Felicia R. Hendrix - Barclays Capital, Research Division
When we look at your pipeline and knowing what we know about Ohio, specifically in Dayton and Youngstown, have you changed your expectations for those properties, how you're thinking about them, how you're addressing opening/operating them? Can you talk about that for a minute?
Timothy J. Wilmott
Sure, Felicia. This is Tim.
What we're going to do with the opening of Dayton and Youngstown is just to be a little bit more conservative with the amount of soft product we're going to put on the floor and let the market grow into the addition of more slot supply over the first couple of years. I think that's the learnings from Toledo and Columbus is we're going to open with approximately 1,000 games in each of the facilities, and then build the box bigger than that and then add products as demand warrants when our win per unit threshold hits a certain number that gives us confidence that the added capital will get good returns.
Peter M. Carlino
Let me squeeze something in there, Tim and Felicia. The -- you might recall that at Charles Town, where we eventually got up to a machine count, until competition came into the market, of 5,000 games, but we did that over a period of probably 12 or 13 years, going up in 500 unit increments, and we built a little extra space.
We've moved into it. We build some more and moved into it.
We did it very gradually. One of the issues, I think, we're seeing in Columbus is that we dumped, we and our competitors, 5,000 machines into the market virtually overnight and in an experienced, undeveloped market, overnight.
And I think that also has had an impact on performance there. Another reason why we are satisfied that we'll grow into that.
Clearly with these facilities, as Tim highlights, we'll take a more cautious approach and we'll grow into them.
Felicia R. Hendrix - Barclays Capital, Research Division
That makes sense. So, I mean, as a follow-up to that question was as you think about your pipeline in other states, for example in Pennsylvania and Massachusetts, maybe more particular in Massachusetts, how am I to be knowing what you know now in Ohio?
How might you be thinking about the Pennsylvania probably not as well with it? So...
Peter M. Carlino
So who wants to take a stab at that? I mean, let me comment that Massachusetts is still a speculative state.
We were excited about it. If we can succeed there in gaining a license, it could be very, very good, but we have steps to follow.
Tim, why don't you?
Timothy J. Wilmott
Yes, I'll let Steve comment. I'm sure he wanted to say something as well.
In the slot license we're pursuing at Tewksbury, the capacity is 1,250 units. And given the market just north of Boston there, we feel very confident that, that number is very, very reasonable and that will be supported by the population in that part of Massachusetts.
So I don't think we have any concerns that 1,250 is going to be too many units for Tewksbury, Massachusetts.
Felicia R. Hendrix - Barclays Capital, Research Division
Okay. And then, Bill, just given the regional gaming trends as you think about PropCo and perhaps some of the acquisitions that you might be making in the future, I know you guys have talked about initially eventually diversifying out of regional gaming.
But as you've discussed it many times, that was something that was further down the road. Given what's going on in gaming in general in the regions, is that a strategy that you might think would get pulled forward a bit?
William J. Clifford
I don't really think so. I think -- listen, I think at the outset, it's our expectation that we're going to be highly focused on gaming and we will certainly, won't look to uncover every single gaming opportunity that we can find and I think that is what we would expect to see for the first couple of years probably.
I think at least. Now that doesn't mean that if some unbelievably attractive opportunity comes along, outside of gaming, that we wouldn't be open to listening to it and exploring it.
So that's -- I don't believe, and Peter should probably talk to this as well, is I don't believe that our policy [ph] is going to be outside of gaming. Regional gaming trend, quite candidly, in a lot of markets, are stable enough, right?
In other words just -- once you understand potential for cannibalization and new licenses and that the rest of it in individual markets, there's not an underlying concern about the health of gaming. I think we're a little hyper focused right now because we're looking for quarter-to-quarter trends, but over the long term, we don't see anything that causes us to say, "Oh my God, gaming all of a sudden is going to go the way of cigar bars" or something.
Peter M. Carlino
That says it pretty well. Let me add to this, Felicia.
As Management of a public company, our responsibility is to continue growth for shareholders. We get up every day with that recognition.
It's a long-term game and it's one that we're highly focused on. I used to say when we first went public and went back in '94 as a tiny little company that we were going to do everything we could do in the gaming business.
And I suppose if we ran out of things there, we'd be widgets. Now thankfully, we have not so completely run out of things that we're looking at widget factories.
But I think that the REIT itself demonstrates that as the industry has matured, we're always looking for ways to maximize shareholder value. This looks like the next smart thing for us to do.
We definitely think there's a long runway over the years. And I'll give you the widget analogy again.
Yes, we could go off and do other things but it'll be the tenth in a long list of gaming opportunities that we think we can find. So we're just going to have to stay tuned.
We don't see any downside, this is a huge plus for shareholders. And I'm confident that we can prove that this can be very successful and grow going forward.
But we'll be ever mindful of opportunity, but cautious as always.
Operator
Our next question comes from the line of Henry (sic) [Harry] Curtis with Nomura.
Harry C. Curtis - Nomura Securities Co. Ltd., Research Division
I suppose that's close enough. So I'm just trying to think of the -- as you do your centric rings around Columbus, to what degree some of those customers might be more enticed to go to your facility in Dayton and have you factor that in to the returns that you're expecting out of Dayton?
And then sort of similar question, both for Dayton and Youngstown. You are going to be competing against the kind of full-bore gaming facilities.
What sort of returns are you expecting from those facilities?
William J. Clifford
I don't know if we want to get specific in terms of our expectations for next year. I would say relative to Dayton and Youngstown is that we're actually -- and this is kind of ironic, but we're actually very encouraged by prospects for that, given how well Kyoto [ph] has done.
We again feel it in Columbus. Clearly, a product that's well done, clean, safe, well-maintained.
Peter M. Carlino
In good locations.
William J. Clifford
Good locations. It's a competitive, viable product.
So if anything, I would say that our expectations in Youngstown and Dayton actually are looking up versus where we might have originally thought where we thought that the Columbus property was going to -- this is kind of the horse and the cart, but -- which one comes first. But the fact that we're having some troubles in Columbus was actually encouraging for Youngstown and Dayton because it says that the product and the customers are receptive to a lesser whole product of gaming than we might have originally anticipated.
Harry C. Curtis - Nomura Securities Co. Ltd., Research Division
So any sense of what the customer base in Columbus today might be more attracted to at your Dayton facility?
Timothy J. Wilmott
We do get -- we do know, Harry, that we do get business out of Dayton that goes to Columbus. Dayton is right now equal distance generally between Cincinnati and the Columbus market.
So with Horseshoe Cincinnati opening, it certainly had an impact in Columbus. As we look at Columbus going forward though, and as we do our concentric circle studies, it really is just focusing in on the 1.7 million, 1.8 million people that live in the Columbus MSA.
We do factor in the fact that we are going to see erosion of business in Dayton when more supply comes there, ourselves and also with the Lebanon facility.
Peter M. Carlino
You might consider, Harry, Peter. Comparing Columbus to say, Kansas City, Missouri, and look at the competition there, look at the volumes there, these are -- I think the markets are similar size, though you can see what can evolve with a mature Columbus market.
Kind of a little strange, this is my own thought about this, a little different. Certainly the population of Pennsylvania, but much more compact.
It makes the looking at circles, as you began your question, a little trickier because there's a lot of overlaps throughout the state. It's not like Philly is at one hand and Pittsburgh is at the other.
It's a little more compact, but nonetheless, the population is there. These properties will find their own markets because the population is adequate to handle all of what is currently planned.
Harry C. Curtis - Nomura Securities Co. Ltd., Research Division
Okay. And then, I appreciate that.
My last question is, with the revised guidance, you guys are all -- have always been a very realistic about your expectations. In this case, have you built in a cushion into your latest guidance?
William J. Clifford
I would say no, but obviously, we've looked at -- try to get the number that we think are going to be realistic. I would tell you that I think this as good a number done as consistently as we've done before in terms of the methodology and the thought process we put into it.
I wouldn't say that I think there's a big cushion in there but I hope I'm wrong.
Peter M. Carlino
All right, let me make a comment just for fun. I think in the spirit of what we're trying to accomplish here today.
Tim is smiling at the other end because he thinks Bill's been too conservative. Bill's sticking to his number and we haven't been able to shake either party.
So look, this is not a science. It is partly guesswork and art based upon very careful examination of the numbers.
I think Bill's answer about how we approach this as a ground-up exercise answered the question quite thoroughly. Bill's put a number out there that I think, to quote him, probably doesn't have a cushion, but it's realistic.
And that's the way he's approached it. I think Tim is feeling more optimistic and let's hope that Tim is right.
So there it is. That's the best answer you can get.
Operator
Next question comes from the line of Shaun Kelley with Bank of America.
Shaun C. Kelley - BofA Merrill Lynch, Research Division
So maybe just one technical question on the transaction. In the release, you guys lowered the cash component of the E&P distribution.
Could you just talk, maybe Bill, about the exact driver of that? Is that a lower cash balance at the end of the year?
What exactly drives that -- the amount of that change?
William J. Clifford
At the end of the day, it's the byproduct. What I mean by that is we've obviously taken a look at our expected revised guidances for both PropCo and OpCo.
And we made a judgment that we wanted to keep the leverage as close to our original expectations on leverage we're going to be. At the end of the day, we came to the conclusion that having the appropriate level of debt on both companies is more important than maintaining the cash portion of the E&P distribution.
So effectively what we've done is reduce the amounts that we're going to have to borrow. But that has to come from somewhere.
Where it comes out of is the E&P cash distribution. So leverage for PropCo is very present, close to where it was originally.
And I think maybe OpCo ends up a quarter turn higher but certainly, with its deleveraging profile, OpCo will be able to get right back into the ballpark of where it needs to be pretty quickly. So the E&P part is really nothing more than reflecting where leverage is going to be for 2 companies, and that means we have to borrow less money.
When we borrow less money, the cash needs to come from somewhere, so it's coming out of the E&P purchase.
Shaun C. Kelley - BofA Merrill Lynch, Research Division
That's helpful. And then the question that we're getting from a lot of people is the sustainability and stability of the dividend for next year given -- it was only -- it's really only a 5% revision for this year.
But as we start thinking about Sioux City and then perhaps the underwriting of some of the moving pieces in Ohio. Could you just talk to us a little bit about -- for next year, is the contemplation that you will lose the Iowa property?
And how -- and kind of when would that flow through? And what's maybe the potential offset?
Will that be offset by additionally the guy from the tracks just as we start to roll forward to '14?
Peter M. Carlino
From a crossover [ph] perspective, the brand associated with Sioux City is fairly small. So in terms of the impact on the dividend, it should be rather minor.
Relative to Columbus and Toledo, those numbers, as we start to get into the anniversary period, that we would start to expect to see year-over-year growth. Certainly, the way the rent structure works for those two is that's on a month-to-month as results come in.
So I would expect that from there, we would see increases in rent relative to this year. So the other components of the rent are all fixed.
So at the end of the day, once we get the rent amount for the company, that dividend is not subject to the fluctuations that we're experiencing now. We're going to agree on a number and we're going to set the rent payment coming up here shortly.
And then that number is going to pretty much fixed other than Columbus and Toledo. And there probably will be some sort of a provision for a reduction of the rent if in fact the Sioux City ceases to -- operating, but it's not going to be a big number.
Timothy J. Wilmott
And Shaun, just to clarify, the fluctuation monthly is just in Toledo and Columbus, it doesn't apply to Youngstown or Dayton. That's a fixed 5-year fee payment for those properties.
Shaun C. Kelley - BofA Merrill Lynch, Research Division
And again, just to be clear on that is that, is the -- is that fee dollar number set up kind of before those properties even open, or is it based on run rate of what they're doing in the first quarter, something like that?
William J. Clifford
It's going to be set -- well, we haven't finalized that. So it's going to be set at the time we do the spin.
So it's going to be well ahead of the time that the properties are actually up and running. A little bit of a guess.
There'll be, I guess, that the reasonable rate of return for PropCo, and then we can have a reset in 5 years. That's part of the benefit of the betting the restructure so that its property is doing better, there'll be a rent increase.
If our expectation is a little too high, there'll be a rent adjustment the other way. But that will happen 5 years afterwards.
Shaun C. Kelley - BofA Merrill Lynch, Research Division
That' helpful. I guess my last question is just a bigger picture, strategic one, but given the announcement in -- for the western Pennsylvania license in particular, just kind of wanted to just get your view on how should we -- we're a little bit surprised on that just thinking about that versus maybe maintaining some of your cash balance and your opportunities for some M&A in the future.
So could you just walk us through just kind of your thoughts on that market, particularly given the density of what's going on in Ohio, the supply there, the slightly lower underwriting trend that we're seeing in some of these mid-Atlantic markets as well. How do you balance the greenfield opportunity there versus maybe just holding back some firepower for M&A after the every reconversion is complete?
William J. Clifford
Let me start, then Steve, can hop on. I think what we've done is we found that those guys have been able to secure some pretty attractive financing and, quite candidly, just helped fund the FF&E and the gaming license portion of it.
And then on the property side, GLPI is going to be the financing source for the building costs. So from an OpCo perspective, it's actually -- the balance sheet is pretty small.
On the GLPI side, as we do acquisitions, we fully expect that to fund those acquisitions, we will be coming out in the market with secondary equity offerings. But clearly, we've got to make sure that when we're doing a secondary equity offering, that it's accretive to the shareholders at large so -- and we would expect that transaction in western Pennsylvania wouldn't in fact meet that return threshold.
Peter M. Carlino
But let me may interject though, before Steve Snyder comments, that this is all financing-dependent. This is a transaction that relies completely.
Let's let Steve answer that.
Steven T. Snyder
And Shaun, to that point, I mean we've had a tremendous dialogue with the county commissioners in Lawrence County. They are very committed to getting this project done.
So much so that they have committed to monetize a significant portion of the local share tax that they are going to receive to make sure this facility gets done. It's the first -- it's really a unique set of circumstances in the gaming development projects that we've worked on to see the equivalent of near a $50 million grant coming from the host community in the form of monetizing its tax stream.
So absent that, we'd not be involved in this project. To Bill's point that the GLP component of this covers itself to the rent and generates a more than adequate rate of return based on the expected cost of capital for GLP.
And contribution from the county as it relates to the intangibles, the license and the personal property, the gaming equipment just makes it such that we're very comfortable with our underlying assumptions and we're very comfortable given the proximity with Austintown with, of course, the focus being penetrating further into the Pittsburgh marketplace of this new to-be-constructed facility.
Operator
Our next question comes from the line of Steve Wieczynski with Stifel, Nicolaus.
Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division
Tim, I guess, first question for you. You called out the Cincinnati, northern Indiana market as being overly promotional.
Are there any other markets out there you would call out as kind of seeing the same type of activity? And then I guess, the next question is how to combat that?
Or do you just kind of sit back at this point and take it until that type of activity dies down?
Timothy J. Wilmott
You said northern Indiana, Steve. I think you meant southern Indiana.
Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division
Southern Indiana, excuse me.
Timothy J. Wilmott
Yes, that market -- I mean Cleveland has also got very high promotional spend, but that's not something that's impacting us. But I think more importantly, your question is how do we combat it?
We look at zip code by zip code at where we have a fighting chance based on proximity and look at how we want to adjust the reinvestment dial. And we do everything through test and control to make sure that we're doing profitable marketing interventions and we don't chase it.
We're not going to chase it in Cincinnati. It's something that we don't believe is sustainable on their end because they've got to pay bills.
And we have done a fairly reasonable job of retaining our VIP slot play, especially older females, which we expected based on the fact that we're in a suburban environment and they're in an urban environment. We take a look at all that demographic information to make sure that we're reinvesting in the right zip codes to the right customers.
But clearly, we are not going to chase what their level of reinvestment has done to that marketplace.
Peter M. Carlino
Let me -- this spend is suicidal, I mean it makes no sense at all. And if you go to Cleveland, it's them against them.
So you tell me why, why they've taken this course. But look, we found, and just my editorial comment, I've never seen an industry that's so desperate to give away its bottom line as this industry can from time to time.
Our experience has been hold tight, let them blow their brains out and eventually they come back. That's not to say we don't react, but we try to react carefully as Tim has well outlined.
Bill, you want to...
William J. Clifford
Yes. I don't have the numbers with me, but I think for you guys on the call, if you want to spend a little time looking at the relationship of our promotional credit to the slot lend [ph] in Cincinnati and Columbus, I think -- or Cincinnati and Cleveland, I think you'll find those numbers to be absolutely mind-boggling relative to the amount of promotional credits that are given.
Especially if you factor in the concept that a good percentage of their business in the first year is going to be unrated. If you go to the back half the unrated play and then calculate promotional credit as a percentage of people getting rated, it really is, in Peter's word, insane.
Peter M. Carlino
Steve, I guess, my final comment is based on a lot of years of experience in Atlantic City, watching that market evolve over the years and the successful properties versus the not-so-successful. I've always come to the belief that discounting your product, your marketing reinvestment, never leads to long-term sustainable excellence, and that's what we're striving for.
Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And then last question for Peter, I guess.
I mean, you guys have been going through all the state gaming regulatory agencies and trying to get approval here. But what has been their feedback with respect to the spend?
I guess, what I'm getting at here is, has any state bought up any a potential issues or has the process, to date, gone pretty smoothly?
Peter M. Carlino
Well, many states bring out many issues. That's just the nature of this process.
Jordan Savitch, our General Counsel, is here, and I'll let Jordan talk about that. But there's nothing unusual.
Jordan?
Jordan B. Savitch
They focus on the types of issues that they typically focus on. They're looking at suitability.
They're looking at financial viability. Obviously, they're looking at the relations between the 2 companies and how the rent's going to work.
It's a complex transaction with a lot of moving pieces. So it has been a little bit different in each of the states.
And probably one of the most challenging things was just trying to explain the many various aspects of the transactions to regulators. It has a lot of moving pieces to it.
So just trying to present it in a way that is comprehensive and sensible has been what we've been focused on.
Peter M. Carlino
Yes, I think, our press release had a pretty thorough outline of process and so forth. And I guess the answer you want to hear, do we see any obstacles to getting to the go line.
I think at the moment, none at all. We will get there.
Jordan, is that fair?
Jordan B. Savitch
That's fair. We've got -- as we noted in the press release, we feel like we're getting to the end of the process with most of the jurisdictions and we're hopeful that we'll complete it soon.
Operator
Our next question comes from the line of Cameron McKnight with Wells Fargo.
Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division
Question for Tim, first of all. Tim, when we've spoken about Ohio previously, you discussed the life cycle of gaming spend per head of population as it relates to new markets versus material markets.
Could you refresh us on some of those metrics? And how has Ohio performed on that basis relative to some of the metrics you outlined when Columbus first opened?
Timothy J. Wilmott
Cameron, could you repeat the question? I'd just like to better understand what you're referring to from the past?
Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division
Just some of your previous discussion on the life cycle or evolution of gaming spend per population as it increases over time as markets mature. And how you're seeing that track in Ohio relative to more -- the progression of more mature markets or established markets.
Timothy J. Wilmott
Bill is going to start and then I'll follow.
William J. Clifford
I think what we've measured is we've measured the gaming revenue per adult in the market to start with on the penetration level. And as we've kind of -- based on previous analysis kind of after the fully mature market, is roughly 600 million adults in that market.
Initially, in a first year of operation, you see something in the 25% range, which is pretty close to what we're seeing in Columbus in the first year. That grows within a few years -- a few points over time, that metric will grow.
Eventually, in 15 years, you get to 90% of that number. And then over time -- so over time, you're working from 25% up to 90%.
And second year can move up to anywhere from up into the 30% range. And each market is a little bit different and probably factors in a year almost with kind of like what you see over a course of time which can lead to some pretty strong growth metric in the first year.
I mean, obviously, that 5% is almost like a number, obviously it's on a larger phase that percentage will tend to slow down. But eventually, you get to a point where you'll hit saturation in the market.
Timothy J. Wilmott
And to add to that, Cameron, supply has an effect on penetration as well. There are markets, markets like Atlantic City in Philadelphia, and I can remember the Tunica market in Memphis with a lot of supply vis-à-vis demand where that number can get very, very high.
And if you recall at one time, Tunica was a $1 billion market with -- predominantly coming from the Memphis MSA when there was a lot of supply there. If Columbus continues to be a 2-casino market, that will have an effect on how fully penetrated it gets.
Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division
Okay. Great.
That's helpful. And then a slightly broader question for Bill.
Over the past 8 months, you've obviously spoken to a wide variety of investors. One topic that comes up in a lot of our discussions is the difference between gaming real estate and other forms of real estate.
What are some of the key differences that you would point to in gaming real estate assets versus perhaps more traditional forms of real estate assets that are out there?
William J. Clifford
That's a pretty broad open question. I think at the end of the day, gaming assets, as particularly we've addressed it with GLPI, is we've created a lead term where the gaming license stays with the property at the end of the lease.
So therefore, what we've done is secure that -- although certainly gaming assets are pretty much single-purpose, we've covered that with the concept of ensuring that the gaming license stays with the building, thereby guaranteeing that it will have its best commercial use for investment in the future. And I think there's many other aspects to this transaction that I think are interesting.
But I think the concept of security relative to the ongoing piece and also what I think has also been somewhat of an issue that most real estate investors are still kind of getting their heads around is the concept that we've got a master lease with Costco out of [indiscernible] with enormous great geographic diversification across the country. So we're in more markets than almost any other real estate company and I think the fact that some properties may perform or underperform, but they're all collectively part of a master lease, and therefore, they support each other.
And I think the security of that cash flow is probably unparalleled in the real estate world.
Peter M. Carlino
Maybe 1 or 2 more questions. Why don't we...
Operator
Our next question comes from the line Thomas Allen with Morgan Stanley.
Thomas Allen - Morgan Stanley, Research Division
For the sake of time, I'll just ask 1 question. Just going back to your guidance a little.
On the revenue side, you talked earlier about extrapolating kind of first half results forward. This 3Q, do you expect revenue to decline by around 6% or $45 million to $50 million?
And I think that run rate continues into 4Q. What's driving overall decline?
I think a component of it may be your excluding Bullwhackers, but I assume that's only about $5 million a quarter.
William J. Clifford
Bullwhackers is not...
Thomas Allen - Morgan Stanley, Research Division
Well, okay. So just the rest of it, can you explain it?
William J. Clifford
Well I think the rest of it is -- certainly part of what we're seeing is Toledo started off incredibly strong at initial openings and then, as we've all known, has come down to more reasonable run rates that it's now building on. So that's part of the factor.
As we look out going forward, I think we've got a little bit of that in Columbus as well. When you look at the run rate in the first quarter, Columbus was clearly, from the opening in November, had some a little bit of glide from the opening.
That's now stabilized and they're now building off to the new bay. Other than that, I would just tell you that it's our general overall -- on an overall basis, right, you have to factor in within that the cannibalization that we got out there in terms of a run rate component.
Some of that is more recent than some of the other pieces. But then it's just our general sense of where the economy is at and what we're seeing in regional gaming kind of across the United States, is how I'd explain the delta.
Thomas Allen - Morgan Stanley, Research Division
Again, just quickly following up Columbus. You said last call that March and then July, August are seasonally stronger times.
We've had 3 weeks in July. Have you seen that and should we expect that?
Timothy J. Wilmott
I think, generally, across -- like I said before, generally what we're seeing in July across the enterprise is more like June. And I think that's all I'm going to say specifically about the first 20 days of July.
Operator
Our last question comes from the line of Carlo Santarelli with Deutsche Bank.
Carlo Santarelli - Deutsche Bank AG, Research Division
Just one kind of maintenance housekeeping type of question. If you look at the $805 million that you guys put forth for this year and we start to look out to 2014, obviously acknowledging that the entity, as it stands, won't be reporting that year.
But when you think about all the legal accruals, whether it's Sioux City and some of the severance payments, as well as the cost incurred for the split, how do we think about that $805 million on a recurring basis if we were to extrapolate all of the noise that we've endured this year?
Peter M. Carlino
No, we don't typically give guidance going into next year. I think within the press release, I think we've got a good chunk of the detail that you need there.
We add a little bit more detail in terms of how much we've spent on the REIT in the year-to-date. Obviously, there's going to be -- so you can add that back.
Obviously, you've got to pull Bullwhackers out. You can pull out -- obviously, you can't assume that we're going to have another tornado in St.
Louis or a flood in Alton and those types of things. Clearly, it's going to be better than the $805 million.
I don't know that I necessarily want to give you guys a number on the call right now because I want to make sure I spend a little more time more specifically addressing that concept. But I do believe that in the press releases, not that I'm trying to shirk my responsibility here.
But I do think there's enough detail in the press releases that you can come to a reasonable run rate on your own, and it's clearly higher than $805 million.
Carlo Santarelli - Deutsche Bank AG, Research Division
Great. And really quickly just, Tim, on the update to the -- obviously to the Ohio cafés, anything new there to speak of?
I know there's been some noise recently in the press. But what's your guys' latest read?
Timothy J. Wilmott
How about Eric Schippers? Eric, do you want to get that?
Eric Schippers
Sure. As you know, Governor Kasich signed the Internet café ban into law in June, giving the café operators 90 days to collect their signatures, which will be due the first of September, or the first couple of days in there.
We have engaged as part of a broad coalition of other concerned interests in Ohio and an education effort to point out that what they're trying to do is really keep alive a unlawful industry. And so I think that's having some effect.
We've seen from our polling and where people learn about what the entities actually are, which is unlawful mini-casinos. The less likely they are to sign the petition and the more likely they are to want to keep the ban.
There was a second piece of legislation that was passed out of the Senate, which would, sort of belt and suspenders, also ban the cafés. And we're hopeful that the house will come back even in a special session in August or early September when they come back to the regular session, they will follow suit with an emergency clause that would cause this to go into effect immediately, thus rendering the signature gathering effort moot at that point.
So we've got a couple of lines in the water all with the intent of trying to stop these unlawful operations.
Carlo Santarelli - Deutsche Bank AG, Research Division
Eric, what's the estimate -- I think I know, but what's the estimate of how many dollars run through these facilities statewide? Are we prepared to offer a thought about that?
Eric Schippers
I don't know that we have a dollar estimate. We know that there were the -- at the outset of it, 900 internet cafés that were out there.
Then they've had the launching [ph]. You had to registered them.
That number came down a little bit. We saw an attempt to speak of this in Florida an impact when they outlawed the cafés there, an upside of about 10% would be standard brick and mortar casino operations, just to give you some sense of the impact these things can have in the commercial industry.
Timothy J. Wilmott
The other thing that I would add to that, Carlo, I referenced at my beginning remarks about some research we just got back from Columbus gamblers. And it did point out that 10% of the respondents did visit an Internet café within the last 12 months, so we know it's having an effect.
It's very, very difficult to give any kind of hard prediction. Eventually when they do go away, what's the impact is going to be on all of the casino properties in that state.
But we know it's going to be there. I just can't give you a definite figure and how much lift we're going to get.
Peter M. Carlino
Okay. Well then with that, we'll wind up our second quarter call and look forward to seeing you all third quarter.
Thank you very much.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.