Boyd Gaming Corporation (BYD) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Boyd Gaming Corporation Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note: This event is being recorded. I would now like to turn the conference over to Josh Hirsberg. Please go ahead.

Thank you, Amy, and good morning, everyone, and welcome to our second quarter earnings conference call. Joining me on the call this morning are Keith Smith, our President and Chief Executive Officer; and Paul Chakmak, our Executive Vice President and Chief Operating Officer. Our comments today will include statements relating to our estimated future results, including, among others, guidance for the third quarter, the financial outlook for the company, our expansion and development projects and other market, business and property trends that are forward-looking statements within the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date, and we undertake no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise. Actual results may differ materially from those projected in any forward-looking statement as a result of certain risks and uncertainties, including, but not limited to though, those noted in our earnings release, our periodic reports and our other filings with the SEC. During our call today, we will make reference to non-GAAP financial measures. For complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-K furnished to the SEC today, and both of which are available in the Investors section of our website at boydgaming.com. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Finally, as a reminder, today's conference call is also being webcast live on boydgaming.com and will be available for replay on the Investor Relations section of that website shortly after the completion of this call. I'd now like to turn the call over to Keith Smith, our President and CEO. Keith.

Thanks, Josh. Good morning, everyone, and we appreciate you joining us this morning for our second quarter earnings call. In addition to reviewing our second quarter financial results, we have 2 new development opportunities to share with you. In a few minutes, I will have Paul Chakmak take you through details of each of our business segments. But first, let me start with a top line review. Our results for the second quarter clearly were not in line with our expectations or the guidance we provided on our last earnings call. At the time of our last earnings call, we had seen several consecutive quarters of encouraging trends in the business, both in Nevada and in the Midwest and South. And there were no signs that these trends would change in a material way. But starting in May, we began to see some weakness in economic trends, both locally and nationally. Manufacturing, job creation and consumer spending all started to slow. This slowdown in economic activity clearly showed up in our business in May and June and impacted our overall results. But beyond the slowing economy, each region had its own unique challenges in the quarter. In Nevada, our Las Vegas Locals region was impacted by low sports hold and higher employee benefit expenses. In Atlantic City, the market continues to face increasing competition, both in New Jersey and the nearby jurisdictions, and that is reflected in our business. However, the Borgata continues to increase its market share, and we believe it will remain the dominant resort in the region for years to come. In our Midwest and South region, results were more encouraging. We maintained or grew market share in every market where we operate. This has been the strongest region of the country for the domestic gaming industry for some time now, and it is also our most robust business segment. That is why we are so excited about our pending acquisition of Peninsula Gaming. Acquiring properties in Kansas, Iowa and Louisiana is a clear indication of our confidence in these markets. In the Peninsula markets, team members and customer base provide an extraordinarily strong foundation for delivering positive future financial performance. We continue to make good progress toward completing this transaction. The Federal Trade Commission has granted us early termination of the Hart-Scott-Rodino review period, and we have filed applications with gaming regulators in Kansas, Iowa and Louisiana. Based on our progress to date, we anticipate this transaction will close as intended some time in the second half of the fourth quarter. Once again, it makes compelling sense to expand our footprint in the area of the country where the gaming industry is strongest, and that is precisely what the Peninsula acquisition does. While the pending acquisition of Peninsula gaming is a huge milestone and easily the most significant near-term growth opportunity for our company, we're also excited about the 2 new development agreements we announced this morning. These agreements provide the foundation for future growth. The first of these new agreements is with Wilton Rancheria, a federally recognized tribe located about 30 miles southeast of Sacramento, California. This project will provide us our first entry into California, further diversifying our geographic footprint and extending our brand to an attractive new market. We are early in the process of this development and anticipate it will take approximately 24 months to receive all the required approvals to proceed. The second agreement, and equally attractive, is an agreement we have entered into with Sunrise Sports Entertainment, the company that operates the BankAtlantic Center, which is a major entertainment venue located in Broward County, Florida and home to the NHL Florida Panthers. Boyd and Sunrise Sports have agreed to work together to pursue our development adjacent to the BankAtlantic Center should the state of Florida decide to approve expanding gaming opportunities in South Florida. The BankAtlantic Center is the largest indoor arena of its kind in Florida, host to more than 200 events a year. Directly across the street from the BankAtlantic Center is the Sawgrass Mills mall, the sixth largest shopping mall in the country drawing the second highest annual visitor volume of any attraction in Florida. This development would be ideally located in a major metropolitan area with terrific guest counts, right in between 2 attractions that already draw a substantial visitor volume. While additional Florida development is contingent on the state passing legislation, this agreement gives us an additional exciting option for Florida if and when it does. With regard to our other operation in South Florida, Dania Jai Alai, we continue to look at a number of alternatives for this property. These options include but aren’t limited to further developing the site or selling it. As the state considers gaming expansion and potential changes in tax laws, we believe the value of Dania should only increase. Finally, we are well positioned to capitalize on the legalization of Internet poker in the United States, thanks to our joint venture with bwin.party. Federal legislation remains the best option for online gaming, and we believe the chances are good it will pass, although timing remains uncertain. In the meantime, states are moving ahead, and we are ready to compete in this space under either a state or a federal scenario. As we have said repeatedly, we are keenly focused on generating long-term growth for our shareholders through both improving store core operations and through acquisitions and other growth opportunities. We have made great progress on the growth front recently, executing 5 separate agreements since the middle of last year. But we have not lost our focus on working to continuously improve our core operations. The core of our business strategy in Nevada and across the company remains focused on developing and maintaining strong relationships with our customers. The inherent soundness of this approach has not changed. We have extraordinary assets, our team members deliver exceptional personal service and our management is as knowledgeable and experienced as any in the industry. Our near-term focus will clearly be on the successful execution of the agreements we have announced in recent months, especially Peninsula Gaming. However, we will remain opportunistic. If a new growth opportunity emerges that make sense for our company, we will not hesitate to pursue it. Thank you for your time today. I'd now like to turn the call over to Paul who will review our operations in more detail. Paul?

Thanks, Keith. Hello, everybody. Our second quarter results were mixed from an operating perspective. Results in Nevada and in Borgata fell below expectations for a variety of reasons. But our Midwest and South results were solid, led by continued strength along the Gulf Coast. Now let's begin with our Las Vegas Locals business. When we last spoke in late April, we were encouraged by the trends we were seeing in our Locals business. As the economy weakened beginning in May and continuing into June, business from our casual gaming customers softened, leading to shortfall in results. There were other factors in play as well. One was a spike in our employee benefit costs during the quarter. Another factor was an unusually bad run of luck in our sports books. Taken together, these 2 factors, benefit costs and sports, accounted for about 2/3 of the shortfall in EBITDA in the Locals region. As we have said earlier, we are contending with an aggressive promotional environment in the locals business. But importantly, this competition has had no impact on our top tier business. In fact, the tremendous relationships we have built with our top tier customers has been a real bright spot in our Locals business this year as business volumes among our core customers have continued to grow. The promotional environment has, however, had a significant impact on play of customers in our lower tiers, customers we consider to be casual gamers. We're confident that our Nevada business offers compelling value but are at the same time continually evaluating our mix of tactics to ensure we perform better with all customer segments. Now let's move to Downtown Last Vegas. We experienced an EBITDA decline in this business segment as well but are confident that the causes are temporary. As business trends strengthened in Hawaii, and in an effort to improve our margins, we began pulling back on marketing programs that were put in place last year. But after discontinuing these efforts, it quickly became clear that they are extremely effective in driving business from Hawaii. Consequently, we resumed these programs and are seeing the early signs of recovery. The region was also affected by a shift in our Hawaiian charter service. In order to run more efficiently, we've reduced the number of weekly flights of from 5 to 4, lowering our fuel expense and maximizing our use of available seats without significantly reducing the number of customers flying into Las Vegas. So we are confident that the shortfall we saw in the second quarter was a short term in nature and expect business to stabilize in the third quarter and resume growing in the fourth. In our Midwest and South region, results were more encouraging. EBITDA grew nearly $12 million before considering last year's benefit of a $2.8 million nonrecurring property tax adjustment at Blue Chip. Blue Chip posted a strong operating performance and has increased its market share for 12 consecutive months. And Delta Downs continued to generate double-digit EBITDA growth as well, posting all-time monthly coin in records for April and June. But we are particularly pleased with the continued strength at the IP. When we first announced this acquisition, we said we were confident there was a lot of potential upside at this property, and we continue to deliver on the promise. EBITDA at the IP rose nearly 25% in the second quarter. This is our best year-over-year improvement since we acquired the property. We recently began introducing our nationwide player loyalty program, B Connected, and it should begin to have an impact in the third quarter. This will allow us to make more strategic marketing investments, which will drive more profitable business to the property. We're also seeing the positive effects of efficiency measures at the IP, where we are saving money without compromising the IP's reputation for strong customer service and outstanding amenities. The IP is running ahead of our expectations and is demonstrating our ability to unlock significant value with acquisitions. Finally, let's briefly touch on Borgata. A new casino resort opened on the Boardwalk in early April, and the property in the Marina district was remodeled and re-branded. However, these projects did not generate incremental growth in the market. In fact, the net result was a 6.9% decline in casino win for the market in the quarter. But there are reasons for optimism as well. Borgata actually grew its market share during the quarter even with one of the lowest reinvestment rates in the city. That speaks to our ongoing ability to retain our customers even against the most extreme competition. We attribute that to the quality of our amenities as well as the hospitality and service we provide to our customers. These are obviously challenging times for Atlantic City. But Borgata remains the clear market leader and is well positioned to maintain that position for years to come. To recap, overall results did not meet our expectations, but we remain confident in the long-term fundamentals of our business. In our Las Vegas Locals region, we are actively working on new programs to enhance revenues from our casual gaming guests. In Downtown Las Vegas, we have made modifications to our Hawaiian marketing programs and are seeing business levels recover. In Atlantic City, Borgata is contending with heightened competition, but we expect to see solid results during the busy summer season. And the brightest spot in our operation continues to be our Midwest and South segment, which continued to post operating growth in the quarter. The strong performance of this business segment shows why expansion in this region is a central piece of our long-term growth strategy. Thanks for your time today, and now I would like to turn the call over to Josh.

Thanks, Paul. I'll start with a few items from the quarter and then provide third quarter guidance. Beginning with the balance sheet, excluding Borgata, Boyd's debt balance at the end of the second quarter was approximately $2.8 billion. This balance is higher than the debt balance at the end of the first quarter primarily as a result of our pre-funding into a cash account a $200 million equity contribution for the Peninsula acquisition. Our cash balance at the end of the quarter was $327 million as a result of the Peninsula equity contribution I just mentioned and the timing of quarter end. Also during the quarter, we issued $350 million in senior notes that mature in 2020. These notes were issued at par with a coupon of 9%. At quarter end, there was $1.4 billion outstanding under our credit facility, providing $300 million of incremental availability. From a financial covenant perspective, as calculated under the terms of our credit agreement, at the end of the quarter, secured leverage was 3.7x compared to a covenant of 4.25x, and total leverage was 7.1x versus a covenant of 7.5x. Borgata's debt balance was $816 million, of which $24 million was outstanding under their $75 million credit facility. Their cash balance at the end of the quarter was $34 million. On the income statement, corporate expense, excluding tier-based compensation expense, was $10.5 million in the quarter, essentially even with last year. Consolidated depreciation expense, that is including Borgata, was $51 million, an increase of -- over prior year of $2 million. Our depreciation expense was approximately $35 million, which includes approximately $4.8 million associated with IP while Borgata's depreciation expense was $16 million. Other operating items on the income statement of $2.2 million represents an amalgamation of several different items, including $2.2 million received by Borgata as a result of the Water Club fire that occurred in 2008, $6.3 million related to an insurance settlement from the Tunica flooding that occurred in May 2011 and $6.2 million of acquisition-related costs as a result of our agreement to acquire Peninsula Gaming. The net impact of these items is excluded from our calculation of adjusted earnings, as shown in the adjusted earnings table attached to our release. Excluding the impact of Las Vegas Energy, consolidated interest expense for the quarter, that is including Borgata, was approximately $62 million, marginally higher than last year. Our interest expense was $41 million, a little over $1 million higher than last year as higher expense this year was offset by swaps that matured in the prior year. Borgata was $21 million, about even with prior year. We reported a tax benefit in the quarter that more than offset our pretax loss as a result of settling outstanding audit issues that resulted in the release of our reserves from uncertain tax positions. For guidance purposes, we are assuming a 35% tax rate for 2012. Our capital expenditures in the quarter were approximately $25 million and $13 million at Borgata. The room project at Borgata was completed in the second quarter and has received very positive feedback from our customers. Now in terms of guidance for the third quarter. As has been our practice, we will provide quarterly EBITDA and EPS guidance. We'll provide separate guidance for Borgata. We will provide adjusted EPS guidance for the consolidated business, including both our wholly-owned segments and Borgata. You should note that in the third quarter last year, there was a $4.6 million favorable property tax adjustment that benefited Blue Chip. Hence, the $44.5 million in EBITDA that was reported last year for the Midwest and South segment was $40 million on a comparable basis. Also, interest expense in the third quarter will be higher as a result of the $350 million of bonds that we issued in the second quarter at 9%. So I expect that number to be $67 million to $68 million for the quarter. With those considerations in mind and factoring in the trends in our business currently, we expect wholly-owned EBITDA, after deduction for corporate expense, to be in the range of $77 million to $82 million. We expect Borgata to generate EBITDA of $47 million to $49 million compared to $50 million last year in the third quarter. With this range of EBITDA guidance, adjusted EPS for the quarter is expected to range from a loss of $0.05 to breakeven. With that, Operator, that concludes our remarks and we're now ready for any questions from participants on the call.

[Operator Instructions] And our first question comes from Felicia Hendrix of Barclays.

You all addressed -- Paul, you addressed the promotional environment in the Las Vegas Locals market in your prepared remarks. Just wondering if you could walk us through what you're doing now to mitigate that, if anything. And then also in Las Vegas Locals, I was wondering, you mentioned the performance of the top-tier customers, that they're doing well. You explained why the casual gamers are not performing as well. Just wondering about the players in between those 2 levels.

Well I think, I guess first, I'll talk about kind of what we're doing. And as you know, it's kind of a constant state of flux in trying to dial in really the right formula to maximize both visitation as well as, obviously, profitability. And I think what you'll see is over the course of really the balance of the year, a series of different programs kind of roll out from us that certainly take care of our best folks who, as I said, continue to be very important to our business and are very engaged with our brands and what we do and are certainly folks that we want to pay a special amount of attention to but really focus on where we have seen overall growth in the market. I mean, you can see some of those numbers in the gaming abstracts that I know everybody follows from the state of Nevada. And that is the, as we called it, casual gaming segment that focus on some of the more trendy games, typically in the penny denomination, and we'll continue to enhance the product offering as well as the programs that focus on those particular players. As far as everybody kind of in between, I guess, to answer that question, a bit steady as she goes there. And again, folks that like to frequent our facilities on a very regular basis continue to do so and I don't want anybody to think otherwise. Really, at most all levels, it's really folks that are kind of coming back as the economy lagged, are seeing gaming as a fun entertainment option, and that is really the term of our casual gamer. It's somebody that doesn't show up necessarily every week or even every month but just see gaming in Las Vegas as one of those options for them to have a little fun. And that's an important and a very large segment of the business. It's good to see that there may be some improvements in that area, and we just need to make sure that we capture kind of our fair share of that.

And then just moving to Atlantic City, your margins were lower year-over-year by a lot more than we thought. I know there were some puts and takes in there. But that was despite your ability to keep promotional allowances as a percentage of revenues sort of flat. So just wondering what was causing some of the cost pressures there.

Felicia, this is Keith. In Atlantic City, one of the big items that is in the EBITDA decline is about $2.5 million in property taxes. And that’s a difference year-over-year. The property tax rate is up about 11% year-over-year as a result of many of the properties in Atlantic City filing appeals and being successful in their appeals. So the rate continues to move up. In our 9 years of operation, we've never seen that type of a rate increase year-over-year. So that is probably the most significant impact to the business there, is $2.5 million year-over-year in property taxes.

The next question comes from Shaun Kelley, Bank of America.

Following up on Atlantic City, I think we were also a little surprised by, I guess, the magnitude of flows through there. So could you just give us a little bit more sense in terms of maybe the promotional side? It looks like promotional costs did come down a little bit year-on-year, but that still wasn't enough to kind of be -- to be a full offset. Do you -- so do you expect that to get that -- I guess that environment to get better based on your guidance for next quarter?

Yes, Shaun, this is Keith. I think when you look at Atlantic City and look at the second quarter in our operations specifically, we knew that Revel was going to be opening. And frankly, we took a little bit more of a measured approach and pulled back on some of our marketing dollars to simply see what was going to happen. Revel has been through this kind of rolling opening phase, and they continue to open parts and pieces of that facility as we go. We are reinvesting a little higher rate in our customers going forward. Once again, we pulled back in the quarter specifically just to watch the opening of Revel and see how they responded. I think you'll see our reinvestment a little bit higher going forward. And some of the new -- I think the other impact are some of the new food outlets that are in the market, both at Revel and over at the Golden Nugget, and people going out and sampling some of those. And frankly, because the market hasn't grown and neither Revel or Golden Nugget have been successful in growing the overall market, you're just seeing a few less people in the building.

Shaun, I think it's -- first, it's Paul. I think to add to Keith's point, it comes back to his previous answer to Felicia on the property tax difference, which is in operating expense at Borgata. So when you look at the decline in revenue commensurate to the decline in EBITDA and your comment to flow-through, which is completely fair, then factor in there's $2.5 million of higher operating expense in that EBITDA decline. And so I think you see one of those maybe a little bit more normal flow-through impact.

And so to be clear on that, then there -- the property tax or issues probably, is that only for the second quarter? That won’t continue in the third.

No, it will continue at an elevated rate into the future. We have an appeal pending ourselves. We would expect that appeal to come to a conclusion sometime towards the end of the year or at the end of the year, and we'll see how successful we are. But until that point in time, until our appeal gets successfully heard and dealt with, then we'll see an elevated property tax rate.

Okay. So I guess then just lastly, I'm sorry to beat a dead horse on this, but in terms of the guidance, I mean, you were down 20% or so with the elevated property taxes this quarter kind of year-on-year. I mean, your guidance only is estimating like a 5% decline for the third quarter, but you've got Revel coming on with more amenities. So I'm just trying to kind of -- to understand, are you seeing a little bit more -- kind of, I guess, a little bit more customers flowing back in July? Is there something that you're seeing that maybe we're not that's giving you a little bit more confidence in the market sequentially for the third quarter is kind of where I'm going.

Yes, I think -- Shaun, this is Josh. I think from the impact that we've seen in the second quarter, while it was disappointing, did have some unique items such as the property taxes. But also, I would say that certainly, we had some self-inflicted results as well, as Keith mentioned, in terms of not marketing as aggressively as we normally would relative to our own budgets. And so I think from the perspective of looking at the second quarter and trying to understand it sequentially going into the third quarter, I would say there's really those -- there's kind of 3 items. One, a little bit of self infliction as we didn't want to fight trial of folks who wanted to go see Revel. And so that affected revenue and EBITDA. Secondly, in terms of the property taxes we mentioned. And then thirdly, coming into the third quarter, it is the strongest period of time, and we've really seen limited impact from our customers on Revel -- from Revel. I mean, they've had an impact on our food and beverage side of things, maybe some of the lower-end customers, but certainly not the core components of our business. And so our thesis continues to remain intact; that is that we don't really expect to see the most significant impact from Revel until the fourth quarter just given the seasonality of the business. We feel real good about the trends that we're seeing starting off in July, and that's the basis of our guidance, really.

And Shaun, this is Keith. Let me try to maybe just kind of wrap it up with a couple of final comments. The business at Borgata remains very solid. We have strong results in the hotel, occupancy is up, ADR is up, cash ADR is up. Our group business is very strong. Our mid- and high-end table games business has remained strong. Our slot business remains strong. And so we are expecting a good summer season. Now one of the things you have to keep in mind is that last summer season, we ended up closed for a few days as a result of a hurricane. And so there is a -- I always hate to talk about weather on these calls, but there's a weather-related issue that is buried in last year's Q3 numbers. So it does cause some comparison issues, to be fair.

And -- yes, I think we had a little bit of that baked in. But you're right, that was probably pretty material on a year-on-year basis. Last thing for me was just on Kansas Star in particular and kind of thinking about Peninsula Gaming overall. Obviously, last quarter was a huge out-of-the-box kind of quarter for them in terms of margins and the initial revenues. We've seen revenues in the second quarter for Kansas Star decline a little bit sequentially, but it doesn't seem too extreme. Is that kind of -- have you seen the -- is the performance there kind of within your underwriting and kind of what you guys are expecting? Or has it been any worse or any better than anticipated?

I think the public results that have been issued on Kansas Star, Shaun, really frankly mirror the start-up of any new property with initial surge with everybody going there in the first month or 2 to see what it's all about to a slight tail-off before probably we have continued to ramp up. Also, keep in mind there is a major expansion of that project, which is effectively the permanent casino that'll open some time around the end of the year. So there's another wave coming.

Yes, absolutely.

And the other thing we don't know, this is Keith, is the seasonality of that business. Every market that we operate in has its own seasonality. From Louisiana to Illinois to Mississippi in the East and West Coast, they all operate somewhat differently. And I don't think we quite understand the seasonality of that business yet because we haven't lapped a year. So I think there was a couple of things that will play out in the future. We're still very, very excited about the acquisition. We're very excited about the results. As I said in my prepared comments, it is on track to close later this year or towards the end of the year, and it's going to be a tremendous addition to our company. So we're really looking forward to it.

Our next question comes from Joe Greff at JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: Question for you on Peninsula. I know, Keith, you commented earlier about seeing some softness generally starting in the middle of May. And since then, what are you seeing within broadly the Peninsula portfolio? How has it performed since you announced the deal in mid May? Then I have a follow-up.

Joe, this is Josh. We -- they're a separate company. We don't own them at this time so we're not going to talk about trends in their business other than what is publicly out there as reported by the state. Joseph Greff - JP Morgan Chase & Co, Research Division: All right. And then you earlier talked about Hurricane Irene's impact on last year's third quarter at Borgata. Can you quantify what that EBITDA impact was? I believe you said you would have generated year-over-year growth in EBITDA 3Q '11 versus 3Q '10 were it not for Irene, but if you can sort of pencil in what you think that, that EBITDA impact is, that would be helpful in kind of understanding your guidance.

Joe, I think -- this is Josh. I think the estimation at that point was $5 million or $6 million for that weekend because it was a significant weekend, as I recall, and there was a lot of marketing and programs planned for that, that were not able to take place as a result of it.

The next question comes from Steve Kent at Goldman Sachs.

Two questions. First, and maybe we're doing this wrong. But when we back out the impact of the IP, the Imperial Palace, we see -- I see revenues only growing around 2.6% and EBITDA actually declining 6.6% for Midwest and South. And I just was wondering if that was in line or better because that to me sounds a little bit worse than what we would have expected. And also, does that include any cannibalization impact? And then second, I can't help but ask what was the specific impact of bad luck on your regional casino sports book since second quarter other than NBA basketball. I can't think of anything else that would affect it very much.

It's Paul. Let me try to answer both questions. First, on the Midwest and South region, backing out IP, the other adjustment as I had mentioned that you need to make is last year, there was a $2.8 million nonrecurring property tax adjustment in Blue Chip that was good news last year that artificially increased that number related to some accounting and not related to operations. So if you factor that piece out on an EBITDA basis, the Midwest and South region was up slightly. And as I said, the strength in that business overall came out of the Gulf Coast markets. I think as we've talked in the past, there are a couple of markets that continue to be under pressure like the Tunica, Mississippi market and Shreveport, Louisiana market. But with that said, to Keith's point, we either maintained or grew market share in every single market we operate in, in the Midwest and South region. On the sports book, which really is primarily an impact on the Las Vegas Locals business and, to a lesser extent, the Downtown Las Vegas business, it was baseball. And it was parlay cards, that is bets that involve multiple games with odds being given to the bettor. There were many favorites that won during the quarter over a fairly long period of time. We happen to be one of the largest parlay card writers in town. It is a very key part of our business so it will tend to affect us, good or bad, more significantly than others. And that impact was about $1 million in the quarter versus the prior year.

Our next question comes from Harry Curtis at Nomura.

Two quick questions. Turning back to Atlantic City. Keith, do you have any sense that capacity is going to come out in Atlantic City over the next year and that it might become more rational?

Actually, I don't have any specific information or knowledge that there'll be any reduction in capacity there. So I don't have any insight, sorry.

Okay. And then the follow-up question was with Peninsula Gaming. Can you talk a bit more about what you believe is the low-hanging fruit there? Where can you step in and improve operations? Has there been -- have there been any operating -- areas of operating weakness? What about -- and also, is there any -- has -- is there any investment that you can make that should have high ROI returns like on the slot floors?

Sure. Well, as we talked about the acquisition over the last several months and even back when we announced it in the middle of May, I think we’ve talked about this; slightly different than the IP. This is a very well run company, very high-quality assets, very high margins as you look through their business. They operate a very strong business. Having said all of that, there are opportunities. I think ones -- the opportunities are different than the IP. The opportunities center around synergies, purchasing issues with being part of a larger company, whether that be groceries or whether that be insurance-type issues. I think there are opportunities with our B Connected brand as we're able to roll that out and have maybe a more targeted, focused marketing effort. And we're seeing the benefits of that at the IP currently, so we look forward to that. But other than that, this one's, I think, very solid business, very well run, very high margins. And those are kind of the couple of areas that we look forward to as we take over that business.

Next question comes from John Maxwell at Jefferies. John Maxwell - Jefferies & Company, Inc., Research Division: Keith, just a quick question on the Florida announcement you made. Just wondering what the thought process was pursuing a potential property there while you have the Dania property. It doesn't look like it's that far away. Or is it really just this sunrise area is just -- would be that much stronger of a market?

A couple of thoughts. One, it is -- it's a good 20 miles from -- between the 2 sites. But more than anything, it is simply the quality of the location and the quality of the site. When you look at the demographics in the area, when you look at the amount of traffic, the fact that these are well-known destinations, both Sawgrass Mills mall as well as the BankAtlantic Center, they’re locations people currently travel to in very large numbers. As I said, Sawgrass Mills Mall being the second highest visitor destination in the area means that people know that it's there. So it's a great site. There's a lot of land there. There's a lot of opportunities to do things. We just think overall, if there's an opportunity for expanding gaming in South Florida, that -- for a more full-scale gaming, that this could potentially be a better site. We've basically taken an option on it, if you will, and we'll see how things develop. John Maxwell - Jefferies & Company, Inc., Research Division: So does that mean, if, let's say, Florida doesn't move forward with that, that you kind of revisit plans for Dania? Or would that be -- is that more likely to be an asset for sale?

Well, we're juggling all that right now in terms of determining the value of Dania and whether there's more value in holding it to develop or more value in looking to sell that property. So it's something that we look at every week and every month and try and balance the best opportunity for that asset that we have. We obviously have owned it for a number of years having developed it because we don’t like the current dynamics in that market. But if there's changes in the law, changes in tax rates, there may be more opportunities there. John Maxwell - Jefferies & Company, Inc., Research Division: Okay. And then on the California project, does the tribe need land in trust? Or is that already in place?

The tribe does not currently have land in trust. We don't believe that to be an issue. This is a tribe that has been restored, and so we expect that to take place over the next year or 2. John Maxwell - Jefferies & Company, Inc., Research Division: Okay. And then just finally, Josh, the mechanics with Peninsula. So when the deal closes, as you talk about kind of the second half of the fourth quarter, is that when the new financing gets put in place? Or mechanically, does it work that way or is it -- does it come a different way?

Yes, I think it comes a different way, John. I think it happens sometime between now and the actual closing just so everything is in place for the acquisition. And then, upon consummating the acquisition, then we'll take steps to take out their existing debt with the proceeds we've raised from the commitments we have today from the banks. John Maxwell - Jefferies & Company, Inc., Research Division: So you would -- so the commitments could be -- you can put that in place -- okay, all right, I get it. So you can just put in place before the actual, and that when the deal is -- everything is signed of on, you just move forward that way?

Right. So you get everything in place so you can close the transaction, and then you move forward with taking out the rest of the capital structure.

Our next question comes from David Farber with Credit Suisse.

I just -- 3 questions. First, on the maximum leverage covenant, I believe, steps down to 7.25% at the end of the year. Just curious if you anticipate any issues there. And then maybe as a follow-up, if you can remind us how the Peninsula assets potentially play into the covenant calculations. And then I have a couple follow-ups.

Right. We don't anticipate an issue with the step down by year end of the total leverage covenant. And only to the extent that we're actually receiving management fees from Peninsula's assets would they somehow benefit from the covenants today. The Peninsula assets will be in an unrestricted sub, and the obligations of Peninsula -- of the Peninsula debt will be limited to the Peninsula assets. Boyd will have no obligation. And so for that reason, it doesn't come into consideration in our covenants, Dave.

And as currently contemplating, do you anticipate receiving a management fee that was originally talked about in the deal? Or they're still -- those conversations still moving?

\No, I think we plan to receive a management fee.

And then 2 additional questions. Do you guys anticipate any future cash outflows that are associated with either of these development agreements in the next year or so? And if so maybe what are they? And then one more.

This is Keith. There's no significant outflows on either of the development agreements in the next year or so.

And then just in Las Vegas Locals, just curious. Just to follow up, I think, on some earlier questions. On the cost structure side you described what seems to be higher employee benefits. I'm just curious if that's running and has been running through the P&L sort of on a trailing basis. Or is that new to the second quarter? And how should we think about the cost structure in that segment?

Well, we are, as a company, self-insured on the health care side. It -- we make our best estimates as to what those costs run on a monthly and quarterly basis. We took a catch-up charge at the end of the second quarter based on some negative trending that we were starting to see in the business. It is honestly difficult to predict what the costing will be for the rest of the year obviously that we have, because, as you would expect, though we have a whole lot of lives covered under our plan, a few significant cases can materially impact the company overall. So we think we're in the right spot, obviously, at the end of the second quarter based on the additional charges that are in the quarter, but we'll just have to see how the rest of the year plays out.

The next question comes from Brian Egger at Topeka Capital Markets.

Just a question about the promotional environment, I guess really asking it in 2 different capacities. The first is in the various Midwest markets. Although you guys obviously did quite well relative to the market conditions, certainly the same-store trends in those markets deteriorated very much throughout the quarter and I'm just wondering as that happened have you seen any change in the promotional climate in any of these markets? And I was going to ask specifically back to Atlantic City for a second. As the Revel seems to have been modifying its strategy in terms of maybe focusing a bit more on some of their gaming programs, have you seen them change behaviorally as a competitor at all as the quarter progressed either?

Well, we'll start with Atlantic City. This is Keith. I think I was going to -- as Revel has rolled out or continued to roll out the opening of that property and then using that asset, I think, as we've all seen the numbers that have been produced, they have continued to ramp up their marketing efforts, they have continued to refine them. I think they have continued to get increasingly more aggressive. And you can see that in the numbers that are produced in the Atlantic City when you look at promotional expense. And so they have continued to do that. I think the market as a whole in Atlantic City, I would call it as somewhat varied as different operators are taking different approaches. Once again, when you look at the promotional spend and the numbers that come out of Atlantic City, you will see that some operators are down and other operators have really increased the level of promotional expenditures that they are spending. And so there's really a wide -- kind of a wide variety of what's happening in the city right now. But Revel clearly is increasing the overall spend and that just -- once again, that’s just a matter of public numbers that are out there.

I think as it relates to the rest of the Midwest and South operation, spend is, I would say, stable on a year-over-year comparable basis in all markets relative to ourselves. We are also stable except for in Biloxi where we have made, obviously, a calculated decision to actually reduce marketing expense and drive profitability versus the prior owners.

Our next question comes from Kevin Coyne with Goldman Sachs.

Just a follow-up to David's question. I know he asked about the total leverage covenant, but I know the secured test, I think, Josh, you said was 3.7 and currently, the covenant's 4 in the quarter and steps down to 4. Do -- any need to adjust that? And if you could also mention what's the minimum liquidity that you kind of feel comfortable running the business at.

Sure. Thanks, Kevin. I would say given where we are right now, the secured leverage ratio is really not a pressure point for the company going forward. In fact, I think we got plenty of cushion under there. And from the perspective -- so we feel comfortable generally where our covenants are and feel comfortable that they won't present an issue for us going forward. I would say that from a liquidity perspective, I mean, I think it's -- depending on what's going on in the business right now, we have very limited capital expenditure programs other than really at IP. We have a limited kind of maintenance program. So liquidity doesn't need to be that significant given the performance of our business and the ability to generate free cash flow. So that number could be $50 million to $100 million. But generally, longer term, I think we want to have a $150 million to $200 million of availability around the company. But again, we have a lot of flexibility just generally in the business.

That's exclusive of Cage Cash?

Yes. Yes. And that is...

Can you remind us. . .

I'm sorry, Kevin. Go ahead.

Can you remind us of Cage Cash requirements?

Caged Cash, I mean, generally, at quarter end is probably right around $100 million, $105 million. Obviously, that will go up when Peninsula comes in and is reported on a consolidated basis. But for our business, I'd say just generally around $100 million to $105 million when you include IP. And then depending on when the quarter ends, sometimes it's a Friday, sometimes it's a Saturday, and that affects how much cash we have in the business from the perspective of the weekend. But I think that's a good kind of proxy for you to think about it.

And just one question for Keith. I guess with some of the other potential projects for Florida and California, I know that we always ask the question about Borgata as we approach kind of MGM's deadline to sell their stake in March of next year. Do these types of projects potentially lower your probability of buying that other stake or change your thinking in any way?

Yes, I would not connect those dots. I think that those are completely separate decisions. Obviously, we enjoy our ownership position in Borgata and enjoy being the operator of that. And as I've said a number of times, if it were to come our way at the right price and it was financially attractive, we would certainly take a look at it. And we still keep our options open to do that so none of these other development opportunities foreclose that possibility.

Our next question comes from David Hargreaves with Sterne Agee. David Hargreaves - Sterne Agee & Leach Inc., Research Division: I just wanted to follow up on the Wilton project. I wanted to get a sense for where you guys contemplate locating that project and how big you would expect it to be.

Well, the tribe in Rancheria itself once again are about 30 miles southeast of Sacramento, and that is the presumed location of a project. And in terms of size and scale and scope, it's really way too early. We're just in the beginnings of this in terms of working through the permitting process, environmental impact statements and designing and developing a project. So it's just premature to get into any of those other details. David Hargreaves - Sterne Agee & Leach Inc., Research Division: On their web page, I think they indicated they have something 38 acres. That's not gaming-entitled land currently?

It is not. Once again, there has not been land taken into trust for purposes of gaming at this point. But we don't see that as an issue. We're highly confident that, that will get approved.

This concludes our question-and-answer session. I would like to turn the conference back over to Josh Hirsberg for any closing remarks.

Thanks, Amy. To the extent you have any follow-up questions, please feel free to reach out to the company. And we appreciate you -- your participation in the call today.

The conference has now concluded. Thank you for attending today's event. You may now disconnect.