PENN Entertainment, Inc. (PENN) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming Second Quarter Results 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, Savanna. Good morning, everyone and thank you for joining Penn National Gaming's 2017 Second Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers but first I'll review the safe harbor disclosure. In addition to historical facts or statements or 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 terminologies, such as expects, beliefs, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussion 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 assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures are calculated and presented in accordance with GAAP is found -- can be found in today's press release as well as on the company's website. And with that, it's my pleasure to turn the call over to company's CEO, Tim Wilmott. Tim?

Thank you, Joe, and good morning, everyone. And thank you for joining our second quarter 2017 earnings call. With me today are Chris Sheffield, our Head of Penn Interactive Ventures; our CFO, B.J. Fair; our Senior Vice President of Public Affairs, Eric Schippers; General Counsel, Carl Sottosanti; Chief Operating Officer, Jay Snowden; our Treasurer, Justin Sebastiano. I wanted to first highlight our second quarter performance with my remarks and then turn it over to Jay, which will be followed by B.J. But certainly we saw a very solid second quarter with very positive consumer trends with visitation and spend per visit, highlighted by very solid growth in Massachusetts at Plainridge Park. And also the State of Ohio with our 4 properties there, and we continue to see and understand much better the impact of National Harbor on Charles Town and continue to be pleased with how well Charles Town has held up with the new competitor in the market. We also saw significant year-over-year growth based on our acquisitions in Penn Interactive Ventures and also Prairie State Gaming in Illinois with our VGT business. With all that, when we take it out the addition of our 2 new Tunica assets, which came online May 1 and also remove the charge at corporate for the cash settled stock-based comp, we beat revenue and specifically adjusted EBITDA by $2.5 million in the second quarter from a guidance standpoint. With our free cash flow, we're able to reduce traditional net debt by almost $50 million in the second quarter. And I just want to speak to the operating performance of the people running our businesses out there and continue to tout the fact that our EBITDA margins across the enterprise were up 30 basis points for the quarter year-over-year. As we look toward the balance of 2017, when we include the approximately $7.6 million contribution from our 2 new Tunica assets beyond the beat we have for the second quarter, we're raising our EBITDA guidance by $10.2 million for the balance of the year. Again, encouraged by the consumer trends we're seeing that have continued into the months of July and our team's ability to improve our operating efficiency in our businesses. So with those introductory comments, I'd like to turn it over to Jay Snowden.

Thanks, Tim, and good morning to everyone. Second quarter was largely a continuation of Q1 performance across the majority of the portfolio. We exceeded revenue and adjusted EBITDA guidance largely due to solid same-store sales growth, which when you exclude Charles Town was actually the highest since Q1 of 2012. Continued to improve our adjusted EBITDA margins as Tim mentioned year-over-year, given the great work by our property teams and believe there is more to come in the quarters and years ahead. Some additional detail from a few of our key markets starting in West Virginia. Our Charles Town property actually grew EBITDA in the month of June in face of new competition year-over-year. And consistent with Q1, second quarter we continued to perform better than expectations going into the year, with revenues year-to-date only down high single digits having -- even with MGM National Harbor having opened in December of last year. In Las Vegas, today we open Robert Irvine's Public House restaurant, his first in Las Vegas. The second quarter was challenging a trot due to the 2 disruptive construction projects that we noted in the earnings release but we're very encouraged by what we're seeing in July since the pedestrian bridge from MGM reopened. Through the 21st of July, visitation and gaming volumes are all up over 20% year-over-year. This, of course, is all in advance of the restaurant opening later today. In Ohio, we saw impressive top and bottom line growth in the second quarter at all 4 of our businesses as we continue to grow our database and relationships with our most valued guests. And though road construction continues on I-75 north of our Toledo property, the impact is certainly less disruptive than it was last year at this time. Moving to Massachusetts, Plainridge Park Casino had a fantastic second quarter, growing revenues just shy of 10% year-over-year, while simultaneously improving EBITDA margins by a 100 basis points. And then lastly in San Diego, we continue to refine our marketing strategies and cost structure. Sequentially from Q1 to Q2, we experienced solid top line growth, coupled with margin improvement of nearly a 1,000 basis points resulting in over 25% higher EBITDA in the second quarter when compared to the first quarter. And now some insight into what we saw in the second quarter with regards to our database trends. Similar to the first quarter, VIP segment was particularly strong across nearly all of our markets, both in visitation and spend per visit. The [ unbraided ] business was also an area of strength outside of 3 markets- Charles Town, Illinois and Mississippi- and we're confident that these trends will continue as consumer confidence, job and income growth and home values all continue to improve year-over-year. One quick comment on July to the first full weeks, it's been very strong start to the third quarter. It is still early, with that said, but we're encouraged by what we're seeing across the vast majority of our properties as we head into the second half of the year. So with that, I'll turn it over to B.J. to cover Q3 and second half guidance.

Thanks, Jay, and good morning. In just a few -- the detailed assumptions for our Q3 and updated 2017 financial guidance are found on Page 5 of the press release. I just wanted to give a few highlights. Revenue for the year is $3.12 billion for the full year; and Q3, $790.9 million. Adjusted EBITDA is $867.4 million for the full year, $220.4 million for Q3. I did want to note that the guidance for the full year of $867.4 million includes the $6.6 million of cash settled stock awards and the Tunica charges that we experienced in Q2. Absent those charges it would have been approximately $874 million but they're included for the full-year guidance. We don't normally also give property available information but because our guidance now includes Tunica we wanted to be very specific about the second half estimates for Tunica. The net revenue is forecasted for the second half of '17, of $34.7 million. The EBITDA before rent contribution for the second half is $7.6 million, which is reflective of a $1.7 million of integration expenses and conservative estimates for the disruptions to the slot floor for the installation of our Marquee Rewards system conversion. Our outlook for the performance of Tunica remain consistent with the assumptions that we had at the time of acquisition. In addition to the increase for Tunica, as Tim had mentioned, we have increased our property level guidance of approximately $2.6 million beyond the beat we experienced in Q2. Our maintenance CapEx guidance remains at $78 million for the year, approximately $32 million of which is expected in Q3. Cash on hand at the end of June is $224 million. Our project CapEx is expected to be $29 million for the year, $14 million of which is expected for the remainder of the year. And again, it goes without saying but we -- as we have previously stated, the construction of our Tropicana expansion has been shifted out until next year. We have updated our cash tax -- our cash taxes to be a net refund of $28 million. This reflects our higher pretax income from the operating performance as well as the lower estimated depreciation due to the shifting of the Tropicana expansion capital spend. Our Master Lease rent recoverage ratio was 1.83 as of 6/30. At this time, we expect to incur a rent escalation of approximately $4.1 million at the conclusion of our lease year. This is due to higher forecasted performance from the properties as well as the inclusion of the new Tunica assets. Our free cash flow generation at the end of the year is expected to be $310 million and net free cash flow after mandatory payments and project CapEx is expected to be $161 million, which includes the acquisition of Tunica. And all of our debt covenants will be comfortably met. In addition to the guidance, I wanted to just say a few words about Jamul, and as Jay said earlier, we continue to be encouraged by the improvements that we're experiencing in the property. But that being said, I wanted to bring a -- provide a brief update on the status of our loan at Jamul. First and foremost, the loan is current and is being fully serviced. We do anticipate that the total leverage covenant will be breached at the -- upon the August 15 certification test. We also anticipate that all of our Term Loan C will become subordinated. Negotiations are ongoing between the Tribe and its lenders and it's the intent of all parties to come to a timely resolution of the issues based upon the current financial performance of the facility. We have taken a $5.6 million cash impairment charge against the loan. The impairment assumes that there may be concessions as part of the restructuring of the loan due to the covenant breach. Once the negotiations have been finalized, we will be very forthcoming with what the results are but until such time, they are still under negotiations. Now I'd like to reiterate that our guidance does not assume any EBITDA will be received in 2017 from our license or management fees based upon the current negotiation status. So with that, I will turn it over to Tim.

Thank you, B.J, thank you, Jay. Operator, we're now ready to take any questions from the audience.

[Operator Instructions] Our first question comes from the line of Carlo Santarelli with Deutsche Bank.

If I could just clarify something before I ask my question, and I think, B.J., you more or less outlined this. But the new guidance of $867 million, that includes Tunica charges and that was like the $1.5 million or so plus the cash stock of like $6 million and change. So you're really looking at an 874 number. All things equal with those two charges from the 2Q? And a little bit of Tunica?

That's correct with one caveat. Your $1.7 million is basically what we're expecting for -- in additional Tunica -- your $1.7 million is expected for additional Tunica charges in the second half. Some of the Tunica charges that were in the previous -- that were in Q3 included the severance of approximately -- or Q2 -- approximately the 600,000. So your number about 6 is correct and would have been equivalent to the 874.

Got it. Okay, great. Thanks. The -- just on a go forward basis, as you guys look at your business now and Jay, obviously, you had some favorable comments about July. The comps seem to be a little bit easier in the back half of this year than they were in the first half. You came through the first half very well in terms of same-store performance, which leads me to kind of a two-part question. Maybe, why not be a little bit more aggressive with respect to the stock buy back in the 2Q? And do feel like the guidance you put forth for the second half is leaning conservative?

Let me -- I'll answer the second part of the question first then I'll turn it over B.J. to answer the question on buy backs. Carlo, this is Jay. Look, it could be conservative, we're off to a great start in July and if the trends that we're seeing in July continue to the remainder of Q3, then our guidance is going to be extremely conservative. But it's hard to say, 3 weeks doesn't make a quarter, 3 weeks doesn't make a second half of the year. And there's still unknowns, obviously, we're opening up a brand-new restaurant here at Tropicana today. We're very excited about that, we're seeing the improvements in foot traffic and gaming revenues. All in advance of the restaurant opening just since the pedestrian bridge reopened to MGM. So we're encouraged by what we're seeing. Trends in Ohio and Massachusetts continued to be very strong this month and really across the portfolio. So I hope that it's conservative but it's typically our approach just to make sure that we're not getting ahead of ourselves as we put guidance out there.

And with respect to the share repurchases, obviously, it remains a primary focus of the company as one of the key elements of our capital allocation. But as you think, as many of you are aware out there, there are number of processes that are currently going on for M&A activity that's out there. There's -- we've been looking at a number of things in Canada. And as a result, I think we made the determination that at this time, we're looking at potentially -- M&A activity that is probably going to be a better return than we're looking at for the allocation of the company. And as we continue to move forward, as I said, we'll continue to look at the share repurchases but based upon some of the M&A activity that is going on out there right now with the processes that are going, we've elected to delever [ at ] this time and be able to take advantage of those opportunities.

Just to remind everybody, when we got the authorization, Carlo, from our board, it was a 2-year authorization. So we have plenty of time to act upon that if we feel it's the best use of our capital.

For sure. Thanks, guys. And all of that was really helpful. B.J., if you don't mind me just asking one point of clarity is -- are you making the point that you were potentially prohibited from buying back stock in the quarter? Or you chose not to because of some things that you think are more than likely to come to the goal line?

We chose not to. As -- there's a number of things, a number of different opportunities that are out there that I think we're really looking at. And obviously, taking it under consideration the capital structure at the time. So we felt that delevering was putting us in our best position to be able to take advantage of any of those [indiscernible]

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

N I just have a few property specific questions. And I was wondering if we could start on Charles Town. Certainly, the stability there has been impressive throughout. So just wondering, kind of, what you continue to do there? Any kind of plans for that property going forward to further insulate it? Or even though it's stable, it's still down to, kind of, maybe abate some of the declines?

Well Jay was in Charles Town on Monday so I'll let him answer that question.

Yes, look Felicia. Perhaps, what I've been -- I'll answer your question maybe a little differently and get to your question. What I've been most pleased with since the opening of MGM National Harbor in December of last year is that the impact to our property has been very consistent every month. So from January, all the way through to what we're even seeing in July. And I mentioned on my comments at the beginning, we've actually grew our EBITDA year-over-year in June with the new competition. But if you look at the top line, our top line has been down anywhere between 7% and 10% year-over-year, pretty much every month and even on a weekly basis, it's very consistent. So we're pleased, we know who our customers are, we're very focused on the mid-segment -- mid-worth segments and the VIP segments. Certainly, closest to our property, the midpoint of the fight zone's between us and National Harbor. We performed very well in Frederick County, Maryland and Loudoun County, Virginia. And actually, have held up better than we anticipated in Fairfax County, Virginia and Montgomery County, Maryland. So we're pleased with what we're seeing in the business. The team there has done a great job on the cost structure. Our margins year-over-year are very close to where they were last year, even with the revenue decline. So property performance is great. And we're going to continue to do what we've been doing. We're very focused on the experience, we programmed a lot more entertainment and we're confident as we head to the second half of the year that we'll see trends continue as we've seen the first half of the year.

Great, meaning the kind of the revenue declined but continued increased flow through?

That's -- well consistent with what we've see in the first half of the year, which is exactly as you described.

Okay, great. Then just moving on to Tunica. You know just now that it's closed, maybe give us an update, your thoughts on those? And is there any kind of upside there?

Sure, it's still very early. So I don't have all the answers to the question at this moment, Felicia. But I would say that what we're seeing in the business is very consistent with what we saw during the due diligence phase and we're very confident that we can deliver on the EBITDA that we put out at the time of the acquisition. There is some noise in the second half of the year that B.J. laid out very well. One-time charges to the tune of $1.7 million so the guidance we put out there for Tunica, of course, is net of that. And then we also took down our assumptions for the second half of the year because we will be installing our Marquee Reward, play our loyalty card program and systems at both properties over the course of the next couple of months. And as we saw Tropicana, that can be disruptive to the gaming experience. So going into 2018, our assumptions for those properties are in line today with what we thought they would be at the time of acquisition.

Great. And then just finally on Trop. So you've added, you've improved some of F&B, something is opening today. As you kind of look at what you've done now and kind of the benefits of that, wondering if it's kind of making you rethink the deferred CapEx project that's now pushed to 2018? Is it making you think about you know what you've invested today and the benefits? Is that kind of making you rethink your future project there?

Felicia, this is Tim, I'll answer that question. And -- we're opening, as Jay said, the Robert Irvine restaurant today. We have another Asian restaurant opening up later this year. We want to give it more time before we think about further capital allocation here. And we're going to at least give ourselves a couple quarters of performance with the added amenities. So our thoughts haven't changed about Tropicana Las Vegas. We're going to wait probably until the first half of 2018 to determine what's going to be next after we see the response from our customers, specifically, the Marquee Rewards customers on the new amenities here. We're encouraged with what we've seen so far since the bridge reopened at the end of June. But we're going to give ourselves at least 6 more months of performance before we communicate further what our plans here will be.

Okay, great. And then just one last housekeeping. B.J., can you just remind us of the covenant on the Jamul loan, the details there?

As on a pro forma basis as of June 30, the total debt -- I'm sorry the total leverage ratio needed to be below a 5x. And we will -- the total leverage ratio will exceed 5x, the certification of that comes on August 15, and that is when the actual breach is anticipated to be.

Our next question comes from the line of David Katz with Telsey Advisory Group.

I wanted to just follow that up with respect to Jamul. And I'm not sure if you stated this before. What is the company's financial exposure? Or remaining investment in that? How much money is quote unquote "at risk" with that project at this point?

I won't put "at risk." We currently have a loan of 98 -- approximately over $98 million of our term C loan. We have an additional obligation to continue to fund roadway improvements in the area of up to $15 million. So our anticipated exposure is to be $115 million of the total loan. As I mentioned, that loan and the term loan B are both current right now. They are being fully serviced and we are in the process of a renegotiation based for the loans based upon the current operating performance that we are seeing. And so I think that, that as we have identified a slight impairment to that loan based upon the current negotiations and potential outcomes of those negotiations. But again, I think we still feel very, very comfortable about the long-term operations at Jamul and the viability of continuing to -- restructuring that loan and having everything be fully serviced and not at risk.

Right. And if I can just follow that up one more time. I hear your optimism. Has the return view changed or been reset? Or should we be thinking about a kind of flatter trajectory to get there, or a longer timeframe to get there, than say, where we were a quarter ago? Right, I think if before the property opened, we probably all had a different view. But say, over the past quarter or so?

David, this is Tim. I don't think our expectations have changed much from the prior quarter. We have seen notable improvement second quarter over first quarter and are continued to be encouraged by the trends there. But from where we were 3 months ago, I think we're right on or maybe even slightly better than the expectations we had from a quarter ago. So things continue to project in the right direction and we're just in the process of -- with the Tribe and the other lender trying to get the capital structure settled.

Yes, and I think that's just -- that's the easiest way to say it, which is based upon the current performance, the capital structure is just a little over-levered and we need to continue to work through and restructure the existing loans to able to be more appropriate to the -- for the current operating performance for the capital structure.

Got it. And if I can just ask one quick one with respect to Tropicana. And I did walk the floor recently and I do -- I heard your comments, I appreciate your comments about the allocation of capital there. As you look through the property, it does look as though there are some other incremental projects to take on whether it's food or the pool areas or other things like that. Irrespective of any thoughts about a hotel tower, what are the next projects there? And how are you sort of thinking about the return as it is today or this year on what you've spent so far?

I'll tackle that one, David. We're continuing to look at our non-gaming amenities and offerings here at the property, as Tim mentioned, we have another smaller Asian concept that we're opening up toward the end of this year that will be adjacent to Robert Irvine's restaurant. We're converting our café, the beach cafe to a buffet over the course of the fourth quarter. So we're continuing to make significant improvements to the non-gaming amenities. We have a new resident entertainment offering here at the property, David Goldrake, he's off to a great start, new magician to town. So we're doing a number of things that really fall within the typical maintenance CapEx budget of the property beyond the sort of $40 million that we talked about previously. So acquisition of 360 and we're a total of $400 million all in when you consider the renovations to the casino floor, Marquee Reward installation and now the recent additions of the restaurants. And that's where we expect to be until we make our decision on what to do longer term, as Tim mentioned, that will be in some time in the first half of next year after we let these amenities come to life and see what the response is from our customer base, particularly those that are traveling in town from our feeder markets. So nothing's really changed there, David. Beyond, some smaller projects we're continuing to work on but those fall within the maintenance CapEx budget of the property.

Now we have some areas, as you've probably suggested David, that are underutilized. And that's our decision process, how to allocate capital. Mostly through maintenance capital to address some of the existing facility opportunities before we make a final decision in 2018 about further expanding the footprint of this property.

Got it. And if I can ask one last quick one. In the past, we've talked about the potential M&A landscape for distributed gaming. And we haven't really seen or heard much about that, I don't think. What's going on there? And is there any potential opportunity for you to allocate capital there in the near term?

We certainly -- we have done a number of small deals, and B.J. is probably closer to that than anyone else in the room today. But yes, we still are very interested in continuing to expand our footprint in the State of Illinois and beyond with the distributed gaming business and we continue to have discussions with the operators there that are interested in selling their roots to us. And I think that will continue and be an ongoing opportunity for us quarter-to-quarter.

No, no. I was just going to say that's pretty much it. I think it's -- we're seeing a lot of activity in this space. It's definitely an aggressive marketplace, you still have a very high expectations on the valuation side. But I think that there is activity and as time goes on, I think you're going to start to see more activity in that space as well.

Our next question comes from the line of Steve Wieczynski with Stifel, Nicolaus.

So Jay, I apologize if I missed this in your prepared remarks. But can you go a little bit more into the average play in terms of what you're seeing today, that rated player? Can you maybe go into some details about what you're seeing in terms of trips made and spend per trip? And then also that non-rated player, are you seeing that segment pick up as well?

Sure thing, Steve. So really the strength that we saw in the second quarter and very consistent with the first quarter, was concentrated at the VIP segment. So our higher-worth guest, we saw improvements in spend per visit and visitation. As you go down further in the database sort of at the mid-worth level, spend per visit, again great story, visitation more flat at that level. And the lower worth customers we're seeing spend per visit improvements but visitation down slightly, low single digits. So that's sort of the layout of the rated portion of the database. The unrated portion was another strong area in the second quarter. There's a few markets that are soft and to be expected, we're not seeing unrated business growth in the Gulf Coast of Mississippi with some new competition there. Charles Town, of course, we're not growing our unrated business, though our rated business has held up very well. And we did have some impact to our property in Illinois, Alton, we had a flood that impacted us and we had to shut our business down for a few days that impacted our unrated business in Illinois. But outside of those, those are really the exceptions, unrated has been a great story in Ohio, Missouri, Massachusetts, Las Vegas. It's been a good story overall, so hopefully that answers your question but happy to answer anything else.

No, that's great, Jay. And just one quick final question. Just going back to Vegas, we've talked a lot about the Trop and you guys gave a lot of detail there. But can you maybe just fill us in, in terms of what's going on at M and how that property has held up over the last couple of quarters?

Sure. We continue to have a very strong year as we have the last several years at M Resort. The current performance of that property continues to get better every quarter on a year-over-year basis. And it's somewhat driven by top line and visitation. And we continue to work on the cost structure there as well. We're actually taking a hard look right now at an additional hotel tower at M Resort because the property's performance continues to get better and better and the returns look better and better. There's a lot of rooftops, we're in Vegas right now and when you drive out to M, where we had dinner last night, you just see construction trucks and cones on the roads. And they're digging into the mountain to build additional homes around Southern Highlands, it's a really great story. Population growth is going to continue on the south end of the valley here in Las Vegas, which benefits us tremendously at M Resort long term.

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

I joined late and I don't really want to make you repeat anything. So maybe to try and go to an area where you haven't really covered. Obviously, with Tunica, like last quarter, we've heard from some different operators and just the general environment out there that M&A opportunity is maybe sort of picking up in the regional business overall. I'm kind of curious on, and obviously you can't comment on the specific transactions, but just kind of curious on your overall thoughts on the transaction environment and how you kind of feel about additional opportunities like tuck-in deals like Tunica?

Shaun, this is B.J. As we mentioned a little earlier, we see a lot of M&A activity that's out there right now and that's part of the reason we're keeping our powder dry to try to take advantage of some of those. There's some very large opportunities out there, which some processes are currently being [ rent ] for, I'm sure you're aware of and others. So we're seeing some activity that's there and we are continuing to kick the tires on a number of different opportunities.

Our next question comes from the line of Chad Beynon with Macquarie.

First, I wanted to start on Canada, not on the M&A side, to your comments B.J., but on the new casino side, I know there was an RFP recently in Ontario for 3 properties. And you guys have run Casino Rama for some time. So could you maybe just give us some color in terms of why you didn't submit a proposal -- if returns are better elsewhere, or you just don't think the opportunity up there kind of fits your criteria?

With respect to the Casino Rama bundle that is currently being run for the OLG modernization process. The application on that bundles have not been -- the due time on those bundles have not been -- have not hit yet. So that's still out there as a potential and that process is still very active and underway.

And Chad, we have submitted a proposal for another bundle in the province of Ontario. So that is in play right now. But some we've passed on because we didn't think the opportunity was significant enough for us. But we recently have gotten a proposal submitted and we're waiting to see next steps on that.

Okay, great. Yes, I was actually referring to the Woodbine, Ajax and Great Blue Heron bundle. And then just moving on to Plainridge, which isn't under your Master Lease Agreement. Could you kind of give us some targets or maybe just some color around how you're thinking about this, obviously, the EBITDA continues to grow. A lot of us don't believe you're getting full credit for this property that is a PropCo and not an Opco. So how do you think about the right timing to maybe explore selling the rent under this property? And that's all for me.

Well Chad, that is and we've said this in the past. That's certainly the option we have, we've said also in the past that we want to see what the impact of the new supply in Massachusetts will be. We know that the Boston Steve Wynn operation will open up in 2019. There's a little bit more uncertainty about the Mashpee Wampanoag Tribe in the southeastern zone. But we certainly want to see what the impact of that supply has and the stability of our cash flows before we think about exercising that option.

[Operator Instructions] And now our next question -- Sorry, we do have one more question.

Please, go ahead operator.

And that's from the line of Brian Egger with Bloomberg.

Just to clarify this, and I apologize if you had gone into detail on this earlier. To get to the $2.5 million favorable EBITDA variance relative to your previous guidance, which is kind of related to Tunica. Just so I understand, what you're basically saying in your reconciliation is that if you start with the 219.1 [ basically ] you have to effectively add back the $3.3 million net effect of Tunica, net of the severance charges and everything else in the stock awards. Just -- I just wanted to understand that $2.5 million bridge, if you will?

Yes, it'll be an increase, I am sorry. The increase...

That was the second quarter beat.

Second Quarter. Yes, yes.

Are you referring to the guidance going forward?

Second quarter beat.

The second quarter beat.

I was referring to the second quarter beat, the reference specifically to $2.5 million if one were to remove the contributions from Tunica, just want to make sure I understood how you were getting there?

Yes, it's once you remove Tunica and then on the property level basis, then the remainder is a $2.5 million on -- for the non-Tunica properties.

Brian, you take out the performance of the 2 months of the Tunica assets, which weren't in the second quarter guidance. And then you remove the corporate charges for the cash settled stock-based comp and the severance charges in Tunica. The net of that is a positive beat of $2.5 million for the second quarter. Before we continue if there are any more questions, I'd like to have B.J. just clarify an answer he gave regarding the Jamul leverage.

Yes, Felicia, I apologize, the 50 test -- the 5x test is basically for our subordination. The total leverage covenant test on a pro forma basis was 5.5x. But the answer still remains the same.

Operator, are there any more questions?

There are no further questions at this time, sir. Please continue with your closing remarks.

Well thanks, everybody, for listening into our second quarter 2017 earnings call. I know today's a busy day for everyone in the gaming space with a lot of different earnings releases and calls. So again, we're optimistic about what we see for the balance of 2017. Our properties and our teams there are delivering on the expectations that we set forth at the beginning of the year. So we'll certainly be back in touch with all of you in about 3 months to talk about third quarter and the balance of 2017. So thank you for your participation on this call.

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.