Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming's Third Quarter Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead, sir. .

Thank you, Savannah, and good morning everyone, and thank you for joining Penn National Gaming's 2018 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 forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties.

These statements can be identified by the use of forward-looking terminologies, 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.

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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 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. Thank you for your patience with that.

And 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 Penn National's Third Quarter 2018 Conference Call. I'm going to have some introductory comments, and then following me, will be Jay Snowden, our President and Chief Operating Officer, who will give additional color on the operations for Penn in the third quarter of this year.

And then following Jay, will be B.J. Fair, our Chief Financial Officer, who will provide certain financial metrics as well as provide the details around the fourth quarter guidance for new Penn, which is the full fourth quarter for Penn and for the Pinnacle properties, starting with the close that we had on October 15 to the balance of the year..

As we mentioned, a couple of weeks ago, we closed on the Pinnacle deal on October 15. We now are welcoming 12 new properties to the Penn family, which will give us 40 facilities operating in 18 states.

We've quickly engaged and began and will continue to engage over the next couple of weeks with these new properties to begin the budgeting process for 2019. We remain very confident in the $100 million of cost synergies that we previously have outlined, which we've said will be 50% in year 1 and 50% in year 2.

And we also know now that by the end of the fourth quarter of this year, we will already be over $30 million of those synergies on a run-rate basis by the end of Q4..

I did want to highlight other developments that have occurred and continue to progress in the third quarter. First, an update on the Margaritaville Resort in Bossier City, Louisiana. As we previously announced, we are purchasing the OpCo portion of this resort for $115 million. Our landlord will be VICI, in a triple net lease format.

It is the market's newest property, one that continues to perform very well in a relatively flat market. It opened in 2013. We expect to close by year-end on this transaction.

And as we previously mentioned, the trailing 12-month multiple that we're purchasing this OpCo was at 5.5x and we now expect to be below 4.5x post synergies, as we get ownership of this and operate this in conjunction with the Boomtown facilities as part of the property -- one of the 12 properties we picked up in the Pinnacle transaction. .

We've also had some new developments and further clarity on our Category 4 licenses in the state of Pennsylvania. In mid-September, we announced that we're going into a location, just outside of York, Pennsylvania, in a mall location on Route 30, which will require $120 million of CapEx.

We'll open up Hollywood Casino York with 500 slot machines and 20 table games. We expect to open in 2020, and that's dependent upon certain levels of approvals. We'll provide further clarity, as we secure these approvals in a more definitive timeline, as we know more information. .

And also yesterday, we announced our intent to invest $111 million at Hollywood Casino in Morgantown, which will be a ground up development right off the Pennsylvania Turnpike at Interstate 176, a great location that will give us access into the Western Philadelphia suburbs, into the Reading, Berks County area and we think it's going to be one where we're confident to open up with full 750 slot machines, which is the allowed amount -- maximum amount allowed by that category here in Pennsylvania and 30 table games with the opportunity to add 10 more table games 1 year post opening.

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Again, we think that's going to be a 2020 opening as well. And as I look at these 2 investments combined, slightly over $230 million, we feel very confident that these will generate north of a 15% cash-on-cash return, once these facilities get up and running..

Lastly, in the final piece of my remarks, I wanted to just touch on the combination of Penn and Pinnacle and the engine that will be delivered going forward generating significant amount of free cash flow, where we'll continue to have the ability to delever, and B.J.

is going to cover some of our leverage levels where we are today, but we want to stay focused and getting to a leverage level between 5 to 5.5x, rent-adjusted. It will also, with this free cash flow, give us the opportunity to look at tuck-in acquisitions like we announced with the Margaritaville deal in Bossier City, Louisiana.

And I want to remind the audience out there that we also have the ability, if we choose, to return capital to shareholders. We still have $75 million remaining on our share repurchase authorization to use free cash flow against as well. .

So as I think about, and as we've talked about before and why we put the 2 companies together with the $100 million of synergies, we have a lot of opportunity to continue to grow our company, return capital to shareholders and delever, which is something we're going to continue to focus on as we get into 2019. .

With that, I'll turn it over to Jay Snowden. .

Thanks, Tim. Good morning, everyone. Operationally, the third quarter was really a tale of 2 stories for us at Penn. We experienced some softness in Illinois and Mississippi due to the continued impact of VGTs as well as some elevated promotional activity within our competitive sets that we elected not to get involved in.

We believe this dynamic will be short-lived, but it did impact us in the third quarter, nonetheless, it's virtually all of our shortfall to EBITDA guidance was due to these 2 markets..

On the positive side, and there's plenty to share, same-store sales growth, when you exclude Mississippi and Illinois, came in at a low single digits across the rest of the combined portfolio and was very consistent with the last several quarters. .

Top and bottom lines streams continued throughout Ohio as well as all 3 of our properties in the West region. Charles Town ended the third quarter with momentum, as we launched retail sports betting in August. For the first full month of September, we saw sports betting handle of $7 million and over $1 million in sports betting win.

And perhaps even more encouraging, we experienced nearly 10% growth in both table games and poker year-over-year and introduced the property to thousands of new sports bettors for the first time..

And our company-wide property level margins in the third quarter, again, improved by over 100 basis points year-over-year, as we continue to find ways to operate smarter and more efficiently. Transitioning to our database results.

We, again, saw outsized gains in the high-end segment both in slots and table games driven by growth and visitation and spend per visit. .

Our unrated customer base also showed strength with growth in the low single digits in the third quarter. Offsetting these results was the lower-worth-rated segments where we continue to refine our marketing strategies in an effort to reduce or eliminate unprofitable promotional spend. .

And lastly, with regards to our integration work, all is positive in the first few weeks post-close. Our industry-best leaders on both sides continue to help us identify best practices and opportunities at the properties as well as at corporate. A lot more to share on our fourth quarter earnings call, but for now, we're off to a great start. .

With that, I'll turn it over to B.J. .

Thanks, Jay, and good morning. I'd like to start this morning by addressing a few key financial highlights of the quarter and present the revised 2018 financial guidance. At the close of the Pinnacle transaction, we funded our outstanding loan -- term loan commitments under our credit facility. .

In addition, we repriced our existing Term Loan B balance, which took effect upon the close of the transaction. As a result, we increased our Term Loan A by $430 million for a total balance of $708 million. And we increased our Term Loan B to a total balance of $1.13 billion, for a total variable debt commitment of $1.84 billion. .

Our master lease obligations are primarily fixed. So with our master lease obligations combined with our $400 million unsecured notes and the other fixed debt obligations, we equate to a variable debt-to-fixed-debt ratio of 22% to 78%.

Our percentage of variable debt rate will continue to decrease as we utilize our strong free cash flow to reduce our leverage. It's important to underscore that our lease obligations are not subject to the risk of rising interest rates, nor are they subject to the potential tax deductibility limitations associated with traditional borrowings. .

Further, commencing November 1, 2018, which is today, our legacy Penn master lease annual rent payments will decline by approximately $11.8 million due to the 5-year revenue reset, which is partially offset by a full escalator of $5.4 million due to the strong performance of our legacy Penn properties over this past lease year for a net annual benefit to the company of $6.4 million..

Our Pinnacle-amended master lease has revenue resets every 2 years with the next reset occurring in May 1, 2020. Subsequent to the Pinnacle transaction, we remain undrawn on our revolver with approximately $670 million of availability on the facility.

Our total leverage ratio post-transaction is consistent with our original expectations upon the announcement of the Pinnacle transaction. And we intend to return to our target leverage ratio of 5.0 to 5.5x EBITDAR within 12 to 18 months. .

Our current financial position allows us to remain opportunistic and looking for additional accretive acquisitions and/or returning capital share -- capital to our shareholders via our previously announced share repurchase program. .

Finally, I'd like to provide an update to our 2018 guidance to reflect the combined company post the Pinnacle transaction, where we recognize that there are many variables that impact the historical reporting of these numbers, such as the impact of the divested properties, the combined corporate structures and the mid-quarter close.

We really like to emphasize that the following guidance for the combined company is consistent with our projections for 2018 that we outlined in our S-4, which we reported subsequent to the announcement of the transaction. .

Consistent with past practices, we provide further guidance for 2019 during our Q4 earnings call in February. So our revised guidance and underlying assumptions are found on Pages 5 and 6 of the press release.

The guidance reflects estimated results for the entire quarter from the legacy Penn properties and the projective results for the previous Pinnacle properties or what we call our new Penn properties commencing on October 15. .

The revised revenue guidance for the full year is $3.582 billion, $1.149 billion occurring in the fourth quarter. Adjusted EBITDA -- EBITDAR of $1.038 billion with $318 million in the fourth quarter. And adjusted EBITDA after master lease payments of $501 million, $129 million in the fourth quarter. .

Our maintenance CapEx is expected approximately $107 million for the year. $52 million of that is expected in Q4, which does include the increment necessary for our new Penn properties.

Master lease rent payments, including the Penn master lease, the amended Pinnacle lease and the Meadows lease are forecasted to be $537 million, $190 million of which is incurred in Q4. As of 9/30/18, the Penn master lease rent coverage was 1.87. .

As I mentioned earlier, we'll benefit from an approximate net $6 million rent reduction after the 5-year revenue reset and any impact of the upcoming escalators. $1 million of the benefit will be realized in 2018. We have decreased our cash tax estimate for the year to $27 million.

Due to tax benefits associated with the transaction, we have decreased cash taxes in Q4 to approximately $4 million. .

Cash interest on the traditional debt has increased to $70 million, as a result of the incremental term loans, $19 million of which will be in the fourth quarter. Free cash flow generation for the year is estimated at $302 million and net free cash flow, after mandatory debt payments and severance, is expected to be $243 million.

Cash on hand, as of 9/30/18, was $244 million, and as usual, all of our debt covenants will be comfortably met. .

As a final note, I wanted to call everyone's attention to Page 15 of the press release to commencing with our year-end results, we will be changing our reporting segments. The details of our new reporting segments are outlined on Page 15 of the press release. And with that, I'll turn it back to Tim. .

Thank you, B.J. Hearing B.J. talk about the 5-year rent adjustment reminds me that today is the 5-year anniversary of the creation of GLPI and the splitting up of the OpCo and the real estate back in November 1, 2013, which just seems like yesterday to all of us. With that, operator, we're ready to take questions from the audience. .

[Operator Instructions] And our first question comes from the line of Steve Wieczynski with Stifel, Nicolaus. .

So Jay or Tim, I want to be sure we heard this correctly and that's, I guess, that we exclude essentially Illinois and Mississippi. The underlying trends in your business really have not changed at all and, in fact, remain pretty healthy.

Am I thinking about that the right way? And Jay, I know, you commented on the unrated play being, for the most part, pretty strong, but are there any markets out there, where you've seen that unrated play soften at all?.

Steve, sure, I'll take that. You heard me exactly right outside of Mississippi and Illinois, where there's some elevated competitive issues going on that, again, we didn't participate in, in the third quarter and don't plan to. We think, they'll die back down as they usually do in today's operating environment.

The rest of the portfolio looks very consistent with what we've seen over the last several quarters.

The only other exception to that, of course, as you saw in September, we were hit a little bit at Plainridge Park with people taking a look at the MGM property in Springfield and perhaps the Tiverton property in Rhode Island, but we've seen trends in October come back to close to normalized levels.

So we don't think that was the beginning of any new trend in Massachusetts. But the rest of the portfolio looks good. Visitation looks good on the unrated side. VIP trends look good.

The only softness that we're seeing in a lot of it is we're continuing to institute changes at the low-end rated segments that are dropping visitation a bit, but the visits that come in are more profitable. So that trend will likely continue. .

Okay. Got you. And then, Jay, you did talk about certain markets out there that have become overly promotional during the quarter. You guys didn't follow suit.

But, I guess, the question is have you guys lost some share in these markets, as certain operators did become more promotional? How much longer you think operators will remain somewhat rational around the promotional spending environment, if they do see others pick up share? I don't know if that -- I hope that makes sense. .

It does. Look, I mean, we're not -- and I think, most of our competitors are not going to chase monthly gross revenue numbers. It's just -- it's a race to the bottom. I think that's been proven out over the last few years. And so our publicly-traded competitors, I think, are focused on EBITDA and margins and that's certainly where our focus is.

Where we've seen some elevated spend is on the private ownership side, both in Mississippi as well as in Illinois, and so I don't think it'll last, because you might benefit for the first month or 2, but that incremental spend when same-store sales growth or organically low single digit, it's just not going to benefit your bottom line longer term.

So I don't anticipate that it's a beginning of any significant or troublesome trend. I think it's what happens every now and then in some of these markets. We're seeing it largely in Tunica, a little bit on the Gulf Coast and then in Chicagoland right now. .

Our next question comes from the line of Carlo Santarelli with Deutsche Bank. .

Tim, Jay, B.J, just big picture, as I think about your prior 4Q implied guidance for Penn. You guys were looking for about $215 million just backing into your full year with your 3Q guidance. If you think a little bit more about, kind of, the Pinnacle assets that you brought in probably generated somewhere around $45 million to $50 million last year.

You are obviously getting a stub period of those assets. So Pinnacle contributes a little bit more than $100 million, kind of, get you into a range of like $315 million to $320 million with your guidance at $318 million.

Acknowledging that, when you layer in the synergies that you've recognized so far, is there some conservatism in there? Or did the Penn and/or Pinnacle guidance for the 4Q implied to get to the $318 million that you're guiding to? Did either of those, kind of, projections come in a little bit?.

Good question, Carlo. There's a lot of factors as you just laid out in our fourth quarter guidance given all the variables that B.J. covered in his opening remarks.

We did include a little bit of conservatism in Illinois and Mississippi, continuing into the fourth quarter, just because we don't have complete control over the elevated spend that we're seeing right now. So that would be the only difference from where we were anticipating guidance previously on Penn standalone.

When you combine Pinnacle and Penn, our results for the year as well as for fourth quarter are very consistent with what we put out there in our S-4. So there's really no deviation to be concerned about. We're just, again, making sure that we're looking at Mississippi and Illinois the right way as we head into the final quarter of the year. .

Great. That's very helpful.

And then just, I don't know if you mentioned, I could've missed it in your prepared remarks, but did you comment at all about, kind of, what you're seeing in October? And if not, would you be able to shed any light on, kind of, how October has looked coming out of the 3Q?.

Yes, no problem, Carlo. I did not mention that. I probably should have. October looks very similar to third quarter and previous quarters and that Mississippi, Illinois, it's still a bit challenging at the moment. The rest of the portfolio looks good in same-store sales growth and healthy flow-through. .

Our next question comes from the line of Shaun Kelley with Bank of America. .

Just wanted to touch on, I think, in the release, you guys hit on the new Pennsylvania satellite casinos and the opportunity there. Could you just walk us through, whether it's B.J.

or Tim, a little bit of timing around both the CapEx and license fees that are going to go into those? And then just what the, kind of, general contribution and strategy behind those opportunities are?.

Shaun, let me take a shot at that. We have already paid to state of Pennsylvania the license fees for York and Morgantown. If you remember, York was paid in the beginning part of this year $50 million, in that neighborhood, and the Morgantown license was $7.5 million or so.

So that's already been paid and that's inclusive of the numbers that I gave in my introductory remarks of York being total CapEx of $120 million and Morgantown being a total CapEx of $111 million. It's really -- you're going to see most of the CapEx occur in '19 and '20.

It's difficult to be more specific than that until we get the required approvals to begin the construction work. .

Yes -- no -- I think, that's exactly right. We're going through the -- both with the local as well as the gaming commission's final approvals. The construction period for both will be between 12 to 18 months. And so as soon as we have that, we'll get proceeding and the spend will be a typical spend based upon that construction period. .

Great. And the other thing I just wanted to touch on a little bit was, sort of, competitive supply. As the portfolio continues to get bigger, it gets harder and harder to keep track of all of the puts and takes property-to-property.

I think, Jay, you called out the impact that you saw a little bit from, maybe trial over at MGM Springfield and Plainridge.

Anything else as you look out to 2019 and beyond, let's call it the Massachusetts market, where we know there's additional supply coming, that people should be focused on or looking out when they're, kind of, looking at underwriting the outlook?.

No. The only 2 factors that I would throw out there, Shaun, and we think long term, the additional hotel rooms and casino expansion of Monarch and Black Hawk is going to be terrific for us. We have the best asset in the marketplace. And I just don't know what that short-term impact is going to be when they open mid-2019.

So we'll obviously be staying close to that and -- look we've had the properties now for 2.5, 3 weeks. So we're still in a bit of learning mode and we'll be spending time at the Black Hawk property leaders here in the near future.

And then the only other factor to consider is there is going to be bridgework and I think, it's been well-documented, certainly, by the media and most of you that cover the space, on the bridge outside of Lake Charles. So that could impact the market, in general.

But again, long term, we feel terrific about where we can take the business over the coming years. But '19, there could be some impact with that bridgework. .

Our next question comes from the line of Harry Curtis with Nomura Instinet. .

Tim, you talked or prioritized about what your use of free cash flow would be beginning with deleverage, then tuck-ins, then perhaps returning capital. Wanted to focus on the acquisition side.

If you could, give us a sense of whether or not asking multiples have moved down at all to reflect the, at least, decline in public equity market valuations?.

You know, Harry that's a tough one to speculate on. We just saw today that Churchill Downs is buying majority interest in Rivers in Des Plaines, Illinois. And looking at the math that we saw out of the announcement, the multiple there was north of 11x. So based on today's news, I would say, just in short, the answer is no, not yet.

We haven't seen any change in multiple expectations given what's happened with the equity markets. .

So then thinking about maybe the next 18 months, as you integrate Pinnacle, do you have much of an appetite for larger acquisitions? And the reason I ask that is that you now have 40 properties, you have some exposure to Vegas, not a lot.

What is your -- I don't know, if there's the right way of asking it, but what's on your wish list and from a strategic point of view, as you think about growth for the next 3 years?.

Well, we certainly will take advantage of opportunities like we had in Margaritaville. If we get those kind of opportunities that make sense, that give us an expanded footprint beyond the 18 states, that's important to us.

But obviously with what we're building combining Penn and Pinnacle with our Las Vegas service center and the ability to have a cost structure, that's even going to be more efficient a year from now than it is today.

We think, we're going to be able to generate a lot of tangible synergies with acquisitions where we're plugging in another asset or 2 into our corporate center. So it's all about the return profile, the ability to get access to new and additional markets and what opportunities are out there and what are the sellers' expectations.

But like I said in my introductory comments, we're going to have -- we're going to be generating a lot of significant free cash flow to delever, to give us the opportunity to look at these acquisitions where it makes sense for our shareholders. And if we have an opportunity to return capital shareholders, we'll do that as well. .

Our next question comes from the line of Felicia Hendrix with Barclays. .

Just in Mississippi and Illinois, is there anything that you can do to mitigate the pressures? I know that you guys have an ongoing margin expansion program, but what can you do to, kind of, improve things there despite the competition?.

Sure, Felicia. Look, there's a number of things that we can and really test on a regular basis from a marketing standpoint. We're very focused on the mid-worth and high-worth segment. We're not going to chase low-worth-rated customers that are, perhaps, unprofitable if you get into a bit of a pricing war.

And so we're not going to do that, but there's a lot of things that we can do to drive unrated business that we're in the process of doing, driving more visitation from our -- again, our mid-worth and high-worth customers. Cost structure is fine. We just got to stabilize the revenues and that's our focus right now. .

Okay. That's helpful. And then now that you're starting to dig in, in Pinnacle and I know it's early days and I also know you guys are going to give us more color on your next quarter. But how are you thinking about things now versus how you underwrote? And I know what you said before like in terms of EBITDA and things like that, that's unchanged.

But I'm primarily thinking about what you anticipated you could get from revenue synergies before versus what you think you can get now that you can actually dig in and see things? And then also, if you could just remind us of how you're going to think about the combined loyalty program and the leverage that, that could give you?.

Yes, Felicia, I think, my answer goes -- will respond to both. I mean, the revenue synergies are largely database-driven, cross-property visitation, exposing the new Penn property database to our social product offerings and our Las Vegas destination properties. So we're, again, 2.5, 3 weeks in, so we continue to feel like we're getting better data.

We got full access, obviously, to the customer databases. We're starting to do a lot of comparisons and analysis. So we're just in the very, very early innings.

I don't want to start to speculate now when I think I'll have a much better handle come early February, when we're going through 2019 guidance, what those revenue synergy opportunities are, that'll be the right time to do it. But, look, we're going through property-by-property budget reviews.

We started them last week and for the next 3 weeks, and it's encouraging. Every review we go through something new is identified that we hadn't thought about previously, whether on the revenue side or on the cost side.

So we're feeling good, and I think that we'll be able to articulate what those are and be specific in our response to your questions come February. .

And I know there's a lot of complexities, particularly with systems, but how long do you think it will take for the loyalty program to be one?.

We're targeting sometime in the first half of 2019, Felicia. So a lot of it is just system integration. The markets that we're -- are most competitive, i.e., St. Louis, where we have 2 properties, 1 was an existing Penn property, one's a new Penn property, will be on the front-end of that schedule.

And then we anticipate having the entire company on one loyalty card program no later than midyear 2019. .

one is Tropicana, specifically, having there -- going there, but also just in Vegas, in general, both for, to, kind of, think about the fourth quarter and how you might be thinking about next year?.

Sure. I mean, we have some visibility into 2019 and what we're seeing, I think, was consistent with what I heard MGM say, which is that Q1 grew business. It's pacing ahead of 2018, which is a good sign. I think, people have a pretty good handle on what's going to come in the fourth quarter. Obviously, we're lapping the tragic events of October 1, 2017.

So our trends, right now in Las Vegas, are very good both top line, bottom line margins are terrific. We've got some initiatives that are really starting take hold at Tropicana and M Resort and you see the locals results that are reported monthly is very healthy. We wish we were in the locals market in a bigger way in Las Vegas.

M Resort's been a terrific earner for us and more to come on potential expansion ideas there. But overall, we're feeling positive about Vegas heading into the new year. .

Our next question comes from the line of Joe Greff with JP Morgan. .

Jay, I think, you may have answered this, but you said in your earlier comments about the dynamics in Illinois and Mississippi, that you think it'd be short-lived. And I think, then you mentioned October, seeing similar trends there.

So are you seeing any change in activity there? Or is that due to surmising that uneconomic activity at some point will cease?.

I think the latter. We're still seeing it. It's there in October, but we can't predict what's going to happen in the coming months. But there's typically promotional flare-ups. It's -- again, it's nothing broad-based. It's specific to 1 operator on the Gulf Coast. Again, this is within our competitive set.

One operator in Tunica, Mississippi and 1 or 2 in Chicagoland. So this is not, everybody in the marketplace and I don't see everybody, quite frankly, jumping in or responding either, as we've taken a disciplined approach. I think, others, certainly on the publicly-traded side, have done the same from what we can see in our competitive shots.

So again, we've built-in a little bit of conservatism in those markets in Q4, because I can't predict exactly how this will play out, but I don't anticipate it being long term. .

Got it.

And so what's implied in the 4Q is a similar impact that you experienced in the 3Q?.

That's correct. .

Got it.

And then -- so when I look at your earnings release today and I look at the EBITDA variance relative to your guidance of $6.393 million, that's entirely related to Illinois and Mississippi?.

It's over 90% with the balance really being Plainridge having a soft September due to the visitation I mentioned earlier to MGM, Springfield and Tiverton. .

Our next question comes from the line of David Katz with Jefferies. .

Now that the Pinnacle deal is closed, I think, one of the MOs of Penn has typically been a decentralized structure. But my sense is that, that's moving or drifting in the other direction. With other branded companies, let's say, arguably being, maybe the ones that you've worked for before, being the most centralized.

How are you thinking about that spectrum? And where you want to put this to capture as much synergy as you can and derive as much benefit from the bigger system?.

It's a great question, David, and my short answer is it's all about balance. And we have -- many of us have lived through companies that have gone really far on that end of the centralization spectrum, and we're trying to strike the right balance.

We think that Pinnacle did a lot of things really well as an organization, of which we were headed down that path on the Penn side and hit pause once the deal was announced, because we didn't want to create redundancies in Wyomissing along with the Las Vegas service center.

So we really view it as where we want the properties to maintain their edge from a marketing and a competitive perspective. So we're not looking to go as far as some companies have where you're making strategic marketing-based competitive decisions out of one location, call it, Las Vegas or Pennsylvania. We want to maintain that edge.

It's made us who we are as a company. We're a leader in most of the markets where we operate.

So we're going to maintain that balance, but we will be taking a lot of cost out of, quite frankly, the Penn National Gaming existing properties by the fact that we can do a lot better by leveraging our size, our scale, our purchasing power and a lot of areas in finance and marketing and IT that need to be centralized, and we're in the process of doing that.

So we'll strike that right balance. We've got -- properties are incentivized on their property level results. And so they've got to maintain a significant level of autonomy to be able to deliver against that, and we don't see ourselves drifting from that model now or in the future. .

David, this is Tim. Our message to property management is that they're responsible and accountable for their property level performance. So they have to be the ones making the decisions how they compete in their local markets.

We're not going to do that centrally, but with things that don't touch the customer or don't engage the team members that really are just administrative tasks like payroll and accounts payable, those are things that we are looking to centralize and reduce our overall cost to delivery for those administrative tasks.

And that's how we think about how far we want to push centralization versus autonomy. .

If I can follow that up and just be a bit more pointed about it, the bigger you get, the more -- does that necessarily mean the more centralized you have to become?.

I don't think so, David. I think, it's really more about the functions and the activities than the size of the company. That -- again, the model that we have in place today that Tim and I both just described, we're going to keep that in place.

We think we can best compete in each one of these markets by allowing the local property leaders to have the decision rights that allow them to compete.

And so that's not going to change, but everywhere and anywhere where we can take tasks or duties away that are, again, not touching the customer or more administrative in nature, we're going to look to do that now and forever. .

Our next question comes from the line of Barry Jonas with SunTrust. .

Just a couple. Maybe I missed this, but can you maybe comment on how sports betting has played into the Mississippi results so far.

And then just relating to Pennsylvania, how do you see sports and iGaming economics playing out, given the tax rate and fees?.

Sure. No problem at all. Look, I articulated what our results are at Charles Town, which have been very encouraging. Again, the dynamic at Charles Town is that we offer retail sports betting on the Eastern Panhandle and sports betting is not legal at this point in Virginia or Maryland. So we've seen some great results in Charles Town.

And as solid as our September results were of $7 million in handle, we're seeing that in October it's up about another 20%. So very encouraging on the sports handle side for -- and related activity at Charles Town. Our Mississippi properties are pretty small properties. So we've seen some incremental foot traffic.

We are seeing some activity on the sports betting side. But in Biloxi and Tunica, we have not seen the same improvements to the other side of -- other pieces of business that we're experiencing at Charles Town. That was to be expected. We weren't expecting anything significant given the size of the properties we have in Mississippi.

But it's definitely a net positive from a traffic flow perspective. And then with regards to Pennsylvania, and we said this publicly yesterday, that we're looking to go live with retail sports betting some time mid-to-late November.

We're just waiting on final approvals for both us and our operating partner, William Hill, from the regulators and will be live in taking bets before December. And with regards to online commercial gaming, we're still anticipating an early Q1 launch. I think, the tax rates are well known.

They're the highest both in sports betting and online commercial in Pennsylvania than any other state at this point and hopefully, it stays that way that no other states are competing with Pennsylvania at these tax rate levels. But we're going to be smart. We're going to be disciplined. And we're going to operate these businesses to make money. .

Okay, great. And then just one more. Clearly, VGTs are impacting Illinois.

But maybe on the flip side, can you talk about the outlook for Prairie State Gaming in Illinois and maybe any other new jurisdictions?.

Yes, I mean, I'll speak to Illinois, because we're not seeing anything in the near future in other jurisdictions. Our Prairie State Gaming business is doing great. It's growing at or ahead of the VGT market in Illinois. Our team, led by John Canham there, continues to do a great job. We've had some small tuck-in acquisitions over the last several years.

And on a standalone basis, it's great. It's just that, obviously, the riverboat casinos have seen their market share or their overall market decline by over 20% since the advent and introduction of VGTs.

And there's just -- they're nipping at the heels of the properties depending on who your competitive mix is and I don't see that going away other than we do see the VGT approval starting to slow down finally in Illinois. So good on the one hand with Prairie State and challenging on the other hand with our 3 riverboat casinos there. .

And, Barry, this is Tim. We will get involved where we can in the Pennsylvania truck stop opportunity for VGTs to continue to expand our footprint into that platform as well. Although, it's going to be on a much smaller scale in Pennsylvania when that kicks off. .

Our next question comes from the line of John DeCree with Union Gaming Group. .

Just one for me. Jay, I think, in response to a question, you've talked about maybe one of the revenue synergy opportunities is getting the Pinnacle player database up onto your social gaming network, and we think about your footprint now across the U.S. being much larger.

What's the strategy for, maybe, social gaming interactive iGaming at a high level? Is that an opportunity where you'd look for more growth or tuck-in acquisitions? I guess, more broadly, how do you think about, with a bigger network, your approach to the online space?.

John, this is Tim. I'll take that. Clearly, we're going to take advantage of the, potentially, up to 2 million additional players we're getting with the Pinnacle properties that we're absorbing today.

I think, longer term, we're taking a very broad look at the fact that we have expansion of sports betting that we think's going to occur in 25 to 30 states in the next 5 to 7 years.

It's potential with and its relationship with iGaming and how do we think about taking advantage of the right partners and the right players to take advantage of this across the United States. We're talking to people, honestly, that I never thought we'd talk to before, large media companies, potential B2C partners.

And we're taking a pause to see where the best long-term players for Penn National that includes iGaming with sports betting. So that's how we're thinking about it.

We've seen other competitors in our space already announce who they're making their deals with, and we want to make sure we get it right long term and don't feel pressed that we have to be up and running for this football season.

But I think, you'll see in the next couple of quarters, we'll finalize our strategic thoughts on this opportunity and articulate it to The Street when we're ready. .

And the only other point I would add on the social business is we said from day 1 and it's continued to play out since the acquisition of Rocket Speed that this was a great opportunity for us not only to generate cash flow in the short term, but to prepare us for real money online gaming.

And we have a team in place, 3 locations across the country, we have CRM teams, we have acquisition teams. And we've learned a lot. I mean, obviously -- and play-for-fun is different than play-for-cash, but there's a lot of similarities.

And we feel as though we're in a good place in preparation for going live in Pennsylvania in the first quarter, and we'll be prepared for any other jurisdiction where we operate today. .

And our final question comes from line of Chad Beynon with Macquarie. .

Regarding the synergies before today, I think, we're all thinking about $50 million of the $100 million in year 1, $50 million in year 2.

So given that you noted that $30 million will be implemented by the end of the fourth quarter, should that change how we're thinking about the weighting of the $100 million year 1 versus year 2?.

Chad, I -- for now, I would say -- I would keep your models with $50 million and $50 million. Obviously, you're going to get out a lot of it day 1 just because you've eliminated the redundancies between our 2 corporate offices. But -- and some of these take a little bit of time for system integration purposes.

You have to get your resources in place at the property level before you bring something on to corporate and vice versa.

So I wouldn't change your modeling at this point, and we'll have certainly more color for you in early February when we cover 2019 guidance in terms of not just the cost synergy, sequencing and cadence, but also how we're feeling about revenue synergies. .

Okay thanks Jay. And on that note, just for the fourth quarter guidance, I know you went into some details on this and said it's, kind of, right on schedule with what was outlined in the S-4.

Is there some additional corporate carrying cost that went into the fourth quarter that may have brought that down by a couple of million? Or is that not fair to assume?.

No. .

No, no. The -- I think we're -- our corporate expenses were consistent with what we had and with their -- we've got the corporate allocations that were included in there. So I think it's relatively consistent with what we had on the S-4. .

Okay. And then the last one for me, B.J., depreciation, we see that it -- your guidance for the fourth quarter went up to $66 million.

If we adjust that for the full quarter with Pinnacle, is that, kind of, a fair number to assume for 2019, just as we think about free cash flow for next year? I know, you're not giving guidance, but just now that we have the stub depreciation for 4Q any color there would be helpful. .

No. Sorry, Chad, with -- let us get back to you with respect to the depreciation expectations for '19. I think that we're very comfortable with what we've laid out for the Q4 here. But for '19, let us come back and provide that full guidance for you at that time. .

And Mr. Wilmott, I'll turn the call back to you. Please continue with your closing remarks. .

Thank you, operator. I want to thank everyone for their attention this morning to our earnings conference call and look forward to when we're back together in early February to give you an update on the integration work we're in the midst of right now in putting Penn and Pinnacle together, along with what that means for 2019 guidance.

Everyone, have a good holidays and we'll be back in touch in about 90 days. Thanks. .

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..