Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming Fourth 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, Velina. Good morning, everyone, and thank you for joining Penn National Gaming's 2018 Fourth Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll read the safe harbor disclosure.

In addition to historical facts or statements of current conditions, 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 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 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 measure 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 Penn National's Fourth Quarter 2018 Conference Call. After I give my introductory comments, I'm going to turn it over to Jay Snowden to give a little bit more detail about our operational results and then over to B. J. Fair to talk a little bit about 2019 guidance and some financial statistics as well.

But as I reflect back on the fourth quarter of 2018, I clearly believe it's transformational for the shareholders of Penn, our team members and our customers.

If you look back on what happened with the closing of the Pinnacle transaction and us assuming ownership of 12 new gaming properties and over 10,000 new team members, and then that was followed by the announcement that we intend to acquire the operating asset at Greektown in Detroit.

And we also received, Louisiana, an FTC approval to acquire the operations of Margaritaville in Bossier City. Certainly, as we think about the end of 2019 from where we are today, our company is going to be radically and positively different than it is before we started the fourth quarter of 2018..

I do want to touch on the operating results for the fourth quarter. Jay will go into more detail on it, and it includes approximately 75 days of the Pinnacle properties and the full quarter for Penn. We delivered adjusted EBITDAR of about $324 million, which was a -- beats the guidance of about $5.5 million.

And the Penn legacy properties realized year-over-year EBITDAR growth of just under 6%. I have to commend our operations for this terrific flow through. Our adjusted EBITDAR margins were up over 200 basis points.

If you look at the same-store Penn legacy properties, our margins were up 150 basis points, and 17 out of 23 casinos for the Penn legacy properties improved year-over-year margins. We provided, again, an update on the Pinnacle integration, and we're still very, very confident on the $100 million of cost synergies.

And again to reiterate, we see $50 million run rate being realized in 2019 and the other $50 million in 2020. We have announced that we have quantified the revenue synergies, which Jay is going to provide a little bit more color on, of a range of $15 million to $20 million in EBITDA starting late in 2019, but mostly being realized in 2020 and 2021.

And in the fourth quarter due to the Pinnacle transaction, we had about $78 million of transaction costs closing that deal, and we expect that number to diminish as we progress through the quarters of 2019..

Turning over to development. I mentioned at the outset that we received all the regulatory approvals that we needed. And right at the beginning of 2019, we closed on the Margaritaville property in Bossier City, Louisiana. Our purchase price for those operating assets was $115 million. We welcome approximately 1,000 new team members to the Penn team.

If you look at that performance of that business, the purchase multiple for trailing 12 months was about 5x. And we expect with synergies realized, operating that business under the Penn banner, that the purchase multiple will go below 4.5x.

And this is the first property that we have in partnership with VICI properties as our landlord with a triple net lease arrangement..

And then as I mentioned in November, we announced our intent to purchase the operating assets of Greektown in Detroit for $300 million. We really like the Detroit market. It's very stable. We've been very, very impressed with the renaissance of what's going on in Downtown Detroit and how the area has improved dramatically over the last 10 years.

I'm pleased to report that we've cleared FTC review of that transaction, and we're working closely now with the Michigan regulators and we anticipate a second quarter 2019 close. And this will be our second deal with VICI properties as our landlord.

And as we announced in November, we expect the purchase multiple post synergies to be about 6.3x, again post synergies..

I also want to highlight the development in Pennsylvania with our Category 4 licenses, the 2 new Hollywood casinos that are under development. We still are securing the necessary permits to begin construction.

To remind everyone, we have, inclusive of the licensees, $120 million development in York, Pennsylvania, and a $111 million development in Morgantown. We expect to begin construction of both those sometime later this year.

And we expect the opening of York to occur sometime in the first half of 2020, and in Morgantown more like the mid-year 2020, again all subject to getting the necessary approvals that we're working on today..

I also want to highlight in the fourth quarter, our use of free cash flow. We did announce in our release today that we repurchased about $50 million of Penn shares at an average price of $21.74. We did previously announce that our board approved a new share repurchase program up to $200 million that runs to year-end 2020.

We ended the year of gross leverage, inclusive of rent, of 6.1x, which we will, over the next 4, 5, 6 quarters, continue to delever with our use of our free cash flow this year and next. But, I think, the quarter itself showed our flexibility and now our ability to generate a lot of free cash flow.

If we see, it's the right opportunity to return capital to shareholders. We've done so. We will continue to delever and we have -- if we have the right opportunistic accretive acquisitions, like we did with the Greektown deal in Detroit, we have that flexibility as well..

With that, I'd now like to turn it over to Jay Snowden to give a little bit more detail on what we saw in operations in the fourth quarter. .

Thanks, Tim. Good morning to everyone on the call. We're obviously really pleased with our fourth quarter operating results as a new combined company, as we exceeded guidance in both revenues and EBITDA, as Tim mentioned.

Same-store sales growth of over 2% at the legacy Penn properties was on top of 2% same-store sales growth for those same properties in Q4 of '17, marking our best quarterly 2-year stack in over 5 years.

Same-store EBITDA growth of 5.9% at the Penn legacy properties was realized due to nearly 100% flow through at the property level on incremental revenue same-store margin improvement initiatives.

Looking more broadly at the total portfolio, we had stellar year-over-year results in Ohio, Massachusetts, Missouri, Charlestown and the entire West region, including the legacy Pinnacle properties in Nevada and Colorado.

Those year-over-year results were somewhat offset by the smoking ban impact in Baton Rouge, I-10 road work that negatively impacted L’Auberge Lake Charles in December and some continued elevated promotional noise in parts of Mississippi.

That said, the heightened promotional activity from the competition in Illinois was short-lived in Q3 and the environment in Q4 was much more rational and typical for that marketplace..

Now turning to the database. We posted some of our best results both in terms of visitation and spend per visit with our VIP and unrated segments that we've experienced in years. We also saw improved results year-over-year with the mid- and low-worth segments in Q4 versus what we experienced in the third quarter.

It's worth noting that the database trends I just detailed, though not exactly same, were directionally similar at both legacy Penn and Pinnacle properties in the fourth quarter..

Transitioning to integration and synergy activities. As mentioned on previous calls, we are targeting $50 million in run-rate cost synergies in '19 and another $50 million in 2020.

We are encouraged by the progress that has been made over the last 4 months and the energy and enthusiasm with which our leaders at Penn are approaching each and every opportunity.

Most of the corporate initiatives are either in place or soon to be in place at this point, and the primary focus for the remainder of the year is executing our cost synergy plans at the property level. We are well on track to deliver on the $50 million of run rate synergies in '19, and we'll provide regular updates throughout the year..

As you read in the release this morning, we also, for the first time, provided a range of incremental EBITDA via revenue synergy opportunities. And to be clear, these revenue synergies are not built into our '19 guidance as we anticipate, as Tim mentioned. They're mostly being realized in '20 and early '21.

The reason behind the timing is largely due to the fact that we will be completely merging our databases and loyalty programs mid-year. Once combined, we will commence a number of initiatives to optimize best practices, drive cross-property visitation and leverage the company's size, scale and distribution..

Moving to 2019, as is typical in the first quarter for our gaming company as geographically diverse as Penn, results year-to-date have been a mixed bag. The Midwest region and much of the Northeast region has been plagued with snowfall and record cold weather.

As an example, we had 15 snow-impacted days in Chicago land in January of this year versus only 4 in 2018. The Illinois numbers came out this morning and the market was down 10%. So the early results have, obviously, been challenging there.

Conversely, the South and West regions had been largely unaffected by weather to date, and the results have been better than we anticipated which is encouraging, and we think speaks to the financial health of the consumer. Macroeconomic indicators remain strong.

And based on the visibility we have today, we are optimistic these trends will carry throughout 2019..

With that, I'll turn it over to B. J. to walk you through 2019 guidance. .

Thanks, Jay, and good morning, everyone. I'd like to start by presenting our 2019 guidance. As a couple of reminders, our guidance does not include any provision or assumptions for the projected Greektown closing. We've also not included any provision in 2019 for the projected revenue synergies that were discussed by Jay and Tim earlier.

In addition, we are modeling the nonrecurring impacts of the bridge construction in Lake Charles and the Monarch expansion opening in Black Hawk. The 2019 guidance and underlying assumptions are found on Pages 5 and 6 of the press release.

We provided detailed line item guidance for both the full year and the first quarter in the release, so I will not reiterate all of the detail here. But on a high level, our revenue guidance for the full year is $5.208 billion. Our adjusted EBITDAR is $1.541 billion. And our adjusted EBITDA after all lease payments is $702 million.

The lease payments, including the Penn master lease, the amended Pinnacle lease, the Meadows lease and the Margaritaville lease are all forecasted to be $839 million. We do expect to incur full escalation for each of the leases at the anniversary of their respective lease years.

Free cash flow generation for the year is estimated at $371 million, and net free cash flow after mandatory debt payments and other obligations is expected to be $302 million. Cash taxes and cash interests are identified in the release.

And for clarification, our $188 million of maintenance CapEx guidance includes $20 million of Pinnacle integration capital which we've discussed earlier, over $10 million of carryover capital from prior year projects and includes the Margaritaville capital. Cash on hand as of 12/31/18 was $480 million.

And I want to point out that this cash balance includes $100 million of funds drawn on a revolver on December 31, 2018, for the Margaritaville transaction, which closed on January 2, 2019. So after accounting for the Margaritaville transaction, our lease adjusted gross and net leverage ratios as of 12/31/18 were 6.12 and 5.87, respectively.

This level is consistent with our projections, and we are on pace to return to our target leverage ratios of 5.0 to 5.5x EBITDAR within 12 to 18 months. And as always, all of our debt covenants are comfortably met..

So just a few other items. On Pages 13 to 16 of the press release, we provided historical quarterly operating results for our operating segments that include the results of the acquired Pinnacle properties for the quarters ending December 31, 2017, and forward.

A number of assumptions were made regarding corporate expenses allocated to the divested properties as well. While on a historical basis, there are some differences between the property allocation policies between Penn and Pinnacle.

The numbers included in the release reflect a consistent treatment of the historical results to the current accounting treatment, and most importantly to our guidance..

So finally, I want to touch on our share repurchases for the quarter. As Tim mentioned, during the quarter, we repurchased 2.3 million shares at an average price of $21.74 for a total of approximately $50 million. A previous $100 million repurchase authorization has expired. We repurchased a total of 3.6 million shares total under that authorization.

And our board has authorized a new 2-year $200 million repurchase authorization that will be in effect until 2020..

And with that, I will turn it over to Tim. .

Thank you, B. J. Operator, now we're ready to take questions on this call. .

[Operator Instructions] And our first question comes from the line of Felicia Hendrix of Berkeley. .

I just wanted to talk for a moment about your guidance for the full year. And I was just wondering if you could help us understand how you're thinking about the cadence of the quarters.

So if we take your guidance for the first quarter and the full year, the rest of the year on a quarterly basis, if you even it out, it'd be lower than first quarter, and I'm assuming that represents the acceleration of the bridge construction and the Monarch expansion, which is going to open in the second quarter, so it make sense for the rest of the year.

But can you just help us understand the cadence, for example, like would fourth quarter be higher than the second and the third quarter, that sort of color would be helpful?.

Felicia, we typically provide guidance by quarter as we go through the year. There's a lot of moving parts as you can imagine. We feel like we have a good handle on Q1 based on what we're seeing in the business today. But to give you much detail beyond that for the out-quarters is difficult at this stage.

I'd rather just stick the conversation around full year guidance. Q1, happy to answer any question about timing, to when things happen, but to lay out exactly what our guidance is going to be at this stage, I think it's premature. And then typically... .

Well, I'm not really -- sorry, I'm just not really -- okay, sure. .

Well, let me try and give you a little bit more color, Felicia. Typically, now we've got factors like the bridge in Lake Charles and the expansion up in Colorado, but typically there's not a lot of seasonality in our business.

Means that you can say that the first quarter and third quarter are little bit slightly better than Q2 and Q4, but it's -- there's not a lot of seasonality in our business.

I think the more important thing for us is the things that we know will impact the flow of customer traffic in our businesses and the changes either to the infrastructure of ingress, regress or the introduction of new supply. But it's a very stable business quarter-to-quarter, typically.

Not a lot of variability, like you see in certain markets like Atlantic City, which is -- or Lake Tahoe, which is driven by mostly in the third quarter. .

Okay. And -- I'm probably going to bat zero for 2 now.

But is there any way that you can call out the impact from the 2 items in the year? I guess, what I'm trying to get at is, would've your guidance been better than consensus expectations if it weren't for those headwinds?.

I would venture to say, Felicia, that we're probably taking a little bit more of a conservative approach on those 2 onetime impacts because we just don't know what the impact is going to be, and we've spent a lot of time with the property teams trying to assess.

And quite frankly, we've underestimated impacts from competition and overestimated over the years. And we're taking our best guess, it's an educated guess, but it might be a bit more conservative than maybe what you've modeled because we'd rather underpromise overdeliver, if we can. .

Okay. Great. And just finally, just as I'm thinking about your margin improvement program for the legacy properties, and I know things have changed.

But just wondering when you look at that and you think about that, how much is left in the cost savings program? And maybe how -- if you could talk a little bit about how that plan has changed since you first announced it? And then can you also help us understand some of the learnings you've had so far from Pinnacle that could benefit the Penn properties and vice versa?.

Yes, I'll tackle the second one first because we're living it every day. There've been so many learnings over the last several months. We had a good idea pre-close as to what the opportunities would be. But a number of ideas and initiatives that we're now pursuing in earnest has expanded, probably twofold from what it was pre-close.

Some of the things that Pinnacle legacy properties, I think, have done better than the Penn properties have done is a real focus on the high-end table game customers, did a much better job at moving their customers around the network.

Obviously, they didn't have a Vegas location, but they've got some real destination properties in Colorado, Louisiana and the like. And so there's a lot of opportunity, I think, on the revenue synergy side to take best practices from those Pinnacle legacy properties and apply them to the Penn properties.

And then I think on the other side, the Penn properties certainly have, if you look at the property level margins, operated more efficiently, and so there's a lot of sharing of best practices at the property level. And those are things that we're continuing to bake into our plan throughout the year.

We're bringing the teams together and sharing a lot of ideas. So those are at a high level, I would say, are probably the biggest findings early on and ideas that are moving in both directions. .

And I think from a margin improvement plan, I think, we -- for our legacy Penn properties, we continue to be on the same plan, really nothing has changed with respect to what that program was and how we were implementing that out at the individual property level.

So I think that's consistent with -- on those individual legacy properties with what we originally laid out. .

If you look, Felicia, even more specifically -- and I agree with all of B. J.'s points there. If you look at what we have laid out at the end of '17 in terms of what the margin improvement opportunities would be and you looked out into 2019, we thought we could get our Penn legacy margins to that sort of 29.5% range.

And given the quarter we just had and the flow through we experienced at the Penn legacy properties, and what we still have in store for the Penn legacy properties in margin improvement initiatives, I think we probably would be touching closer to 30%.

But again there's a lot of moving parts because we're now at the point where we're sharing margin improvement ideas between Pinnacle legacy properties and Penn legacy properties. Synergies impact not just the Pinnacle legacy properties, but also the Penn legacy properties. So there's a lot of moving parts.

But I think you'll see that based on the guidance we're providing for '19, margins are moving in the right direction quickly, and we think that will carry forward into '20 and '21 as well. .

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

My first question touches on the expansion in Pennsylvania. There is some concern that the spending is defensive, but it sounds to me like you're thinking more positively about the accretion potential for these casinos.

Can you just give us a sense of why they're really additive and ROIC positive after you back out any cannibalization?.

Yes, Harry, this is Tim.

I mentioned, I think, on the last call that as we look at the developments in York and in Morgantown, especially Morgantown, which we think will be even more offensive, and look at the $230 million of capital we're going to spend there inclusive all the license fees, we expect inclusive of any cannibalization at Penn National that we're going to deliver north of 15% cash-on-cash return on those investments when they come online in 2020.

So we feel very comfortable that these are going to be good solid investments for us, and obviously are mindful of the effect it's going to have on Penn National outside of Hershey Harrisburg, but we are absolutely confident it's going to be accretive to our shareholders. .

And while we're on the topic, you've made some significant acquisitions over the past 12 months.

Can you talk about the M&A environment today, and whether or not there are regions that you really would like exposure in that you don't have at the moment? And then lastly, what -- whether or not the sellers are rational?.

Well, sellers are never rational from a buyer standpoint, Harry. There is, obviously, a couple of markets where we don't have a presence, and they're getting fewer and fewer.

I would say, and I was going to cover this in my concluding remarks, that we've got a lot on our plate now to digest with the 14 properties that we are -- we have acquired or will acquire.

So our focus right now at Penn over the next couple quarters is to integrate these businesses and realize the synergies we've committed to our shareholders to deliver. There, obviously, are other things out there that we're going to look at, but I would characterize right now our focus is more internal than external.

And these things change quickly and there's always opportunities to take advantage of. But I wouldn't say that we're actively looking at things right now, but, I think, we need to let a little bit more time go on before we start to determine what's next.

But that said, you never know how these things -- how these opportunities present themselves, and you always have to be prepared to take a look at opportunities to grow your company. .

Of our next question comes from the line of Joe Greff of JPMorgan. .

I have 2 questions with respect to 2019 outlook and maybe some of the broader underlying assumptions therein. Obviously, you highlighted Lake Charles and Black Hawk as having issues at some point during this year and Mississippi is still sort of elevated in terms of promotions.

So if you exclude those 3 properties, can you talk about how you're thinking about the rest of the portfolio's same-store revenue and same-store EBITDA growth?.

Sure thing, Joe. We're anticipating when you exclude the onetime impacts in Lake Charles and Black Hawk and, again, the noise in Mississippi, though still present, is not as significant -- was not as significant in the fourth quarter as what we saw in the third quarter. So it's moving in the right direction.

We built into our modeling from a same-store sales perspective low single digit, less than we saw in Q4.

And that's -- we want to make sure that we've got goals out there that take into account the number of different markets that we operate in, obviously much higher than that for the Ohios of the world, but lower than that in some of the other markets that are more challenged like Illinois. But it shakes out to be a low single digit number.

And you can take from there what our assumption is on EBITDA growth, obviously higher than the revenue growth percentage as we continue to drive margins throughout 2019. .

Great.

And then if we exclude those 3 properties, how do you think Penn legacy versus the newly acquired properties? Which would have higher growth?.

Well -- I am sorry, about that, Joe. I would say the newer properties would have higher growth by virtue of continuing to improve margins at the property level.

As we've articulated on previous calls, when you look at the tax adjusted margins, and really comes through when you exclude Nevada which is really a different business model altogether at Tropicana and even at M Resort, much more non-gaming focus.

So if you exclude Nevada properties, there's a property level margin differential of 400-plus basis points. And so we're going to continue to close that gap, which is why you'll see more improvement coming from the Pinnacle legacy than you will the Penn legacy properties. .

And that's reflected in our synergy assumptions. .

Excellent. And then maybe one final question, it's a little bit backward looking. But when you look back at all the regional markets in December, I mean, and characterize – how ever you want to characterize some of the regional markets, in December they were pretty strong.

When you parse through the -- I don't know, the daily or the weekly numbers, how much of it was customer behavior acting differently versus calendar and year-to-date?.

Here's how I would answer that one, Joe, because we've spent a lot of time looking at the same dynamic. I mean, December was a really, really strong month. And it was really focused on strength the last 10 days.

It's just tremendous pent-up demand partly because weather earlier in the month was not good and then the calendar orientation was very favorable in terms of where Christmas landed and where New Year's Day and New Year's eve landed.

But I think, you have to take a look as you go into 2019, it's why I laid it out in my prepared comments, where weather has not been an issue. We have enough properties now that we can take a look at weather impacted versus nonweather impacted.

And the properties we have in the South and the West, which have not been impacted by the bad weather in Q1, the trends have been really good, very much a continuation of what we saw in December and some of the other better months in 2018.

So hard to say what that all means because there's a lot of noise in our numbers in the Midwest and Northeast properties due to weather; South and West, there's been no weather issues maybe -- versus maybe a little bit last year.

But we're encouraged by what we're seeing in terms of not just spend per visit, but also visitation so far this year in those 2 regions that have been unaffected. So I, think that's the best way to look at it. Again, we'll have more information as the year tracks on. .

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

Just 2 fairly small ones. Thanks for all the breakouts on the kind of cash and free cash flow bridge in detail. Just, I did want to clarify 2 things. One, you guys have given, I believe, in the guidance for cash interest expense on traditional debt of about $126 million. You said $38.5 in the first quarter.

So just trying to reconcile those 2 numbers, given -- is there timing of a bond payment or something that would drive that not being a little bit more stable as we move through the year?.

No. We do have a mandatory redemption period -- redemption times that we have. And so if you look in the first quarter and the third quarter, you'll probably see a little bit higher, but other than that, it's pretty consistent with our prior. .

Okay. Thanks for that B. J. And then the other question I had was just, you also gave a little color on cash taxes, which is helpful, given all the moving pieces below the line.

Any thoughts on sort of either how that would look in 2020 or how it may -- or cash tax rate, how it may look on more a stabilized basis as we move through integration costs and remaining acquisitions and the like?.

We did have some benefit as a result of the Pinnacle transaction. But in 2020, we'll probably be a little bit higher. And I think that we've kind of talked previously about what that stabilized level would be. So I think that we're not providing anything on 2020 right now.

But the previous level that we had provided guidance for of this last year, I think, was probably the right level to be looking at from a cash tax perspective. .

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

On the third quarter call, I think, you guys mentioned that you expected to be kind of at a $30 million run rate for Pinnacle synergies at year-end.

Could you kind of give us a little bit of an update as to maybe where you are or where you finished at year-end or where you are kind of now in terms of the annual synergy run rate?.

Sure thing, Carlo. So yes, we mentioned that on the -- as you detail on the third quarter call, the $30 million is -- most of that was pretty immediate. You're eliminating the redundancies between corporate legacy Pinnacle and corporate legacy Penn. The other $70 million takes a little bit longer to get at obviously.

So we kind of entered the new year with $30 million in the bank in terms of run rate. And that $30 million will grow to $50 million between now and the end of the year, and we hope that that's conservative, but that's sort of how we're thinking about it now.

There's quite a bit that takes place in the first quarter as we round out most of our corporate initiatives. And then at the property level, there's a number of things we're working on that just take a little bit of time. We want to make sure we're thoughtful around changes that we're making before we fully implement.

So we're testing a number of things right now across the organization. So you'll see more of those property level cost synergies, they'll be realized more mid-year and toward the latter half of the year. .

But we did hit the $30 million mark that we had previously communicated and probably maybe beat it by a little bit. .

Got it. Great. And then Jay, you kind of alluded to this earlier, I think it was in response to another question. But you talked a little bit about, I think, that the gaming tax adjusted margins, where you guys -- kind of legacy Penn relative to legacy Pinnacle, you guys were roughly 400 basis points north of kind of their gaming tax adjusted margins.

Structurally, is there much in the way of the Pinnacle assets and/or the gaming floor mix that makes kind of the complete bridge of that gap difficult or more challenging or, frankly, maybe it's not necessarily possible if the properties continue to be ran in a similar fashion to what they were -- how they were being run before?.

It's a great question, Carlo. We've spent a lot of time looking at that. And sitting here today, I don't know the answer completely. I will tell you that what we have assumed in our $100 million of cost synergies and the percentage of that -- or the portion of that, that comes from the properties, we assume that we'd be able to close that gap by 50%.

So we feel, as though, that's doable. As we sit here today, I'd like to believe that we could do better than that. But yes, there are some -- not everywhere, but some of the properties, there are some structural issues, more of a resort property, more hotel rooms, that would impact the margins between Penn legacy and Pinnacle legacy.

But I think we played it pretty conservatively in terms of what we believe we can get at, just building into the $100 million of cost synergies, and obviously, we'll have more updates for you guys as the year tracks on. I hope we can do better. But that's where we are today. .

Great.

And Jay just as kind of a little follow-up to that, in terms of -- obviously, we could look at Pinnacle's filings historically and kind of establish where they were on a gaming tax adjusted basis with the legacy portfolio, but acknowledging that 4 of those assets, obviously, are not with you guys, I'm assuming that the remaining portfolio is kind of a similar SKU and you're referencing kind of the piece of the business that you ultimately bought is still kind of right in that same company-wide differential that exists previously?.

That's right, Carlo. I'm quoting just the properties that we acquired, not the divested assets. .

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

Just curious on sports betting.

How that's trending so far? And then also how maybe you're thinking about potential JVs or partnerships?.

Barry, this is Tim. We just announced earlier this week that Chris Sheffield, as planned, was leaving Penn, heading back home to the U.K. And we've hired Jon Kaplowitz, previously from Comcast, to lead Penn Interactive Ventures. And we continue to take a look and evaluate the different opportunities we have regarding sports betting and iGaming.

And obviously the new interpretation from the Department of Justice on the Wire Act has caused us and also states to pause to understand that new direction. So we're continuing to talk to media partners, potential scheme partners. We don't have anything firm to announce yet.

But as you can imagine now that we -- when we finish the transaction with Greektown and having presence in 19 different jurisdictions, we're still engaged with a lot of potential partners that could really make a national impact on the sports betting, iGaming opportunity. But still a lot more to come before we make a final decision.

And we're thinking about it a final long-term decision and how we want to take advantage of this. We have opened up our retail sports operations in Mississippi, Pennsylvania and in West Virginia. And specifically in West Virginia with a very appropriate tax rate, we saw very solid results in the fourth quarter during football season.

So that's all good. And we anticipate that there's going to be a lot of legislative activity in the state capitals this spring, as states look at taking advantage of this opportunity in many of the states where we operate businesses in.

So I think you're going to see a lot of political activity, legislative activity around sports betting, and I think we're well positioned to take advantage of that. And again, we'd want to make sure when we make our decision, we're thinking about how it's going to impact us 3, 4, 5 years out. .

Great. Great. That's really helpful. And then just a quick clarification. For the maintenance CapEx guidance, B.

J., are you saying if you remove the $30 million for Pinnacle integration and some carryover, then is 158 basis points sort of the right run rate on a recurring annual basis to think about it?.

Yes, I think, we've publicly said before that between the 2 companies, when we take out the best of properties, the 150 basis points to the 160 basis points area was what we're really looking at as a going forward rate. .

Our next question comes from the line of Thomas Allen of Morgan Stanley. .

So just thinking about a couple of properties, you called out the issues in Lake Charles and Black Hawk. But then just 2 other properties, Plainridge, Encore, Everett was opened in June.

How are you thinking about the impact now? And then there was a GM plant closure in Ohio at Youngstown, how are you thinking about that impacting your property?.

Sure thing, Thomas. And the only reason why we didn't reference Plainridge and Youngstown is because we're really focusing on the sort of onetime impacts, which are specific to Lake Charles and Black Hawk with the Monarch opening. Look, Plainridge Park Casino, we've said before, obviously there's going to be some impact to the property there.

The good news for us is that the vast majority of our business comes from within a 30-minute drive, and almost all of our business comes from Boston or South, not a lot of business from North of Boston.

We believe that based on where the customers are coming from and how difficult it is -- I live in Boston, I can tell you that it's very difficult to travel through Boston on weekdays and even on weekends. We're comfortable we're going to be able to retain most of our business that is South of Boston.

Obviously, anything in Boston would be exposed, but it's a small percentage of our business overall. We don't know exactly what the impact will be, but we've taken our best guess and that's built into our guidance for 2019. And then with regards to Youngstown, we really have not seen any impact with the plant closure or the news of the plant closure.

Time will tell. We did assume some impact in our budget for 2019 for that property, but very little. We actually anticipate that property continuing to show strong growth through the year. .

Helpful. And then just tax season started a week ago and most people haven't received refunds yet, but some have.

Have you seen any change in behavior or tax refund checks being cashed to cages? And are they higher, lower, anything to read into it so far?.

Yes, I wish we had more to share on that, Thomas. We really haven't seen much activity, yes, with the government shutdown and the delay in refunds. We're probably going to have a lot more information, obviously, over the coming weeks, but not today. .

[Operator Instructions] And our next question comes from the line of Chad Beynon of Macquarie. .

In Vegas at Tropicana, can you provide a little bit of color in terms of what you've seen in terms of that rated play increasing and kind of using your database and finding customers there? And any outlook for 2019? And how you can yield manage your rooms better, given the more positive outlook for '19 from a lot of the operators?.

Sure thing, Chad.

We had -- just starting with sort of closing out the fourth quarter, we had a strong quarter in Las Vegas as you saw from our West region results driven by both Tropicana and M resort showing RevPAR growth in the mid- to high-single digits year-over-year, obviously, benefited from the tragedy at Mandalay Bay in the fourth quarter of 2017.

As we look at 2019, obviously there's a big opportunity for us within the database to continue to cross market Tropicana to the Pinnacle database of customers. We have started to test a few things. Obviously, it won't completely come together until we merge our databases in the loyalty card programs in the middle of the year.

But Las Vegas on its own is also set up to have a pretty strong year, at least from what we can see the first half of the year from a group convention business perspective. We're in a much better position than we were in 2018. So we anticipate having another year of growth at Tropicana, another year of growth at M Resort on the nongaming side.

And I think the gaming is sort of we haven't built a lot into our modeling because we want to make sure we get the offers right and do this in a phased approach. But we think, there is upside to take the percentage of hotels that we allocate to gaming customers from the high-teens, low 20s to maybe the mid-20s to high 20s over time. .

Great. And then back on the guidance, you've walked us through a couple times how you guided to revenues and flow through, and flow through was obviously very strong in the fourth quarter. And if revenue is below a certain level, obviously that flow through won't be as strong. We've seen '19 minimum wage increases for January 1st.

Does that change how we should think about flow through, if revenues are above the same-store guidance that you've guided to, or is that just such a small piece of the overall algorithm that you should be able to offset that?.

I would say more the latter, Chad. We have a pretty good handle on minimum wage increases market-to-market across the portfolio, and we've built that into our assumptions.

Whether revenues are up 1 or 2 or down 1 or 2, we have a good sense as to how to manage the labor with some of the increases that have been mandated or built into law at the state level. .

Our next question comes from line of David Katz of Jeffrey. .

It's Erik Hellquist, on for David. I just wanted to touch real quickly on the revenue synergies you outlined.

So can you just talk a little bit about the $15 million to $20 million, and how you got that number and how we can think about it being derived?.

Yes, sure. There are many variables, as you can imagine. I shared some of the ideas to Felicia's question earlier on the call in terms of sharing of best practices and some VIP and table games specific initiatives that the Pinnacle properties have been successful at deploying over the last 5 years that we're going to be doing at the Penn properties.

We also -- obviously, once we bring the 2 databases together and we merge the Marquee Reward player loyalty program from Penn with mychoice from Pinnacle, then we have a single what, we believe, to be best-in-class loyalty card program.

There's a number of changes we believe -- positive changes that will be communicated at the time of launch midyear that, we believe, are going to spur accretive revenue growth throughout the organization and really enhance the cross-property visitation once we have 1 card that is -- then, points are bankable and portable across the country.

So there's a lot of opportunity there, and then there are some best practices on the Penn side that we're sharing with the Pinnacle properties, similar to what I mentioned earlier. But there's literally 11 or 12 different initiatives that build into the revenue synergy target that we laid out.

We're comfortable with the target and the range, but we just don't want to rush those decisions for the reasons I laid out, and that's why we said most will occur in 2020 and some will leak into 2021 as well. .

We're also taking advantage of our social products and marketing the social gaming products to the Pinnacle customers as well, which is inclusive of the $15 million to $20 million revenue synergies that Jay outlined. .

And at this present time, we do not have any additional questions. Please continue with your presentation or closing remarks. .

I'll give, operator, closing remarks. Thanks, everyone, for your attention to our call this morning.

As I mentioned during the Q&A, within Penn, we're really focused on realizing the synergies coming from the new properties from the Pinnacle transaction, the Margaritaville deal, which we closed earlier this year and the upcoming close of the Greektown Casino in Detroit.

So everyone at Penn is really focused on delivering the synergies we've committed to our shareholders on.

And we're going to continue to update you on the progress each quarter as we produce these results and give you as much transparency as we possibly can toward a story of -- that will deliver a lot of free cash flow to our shareholders, that, I think, we've outlined how we're going to use that over the next 4, 5 quarters to take advantage of..

So with all that, thanks. And we'll be back in touch during the spring of 2019. Take care. .

Thank you. 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..