Caesars Entertainment, Inc. (CZR) Q1 2018 Earnings Report, Transcript and Summary

Hello, and welcome to today’s webcast. My name is Cristina, and I will be your event specialist today. [Operator Instructions] Please note that today’s webcast is being recorded. [Operator Instructions] It is now my pleasure to turn today’s program over to Joyce Arpin, Vice President of Finance and Assistant Treasurer. The floor is yours.

Thank you. Good afternoon, and welcome to the Caesars Entertainment First Quarter 2018 Conference Call. Joining me today from Caesars Entertainment are Mark Frissora, President and CEO; and Eric Hession, CFO. A copy of our press release, earnings presentation and a replay of this conference call are available in the Investor Relations section on our website at caesars.com. Also please note that prior to this call, we furnished a copy of our earnings release to the SEC in a Form 8-K and will file a Form 10-Q. Before we get underway, I would like to remind you to reference slides 2 through 4, which include forward-looking statements, Safe Harbor disclaimers and definitions and certain non-GAAP measures. In addition, Caesars Entertainment Operating Company, or CEOC, emerged from bankruptcy on October 6 and Caesars Entertainment Corporation completed its merger with Caesars Acquisition Company or CAC on that date. We also deconsolidated the results of Horseshoe Baltimore in the third quarter of 2017. Therefore, our U.S. GAAP results do not include CEOC in Q1 2017 and include Horseshoe Baltimore, same-store results include CEOC in the prior year but exclude Horseshoe Baltimore. You can find a reconciliation of GAAP and non-GAAP figures on slides 25 to 28. I will now turn the call over to Mark. Please turn to Slide 6.

Thank you, Joyce. I’m pleased to report that Caesars Entertainment delivered solid operating performance in the first quarter, reflecting progress on our marketing initiatives, continued success in driving operating efficiencies and strong execution on our growth initiatives. First quarter net revenues of $1.97 billion and adjusted EBITDAR of $518 million increased year-over- year since CEOC’s results are not included in the prior year. Same-store revenue decreased 2% year-over-year to $1.97 billion. We experienced robust gaming volumes in Las Vegas led by the strongest Chinese New Year volumes in five years. Core business growth was offset by some notable headwinds, including unfavorable hold impact on revenues of $22 million year-over-year, several weather-related property closures in the other U.S. segment, lower hospitality revenues in Las Vegas due to the cycling of the CON/AGG construction trade show and some lingering impact from the October 1 shooting. Las Vegas RevPAR declined 1% year-over-year, and we are outperforming our peers in the Las Vegas Strip who reported average RevPAR down approximately 2.5%. Domestic slot win increased sequentially throughout the quarter and, adjusted for the impact of bad weather, was up 1% versus Q1 2017. Slot win and hotel results were also up to a solid start in April, giving us more confidence and a positive outlook for the full year. Same-store adjusted EBITDAR decreased 3.4% year-over-year to $518 million due to unfavorable hold and bad weather but was offset by outstanding cost control efforts in labor and marketing. On a hold-normalized basis, adjusted EBITDAR was flat year-over-year. Unfavorable hold impact on EBITDAR this quarter was primarily driven by baccarat play at Caesars Palace. Our peers held well in this segment during the quarter, and we believe that this is the primary driver of movement and market share. Excluding baccarat play, we gained 60 basis points of gaming market share on the Las Vegas Strip. We have provided supplemental information in the appendix of the presentation to provide more insight into baccarat hold, which has been a profitable business for us over time. I’m also very pleased to announce that our board has authorized a $500 million share repurchase program, marking the first anticipated return of capital to shareholders since prior to the LBO. We’re very proud that we are able to take this step, following several years of strong performance and tireless efforts to transform our balance sheet. We are committed to taking a well-balanced approach to enhancing shareholder value using all methods at our disposal. Eric will go into more detail on our capital allocation strategy later in the call. On Slide 7. Our cornerstone initiatives summarized here form the foundation of our strategy to accelerate organic and inorganic growth. Today, I would like to focus on our marketing programs, which we are constantly evolving to drive greater returns on our marketing investments. I will also highlight some exciting progress on our asset-light operating and licensing strategy, which expands our network. Turning to Slide 8. As many of you know, we believe there is substantial cost and revenue upside to increasing our marketing efficiency, which has been an area of focus and innovation for us. We have been very active in testing, learning and in optimizing new digital marketing capabilities. With machine learning technology to guide our reinvestment decisions at the individual customer level, we are able to produce more accurate and predictive algorithms that help us rebalance and optimize our marketing spend. These initiatives have improved our ability to provide the right incentives to our guests while reducing non-accretive offers. One example of this that we can share today is a coding contest we ran last year. We provided disguised data to coders around the world and asked them to come up with the optimal algorithm. Using the results from the contest, we were able to dramatically improve our ability to predict future value contribution of a particular customer. We have a successful pilot during the first quarter at certain properties and have now rolled the algorithm out across all of our domestic properties. We’re optimistic this effort will yield additional revenues while reducing expenses. We continue to meaningfully reduce total marketing spend as a percent of gross gaming revenue over the last several quarters while average spend per trip increased across most customers segments. Domestic marketing expenses were down 11% year-over-year or $55 million this quarter, and we expect to continue to focus on this initiative in the long term. It’s important to note we’re not just cutting spend across the board, we are increasing marketing reinvestment for a large number of our guests with more visibility into the returns on our investments across the entire data business and a more accurate picture of which offers are most valuable to our guests. Next, I’d like to share some updates on our branding and licensing strategy on Slide 9. There’s a broad portfolio of iconic brands that we have been seeking to leverage domestically and internationally through management and licensing agreements. Over the last month, we announced plans to bring the Caesars brand to two new beachfront resorts in Dubai and a resort in Cabo and bring the Harrah’s brand to a new tribal casino in California. These projects exemplify our asset-light growth strategy, which will expand our brands, create new sources of revenue and facilitate broad distributions of the Total Rewards program, all with minimal capital deployment. On slides 10 to 12, I’d like to provide you more detail on these three deals. We have entered into a nonbinding letter of intent with Meraas Holdings to brand and manage a large scale Caesars Palace Resort complex in the popular Jumeirah Beach region of Dubai, one of the top tourist destinations in the region. The complex will include two luxury five-star quality resorts, two serviced apartments, 10 residential buildings, 200 food and beverage in retail outlets, a convention center and a beach club and the largest observation wheel in the world. Under the terms of the letter of intent, Caesars Entertainment will manage both hotels, branded Caesars Palace and Caesars, the convention center, the beach club and the observation wheel. We will also brand and manage all hospitality aspects of the 180 serviced apartments. When the transaction and development are completed, these luxury hotels will be the first Caesars hotels without a gaming component and will be focused in offering our guests world-class hospitality and entertainment experiences. The hotels are expected to open later this year, with the observation wheel opening in 2019. This project will expand our international footprint and grow the Caesars brand in a key destination region. Realization of the project is, of course, subject to negotiation and definitive documentation, completion of construction and other conditions. Next, we have entered into an agreement to open a new Caesars Palace in the prime tourist region of Cabo, Mexico in partnership with experienced developer, Grupo Questro, who will own the Caesars Entertainment managed assets. This $200 million beachfront property will carry a luxury resort with 500 rooms, suites and villas, a 50,000 square-foot convention center, 40,000 square feet of meeting space, a 25,000 square foot full-service spa, three fine-dining restaurants entertainment venue, pools, tennis courts and access to the area’s best golf courses. The developer expects to break ground in the first half of 2019. We anticipate opening in the fourth quarter of 2020. On the domestic front, we are working with Buena Vista Tribe of Me-Wuk Indians to open a new 71,000 square foot Harrah’s Northern California casino near Sacramento, California. The $170 million property will include 950 state-of-the-art slots, 20 table games, one full-service restaurant and three fast-casual dining concepts. The developers began construction of the property, and we expect an opening date in Q2 2019. The new property will expand our Total Rewards network and grow the Harrah’s brand in a capital-efficient way in an attractive new market through a mutually beneficial relationship. Caesars has long-standing relationships with various Native American communities across North America dating back 20 years, and we are the only gaming operator to renew agreements with tribes multiple times. We currently operate four tribal-owned casinos in three states, and we see extending our agreement with the Cherokee tribe in North Carolina for a period of seven years. Our experience gained through these relationships is an opportunity for us going forward as Native American gaming expands in the U.S. These three exciting new destinations will further our growth strategy by increasing awareness of our brands in key destination cities through an asset-light model, while growing and diversifying our income stream with reliable management fees. We believe each project could be worth $5 million to $10 million in incremental annual EBITDAR. We will continue to look for attractive licensing and management opportunities, both domestically and internationally. Moving to Slide 13, I want to highlight another important partnership. Earlier in Q1, we announced a new partnership with Zappos and officially renamed the AXIS at Planet Hollywood to Zappos Theater. With the AXIS, we are able to take an underutilized asset, introduce our highly successful entertainment residency strategy, with headliners like Jennifer Lopez and the Backstreet Boys, and turn it in the second-highest grossing theater in the U.S. The success enabled us to implement a branding and sponsorship strategy with a partner like Zappos. Core to our entertainment strategy is making our Las Vegas venues the destination for headliner acts that appeal to a wide variety of audiences. And we’re building on strong momentum in 2017 with an impressive lineup this year. We recently announced that Gwen Stefani will begin a new residency at Zappos Theater beginning in June with strong ticket sales to date, marking the newest addition to our roster of top-rated headliners. We also just announced the return of Mariah Carey to Caesars Palace with a brand-new show, The Butterfly Returns. Our headliner business continues to be an important driver of incremental hotel, gaming and food and beverage revenue at Planet Hollywood and across the city. I’ll now turn it over to Eric to discuss the quarterly financial results in more detail.

Thank you, Mark. I’ll start with our quarterly same-store segment results followed by a review of the company’s liquidity position and capital structure. I’ll then conclude with some notable items for the second quarter and also the full year before turning it back over to Mark for closing comments. Please turn to Slide 15. Today’s commentary will cover same-store results, unless otherwise stated. Same-store commentary include CEOC results and exclude the Horseshoe Baltimore from the prior year. Same-store net revenues were down 2% year-over-year to $1.97 billion. Las Vegas net revenue was $906 million, down 2.6% versus the prior year quarter-to-date due to unfavorable hold of $19 million per year and the CON/AGG convention not recurring this year. Adjusted for unfavorable hold, Las Vegas gaming revenue was up slightly versus the prior year quarter, and cash ADR was up meaningfully when excluding the convention-impacted results of March. Results were also negatively impacted by about 37,000 rooms off the market in Q1 of 2017 for ongoing renovations at Bally’s and Flamingo. Our Las Vegas RevPAR was down 1% against the prior year period and was in line with our guidance for the quarter. Moving on to our other U.S. segment. Revenue declined 1.2% due to the impact of flooding and other unfavorable weather-related events which, together, amounted to a revenue headwind of approximately $25 million and an EBITDA impact of approximately $15 million when compared to the prior year quarter. Excluding the impact of bad weather, we estimate net revenues would have been up approximately 1.5% in the other U.S. segment. Note that some of these weather-related losses are expected to be offset by insurance recoveries, but they will be realized in future periods. EBITDAR across our regional properties increased 7.5%, reflecting exceptional cost management and improved marketing efficiency. Our regional margins improved 180 basis points. Marketing efficiency improved across the board and played a critical role in more than offsetting the impact of the multiple property closures and bad weather. As a reminder, on last quarter’s call, we discussed noncash interest and depreciation expenses associated with the real estate assets that were transferred to VICI Properties and leased back to CEOC. These assets are on our books at the purchase accounting multiple, which is higher than industry standard. Therefore, booked interest expense is larger than our actual lease payments. And booked depreciation expense is also elevated due to the fair value adjustment at emergence. This reduced our net income by $159 million this quarter, and we expect the impact will increase gradually over time. We’ve provided an estimate for these expenses for the full year in the appendix to this presentation. I would like to point out that since this is the first quarter incorporating the new revenue recognition standards in our financials, we have also provided restated figures by region for the last two years and also by quarter on our Investor Relations website. In addition, we’ve added a slide to this presentation that walks through these accounting changes to the appendix of the presentation. Turning to Slide 16, I would like to walk you through our debt, cash and liquidity position. We ended the quarter with approximately $2.5 billion of cash enterprise-wide. Our capital expenditures totaled $85 million in the quarter, driven by large room renovation projects currently underway at Bally’s and the Flamingo. We hold $7.9 billion of debt, excluding the CEC convertible note of $1.1 billion. Approximately 50% of our debt is fixed, which includes $2 billion of swaps. Our ratio increases to 70% when we include our lease payments as fixed debt. From an exposure perspective, a 25 basis point increase in LIBOR would increase our interest expense by slightly over $10 million annually starting in 2019. In addition, we recently repriced our CEOC term loan, reducing the spread by 50 basis points to LIBOR plus 200 basis points, which saves us approximately $8 million in annual interest expense. Turning to Slide 17, I’ll discuss our quarterly and full year outlook. In the second quarter, we anticipate RevPAR growth between 3% and 5%. We also expect 30,000 fewer room nights off the market for renovation in the second quarter versus the prior year quarter, which would represent a slight tailwind. Hold had a positive impact on revenue and EBITDA in the prior year period of $13 million and $8 million, respectively. We’re off to a strong start in the second quarter in both gaming and hotel which, along with our future bookings and cost trajectory, reaffirm our optimistic look for the remainder of the year. For the full year, we expect to generate adjusted EBITDAR of between $2.37 billion and $2.42 billion, which assumes a closing date of July for the Centaur acquisition. This range also includes a negative impact of approximately $40 million from the increased competition in Atlantic City. Depending on when and how many competitors open, this number could change as we continue to monitor the progression of that competitive environment. In addition, this range does not include any unanticipated hold fluctuations additional weather issues or any other unforeseen circumstances that we do not control. For the full year, our RevPAR guidance remains unchanged at a growth of between 4% and 6%. And we refined our CapEx guidance slightly to be within a range of $500 million to $575 million. In early June, we anticipate breaking ground on the Caesars Forum Convention Center. We also now consolidated our Korean joint venture, which is expected to spend approximately $100 million this year and which will be reflected in our full year results, but it will not be all our cash and will be from the joint venture. Turning to the next slide, I’d like to walk you through our capital allocation framework. As you’ve heard from Mark’s comments, we believe that our company is well positioned for sustained growth in the coming quarters and years. We have a number of exciting growth projects, improving strengths in our core business and solid operating cost discipline. The combination of our confidence in our future operating performance, our projected free cash flow and our current cash balance gave confidence to our Board of Directors to authorize a $500 million share repurchase program. As Mark mentioned, we plan to deploy a very balanced approach to capital allocation. After using cash for rent, interest, maintenance capital and same-store growth projects, we plan to use – utilize our remaining free cash on M&A, new development activities, debt reduction and share repurchases. This includes addressing options with respect to the convertible note at the parent. Importantly, we anticipate that any acquisitions we will make will be neutral or deleveraging. The relative allocation between the categories will be balanced and will vary depending on anticipated returns, our existing and predicted cash surplus, available opportunities with respect to the M&A and development categories and, of course, current market conditions. Our plan will also be informed by our medium-term gross leverage target of 4.5 times which includes all financing obligations and is roughly 1.5 turns lower than our current leverage level. With that I’ll turn it back to Mark for closing comments.

Thank you, Eric, and please turn to Slide 20. To recap, first quarter results were ahead of our expectations, and we believe the bad weather is behind us. Let us be clear, the first quarter regional gaming revenues are not a reflection on the domestic gaming consumer. We saw strong jobs reported in February and a weaker number in March, which we believe was largely impacted by the weather. Seasonally adjusted, U.S. unemployment remains at its lowest point since the early 2000s. Consumer confidence has increased from year-end despite the volatility in the market, and the current airport volumes of domestic and international passengers are up about 3%, respectively. Looking ahead, we expect to accelerate our momentum in 2018 through revenue growth and efficiency initiatives, continued investments in our properties and room product, the development of Caesars Forum and potential additional international development projects and licensing opportunities. And with the new $500 million share repurchase authorization we announced today, we will have the flexibility to return excess capital to shareholders as we continue to pursue accretive growth opportunities. We will now open the line for Q&A. Operator?

[Operator Instructions] Your first question comes from Chad Beynon from Macquarie. Your line is open.

Hi, good afternoon, thanks for taking my questions.

Hi, good afternoon.

I wanted to start with the margin improvement in the quarter, mainly from the 11% reduction in marketing costs. I believe last quarter, the marketing reduction was roughly 4%. So for starters, Could you kind of help us think about what really changed from the fourth quarter to the first quarter and if that’s sustainable? And then is that 11% what you’re assuming in the guidance that you issued for 2018? Thank you.

I think we continue to test and learn from different projects that we have going on. And each one of those projects can yield very good results, both from an efficiency but also from a revenue-generating standpoint. So I think that in terms of sustainability, we believe that this number roughly is sustainable. I’m not going to give you an exact number for every single quarter, but the changes that have been made are expected to last through year-end. Some of them will anniversary out in the fourth quarter so – but at the same time, we have other projects that are moving ahead that could provide incrementality to it. So I think it’s a question of directional – it’s a directional number. But again, we continuously experiment and then find either new ways to invest or reduce based on the pilots that we perform. In terms of the guidance, obviously, it had – it was a piece of our guidance, but I would not say it was a large piece of our guidance in terms of our confidence. I mean we have a number of things that are going on in the company, but from a labor efficiency standpoint as well as a marketing standpoint, they contribute to our comfort level. And that includes some of the revenue initiatives that we have that are going on within our core gaming operations as well as within our hospitality operations. Eric, do you want to add to that?

No. I think you covered it.

Thank you. And then my follow-up is with respect to Las Vegas. You noted some pretty nice share gains in the quarter. Could you kind of help us think about if the share gains came from improved marketing, your renewed product or maybe a result of all competitors? Just some color on kind of what’s going on in your Las Vegas portfolio would be helpful.

Sure. Yeah. This is Eric. I think we’ve said, we probably had a very solid first quarter given the various disruptions in the cycling of the convention. When we look forward, we continue to have a lot of confidence in the market. The forward bookings look very strong, the convention business looks strong and our RevPAR guidance reflects that confidence that we have for the rest of the year. With respect to the market share gains in the first quarter, I think it’s a combination of a number of different things. Mark referenced earlier the marketing efforts that, although we are reducing marketing, we do appear to be picking up share because we’re able to better effectively use the marketing we do deploy. We also, as you’re aware, undertaking a room renovation project that the customers do respond very well to. It’s a great, great product that we’re putting out there, and about half the rooms are complete now. And then, finally, we did introduce more new slot product to the floor in the fourth quarter that came in, in that period and into the first quarter, and so that certainly contributed to it. So I think all of those factors are lining up well, and they’re all also lining up well for the rest of the year just to continue to outperform.

Thanks, Eric. Thanks, Mark.

We’re also seeing – and just to add to it just for a second, we’re seeing pretty strong convention business in the third quarter and some selected ones in the second quarter. So we expect – I think that we expect that we’ll have a good year-over-year comparison as we move forward through the year. So that business has actually been building. The other thing that I’ll mention is that 37,000 rooms were out of service in the first quarter incrementally. And that comes back online, a lot of it in the second and in the third quarter, most of it completed by the second quarter. So that will also add to our incrementality as we go forward in the year.

Thank you very much and congrats on the results.

Thanks.

Thanks.

Your next question comes from Harry Curtis from Nomura Instinet. Your line is open. Harry, your line is open. Your next question comes from John DeCree from Union Gaming. Your line is open.

Hey guys. Thanks for taking the question. Wanted to first just kind of follow-up a little bit on Chad’s line of questioning and ask about 1Q. Some of your peers we’ve seen at the higher end properties across the Strip had done particularly well. I was wondering if you could kind of elaborate on kind of across your portfolio if you saw similar at Caesars Palace being really strong or if you’ve seen broad-based strength across kind of all segments in 1Q.

I think that the way I’d characterize this that you look at WYNN, for example, they’re in a different segment. They don’t participate. Their occupancy rates went down. We actually went up year-over-year. So obviously, we can get ADR and RevPAR grow if we decide we want to take our occupancy rates down. So we’ve chosen, obviously, to keep our occupancy rates up, meaning there’s a coverage of fixed costs, it’s a smart strategy. And at the same time, we did better than the Strip, if you will, at RevPAR on average. So you’ll see that kind of a strategy going forward from us. We’re not going to – and we’re going to see, obviously, very strong RevPAR growth of 4% to 6%. So we kind of feel like some of these properties are unique in participating in new niche markets. For us, across the board, we’re doing well, I’ll say, on RevPAR. And we treat this as a market – a harmonious market. And we try to appraise to the overall market not to just one individual niche hotel we try to optimize for our network. Eric, you want to add anything to that?

No. I would just add, we didn’t see any variants in particular for any specific category, whether it’s the low end or the high end. I think all the categories performed roughly the same.

That’s helpful. I appreciate the incremental color. And then I just wanted to switch gear, just kind of ask a little bit more on the strategy that you’ve really started to deploy in terms of adding hotels to kind of key gateway markets. I’m wondering if you could kind of talk a little bit about, at least high-level, kind of how the economics work out or get sized up for you guys in terms of any potential key money or capital and kind of how you expect, maybe typical Matchmade or branding fees to kind of line up to the extent you can?

Yeah. I’ll take this one. It’s – these are all capital-light projects. They do have what’s traditionally a nominal amount of capital contribution from key money that – as you referenced. And so the real strategy from our perspective is to enter into these gateway of large, attractive cities, deploy a nominal amount of capital and secure management fees that Mark guided were between $5 million and $10 million per project. And in addition to that, it enhances our brand, and it also allows us to get distribution from the Total Rewards network. So we’ve been very successful getting three of these kind of asset-light transactions done in the past quarter. And the team is actively engaged to continue that momentum.

Great, helpful. Thanks for the questions.

Thanks.

Your next question comes from Harry Curtis from Nomura Instinet. Your line is open.

I hope so, can you hear me now?

Yes.

Yeah.

Yes. Just being my age. So just a little bit more detail if you could, on the strength in the second half in Vegas because, to get to your guidance, you probably need to do the high single digits in RevPAR in the second half. Can you put a little bit – give us a little bit more detail on your conventions bookings and anything else that you think would be helpful.

Yeah. I think your calculation is directionally accurate. We see continued improvement throughout each quarter. So the third quarter will be better than the second and then the fourth, better than the third. As we mentioned earlier, we continue to, on an aggregate full year basis, expect mid-single digits growth for our conventions given that we had a sizable decline in the first quarter. As you can imagine, that does translate into significant growth in the back half of the year. We do believe that there’s very strong bookings in the third quarter, potentially all-time record. And we anticipate also that next year, the convention business continues to be strong, and we’re seeing high single-digit bookings into next year. So it’s definitely an improving quarter-over-quarter environment that we’re seeing, both on the hotel side and also what we believe will translate in from the gaming side. We have a little less visibility there because the bookings do come later, but the calculations that you ran are directionally accurate.

Okay. And just a follow-up question, given the lift in your EBITDA forecast, can you walk us through some of the puts and takes that you haven’t discussed for example, your expectations for the impact of cannibalization in Atlantic City, how much you’re building in for Centaur? Have your expectations changed there?

Yeah. Sure. So in Atlantic City, you mentioned that we’re building in about a $40 million negative EBITDAR impact for this year. Since the properties haven’t opened, obviously, that will all occur in the back half of the year, and so that’s included in our projections. Offsetting that is the contribution from Centaur. And we’ve assumed a half-year contribution from Centaur, which is roughly $70 million. That doesn’t include any upside from potential synergies that we can get, but that’s based on their trailing 12 run rate of roughly $140 million. Beyond that, as Mark referenced, we do include some of the performance that we’ve been able to achieve on the labor side and also on the marketing side when we look at the flow-throughs. And then from the hotel side, we’ve referenced the 4% to 5% growth, and that’s obviously a key driver in our projections.

Very good. Thanks for the help.

All right. Thank you.

Your next question comes from David Katz from Jefferies. Your line is open..

Hi, afternoon everyone. I wanted to ask about – just a little more detail around the capital allocation strategy. If I’m sort of getting your leverage right, you’re – at least on a trailing basis, you’re a little bit over 5x, and I see that you have a target in here of around 4.5x. Is that an unachievable level considering that you used some or all of the share repurchases this year? Can all of that occur based on where the guidance is today?

Yeah, David. Maybe, I’ll jump in and clarify a few items. We did give a target of 4.5 x, but we said that, that was kind of in the medium term, which we look to be kind of a three- to five- year horizons, so it’s not something that we’re aspiring to achieve in this particular year. Using the calculation that capitalizes the leases on the balance sheet as well as uses of the traditional debt, we’re roughly 6x levered today. So that’s how you get 1.5 turns of leverage compression that we referenced as well. We do believe that based on the cash flow profile of the company and the deceleration of our capital investments and the performance of the underlying business that the amount of cash that we’re generating is going to be sufficient to pursue all of those activities, including additional M&A where we identify it, some of the key development opportunities that we have as well as executing the share repurchase plan based on market conditions and also deleveraging the company over time. So we have modeled those out, and we don’t think that they’re at all inconsistent.

Perfect. I wasn’t suggesting that it was. But I do want to follow that up and ask about the remaining properties in the portfolio that are targeted or potentially ready for renovation and, order of magnitude, how many of those there are and how much capital over the intermediate term that might consume.

Sure. We’re maintaining our capital guidance that we had given before, which is that it does ramp down over time. We are still doing room renovations at an accelerated pace. We mentioned, this year, we’ll be doing slightly fewer room renovations than last year. Last year was the peak. This year, we’re primarily focusing on Bally’s and Flamingo. Next year, we have room renovations planned for Paris, additional rooms at the Flamingo and potentially Harrah’s as well. Those accelerated spending levels will be for two more years, and then we’ll get back to our normal, what we’re targeting, at $450 million per year of core maintenance capital. So that’s all included in our cash flow projections, and we believe that’s a reasonable amount of capital to spend such that we can keep our room product up to the expectations of the customers but also manage to have enough free cash flow to allocate to those other investments.

I have more, but I’ll come back around. Thanks for the responses.

Okay. Thanks.

Your next question comes from Ian Zaffino from Oppenheimer.

Hi guys. Thank you very much. Just wanted to delve into the buyback and again also the capital allocation. Can you just give us an idea of the choice, the size of the buyback, preference of buyback versus, let’s just say, taking up the convert and then also maybe intentions to do any more sale leasebacks and others, the tower in – at Caesars Palace or anything else across the portfolio as you kind of look to expand your growth and look at other opportunities? Thanks.

Yeah. Sure. So we sized the $500 million buyback at what we thought was a reasonable level to go out in the market and repurchase shares over time. It’s over 5% of our equity value but less than 10%, and we thought that was a good range. As we move forward, should the investment opportunities that we have outside of repurchasing our own stock change, we can certainly add to that amount if the board deems that that’s a good use of the cash flow depending on the market circumstances. So that’s really how we’re looking at it. We wanted to give ourselves an opportunity to be able to repurchase the shares if we think they’re at a great value while balancing the need to continue to grow the company because we believe that there are great targets out there, and we also believe that investing in our assets through capital and through technology are providing great deterrence as well.

And do you just want to touch on the sale leaseback or potential other sources of cash?

Yeah. We have those in our models as possibilities. They’re somewhat out of our control in the sense that you need another party to participate in terms of executing those. So they are sources of cash. Keep in mind that we do treat that as debt. So when we enter into a sale leaseback, we’ll capitalize the lease payments from a debt perspective. So it is modestly deleveraging, but there is some debt component associated with that.

Okay. Thank you very much.

Thanks.

And your next question comes from Jared Shojaian from Wolfe Research. Your line is open.

Hey everybody. Thanks for taking my questions. If I look at your other U.S. revenue, it was only down about 1% in the quarter and I know we don’t have all the data, but if I just look at the statewide GGR data, the GGR at the bulk of your properties was down more in the 6% range. So can you just help me understand that delta? Is that maybe non-gaming streams making up the difference or maybe it’s other Nevada that’s not reported? Or is there some other factor that I’m missing there?

Yeah. I think it’s a combination of those states that don’t break it out by property. There’s also the dynamic with respect to the future revenues. So some states report the gaming revenues pre-real rewards or discounts, and some states do it post. And so we did have fairly significant reductions in our cash-back programs during the quarter, and so that could certainly be what you’re reflecting. The other thing is that, included in those numbers, if you recall, we had two of our properties actually shut down. And so in some months, they were – one of them was down 40-plus percent. So that might or might not be included or excluded in your numbers.

Got it. Okay, thank you. And then can you just talk about what led you guys to decide to provide guidance right now and, specifically, why you feel more confident giving that today than you did last quarter? And then if you could also just confirm that any new potential labor agreements are already factored into that guidance. Thank you.

Yeah. I’ll take it first. We have another quarter of information – or actually in May, so we have a third of the year done. We have better insights into what the Atlantic City impact would be, so we felt that was reasonable to quantify at this point. The Centaur transaction, we’ve continued to guide towards the midpoint of the year, so that hasn’t really changed. And we continue to expect that to be roughly the appropriate time line. And so we also felt that given the discussions that we’d had with the analyst community and with investors in particular, that providing guidance to help people analyze the value of the company we thought would be very helpful, and so we elected to go ahead and do that this quarter. In terms of the union contracts and other cost-related items, as I mentioned earlier, we’ve taken into account an estimate of our trajectory of expenses, both the marketing and the labor side. And so unless there are shocks to the system, we would expect that everything should be included in that.

All right. Very helpful. Thank you very much.

Thanks.

And your next question comes from Mike Pace from JPMorgan. Your line is open.

Thank you. Good afternoon. I guess just getting back to the leverage target, thank you for including all the definitions of what you’re including in the numerator and the denominator there, but I’m wondering how you guys landed on 4.5x gross fully loaded leverage over a three to five-year period of time. Just your thought process, why that number, why that time period?

Yeah. We wanted to provide a target so that we also – that it was achievable, given where we think the company is heading, and one that would provide some information to you and to the investors, but one that also wouldn’t inhibit the company from pursuing the activities that we wanted to do. So when we look over the multiyear period and we look at the opportunities that are on the table, we look at the various investments and we look at our cash that’s being generated from the operations, we felt that this is a very achievable target and also one that we think will provide some good direction from people analyzing the company over the period of time. I also think that generally, the economy has been on up cycle for a fairly extended period of time, and we are in a consumer-facing business. And as a result, having a profile over time makes sense from a risk perspective, and that’s where we wanted to head.

And then just two on the capital structure. The Centaur funding, you raised $1 billion from selling billion from selling the real estate under Harrah’s, so you have 600-ish left. How should we expect you to fund that cash or new debt? And then since you brought it up in your prepared remarks, you mentioned convert options, I just want to ask convert options include issuing the underlying shares as part of that.

Sure. In both questions, we’ll have to say that we’re still evaluating all of the different opportunities that we have. I think it’s important to note out that, you’re right, we raised $1 billion to fund the Centaur transaction and we do have sufficient capacity under our revolver. So we’re not relying on the debt component to be able to complete the transaction. That said, issuing debt or doing some other type of fundraising might be an appropriate action to take, and we haven’t decided exactly how we’re going to fully finance the Centaur transaction, but there are a lot of different options available to us, and we’ll have to pick at the time which is the best one to do. Regarding the convert, there are a number of different options there as well. And so we’re evaluating that with respect to how best and if and when to try to reduce the amount of convert that’s outstanding.

Operator, if there’s no further questions – yeah. Go ahead.

There are no further questions at this time. Thank you to all our participants for joining us today. We hope you found this webcast presentation informative. This concludes our webcast. You may now disconnect. Have a great day.