Joe Jaffoni - JCIR IR Tim Wilmott - CEO Jay Snowden - COO Saul Reibstein - CFO BJ Fair - CDO Eric Schippers - SVP, Public Affairs.

Steve Wieczynski - Stifel Felicia Hendrix - Barclays Joseph Greff - JPMorgan Harry Curtis - Nomura Carlo Santarelli - Deutsche Bank David Katz - Telsey Group Thomas Allen - Morgan Stanley Sean Kelly - Bank of America Merrill Lynch Chad Beynon - Macquarie.

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Third Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions].

As a reminder, this conference is being recorded today, Thursday, October 27, 2016. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead sir..

Thank you, Kamika. Good morning, everyone, and thank you for joining Penn National Gaming's 2016 third quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions-and-answers, but first I'll review the Safe Harbor disclosure.

In addition to historical facts or statements of current condition, today's conference call contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risk and uncertainties.

These statements can be identified by the use of forward-looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should, or anticipates, or the negative or other variations of these or similar words, or by discussions of future events, strategies, or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results.

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 expectation.

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 SEC, including the Company's reports on Form 10-K and Form 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G.

When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP, can be found in today's press release, as well as on the Company's website. With that, it’s now my pleasure to turn the call over to the Company's CEO, Tim Wilmott.

Tim?.

Thank you, Joe, and good morning everyone to our third quarter 2016 earnings conference call. We’re all here at Wyomissing. I'd like to introduce who is in the room with me.

Our General Counsel, Carl Sottosanti; our Senior Vice President of Public Affairs, Eric Schippers; our Head of Penn Interactive Ventures, Chris Sheffield; our Chief Development Officer, BJ Fair; our Corporate VP of Finance and Head of Investor Relations, Justin Sebastiano; our Chief Financial Officer, Saul Reibstein; and our Chief Operating Officer, Jay Snowden.

This morning we released our third quarter earnings report, and as we characterized it in the release, we navigated a third quarter that looks like the second quarter, some markets solid, other markets choppy. Jay will get into further details of what we’re seeing with our consumer in these regional markets after I am finished with my comments.

But beyond all that, Saul is going to touch on, now that we have refinanced the Jamul loan, our free cash flow story going forward and how strong it is. I do also want to summarize the activities in the third quarter in a couple of different areas.

In early August, we made a purchase of Rocket Games, which is a provider of social casino gaming content. We did saw it a very attractive multiple and that adds to our library of social casino content that we have already with slot games and others under the HollywoodCasino.com banner and that's something that we're very excited about.

Also in October, more recently on October 10, we opened up Hollywood Casino Jamul outside of San Diego, and we are able to see very strong volumes. Jay is going to touch on it briefly as well for the first two weeks of operations.

And then shortly after that, we completed the refinance of our outstanding obligations to the Tribe with a third-party and were repaid approximately $274 million, which we were able to take those proceeds and pay down our revolver, and that left us at a leverage level below 5.8x including rent.

And just to refresh everyone's memory, we began the year of 2016 at a leverage level above 6.6x, so that continues our message that we do want to delever overtime to a 5x to 5.5x leverage level. We continue to move forward with our efforts at Tropicana. We have the Robert Irvine Restaurant under construction, expected to open in the summer of ‘17.

Jay I know will also touch on some third quarter metrics from Tropicana.

And we continue to work on the master plan that will begin sometime in 2017, and I think it's safe to say sometime in the first half of 2017 we'll have finalized our thoughts and be able to provide a more detailed communication and how that master plan will evolve and what the elements of these new programs will be.

Before I turn it over to Jay, I did want to acknowledge and thank Saul Reibstein, who we announced last week will be retiring at the end of 2016 as Chief Financial Officer. Many people don't know but more so than anybody in this room, Saul has the longest relationship with Penn National Gaming.

When the company went public in 1994, he was the external auditor for that IPO. And he joined us as we were forming their new Penn post the spin of GLPI in the fourth quarter of 2013 coming from our Board, and after five years of service joining us as CFO.

And I’m forever grateful for him stepping into that role and getting our company started in this new OpCo format and want to wish him all the best as he retires at the end of this year and as we turn over to calendar look forward to working with BJ Fair as our new CFO with more to that to come.

But Saul, we wish you all the best and you'll be missed but obviously not too far away from all of us as we continue to move this company forward..

Thanks Tim..

With that, Jay, I'd like to turn it over to you to give more color on what we are seeing in our operations..

Sure. Thanks Tim. Good morning everyone. Our third quarter results showed slight improvement from second quarter on a same-store sales basis, but softness in a few of our key markets, no doubt carried over from the second quarter and weighed on our overall property performance.

We had continued strength in the areas Midwest, Missouri, both properties in Las Vegas and three of our four properties in Ohio. Toledo will be in the exception which I’ll touch upon in a moment. But were certainly offset by soft unrated results in Mississippi and Illinois.

We had steep year-over-year declines of over 20% at our property in New Mexico, and of course the delays that are well documented to our opening dates in Jamul.

We do however continue to chip away our corporate overhead expenses in a number of areas in an ongoing effort to help preserve our EBITDA margins in what is currently a challenging economic environment. The third quarter was comprised of two decent months, beginning and end July and September. That same was one very soft month.

Some of that was driven by the calendar dynamics of course. Some also driven by the continued economic and political uncertainty in the market coupled with slow-moving income, unemployment growth, all of which is weighing continuously on discretionary spends.

Same-store sales continued to reflect GDP level growth as consumer confidence remains muted and somewhat fickle. At the property level, a few highlights. Road work that commenced in May continued into the third quarter both to the north and south of our property in Toledo, Ohio, on I-75 which certainly impacted us.

Unrated business was down significantly for the quarter. Some of this work is starting to wrap up for the winter, and our results so far to the first three weeks knocked over are showing some improvements versus the third quarter at the Toledo property.

We had encouraging results similar to the second quarter in Las Vegas, both, at Amber we delivered record third quarter EBITDA and EBITDA margins, and at Tropicana we experienced RevPAR growth for the quarter of over 9% and continued strength in the casino volumes driven by the Marquee Rewards database was provided over 15,000 room nights in the third quarter.

Though revenues declined year-over-year in the third quarter at Plainridge Park Casino due to the strong opening months in the summer of 2015, our EBITDA margins improved over 300 basis points as we continue to right-size the cost structure and generate higher returns on our marketing spends at our property in Massachusetts.

And lastly as Tim mentioned, we're thrilled to have finally opened Hollywood Casino Jamul in San Diego to exuberant crowds on the October 10. The early results are very encouraging both on the gaming and non-gaming volumes. Food and beverage results have been beyond our expectations. We think the property has got tremendous future potential.

From a promotional environment perspective really outside of the Biloxi, Mississippi, it remains rational and stable across the rest of our markets.

And just to update everyone on how October is trending to the first three weeks of the month, so it's apples to apples on a year-over-year basis, pretty consistent with what we've seen in the second and third quarter. We'll see how the remainder of the year tracks out.

December’s calendar obviously benefits with an extra weekend, so we'll see how fourth quarter closes out the year. With that, I'll turn it over to Saul, to walk you through our fourth quarter guidance..

Thanks Jay. The trends we've seen from much of 2016 have continue throughout the third quarter and into the early part of the fourth. Jay touched on the macro trends we have all seen.

However for Penn National specifically, we continue to generate significant free cash flow from operations, and together with the recently announced financing for Jamul, we continue to pay down debt, improve our liquidity levels and lower our leverage ratio.

Further, we began to receive principal and interest payments on our advances to the Jamul Tribe now that the property is operational. In turn, S&P Global Ratings revised the outlook on us to stable and upgraded our senior unsecured notes to B+.

After reporting third quarter results substantially in line with guidance, we turned our attention to the fourth quarter and highlight several key factors impacting our estimates.

We've established fourth quarter guidance for net revenue of $348.3 million and adjusted EBITDA of a $192.7 million and for the due ending December 31, 2016, net revenue of $3,039.8 million and adjusted EBITDA of $840.6 million.

Our estimates consider recent trends in the business, as well as an earlier-than-expected opening of MGM National Harbor, continued challenges caused by low oil prices and Zia Park Mexico property, the continued high promotional spend from our competition on the Gulf Coast, one-time charges for transitional services and other payroll-related costs and the impact of the delayed opening of Jamul and refinancing expenses, which results in our management fee commencing November 1.

Page 6 of our press release provides current estimates for corporate overhead, depreciation and amortization, interest expense and non-cash stock compensation. It also includes the amount of actual cash payments under our Master Lease.

In addition, some other data points are cash on hand at September 30, 2016 of $201.8 million; all of our debt covenant ratios have been comfortably met; project CapEx for 2016 is estimated at $30 million, with $16 million in the fourth quarter, remembering that all of our 2016 advances to Jamul were repaid on October 20.

Maintenance CapEx for 2016 is estimated at $83 million, with $31 million in the fourth quarter. Our GAAP basis effective tax rate for 2016 is estimated at 25.4%.

And finally, free cash flow before Project CapEx and principal prepayments of $261.5 million for the full-year, which based on our current diluted share count and current stock price, implies a free cash flow yield of more than 20%.

I'd like to take a minute on a personal basis to acknowledge and thank Peter and the Board, together with Tim and the management team, for giving me this great opportunity over the past three years. As most of you know, I've been involved with the company in several different capacities since 1994.

I’ve seen firsthand the incredible growth from a three race-track operation into the $3 billion enterprise we are today. The last three years have been fabulously rewarding for me as I have expanded my knowledge beyond my expectations. For that, I thank you all and look forward to continuing my involvement with the team in the future..

Thanks Saul. Well said. Operator, we are now ready to take any questions from the audience.

Operator? Joe, are you on the line?.

[Operator Instructions]. And our first question is from the line of Steve Wieczynski with Stifel. Please proceed with your question..

Hi, good morning guys. So you guys talked a lot about free cash flow generation. Good morning, Tim. You talked a lot about free cash flow generation.

You guys when you look into next year, you’re going to be generating a significant amount of free cash flow and your target leverage range is now you said 5x to 5.5x, and you’re essentially going to - you could essentially be there within a very short timeframe.

So I guess the question is what’s the use kind of once you get inside that range for the free cash flow going forward?.

Steve, obviously to reiterate, we continue to use our free cash flow first order of businesses to delever and continue to pay down debt. Beyond that, obviously we'll look for accretive acquisitions, as well as our Board considers from time to time the appropriateness and the level of potential stock buybacks.

But I would certainly put those three items in that order..

Right now, Steve, the only thing we have on the docket for use of capital is the master plan work we are going to do at Tropicana over ‘17, ‘18 and ‘19. So as Saul said, we’ll delever.

We’ll continue to look for strategic acquisitions that are accretive to our share price, and then out there as well is always the opportunity to do a share repurchase once we've exhausted with other avenues..

Okay, got you. And then second question, I know if I’m reading a little bit too much into the release.

But in terms of your wording around Charles Town, has your view in terms of what - National Harbor be impact to Charles Town, has that changed at all or has that been - is that basically remain the same?.

Hi Steve, this is Jay. It remains the same. The only difference from the second quarter to the third quarter is that we had anticipated a late-December opening of MGM National Harbor given the information we had at that time, and they've since gone public within opening day of December 8, so we had to move that forward in our estimates..

But as you look into 2017, that has not changed in terms of what you’re expecting there?.

That is correct. It has not changed..

Okay. And then last question real quickly. You talked about the rated play being pretty healthy, the unrated play in certain markets being little soft.

What do you tie the unrated softness to in some of these markets, Jay? Do you have any color on there and have you seen that pick up at all?.

It’s really three markets where the unrated was down double-digit and that's what hurt us overall. We have many markets where unrated mirrored the trends that we are seeing on the rated side at either flat or showing slight growth. But the reasons for the three markets are well-documented.

It’s New Mexico, where our rated is down low-double digits but our unrated is down much higher double-digits by virtue of the unemployment rates going from 3% couple of years ago to over 10% in the Eastern New Mexico and West Texas oil markets. You have Toledo because of the road construction.

It’s difficult unless you live within 20 minutes of the property to the access the property currently. That should be wrapping up as I mentioned earlier for the winter. And then lastly, Boomtown Biloxi due to new supply in the market, I'm sure that everyone is unrated business in that market is down just like ours.

So it’s not that unrated is unhealthy across the portfolio but those three properties are really skewing the number and bringing unrated down to the quarter..

Okay, great. Thanks guys. Thanks for the color..

Thanks Steve..

Thank you. Our next question is from the line of Felicia Hendrix with Barclays. Please proceed with your question..

Hi, thanks for taking the question, and Saul, congratulations on your retirement..

Thanks..

I was wondering - question for everybody I guess. Just on Jamul, you gave us some positive commentary in the prepared remarks.

Just wondering if we could get any kind of detail at all, win per unit or just any kind of metrics so that we can get more color to the initial performance for our modeling purposes?.

Does he work for you [indiscernible]. As you know, we don't provide property level details certainly right after an opening with regards to win per units, anything of that nature. I would tell you that we've been very pleased with both the gaming, as I mentioned earlier, the non-gaming.

We have, I think a very solid food and beverage line up there in San Diego. We've taken a different approach. We brought in some third-parties. We have some licensing deals, local restaurant concepts that are well-known. We are operating in the property. And so the response so far has been terrific.

Flat volumes, stable games, and non-gaming business is all healthy..

Typically Felicia though, it takes about two months for the honeymoon period to conclude, and I would point - for everyone on the call, I would point to starting to look at - as we will, the first quarter into second quarter performance really get a sense as that market stabilizes since the new supply that we've introduced stabilizes.

First 60 days to 90 days is always different from what we see as this property will start to mature very, very quickly into 2017..

Yes, that was exactly my follow-up, so I appreciate that. Just switching gears, I wonder if we could just get an update on casino expansion in Massachusetts, particularly what's going on in Taunton and then what’s the status of the legislation is in Pennsylvania..

Why don't I cover a little bit on Massachusetts and I'll turn it over to Eric Schippers who has been deeply involved in the activities in Harrisburg, Pennsylvania, this week specifically.

We saw that in Everett, Steve Wynn and Wynn Resorts announced that they are now looking at a June 19 opening, which is what we kind of expected as we think about new supply in Massachusetts. We also saw that the appeal process is being scheduled for the Mashpee Wampanoag Tribe and their issue of federal recognition or not.

And that timing is very difficult to predict on how that's going to evolve into 2017, Felicia.

We did get commentary from the Massachusetts Gaming Commission from the Chairman that they are going to sit back and watch the legal proceedings evolve before they take any action and consider any other potential applicant for that Southeastern Massachusetts license.

So it's a wait-and-see approach with the court on what's going to happen there and the timing is very, very difficult to project at this stage.

Eric, can you give us some color on Pennsylvania?.

Yes, just before we move to Pennsylvania, there is also a ballot measure in Massachusetts that could allow the Mass Gaming Commission to issue an additional slot-parlor license. Based on the recent polling and the results in a non-binding referendum and the host community of Revere, we do not expect that to be successful on the November ballot.

Moving to Pennsylvania, there has been a lot of talk about expansion there obviously with everything from iGaming to VGTs to slots at airports. That was sort of put on hold as the Supreme Court in Pennsylvania struck down a portion of the Gaming Act that involved our payment to our host communities of 2% or $10 million, whichever is greater.

That legislature has come back to try to fix that provision. The Senate has decided to put forth a clean fix we'll call it, with just dealing with that issue. The House has used that as a vehicle to add back some of the expansion elements like iGaming, slots at airports, fantasy sports.

The Senate sent over its clean fix last night and adjourned basically putting the House in a take-it or leave-it position.

The House extended their session by one day, which is today, and they have a choice of either accepting what the Senate sent them or continuing to push for the expansion elements, in which case it will blow up and they’ll likely have to come back next year likely in the spring to try to start all over again.

We are sending the message to our host community that we are good for the $10 million. We are committed to it, and even without a fix we want to be a good corporate citizen to our host community of Dauphin County..

That's really helpful. I appreciate that. And then just two quick housekeeping questions. Wondering if there was any way we could get an early look to CapEx for 2017? And then just on Toledo and the construction, you said it was ramping up for the winter.

I just want to understand that is it done, or is it just temporarily kind of paused for the winter?.

Felicia, I’ll tackle the second question first. It's going to pause for the winter but the road work is not complete. The road work is going to continue.

It's still on the Ohio side but it does continue to move towards is our understanding from conversations with the Department of Transportation in Ohio and it will likely continue into the Michigan side but as it travels north that helps us.

Obviously the further north it goes, the smoother the rides are into the property south of that construction zone. So I think it will get better as we head into next year but there will be a continuation of road construction on I-75 in 2017..

Okay, thanks..

Felicia, you can be sure that our maintenance CapEx levels will be consistent. We'll give you all those details in the first quarter call..

Just trying to give you a little extra work before you had to go..

Yes..

All right, thanks..

Thanks Felicia..

Thanks..

Thank you. Our next question is from the line of Joseph Greff with JPMorgan. Please proceed with your question..

Good morning, Saul. Congratulation and thanks for everything and best of luck to you..

Thanks Joe. Appreciate it..

Jay, you mentioned Plainridge, the margins were up 300 basis points year-over-year.

Would that still put the property level EBITDA up year-over-year, or is it more kind of flattish territory?.

It's in that flat to slightly up. I mean the revenues year-over-year are down double-digit because of the strong first couple of months after we opened the property in late June.

So that's kind of how it washes out, but you can certainly expect as we move forward to see overall EBITDA growth on a year-over-year basis as we move forward and the cost structure continuing to move in the right direction..

Great. And Jay, your comment obviously on the Tropicana’s results in the 3Q encouraging.

Can maybe all of you talk about how you're thinking about additional CapEx investment, what you're looking to see at that property, and then how you're thinking about the timing of additional CapEx at the property?.

Joe, this is Tim. I did mention that we're going to be more articulate as we get into 2017 on the specifics of the program but it's going to be focused on increasing the non-gaming amenities, primarily with some additional casino expansion that will occur over ‘17, ‘18 and ‘19.

We obviously have to keep the place up and running so we are going to phase it over three years.

We are still looking in the $200 million range of capital and we want to take advantage of the very valuable real estate that is in front of us that really is dormant today on the intersection of the Tropicana and Las Vegas Boulevard to push our offerings closer to the MGM properties at that intersection.

And again more to come as we get into the first half of 2017, where we can be more specific as we finalize our thoughts..

And I know it’s early but of that sort of $200 million, would that be all Penn National capital or would there be third-party, and if there is third-party, would it be of a significant dollar amount?.

At this stage, we’re thinking it's all company capital..

Okay, great. Thanks guys..

Thanks Joe..

Thank you. Our next question is from the line of Harry Curtis with Nomura. Please proceed with your question..

Good morning, guys. I want to stick with Vegas for a moment.

It looks like the percentage of your room nights in Vegas that were filled by your frequent players represented about 11% of the room nights in the quarter, and how does that compare to your experience at Caesars? What is a reasonable target to shoot for?.

Harry, I'll tackle that first. I'm happy to have Tim provide any color after my comments. The 11% is just the Marquee Reward members but remember that we inherited at database of gaming customers at Tropicana, so our overall gaming mix is in the low 20s for the property as compared to 8% at the time that we purchased that asset.

We've said all along - and that's always been a one for one displacement or swap with the leisure business, so it's almost identical. We’re dropping off the OTA and wholesale business in favor of the gaming customers from the database while maintaining what was there when we acquired the property on the database side.

So we've always said that we anticipate dropping that leisure excitement statement which is still on the mid-30s down to around 10%. I think the gaming customers to about 40% to 45% of the overall hotel mix with the property which would be pretty consistent with what you see in other Las Vegas assets, Caesars, MGM and the like.

They still generate significant convention business in those hotels as well..

Harry, just adding onto what Jay said, back in the days of Total Rewards with Rio and Harrah’s, they were pushing north of 50% of their room nights through their casino block. And I should mention, as we all know in Las Vegas, the casino block is at its lowest levels in the third quarter of the year, given that the heat in July and August.

So we expect this number to continue to improve and are encouraged with what we see so far into the fourth quarter. And again this is - we are just six months into this channel and we are encouraged with what we are seeing to-date and know what’s going to improve going forward..

So to follow-up to that is, can you give us some general sense of the difference in the value per customer between OTA, wholesale and a Total Rewards customer?.

Marquee Rewards..

Marquee, Total..

Harry - right, it depends on the time of year that the delta is significant and the first and second quarters of the year to the tune of upwards of 50% greater value than a leisure customer.

And in the summer months it's more negligible just because you don't get much demand from your higher end customers who want to be in Las Vegas in July, August and September, so there is still a premium there but it's maybe half of that 50% in the summer time. Remainder of the year, it’s 50%-plus..

And then just the last question is, it seems, just generally speaking, that there is a fair amount of rate compression, positive rate compression in Vegas now, strong in the quarter for the quarter.

What do you think is driving it?.

There continues to be - I mean it's a continuation of the Las Vegas swift story from last year and it has into 2016. I think it's going to continue as you look out in 2017 as well. I think what's driving is that you don't have much hotel supply entering the market. You haven't had much in the last couple of years.

And outside of a couple of small additions in the market, you don't have much as you look out to next couple of years. And so rates continue to move up, occupancy is stable, so slightly increasing. Those are great dynamics for the market as a whole..

Very good. Thanks guys..

Thanks Harry..

Thank you. Our next question is from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question..

Hey, everybody. Good morning, and Saul, congratulations..

Thanks Carlo..

Tim, Jay, just on the topic of margins, you guys obviously mentioned [indiscernible] you could with corporate expenses in the period and brought them down.

Not to sound overly negative, but are you inferring that kind of what's left at the properties might not be all that much or do you still feel like there is opportunities to adjust in an environment if business volumes were to kind of remain stagnant and you had other cost pressures?.

Yes, Carlo, I think there is still opportunities. We did in this quarter, for whatever reason it kind of works for sometimes and against you at times. We had some issues with healthcare claims and litigation at the property level that impacted us in the third quarter more than previous quarters this year.

So that's putting a little bit of noise, not super material but that does impact your margins. And we are taking a hard look everywhere, in corporate area that we hadn't taken as hard of a look as we did at the property levels and so we are doing everything we can. We’ve shown improvements in our corporate overhead expense throughout the year.

We think we can continue to make improvements there. But there is no doubt there is still meat on the bone at the property level as well. There isn't as much as there was in past years of course, but we can still make improvements.

We've been - when you strip out the effect of gaming tax rate that we operate under here at Penn, we’re still market leaders on property level margins by 500-plus basis points versus our competitors..

Great. Thanks Jay. And then Saul, just on some tie-up balance sheet items in the quarter.

Would you mind just kind of passing along maintenance CapEx for the actual 3Q as well as cash interest, cash taxes, those types of things?.

Sure, Joe - it’s Carlo, sorry. Maintenance CapEx for the quarter was $31 million, $83 million looking at for the year. I'm not sure. $31 million is fourth quarter and $19 million for third quarter.

What else were you looking for?.

Cash interest, cash taxes..

For Q3, cash interest was $11 million and cash taxes were only $1 million..

Thank you..

Thank you. Our next question is from the line of David Katz with Telsey Group. Please proceed with your question..

Hi, good morning. I just wanted to ask about the leverage issue, and ask it in the context that it’s a discussion that comes up with investors regularly.

Given that we are in an economy that's arguably a little long in the tooth and we have some markets that are choppy and there is concern about consumer, do you contemplate the notion of really focusing much more on a lower leverage level than the 5x, 5.5x, given that a downturn could turn that into something considerably higher, maybe 3x or 4x, and how you think about that issue? Thanks..

Let me give you my perspective, and then Saul can add to it, David. We think it at a leveraged level of 5x to 5.5x that we have ample cushion to withstand any significant economic downturn in our regional markets. So we think our comfort level is very high that we’ll be able to operate at a leverage over 5x to 5.5x.

I do want to remind everyone that this includes the rent obligation, which is by itself over, I believe, Saul, 3x leverage. So that’s already embedded into our capital structure as we describe leverage levels..

Right, and the rent - the leverage that the rent causes is one of my favorite topics because the measurement of leverage will calculated at 8x rent expense, even though overtime on our really balance sheet that liability declines as we continue to make payments. So it is somewhat an illusory method of calculation..

If I can just ask one follow-up please. I know there has been a lot of discussion about acquisitions and distributed gaming, and M&A can be hard to predict.

But how is that landscape looking for you, and is there any way you can handicap the likelihood that there would be some more tuck-ins or more than that, in that category near-term? And that's all. Thank you. And best of luck, Saul. Thank you very much..

Thanks David..

Thanks David. I’ll start, and if BJ wants to add anything to it he certainly can. We are certainly being opportunistic in the retail gaming space, specifically in Illinois and potentially elsewhere. We think there are opportunities out there both in a tuck-in level for the right price at a larger more significant level. We love the business.

It continues to be something that is growing nicely and that we are managing better now than we were a year ago when we first got into the space, and we understand the synergies available to us better now as we do additional acquisitions both from a revenue enhancement and cost standpoint.

So I do think, David, you're going to see us continue to be active and more specific about potential opportunities as time moves forward..

Thank you very much..

There has clearly been some upward pressure on some of the expectations but we'll continue to be very conservative and very disciplined in how we approach our acquisitions..

Thanks David..

Thank you..

Thank you. Our next question is from the line of Thomas Allen with Morgan Stanley. Please proceed with your question..

Hi, good morning. Just two questions on third quarter and fourth quarter. How are you thinking about how the Jewish holiday shift from October - September into October and then the elections, how do you think they are impacting kind of these quarters? Thank you..

Thomas, your guess is really as good as mine on the second part of the question there. The Jewish holiday shift over the course of third quarter and fourth quarter on our revenue and EBITDA levels is really nonmaterial. But the election, there is no doubt - I mean, you hear it from your customers.

We see it on days when there is debates on TV, volumes dropping off. There is a closer eye on the election just like we’ll start moving previous cycles. But it's very difficult to speculate on how exactly that’s impacting our business one way or another..

The good news, Thomas, is November 8 it will be over hopefully and we'll able just to move on knowing what the political environment is going to be for the next four years..

Okay. And then just a follow-up on that.

On a state level, are there things in 2017 that you're looking out for from - on the legislative front?.

Eric, why don’t you take that question?.

Sure. I mean, we are continuing to watch gaming discussions occur in Georgia and be a part of that and continue to tell our story there. We still think it's on not a near-term horizon but over the next couple of years that that will evolve, but this is an education effort that we are engaged in there.

Other states with - there is other measures that are going to be on the ballot out there that we are watching on November 8 but nothing really material from our perspective..

Arkansas is off the ballot by the court ruling and we don't think based on the polling we see in New Jersey that that's going to likely pass as well..

Exactly..

Helpful. Thank you..

Thank you. Our next question is from the line of Sean Kelly. Sean Kelly is with Bank of America. Please proceed with your question..

Great. Good morning, guys, and congratulations, Saul. So most of my questions have been asked and answered, so I'm going to ask a pretty high level one. But about two weeks ago, there was an article in The Economist talking about some of the kind of longer term demographic trend as it relates to casino gaming in the U.S.

And I'm sort of curious as two years ago I think we talked about a lot about this topic of internet gaming started to get a little bit more popular for a bit, but we haven't talked about it recently.

So my question is, just at a high level, have you guys seen any changes in demographic pattern as it relates to age group or customer type coming into your properties broadly speaking, and is there anything you're excited about on the kind of game content side after years of probably relatively stagnant slot product?.

Sean, let me take the first part of that question, and then I'll let Jay take the second regarding products what we're seeing. Listen, really nothing has materially changed in terms of a demographic profile who is visiting our properties.

It's still 60% of our revenues come from customers between the ages of early 50s to early 70s, the heart of the baby boomers, and that hasn't changed much. It's obviously a little different in Las Vegas, which is huge younger for all the other entertainment options in that marketplace but in the regional set, it hasn't changed.

And as we look at - our focus over the next, say five to 10 years, I'm of the belief that focusing on in millennials is not going to produce good economic results.

I'm more interested in the 50 million group of Gen-Xers out there that will be moving into the period of when they become more interested in casino entertainment that they have more disposable time and more disposable income as they pay up their mortgages and become empty nesters.

So I think from my company's perspective, our focus on Gen-Xers over the next 10 years will be more keen that it has been. Those are the ones they are going to fall into the sweet spot of who likes to be entertained with our offerings.

Jay?.

Yes sir. And then just to add to that, your question with regards to gaming content, we all returned from G2E not too long ago. And look, I thought there were some interesting concepts at the show, some new boxes, three-dimensional features, but I didn't see anything disruptive.

I mean, we are still waiting for the next little disruptive products or offering out there, and I don't think it’s been conceived yet.

And I think it will be interesting because I'm not sure that Gen-Xers are going to like the games necessarily that are offered today, so we've got to continue the challenge with the manufacturers and work with them on what that next product offering may be..

Thanks. I appreciate you guys entertaining a more theoretical question, so thanks a lot..

Thanks Sean..

Thank you. [Operator Instructions]. And our next question is from the line of Chad Beynon with Macquarie. Please proceed with your question..

Thanks for taking my question, and congrats as well, Saul..

Thanks Chad..

Just one for me. One of the soft spots outside of the unrated play that you mentioned in the prepared remarks was Zia Park that’s obviously been a drag because of the source of the wealth of your customers being related to the oil and gas markets.

Are you seeing any lessening in the weak trends there, anything that you can kind of point to maybe a recovery in that market or at that property? Thanks..

Sure, Chad. I don't see a recovery yet, but I would tell you that the real steep decline started in November of last year, so we are close to anniversarying what were sort of the mid-teens drops in visitation and gaming revenue with that property here next month.

So I look forward to that and I think I'll have more insight certainly when we get together for our Q4 earnings call after we’ve anniversaried some of those steep declines..

Okay, great. And actually a follow-up maybe because we haven't focused on the tiers of the rated play.

Did you see any major change in the third quarter versus prior quarters on the rated side in the different tiers of your loyalty program?.

We really did not. Consistent in the third quarter with what we saw in the second quarter. We continue to hold up well at the mid and high levels. The lower average work customers was a bit of a mixed bag depending on the markets. Certainly saw growth in visitation but maybe a little bit of drop-off in average spend.

So very consistent at the mid and high-end, continued sort of choppiness at the low-end, and underrated largely a good story other than the three markets with severe declines that I mentioned earlier..

Okay, thanks. Very helpful..

Thanks Chad..

Thanks Chad..

Thank you. And we have a follow-up question from the line of Joseph Greff with JPMorgan. Please proceed with your question..

Saul, I was hoping you could just bridge the EBITDA to free cash number that you talked about, the cash interest, cash taxes, cash distributions and any other pluses or minuses to get to that math, please?.

Joe, you're looking - you want to reconcile the year?.

Yes, $840.6 million of adjusted EBITDA and converting $251.5 million of that to free cash flow before the project CapEx and advances.

So I was just hoping you can revisit the pieces to it?.

I’ll give it to you quickly. Rent expense of $443 million. Cash interest of $60 million. Cash taxes is actually a $6 million refund, and then the $83 million of maintenance CapEx..

Got it.

And is that before the distribution from the KC joint-venture?.

That’s right..

Perfect. Great. Thanks guys..

Thanks Joe..

Thank you. There are no further questions at this time. I would now turn the conference back over to Mr. Wilmott..

Thank you, moderator. Again, thanks for everyone who listened in on this call. And we look forward to getting back together in a little over three months to talk about the year 2016, but more importantly talk about our plans going forward in 2017 and how we see the economy evolving post the election.

I think we'll have a lot more color and a lot more clarity and a lot of things that are right in front of us. Thanks again..

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and we asked that you disconnect your lines. Thank you and have a great day..