PENN Entertainment, Inc. (PENN) Q2 2018 Earnings Report, Transcript and Summary

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

Thank you, Savanna. Good morning, everyone, and thank you for joining Penn National Gaming's 2018 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 read the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies, such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations or these or similar words or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risk 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 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 measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, it's now my pleasure to turn the call over to the company's CEO, Tim Wilmott. Tim?

Thank you, Joe, and good morning all to Penn's Second Quarter 2018 Earnings Conference Call. After my comments, 2 of my colleagues will follow me. First would be the President and Chief Operating Officer, Jay Snowden; and then following Jay will be our Chief Financial Officer, B.J. Fair. But to get started, let me first cover the operating performance in the second quarter that we just reported this morning. Pleased to report that we exceeded our EBITDA guidance by over $4 million in the second quarter. Jay will get into it in a little further details, but we had an over 3/5 business' same-store sales growth. The program we articulated in the second half of 2017, our margin improvement program delivered basis points year-over-year improvement in EBITDA margin of 133 bps. And with this free cash flow, traditional debt was reduced by $120 million, and our rent-adjusted leverage at the end of the second quarter is 5.2x. Next, I'd like to touch on a bit of where we are with the Pinnacle acquisition, and I'm pleased to report that we continue to receive regulatory approvals in accordance with our expected time frames. And we now anticipate our closing of this transaction to occur in early fourth quarter of this year. We've done a lot of good integration planning and we -- and that continues to progress very well. We have really defined what the corporate structure's going to look like here in Wyomissing and at the service center in Las Vegas. And we maintain a high level of confidence in the $100 million of cost synergies that we previously articulated as one of the rationales for this transaction. And to remind everyone, we continue to believe 50% of these synergies will be realized in year 1, and 50% in year 2. I'd like to touch on other development activities as well in the second quarter. And I'm pleased to report that in June, we announced our intention to, along with our new landlord, VICI, purchase the Margaritaville Casino in Bossier City, Louisiana. Our piece of it is a $115 million. Combined with the Pinnacle transaction with their Boomtown property in that market, that will give us 2 properties in Northwest Louisiana. We anticipate to close on the Margaritaville transaction in the fourth quarter but post Pinnacle. Again, I mentioned our landlord will be VICI. And as we looked at the EBITDA in that business, as we previously mentioned, the $115 million acquisition represents about a 5.5x multiple. And with synergies, we believe we'll be able to get that multiple under 5x over a couple of year period. I also want to touch on our progress being made on our Category 4 licenses here in the state of Pennsylvania. We are working on both of these locations. First, in York County, we received a 60-day extension from the Pennsylvania Gaming Control Board and are working at finalizing our sites in York County. And we're near the finish line, and we'll be ready to submit the details of our development application in early September. And then shortly thereafter, in Southern Berks County, we'll be able to submit our detailed plan. We're still looking at a number of different sites there as well to finalize those 2 developments. As I've said in the previous quarters, we maintain a high level of confidence that we're going to get good levels of return on our invested capital at these locations. To remind everyone, they we can have up to 750 slot machines and 40 table games in total in both of these locations. Next, I'd like to touch on where we are, given the ruling that occurred on May 14, with the U.S. Supreme Court ruling that the federal legislation prohibiting the expansion of sports betting is no longer constitutional. We are actively working in Mississippi, West Virginia and in Pennsylvania to hopefully get up, by football season, our sports betting operation there. I have a higher degree of confidence that in West Virginia and Mississippi, we'll be ready for football season and possibly in Pennsylvania as well. We continue to have discussions with other states that are considering sports betting legislation and are pleased in trying to promote what Mississippi and West Virginia did with their models and how they've introduced sports betting in these 2 states as models for other states to consider as well. And finally, we also submitted an online gaming application for the state of Pennsylvania, and we'll be ready to launch, we believe, in early 2019. Despite the high tax rate on the slot revenues, we believe we can create a viable business here and learn a lot about how online commercial gaming will take place because we firmly believe this is going to be something over the next 5 or 7 years that other states will entertain as well. And we're excited about getting into this business in Pennsylvania and continue to figure out how we can leverage this big opportunity -- strategic opportunity long term. With that, I'd like to now turn it over to Jay Snowden, our President and Chief Operating Officer, Jay?

Thanks, Tim. Good morning, everyone. We're pleased to report another quarter of solid top and bottom line results at Penn. Nearly 2/3 of our properties grew net revenues year-over-year resulting in enterprise-wide same-store sales growth of over 2%, our second strongest quarter in over last 5 years. We delivered record EBITDAR margins of nearly 30% in the second quarter, as over 3/4 of our business has improved year-over-year. When you combine our first half actual results with our second half guidance, we anticipate delivering EBITDAR margins of slightly over 29% in 2018, a year-over-year improvement of 115 basis points. Economic trends in the U.S. continue to be very encouraging with employment and consumer confidence results being the strongest that we've seen in decades. Shifting to our property results, we had a very encouraging quarter in the west with record results at M Resort, Tropicana and Zia Park in New Mexico. Throughout the quarter, we continue to refine our marketing strategies and identify unprofitable spend at all 3 of these properties, which ultimately resulted in lower than forecasted revenues but higher-than-expected EBITDA and margins. And our first quarter momentum in Ohio, Massachusetts and Missouri carried through to the second quarter as solid top line growth flowed through the EBITDAR at over 100% on a combined basis at these properties. Our database trends across the company in the second quarter largely neared those of the first quarter. We had robust results at the high end, both in visitation as well as spend per visit, combined with solid low single-digit growth in our mid-worth rated as well as our unrated segments on a year-over-year basis. Transitioning to the Pinnacle integration activity, we have made significant progress since our last earnings call in April. We have finalized our post-close corporate organizational structure, as Tim mentioned, and we really could not be happier with the talented roster that we've assembled. We also have identified a number of new shared service functions that will continue to drive improved service and efficiencies throughout the combined company. That, in conjunction with implementing property best practices from both companies, has us feeling very confident about our ability to achieve our cost- and revenue-synergy targets over the 2 years following the close of the transaction. So with that, I'll turn it over to B.J.

Thanks, Jay, and good morning. I have a very brief presentation this morning to present our third quarter and revised 2018 financial guidance. Our revised guidance and underlying assumptions are found on pages 5 and 6 of the press release. Although we were anticipating to close the Pinnacle and Margaritaville transactions in Q4, our guidance remains as Penn standalone guidance. The guidance does not include any estimates for the combined companies. With that, our revised revenue guidance for the full year is $3.219 billion, $807 million as anticipated in the third quarter. Our adjusted EBITDA is $936 million for the full year, $232 million for the third quarter. To be clear, we are holding our adjusted EBITDA guidance for the second half of the year constant and including the $4.4 million we've realized in Q2. Adjusted EBITDA after master lease payments will be $475 million, with $116 million estimated in Q3. Maintenance CapEx remains at approximately $104 million for the year, approximately $45 million is expected in Q3. Master lease rent payments continue to be forecasted at $462 million, $116 million incurred in Q3. As of 6/30/18, our master lease rent coverage was 1.89. As we said in the last quarter, we anticipate to incur the full escalator at the end of our lease year, which will be in October, resulting in an increase in FY 2018 at $900,000. This will be more than offset by the 5-year rent reset that also takes effect at the end of this lease year, which will result in a $1.9 million reduction for the 2 months in FY 2018. We have increased our estimate for cash taxes for the year to $33 million, $15 million expected in the third quarter. Cash interest on traditional debt is estimated at $58 million, $21 million will be in the third quarter. Free cash flow generation for the year is estimated at $280 million, and net free cash flow after mandatory payments is expected to be $242 million. Cash on hand as at 6/30/18 was $201 million. And as usual, all of our debt covenants will be comfortably met. As a final note, I wanted to reiterate Tim's earlier comment on the $120 million of traditional debt we repaid during the quarter. Debt reduction has been a primary focus of the company. Our gross leverage, inclusive of our master lease obligations, has been reduced to 5.21x EBITDAR and the net leverage to below 5x. Our net leverage, inclusive of the master lease obligations, will be approximately 5.7x post the Pinnacle transaction, and we anticipate to be within our gross leverage objective of 5.0 to 5.5x by the end of 2019, inclusive of both the Pinnacle and Margaritaville transactions. We remain steadfast to debt reduction, which we believe strengthens our ability to take advantage of opportunities to enhance shareholder value as we identify them. And with that, I'll turn it back to Tim.

Thanks, B.J. Operator, we're now ready to take any questions from the audience.

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

So when we look at the margin improvement in the quarter, it is pretty impressive, pretty much across the board for you guys, but the south and the west region clearly stood out. I know Jay talked about M and Trop and Zia Park, and those were the drivers there. But I guess the question is, given your changes to marketing at those properties, I guess when you look at it across the rest of your portfolio, are there other opportunities out there to make similar changes that you did in the west? And if so, have you incorporated the potential revenue headwinds in your guidance?

Steve, good question. I would answer that by saying that the opportunities to refine our marketing spend in Las Vegas were greater than they were in some of that the marketplaces, particularly at the Tropicana. Now that we've had that asset under our control for the last several years, we did get smarter, I think, as the quarters march on and you learn from prior year mistakes. And so I wouldn't necessarily extrapolate from the west results that you could apply the same margin improvement to the rest of the portfolio. Though, we continue to learn across all of our properties and apply those learnings across the rest of the enterprise. So we feel as though our guidance does include what we presume we can execute on for the remainder of the year. And what -- we're going to end 2018 if we hit guidance remainder of the year with EBITDAR margin just north of 29%, but ultimately, when we shared on our plan back in October, the margin improvement plan, we thought we can get there by 2019. So we would continue to accelerate a lot of what we had planned to do in '19 into '18. And we hope to be able to get to our 2020 goals some time in 2019 as we continue to move forward some of these initiatives.

Okay, got you. Thanks, Jay. And then the second, I don't know if you talked about or called out July trends or you can talk about those. Have you seen any, I guess, changes there from what you saw in the second quarter? But I know there's also been some weather specifically over the last week or so, kind of up and down the East Coast. And have you seen any material impact from those storms?

I -- nothing worth noting from a material perspective, Steve. I mean, June was robust. July was probably more like some combination of April, May and June, when you put them together, it doesn't really stand out one way or the other. 4th of July was kind of a funky orientation this year on a Wednesday, so we didn't see the same volumes over the 4th of July weekend. But other than that, we don't see anything unique with July trends versus what we've seen here to date.

And non-rated play in the quarter was still pretty healthy, Jay?

It was, I mentioned in my comments that we saw a low single-digit growth at our mid-worth rated as well as our unrated trends, which is something that we always keep a close eye on. I think it's a good indication of the general health of the consumer.

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

Just maybe this is best for B.J. B.J., just in terms of looking at the second half guidance, more so on the revenue, also to an extent though on the EBITDA guidance for the second half relative to the first half, could you talk a little bit about the impact that the removal of Casino Rama has on the optics of first half versus second half?

There was clearly -- as we talked about in the last quarter, we had rev rec, which was the first time it kind of flew through -- pulled through in our press release. We have a taking out of what the results would look like without that rev-rec impact. The impact has been sizable with respect to the number of the margins that we had, had if we'd take out Rama in the first quarter. It was a very slight couple of, call it, 15 days of Rama in -- that was in the third quarter. That was included in our guidance as well. But taking that out, you're going to see in the second half really what is a more true EBITDA performance and actually margins as compared to any impacts that we had on the rev rec.

Also, Carlo, we had that for almost 5 months in the first half of '18, that same treatment with the Jamul operation as well that's not reflected in the second half of 2018.

I would just add one last comment, Carlo, that if you look at -- when you take out the impact of Casino Rama and Jamul for the second half of the year, we're still anticipating same-store sales growth and that sort of low 1-plus percent range. So there really isn't any noise in our assumptions that we'll continue to see same-sales growth through the remainder of the year.

And to get back, we also had -- in the Q1 and Q2 forecasts, we had those assumptions that we're working in our margin estimates as well, which have a rev-rec impact.

Got it, great. Guys, that was helpful. And then just, B.J., on the commentary, I know in the release, you guys noted the $1.9 million of rent savings effective November 1. You mentioned that you're anticipating a $900,000 escalator in October. So should we think about that as the net effect of that? You're going to get a $1.9 million reduction, and then you'll get the -- from the rent reset of the 5-year anniversary. But then the existing portfolio sees a $900,000. Is that increase? Is that the right way to think about it?

That's correct, that's correct. The annual escalation occurs, and then we get the rent reset, which is offsetting that.

I'm sorry, and the $900,000 is the entirety of the annual revenue -- the annual rent escalation, correct?

That's the rent escalation that we will -- it will impact us in the 2 months. So all of the bulk of $1.9 million and the $900,000 are only reflective of the November and December time frames.

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

Jay, I was just wondering if you could just get a little more granular on your revenue guidance. It sounds definitely more strategic than structural. But I was just wondering if you could get more specific about what changed since your prior guidance? And structurally, how you're thinking about the top line?

Yes, it really is, Felicia, as we continue to look at these margin improvement initiative opportunities. We're continuing to find ways to refine our marketing strategy. Some of that is, sort of, retail spend. And it really pronounced at the low-end worth segments of the database where we've been, sort of, leaning people off higher reinvestment. We continue to do that, and we're happy with the results. As an example, you may have our customer that's well under your database that, with reinvestment, comes 3 times a month and with no reinvestment, comes twice a month. But you look at the profitability of the 2 visits versus the 3, and you see there's more EBITDA there. So those are kind of changes that we continue to make to our marketing strategies. And they're more pronounced in some regions versus others. We had terrific success in the west this last quarter, and we're testing a variety of things across the rest of the portfolio and other geographies. But that's really what you're seeing not just in our results but in our guidance as well. The focus is really on maximizing EBITDA and eliminating some of the low to no-profit revenues that we may have been -- seen in the past.

And how -- and I'm sure it's an ongoing process, and your margin enhancement program, it takes you through 2020. But is that -- as we think about revenue growth, '19 over '18, should we, kind of, consider that as well?

I think so. I think that we're going to continue the -- I think, assuming that the macroeconomic indicators are stable, we anticipate low single-digit same-store sales growth like we were seeing in the second half of '17 and throughout 2018, certainly implied in the second half of '18 guidance. I don't see any reason why we wouldn't expect the same in 2019.

Okay. And then just -- and then you guys had mentioned the success seen, same-store sales increases, it's 2/3 of your properties. For that -- for the segment of your portfolio that did not see same-store sales increases, can you just talk about that for a moment?

Yes. Some markets were challenged from an overall top line perspective. Tunica, Mississippi stands out obviously. Gulf Coast is a bit of a mix bag, healthier in Bay St. Louis for us than Biloxi. And then the state of Illinois as the VGTs, the bars and taverns continue to grow and granted we are involved in that business with our Prairie State Gaming business. But nonetheless, we are seeing that from a brick-and-mortar perspective, top line is challenged, and we're not the only ones when you look at Illinois results. But it's primarily Mississippi and Illinois where we're seeing some softness and not the same same-store sales growth story as compared to the rest of the portfolio.

Great. And then just on -- in that line of thinking, just West Virginia, it seems like the MGM cannibalization is now behind that property. Is that the right way to think about it?

I'd like to believe so though MGM did just expand their gaming floor, and Maryland Live!, our other key competitor in the marketplace there in Washington, D.C., Baltimore MSA, just added a 300-room tower about 1.5 months ago. So we'll continue to see, and we had a very strong June at Charles Town. May was soft, and so we're bouncing around a bit. Still -- and I'd like to believe that we completely stabilized, I think we need to see some additional quarters, post some of the expansion, efforts at MGM and Maryland Live! before, I can say that.

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

Congrats on some of the opportunities for growth going on. But I wanted to ask about the Las Vegas strategy and specifically the Trop in particular. How would you update us on how that strategy is working in terms of sending regional database customers into the Las Vegas property? And what measurements or updates can you give us in terms of how that progress is going? I do understand that there was some margin improvement at the property, and that's great. But I was looking for something a bit more interesting.

Sure, David. Look, we continue to make adjustment to our overall hotel mix at Tropicana on the strip, and RevPAR results were very strong, mid-single digit for us in the second quarter. And so in some cases, we may have erred on the side of maybe going lower in the database to get gaming customers in, and we're finding that. There's a point of diminishing returns and so you really want to stay focused on your mid-worth segment and of course, your high-end VIP customers and sending them to Tropicana because they're more valuable than any other hotel segment. But we are seeing that leisure and transient and group and convention business demand continues to be strong, and so we're continuing to tweak the mix, but we feel like we're on a path toward higher profitability right now with some of those changes that we've made.

David, this is Tim. The only thing I'll add to Jay's comments, we have previously said that our focus right now in '18 is really to make sure we successfully close and integrate the Pinnacle business and that the previously referred to expansion plans at Tropicana won't be addressed at the earliest 2019. And that continues to remain our thoughts. We want to integrate their mychoice program into Marquee Rewards. And with that combination, we'll have about 5 million active gamers between the 2 companies being put together, and that'll continue to fuel Las Vegas with their customers now being made offers to Tropicana as well. And all that needs a couple quarters, maybe more than a couple quarters to see how the response is from the Pinnacle customers with the Tropicana experience on the strip before we, more long term, think about spending further capital there.

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

I wanted to start with the announcement of the Margaritaville acquisition. Obviously, the multiple pre-synergy is well below where you're trading and where a lot of the other assets are trading. And you also noted that there will be additional synergies when the Pinnacle acquisition closes. Can you elaborate a little bit more in terms of your ability to do these tuck-ins while the Pinnacle transaction is still pending? And then even after that, kind of what your strategy would be if there's still a number of these tuck-ins that that you believe you can acquire at multiples at such low valuations?

Well, Chad, we certainly, as B.J. referred to regarding our delevering in the second quarter and even as we've structured the Pinnacle transaction with the cash and Penn's currency consideration, we're going to have a balance sheet that's going to give us the opportunity to continue to do these type of tuck-in acquisitions. And we'll be continued to be very opportunistic. We had an opportunity here to get here at a very attractive multiple. There are other opportunities out there that we're currently exploring, some of which we'll pass on because we think the price is too high. Others, we'll try to pursue to the finish line. It's tough to predict how they'll eventually turn out, but we look at everything. And we continue to be very disciplined. When we think prices are too high, we'll move on. And when we think we can get something at a multiple that's accretive to our current story, we'll pursue to the finish line like we did with Margaritaville. So there are a lot of assets out there that are being explored from a sales standpoint, and we're looking at all of those right now. Difficult to predict what's eventually going to happen, but I can tell our investors that we're not going to extend ourselves just to continue to do acquisitions. It'll continue to be very a disciplined approach.

Okay, great. And then switching over to sports, you mentioned that you planned to be live in West Virginia and Mississippi by football season, spend about 1 month where you can see some of the due diligence on some of the operators in New Jersey. Anything, kind of, change in terms of how you view this? Would you still expect it to be really just a driver of visitation in some of the amenities? And then secondarily, on sports, any update in terms of your position with the freehold JV that you have in New Jersey, which is now legal with sports betting?

I'll let B.J. cover the freehold question. But given the reasonable economic models that West Virginia and Mississippi pushed forth, we're going to make modest EBITDA in our Mississippi locations and West Virginia location. I'm excited about West Virginia and the Washington, D.C. market, given the fact that we're going to have a head start over Maryland to give us an opportunity to have that product offering in the Washington, D.C. market. And clearly, it will drive increased visitation to the property, and we will see increased food and beverage volumes. We'll probably see increased demand in hotel room nights. And we typically see increased table drop as well with the sports players. So we're excited about the opportunities, and we're very pleased with the 2 states and how they enabled the legislation and the models they created for us to take advantage of. So it's something we're going -- as I said before in my previous comments, we're going to continue to promote with other states that Mississippi and West Virginia got it right and to look at those 2 states as models for further expansions of our sports betting opportunities, given the fact that with the Pinnacle transaction closing, we'll be in 18 states and have one of the leading footprints of distribution to take advantage of the proliferation of sports betting over the next 3 to 5 years. B. J., why don't you cover the freehold question.

Yes, and Chad, with freehold, we've been discussing with our partners on that possibility, and I think they echo the same sentiments that we have, which is we're very interested to get going. We are working with them right now on the exact format and structure that we'll bring about it, but I think that we're looking -- we're definitely looking to be able to try to work with our partnership to bring that out as quickly as possible.

[Operator Instructions] And our next question comes from the line of John DeCree with Union Gaming Group.

Just had a quick question on Pennsylvania and your development opportunities there. I think you mentioned, in September, you would be submitting your first development plans, and it might be a little too early, but I was wondering if you could talk about what a time line might look like from there from when you might put shovels in the ground and get something opened, kind of, a high level. And how you're thinking about capital spend for those 2 opportunities?

John, we're still looking at a couple different locations and a couple different development options. I think we're looking at a time period that's at least 18 months from today in terms of when these could potentially get opened at the earliest. And the level of investment is still being finalized for both of these. But as we're looking at a very high level, we're going to get, as I've said, good returns on our invested capital, north of 15% cash on cash in both cases. So we'll provide a lot more clarity in the next -- within the next 60 days on York and then shortly thereafter on Southern Berks County on these developments. And we'll have a lot more to speak about when we're on our third quarter call in about 3 months from now.

Got it. That's helpful. If I could kind of stick with the capital investment question, when you think about getting sports books up and running in West Virginia, Mississippi and doing something online in Pennsylvania, is there a material investment that you'd forecast there? Would that kind of fall, maybe get grouped, into maintenance spending over the next kind of 6 months or so?

Yes. We think it's going to be more maintenance capital-light. We're not going to make any huge investments in large-scale sports book facilities, race book facilities. I mean they'll be nice, they'll be entertaining, they'll have all the different functionality that you need to run a racing sports book, but we're not talking about major allocations of capital to take advantage of these opportunities.

Our next question comes from the line of Joseph Greff with JPMorgan.

This is actually Dan, on for Joe. So a couple of questions. First, your second half EBITDA guidance implies 5% growth. Can you talk about some of the markets where you see the greatest opportunity in your margin upside?

Sure, Dan. I would say it's the typical markets that we highlight on these calls. We continue to see great growth potential of all 4 of our businesses in Ohio, Massachusetts, Plainridge Park continues to deliver top line and even more impacts the bottom line growth for us. Las Vegas and New Mexico as I mentioned earlier are markets that are performing very well right now, both at the macro level as well as at the business level. And in Missouri, we've been on a good run in Kansas City, and St. Louis, our margins continue to get better as well. So that -- I would highlight those as the primary.

And then just one more on your -- on the $100 million of cost synergies you guys have outlined. To what extent, if any, do these include opportunities to overlay your existing internal margin enhancement initiatives to Pinnacle? And also, have you guys given any more thought to the revenue synergies and if we could see opportunity there and when they will kind of surface?

Listen, I'll answer the revenue side of things, Dan. We are still 2 separately run, publicly traded gaming companies, and I've been very rigorous in making sure that we don't see their customer database and they don't see ours up to this point. So we don't yet and won't until after we close the transaction and begin the integration process be able to have a good handle on revenue synergies. We know they're there, but we haven't yet been able to apply the analytics around it to quantify it properly.

And -- but we're simply not close enough to the property-level business models with Pinnacle to say how much of what we've learned through our margin improvement initiatives have or haven't been applied at the Pinnacle businesses. And they're doing some things, I'm sure, better than we are on the Penn side of the ledger as well. So yes is the answer that some of our margin improvement ideas are in that $100 million, but there is still more that we need to validate after we close the transaction. I'd like to believe that we can find more beyond that, but at this point, we need to wait until we close, spend time with the property leaders, understand those markets, especially the ones that are new for us and Louisiana and a few other, like Colorado and Iowa before we start assuming that we can apply some of the things that we've done at Penn's to all the Pinnacle businesses.

And our final question comes from the line of Shaun Kelley with Bank of America.

So just maybe, B.J., to return to the rent reset, because it's the first time we're sort of experiencing that. One clarification and then one kind of outlook question. So the clarification would be just to be very clear, the $1.9 million is already net of the $900,000, right? That was the way I read it, anyways.

No, the $1.9 million is the amount that we will -- that the rent will be reduced as a result of the rent reset for those 2 months in 2018. The $900,000 is the amount for those 2 months that we will incur in 2018 that is the result of the escalator.

Got it, and they're separate. Okay, so then as we roll forward to 2019, which is really the question then, obviously, the escalator will work that way, but for the rent reset, is that the right guidepost for the balance of 2018? And then because of 5-year trailing calc, does that number then go down -- or potentially go down again in the last 2 months of '19? Is that the right way to think about it?

It's a onetime -- it's a 5-year calculation. It'll occur at -- or occur at the beginning of -- at the end of this lease year that's in -- 10/31/18 and then that's subject for the next 5 years.

Got it. So this is the number. It's a onetime step-down, and then you're stable?

Then the escalators continue on an annual basis from there.

Mr. Wilmott, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks.

Thanks, operator. Thanks everyone for participating in our Second Quarter Earnings Conference Call. We'll be together in 3 months from now, and certainly, we'll have a lot more clarity on the Category 4 Pennsylvania licenses, the rollout of sports betting across the states that I mentioned previously and a lot more color on the Pinnacle transaction and more color on the timing of the Margaritaville transaction as well. So thanks again, and I look forward to talking in about 3 months.

Ladies and gentleman, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.