Pinnacle Entertainment’s L’Auberge properties in Louisiana produced record performances for the second quarter and fueled stronger-than-expected revenues across the enterprise, the company reported Thursday morning.
L’Auberge Lake Charles generated net revenue growth in the low double digits, grew adjusted EBITDAR more than 40 percent and increased EBITDAR margin by 730 basis points on a year-over-year basis. L’Auberge Baton Rouge grew revenues by 10 percent and adjusted EBITDAR by more than 25 percent on the heels of increased slot volumes and visitation.
Both properties produced record second quarter performances in terms of EBITDAR, said Anthony Sanfilippo, Pinnacle’s chief executive officer, on a conference call with investors.
But the optimism out of Louisiana faces headwinds in the form of a smoking ban passed by the East Baton Rouge Metro Council on Wednesday. The measure will prohibit all smoking in public places, including casinos and bars, in the parish.
Company executives noted that Pinnacle’s L’Auberge Baton Rouge property stands to be affected, as does Hollywood Baton Rouge – owned and operated by Gaming and Leisure Properties – and Belle of Baton Rouge, owned by Tropicana Entertainment.
Sanfilippo said that the company is still evaluating how to handle the development, but emphasized that Pinnacle successfully operates non-smoking casinos in other jurisdictions and that it’s not necessarily a competitive disadvantage because it affects his competitors equally.
“We have a terrific property there. We have a property that’s continued to grow from revenue standpoint materially. We’ve seen great margin improvement there. We haven’t put a [revenue] estimate to it because that would be inappropriate to do,” he explained. “Now that the law will change there, how do we play that hand the very best way we can play it?”
“[The ban] might dampen some of that growth as we look forward,” said Carlos Ruisanchez, chief financial officer. “We think we have some ways to blunt the effect of that. We do not think that this is will be a material setback at all over the medium and long term.”
For the quarter, the company reported total net revenues of $653.6 million, a 3 percent increase year-over-year increase on a same-store basis and inclusive of a $72.3 million contribution from The Meadows outside Pittsburgh. Adjusted EBITDAR for the quarter was $180.7 million, a record high for the company and a nearly 7 percent year-over-year same-store increase.
“We’re thankful for the team at Pinnacle Entertainment. This isn’t something that just happened, this is something we’ve built up,” said Sanfilippo.
Same-store EBITDA margin grew by 110 basis points to 28.8 percent during the quarter, a nod to increased operational efficiencies across the enterprise.
“Trends were generally positive across the portfolio, with same-store spend per trip increasing in the high single digits alongside growth in both spend and trips,” said Chad Beynon, an analyst with Macquarie Capital.
“The better than expected quarterly results confirm the positive fundamental momentum of the company, in our view, as easy comparisons in key markets provided a benefit but were partially offset by market-specific impacts in others,” said David Katz, an analyst with the Telsey Group.
Company management also emphasized that it was off to a fast start in the third quarter, indicating that EBITDAR for July and August was already $6 million ahead of last year’s figure.
“Looking at the early results of the 2017 third quarter, the performance of our company is off to a terrific start,” said Sanfilippo In July, our consolidated adjusted EBITDAR and consolidated adjusted EBITDAR margin significantly exceeded the prior year, and performance so far in August has been strong.”
The company paid down $26 million in debt during the second quarter, leaving it with $898.4 million on its balance sheet as of June 30. However, executives announced on the call that Pinnacle paid down another $32 million in July.
“One of the key reasons to be paying down debt is to get capacity to finance [potential acquisitions],” said Ruisanchez.
Analysts and the investment community were optimistic of the quarter but reticent toward management’s inkling toward growth by acquisition, resulting in downward pressure on the company’s share price.
After opening at $20.25 on Thursday morning, Pinnacle shares were trading down throughout the day to as low as $19.12
“We find it difficult to embrace management’s penchant for M&A-driven growth at this point,” wrote Steven M. Wieczynski of Stifel, in a note. “First and foremost, as evidenced by today’s trading softness, we believe the uncertainties created by actively talking up potential M&A activity detracts from the existing business’ steadily improving fundamentals.”
