Caesars Entertainment Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2022

There are 15 speakers on the call.

Operator

Hello. Thank you for standing by, and welcome to the Caesars Entertainment, Inc. 2021 4th Quarter and Full Year Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer Please be advised that today's conference may be recorded.

Operator

I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations.

Speaker 1

Thank you, Josh, and good afternoon to everyone on the call. Welcome to our conference call to discuss our Q4 year end 2021 earnings. This afternoon, we issued a press release announcing our financial results for the period ended December 31, 2021. A copy of the press release is available in the Investor Relations section of our website at investor. Caesars.com.

Speaker 1

Joining me on the call today are Tom Reeg, our Chief Executive Officer Anthony Carano, our President and Chief Operating Officer and Brett Yunker, our Chief Financial Officer. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward looking statements about the company's performance. Such forward looking statements are not guarantees of future performance and therefore one should not place undue reliance on them. Forward looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward looking statements, You should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission.

Speaker 1

Caesars Entertainment undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after today's Also during today's call, the company may discuss certain non GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure is most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences between each non GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at investor. Caesars.com by selecting the press release regarding the company's 2021 Q4 financial results. I will now turn the call over to Anthony. Thank you, Brian,

Speaker 2

and good afternoon to everyone on the call. We have delivered another strong quarter. Adjusted EBITDA in the quarter excluding Caesars Digital was $886,000,000 up 30% versus Q4 of 2019 on a same store basis. Operating results reflect new 4th quarter records for adjusted EBITDA and adjusted EBITDA margin in both our Las Vegas and Regional segments. 31 of our 52 properties set a record for the highest 4th quarter EBITDA, while 35 set a record for the highest Q4 EBITDA margin.

Speaker 2

Starting with Las Vegas, demand trends remained strong throughout the quarter, leading to an all time 4th quarter record of $494,000,000 and adjusted EBITDA excluding real rent payments. EBITDA improved 33% versus the Q4 of 2019 and margins improved 1,000 basis points to 48%. Total occupancy for Q4 was 86% with weekend occupancy at 94% and midweek occupancy at 83%. Despite an increase in COVID-nineteen cases in late December and into January, We remain encouraged by booking trends into 2022 and beyond. While group attrition remains elevated, we began to see conventions return to Las Vegas in the back And the segment represented approximately 10% of occupied room nights, a dramatic improvement versus the first half of twenty twenty one.

Speaker 2

In Q4 2021, we booked a record $160,000,000 of new business in the group segment company wide. Turning to our regional markets, operating results remain strong, especially in markets not impacted by COVID restrictions, construction disruption or property closures. Adjusted EBITDA excluding New Orleans, Caesars Atlantic City And Lake Charles increased 28% versus 2019 with margins improving by 7 50 bps to 34%. On a same store sales basis, we achieved the highest 4th quarter EBITDA and EBITDA margin in the regional segment in the history of the company. In our Caesars Digital segment in Q4, we generated $116,000,000 of net revenue and an adjusted EBITDA loss of 305,000,000 Sports betting and icasino volume was split roughly 65% 35%.

Speaker 2

Approximately 90% of our handle was for mobile sports betting and icasino. We remain focused on scaling our digital business through customer acquisition during our first Fall sports seasons post launch of our Caesars branded apps in 11 states. Similar to Q3, while customer acquisition and handle exceeded our internal expectations, Net revenues were negatively impacted by promotional investment and odds and profit boosts, competitive pricing strategies and lower than historical hold in certain markets. Following the launch of mobile sports betting in Louisiana on January 28 and retail sports betting in Washington State on February 10, We now offer sports betting in 22 domestic states and jurisdictions, 16 of which offer mobile wagering. During the Q4 and into early 2022, we have rolled out enhanced iCasino offerings, including significant increases in new game content.

Speaker 2

Customer response to our new game portfolio has been encouraging. We look forward to additional improvements in our offering throughout 2022. On the capital front, we have several new projects underway that will add to our growth profile over the next few years. Construction of our land based project in Lake Charles is making great progress and remains on schedule for a Q4 opening this year. In New Orleans, construction work continues on our new hotel tower and property upgrades.

Speaker 2

In Las Vegas, We are excited to announce that we have reopened the dramatically upgraded arrival experience at Caesars Palace. In Pompano, Work has started on the new parking garage and casino expansion, which should be complete by year end. In Indiana, Expansion of our recently rebranded Horseshoe Indianapolis property is now complete and we expect additional gaming and F and B amenities by the middle of the year. We also anticipate breaking ground on our expansion plans for Harris Hoosier Park in the Q2 of this year. Construction is slated to begin on our Columbus, Nebraska project later this year.

Speaker 2

And finally, in Atlantic City, Our $400,000,000 capital plan is actively moving forward with remodeling room towers and setting the stage for exciting new food and beverage and entertainment options in 2022. The growth projects that I just described total a cumulative $1,300,000,000 of capital investment, a portion of which will be spent this year, and we expect to generate at least a 15% return on this aggregate capital spend. We have already escrowed the $400,000,000 AC spend into restricted cash and we have received insurance proceeds for Lake Charles. As we look to the full year 2022, we continue to see strong tailwinds for our business and we remain Optimistic about further visitation gains as consumers return to our properties once COVID-nineteen fears have fully subsided. We remain confident in the eventual return of the convention customer to Las Vegas and our destination markets as well.

Speaker 2

Lastly, we are excited to be rebranding several additional properties in 2022 using flagship brands like Horseshoe and Harrah's from the Caesars portfolio to even further elevate the customer experience. I want to thank all of our team members for their hard work in 2021. I am extremely proud of our operating teams, their execution and their exceptional guest service. With that, I will now turn the call over to Tom for some additional insights on the quarter.

Speaker 3

Thanks, Anthony. Hello, everybody. I would echo Anthony's comments Thanking our team members. I'm particularly heartened by the way that the team came together in a Very difficult environment post closing the Caesars acquisition. This was our 1st full year owning Caesars And we're excited to talk about what we accomplished.

Speaker 3

I'm going to give you some greater detail behind The larger numbers that Anthony went through on the brick and mortar side, and I'm going to talk about what we have said in the past and let you measure how we have performed relative to metrics that we've put out. So speaking about the quarter, We were on track for an all time record in Vegas until the last 2 weeks of the quarter when omicron spiked across the country And kind of nipped us in the bud in the last 2 weeks of the year. Omicron continued to impact us in January, January occupancy was about 75% in Vegas. As Anthony said, we were 86% For the Q4, February month to date has ticked up to 80% and we expect March to be into the mid-80s. All of our Forward demand indicators look very strong in Vegas, Anthony talked about.

Speaker 3

The group business, Our measure of cancellations to new bookings, that number peaked in early January and has been coming down Quickly since. So we're set up for we've got a good setup in Vegas going forward. Regional similar story, omicron clipped the last couple of weeks. If you think about New Orleans and Caesars and Atlantic City that we call out, New Orleans and Caesars Atlantic City Both did a little less than half of the EBITDA that they did in the prior year quarter For different reasons, New Orleans because there's a city of New Orleans vaccine mandate and mask requirement, Competitors of ours that are easily drivable from the city don't have to deal with the Restrictions and we have a minimum tax requirement in New Orleans relative to that license That makes margins difficult as volumes decline. We're building our way out of that.

Speaker 3

We're hopeful that The restrictions go away post Mardi Gras, which is what has been indicated by The Mayor and prior to the restrictions being imposed, we were doing $12,000,000 a month of EBITDA. So we expect a significant snapback when that opens. Caesars Atlantic City had the bulk of its room product out in the quarter. That's part of the construction program that Anthony described. The bulk of that Construction project will be completed by this summer.

Speaker 3

So all the room remodels, new amenities in Atlantic City should be online for the high season, but that's going to impact our results to construction for the next quarter or So that's the current environment. I wanted to go back and look at Kind of what we laid out in prior transactions, what we've told the market to expect and give you an update. We don't give you Property level EBITDA anymore, and I'm not going to get in the habit of doing that. But I think it's Instructed and useful as we move to the digital conversation to talk about how we deliver on numbers That we put out and that we don't take them lightly. So I'm going to take you all the way back to the deal that took us public When we bought MTR Gaming, the only remaining property from that transaction is Scioto Downs.

Speaker 3

And as we've discussed with many of you multiple times, what we recognized was inefficient marketing Subsidization of revenue in the regional space generally And that's what we found in Scioto. And then as we move down the road and ultimately bought Caesars, we said as we roll out Caesars Rewards into these properties, there's going to be a significant positive impact. And so if you just take Scioto as an example, When we bought it, that asset was doing $45,000,000 of EBITDA at a margin a little over 30%. And in 2021, Scioto did just shy of $115,000,000 of EBITDA at a 46% EBITDA margin. And keep in mind that's in a state where our tax rate is 42%.

Speaker 3

So a 46% margin in a 42% tax rate state. Then we went to Reno. We bought out MGM's interest In Reno, that those three assets at the time were doing $60,000,000 of EBITDA. We redid all of the rooms at Circus Circus, ultimately all of the rooms at Silver Legacy, Spent a fair bit of money. We talked to investors about how we thought we could get that to maybe $90,000,000 or $100,000,000 of EBITDA.

Speaker 3

That would have been the prior peak before California Indian Casinos came on the scene. Again, The same work in removing subsidies, adding Caesars Rewards to the property. In 2021, we did just shy of $130,000,000 of EBITDA in Reno at over a 40% EBITDA margin, beating the prior all time high by about 50%. So then we went down the road to Isle and this is where we've finally gotten large enough to where Investors were paying attention to what we were doing. So we bought Isle of Capri in 2017 and we said This company is doing $200,000,000 of EBITDA.

Speaker 3

We think we can generate $30,000,000 of synergies. And we had investors and our peers that were skeptical to say the least, Saying that you couldn't find that kind of opportunity in these assets. They've been picked over. Fast forward to Last year, again, do the same work that we've done in terms of removing subsidies, removing the corporate expense And rolling in Caesars Rewards into these properties, since that acquisition, we sold Four properties that totaled a little over $60,000,000 of EBITDA. So for us to get to that $35,000,000 of Synergies, we'd have to be doing $175,000,000 of EBITDA out of the remaining Isle properties.

Speaker 3

In 2021, Those remaining IL properties did a little over $260,000,000 of EBITDA within our system. Then we went to Elgin. And when we bought Elgin, it was doing $36,000,000 of EBITDA. We bought it for 9 times and we said we think we could get that multiple to 6 times through Synergies, in 2021, Elgin did $62,000,000 of EBITDA, bringing that multiple down to 5 times. And recall that's in Elgin was closed for the bulk of January last year because of COVID restrictions and faced a competitive opening at Rockford late in the year.

Speaker 3

And going back So Reno, Reno faced social distancing for the Q1 of last year. So these are results in a year that had Headwinds, challenges to navigate and those are the numbers that we put up. So then we went to Tropicana. Tropicana, we bought, we said we could do $40,000,000 of synergies. And if you look at just one asset in Tropicana, Lumaire in St.

Speaker 3

Louis, we took that over. It was doing $33,000,000 of EBITDA on a trailing basis when we bought it. In 2021, that did $72,000,000 of EBITDA. So Lumaire alone was enough to cover all of the synergies that we targeted in the Tropicana transaction. And then of course we came to Caesars and that was obviously the Subject of a lot of conversation when we bought Caesars and we said we could find $500,000,000 worth of synergies In Caesars, we had to fight through the skepticism of the Caesars Board at the time.

Speaker 3

We actually had to go through with the existing management team and have them present our synergy case before the Board ultimately approved the transaction. If you look at what we did with our 1st year post owning Caesars, 1st full year, The synergy realization is over $1,000,000,000 at this point. The Las Vegas assets had their Largest EBITDA year on record in the history of Caesars in a year where there was Very little group business, very little entertainment for most of the year and social distancing for The Q1 of the year and masking for the bulk of the year. And then you look at some of the regional assets, Shreveport I'm sorry, Horseshoe Bossier City, we took over, it was doing $37,000,000 of EBITDA. In 2021, it did $72,000,000 of EBITDA.

Speaker 3

And if you look at Tunica in Mississippi, That was doing about $65,000,000 of EBITDA when we took it over. It did over $100,000,000 last year. And so I want you to understand what's in the bigger numbers that are driving our performance. And more importantly that we put out targets because we know we're going to meet them and exceed them. And the nice thing about this business is this call is being transcribed.

Speaker 3

Every call we have done with investors has been transcribed. You can look back at every call that we've had, look back at all of the predictions that we've made, and I think our Track record is 100% today. And so that leads me into digital, where I know The market is struggling. Investors are struggling with, can this be a profitable business? We've gone from Kind of ever increasing bullishness to unlimited bearishness at this point.

Speaker 3

What we told you was we saw a significant opportunity to acquire customers and grow this business. We think this we told you at the time, we think this is the most exciting growth opportunity this space has seen in 3 decades. We thought we had a significant advantage with our Caesars Rewards database of 65,000,000 people. We told you that we'd expect to lose on a cumulative EBITDA loss basis over $1,000,000,000 Before we inflected to EBITDA positive in the Q4 of 2023, effectively football season of 2023. We were behind.

Speaker 3

We were an afterthought in this business. We were buying William Hill last year. So we effectively sat out the 1st full football season in a number of jurisdictions. So we had ground to make up, We had to launch an app, we had to launch a brand and that's what we set out to do. And I would tell you that Everything I just laid out in that framework remains in front of us.

Speaker 3

Nothing has changed. We still expect To lose on a cumulative EBITDA loss basis in excess of $1,000,000,000 and generate better than a 50% EBITDA return on that investment at maturity. That has not changed. What has changed is We launched our brand and we went from that afterthought in the market to if you look at us Through the last month that's been reported in each state that reports sports betting handle, we're 21% of The sports betting market in the United States. And notice I'm not cherry picking markets where I'm doing well and leaving out markets where I'm not.

Speaker 3

That includes big handle markets like Pennsylvania and Illinois, where we have 1% 2% Market share of handle because we've not rolled out the Liberty brand yet. That has Exceeded our expectations. In that original framework, of course, we had market share expectations. We've already exceeded them. So what you're going to see from us as we move forward is you're going to see us moving toward profitability.

Speaker 3

And I'm not going to get into the How does this happen at the state level? That's been debated by others for quite some time. What I tell you is we have A window into states that are profitable within our own business and we know the trajectory that they're going to That the newly launched states are going to move down. And we are you are going to see us Dramatically curtail our traditional media spend effective immediately. We have accomplished what we set out to do.

Speaker 3

We set out to become a significant player And it's happened significantly quicker than we thought. And I think most of you know me as someone who's not one To spend any money needlessly. So we've gotten to where we need to be. You're going to see our commercials Those largely disappear from your screens. You're going to see some that we couldn't there's some media spend that we couldn't get out of Coming into March Madness in a couple of states, but we will largely be off of traditional media other than in new launch states From here and new watch dates in both iGaming and Sports.

Speaker 3

So talk about what we've seen. New York It was obviously an eventful launch for everyone. The volumes in New York were about 2x what we were anticipating and our market share was about 2x what we were anticipating as well. So we signed up about 500,000 customers in New York since we launched. New York is Approaching as large as the rest of the business in Caesars Digital combined.

Speaker 3

And we were extremely pleased with how we came out of the box. But because of the launch of New York And Louisiana, in the Q1, you should anticipate that this current quarter is our peak EBITDA loss, That you're never going to see a quarter like this again, that the quarterly loss is going to be larger than it was in 4th quarter, But you're going to see us moving toward profitability and making moves both in traditional media and Ultimately through the offers to the customers because we have reached where we want to reach in terms of Customer acquisition. If you look at what's happening in Caesars Rewards, so Our view was Caesars Rewards was a distinct advantage for us. If you look at numbers, Numbers of customers since we've launched Caesars Rewards represents about 28% in number Of the customers that we've brought into Caesars Digital, in terms of volume in Caesars Digital, those customers are almost half of the volume of the digital business. So the thesis was we had already identified A lot of the most valuable gamblers that were out there and our job is to convert them to the digital business and that's what we're finding.

Speaker 3

We also discussed that we expected the digital business would help us to drive incremental value in the brick and mortar business, That we would source customers in digital that would show up in our brick and mortar business. And What we've seen to date is extremely encouraging. We have not done a lot of cross marketing From brick and mortar into digital yet, largely because most of our digital customers are very new, particularly if you look at a place like New York that just opened about 5 weeks ago. In the brick and mortar business, if you look at customers that We're sourced out of digital. So either they're brand new customers in the enterprise or they were Dormant Caesars Rewards customers were on a run rate of over $150,000,000 Of gaming revenue annually out of digital into brick and mortar.

Speaker 3

That's extremely high volume or high flow through Revenue, all that comes out is gaming taxes. That doesn't include any spend beyond gaming. So 2 thirds of that business about 70% of that business is sourcing into our destination properties. So if you add assumptions on non gaming spend, we're doing over $200,000,000 a year of revenue that's coming out of digital into brick and mortar right now. So that's what makes us Excited about what's happening here.

Speaker 3

We still have work to do in Icasino. We're at 6% national handle share, we've been creeping up as we add additional games. We should have In excess of 3 50 games on the site by May this year. So we should have a competitive Product, you should expect us to roll out Liberty in Pennsylvania and Illinois In 2022, and you should expect us to market in those states as we do, but that's a very different launch That's somewhere where all the customers are up for grabs. So you're not going to see the expense of the launches that you saw In places like New York, Arizona and Louisiana, except for Ohio and presumably Maryland, if they both come online this year.

Speaker 3

Ontario, I would describe as similar to Pennsylvania and Illinois, where there's been an existing market, it's a great market there, but that's not a all the customers are up for grabs. So we couldn't be happier with where we are in digital in terms of the pace that we've become A meaningful player in the state in the space and the ability to start pulling back levers that will Move us to profitability as quickly as we can get there. But again, The framework of we would expect cumulative EBITDA losses to be over $1,000,000,000 And EBITDA at maturity, so we're talking about 2024 and onward EBITDA should be 50% or greater ROI on that business. And I have the same confidence in those numbers And I added all the numbers I outlined in the previous transactions that we laid out. And so The other thing I want to touch on before I turn to Brett in terms of remainder of this year, we've talked about We expect to sell a Vegas strip asset and launch that process in early 2022.

Speaker 3

You should expect that that remains the case. There are documents within our VICI agreements On the right of first refusal that they have that govern the timing of that, but you should expect that that is in motion And that the next time that we talk to you, we'll be talking about the next time we talk to you about a strip asset sale, it will be to announce that sale. So with that, we can invest in digital. We can invest in the projects that Anthony described that are going to generate significant returns in the business and we can significantly delever this year. We expect to accomplish all of that and we're excited to keep the momentum going in 2022.

Speaker 3

And with that, I'll turn it to Brett.

Speaker 4

Well, as discussed, 2021 was a very exciting year for us in terms of executing on our plan to significantly reduce debt alongside continued investment in our growing brick and mortar and digital businesses. We expect to continue to do more of the same in 2022 through announced and anticipated asset sales. Tom just mentioned 1. The other includes the sale of William Hill International in the 2nd quarter and generation of strong free cash flow. Our 2022 calendar year CapEx spend excluding Atlantic City, which is funded through escrowed cash includes $300,000,000 of maintenance CapEx, dollars 100,000,000 of digital capital and approximately $700,000,000 related to high ROI project capital.

Speaker 4

We are modeling minimal cash taxes and approximately $800,000,000 of cash interest expense for 2022, which we expect to reduce through debt repayment and opportunistic refinancing. I'll turn it back to Tom or the operator.

Speaker 3

Operator, we'll open up to questions.

Speaker 5

Thank you.

Operator

Our first question comes from Carlo Santarelli with Deutsche Bank. You may proceed with your question.

Speaker 6

Hey, guys. Good evening. You spoke earlier about the $1,300,000,000 of spend and the expected 15% return, so that implies kind of just under $200,000,000 of what will be largely regional EBITDAR. Thinking about like kind of the Timing, obviously, there's a lot of projects in there. They all come on at various times.

Speaker 6

Could you kind of lay out how you expect to start To see those returns kind of over the next 1, 2, 3 years and when you believe you hit that steady state $200,000,000 quarterly run rate?

Speaker 3

Yes. So you've got Horseshoe Indianapolis, which is the old Indiana Grand opened its expansion Right around year end. And so we expect to see the benefits of that we are seeing the benefits of that in 'twenty two, the sister property at Hoosier Park, that expansion should be done by the end of this year. So So we'd expect that benefit to start in 2023. We're targeting early 4th quarter for the opening of Lake Charles, which should be that's about a $210,000,000 project, something like that, where We'd expect well in excess of that 15% hurdle rate.

Speaker 3

And keep in mind that 15% hurdle rate It's an extremely conservative estimate on that spend. We've got Atlantic City. The bulk of that will come online before this summer, so say before 4th July. All of those rooms, The bulk of the restaurant product, there's an entertainment piece with Spiegel World that will lag, but the bulk of the Atlantic City spend should be online for this summer. So we should be seeing that in Q3 and beyond.

Speaker 3

The Pompano parking garage and Fino Expansion should come online and begin generating those returns in 2023. And then the New Orleans project should be online by 2024 Ahead of the Super Bowl in 2025.

Speaker 6

Great. Thank you for that, Tom. And then just Tom, I know you specifically said like Don't want to get into property level results. And you did kind of give that $36,000,000 quarterly run rate for New Orleans and mentioned that it was More than 50%. So if we assume that was kind of a $20,000,000 headwind, could you kind of give a similar metric for Atlantic City to kind of quantify a similar down 50 off of what that 4Q base would have been year over year?

Speaker 3

Caesars was about $10,000,000 swing, Carla.

Speaker 6

That was about $10,000,000 Okay. And then lastly, just as you think about Kind of the interplay between slowing down the marketing spend and obviously the early push, It's understandable. As you move forward though, how much do you worry about kind of the I guess the way to think about it is kind of the volume and GGR handle that's created from kind of marketing Spend in the space on just an absolute basis and kind of relative to peers. If you were to start to more or less start to diminish the brand awareness from a public marketing perspective? Yes.

Speaker 3

So keep in mind, Carla, that what we're Largely targeting to start is the traditional media. So you're talking about $250,000,000 worth of spend That we expected that we would have to spend to get to the market share levels that we're already at. The Success based promo spend, you should expect that that will Continue for new customers as you get as you convert new customers into obviously existing customers as time goes on, The offers become very different and the margin become very different. And one thing I should have said on New York, I know there was a lot of focus on our $3,000 deposit match in New York and the thought that, Gee, I could just put in $3,000 make a couple easy bets and withdraw my money. Our average deposit in New York was about $4.50 So our results in New York were not driven by a lot of $3,000 deposits.

Speaker 3

Responding to our offer, it was 100 of 1000 of Smaller customers that came to our site. And so you should expect that As you move out of this quarter where you had the biggest launch of all time, you're getting into A period of time where there's far fewer in the way of new launches and more states should move down the dominated by Existing customers versus brand new customers. And the reason that you go after those brand new customers as Avidly as all of us do, as I can tell you within Caesars when we look at our prior Experience in this arena, both in Playtika that predates us and in mobile states, In sports betting, the customer that you find in the Q1 post launch is worth something in the neighborhood of 2x what you find Afterward. So there is a method to the madness here in terms of the customers that you're targeting.

Speaker 6

That's helpful, Tom. Thank you.

Operator

Thank you. Our next question comes from Joe Greff with JPMorgan. You may proceed with your question.

Speaker 7

Hey, everybody. Tom, thanks for your comments. I know you indicated maybe at the end of A fair comment about your target of a better than 50% annual EBITDA return at maturity. And then just to kind of clarify, does that Has that timeline changed at all or the timeframe in which you look at maturity, has that altered based on your experiences these last two quarters?

Speaker 3

No, none of that's changed, Joan. We our thesis was, as we discussed, Caesars Rewards was our advantage that this business would consolidate into share would consolidate into a handful of leaders. And what's happened is that's all happened quicker than we thought in terms of the share that we've generated, The address the handle volumes have been in the market generally have been higher than we anticipated. Our share has been higher than we anticipated, but nothing has changed in terms of the timing. And so what we said was, if we do better than we're anticipating in share, There might be more investment than what we were talking about 90 days ago.

Speaker 3

But the reality is The accumulation of that share happened so quickly that we can adjust those Traditional media dollars, so that we end up in about the same place from a total investment standpoint With considerably more share than we anticipate, which should maturity increase our ultimate returns.

Speaker 7

Excellent. And maybe it's too early on the I Casino side. I know you mentioned by the end of May, you'll have that large quantum of games, 3 50 games or so At that point, but what's your anticipation as you market more on the I Casino side, what that does to your bricks and mortar business? Does that enhance it or does it go the other way and does it maybe dip into the land based business?

Speaker 3

So we've had the we've had a double digit market share in New Jersey for kind of since launch in New Jersey and we've seen no impact on the brick and mortar business and that's the state Where we have the biggest brick and mortar presence, where iGaming is alive. We're not Active in a physical property in West Virginia. We've got a relatively small property outside Philadelphia in Pennsylvania And we don't have one in Michigan. So we don't anticipate much in the way of impact on our brick and mortar business as we ramp up in iGaming.

Speaker 7

Great. And then my final question, obviously the Q4, and so far in January, there's been noise from Omicron and February, you had some weather in some market. But when you kind of think about the Q4 and the impact from omicron on margins and excluding New Orleans, Atlantic City and Lake Charles, when you look at the regionals in the Las Vegas strip in the aggregate, was there much of a delta in property level EBITDA margins, maybe excluding or trying to account for the impact of omicron?

Speaker 3

That's tough to parse, Joe, given The short time period and the time of the year that it happened, if you want to be to cuff what I think, I think Omicron cost us somewhere between $25,000,000 $50,000,000 in the 4th quarter.

Speaker 8

Great. Thank

Speaker 7

you very much, guys.

Operator

Thank you. Our next question comes from Steve Wieczynski with Stifel. You may proceed with your question.

Speaker 9

Hey, guys. Good afternoon. Tom, I want to ask about the demand for assets along the strip at this point. It seems based on your comments that Demand for those assets remains pretty high. But I guess my question is going to be, if you did sell a moderately sized Strip asset, is there any way for you to help us think about what a sale would do for you guys from a yield perspective across the rest of your strip assets?

Speaker 3

Well, we're 23,000 rooms today. You're taking out The RIIO rooms and then you take out a property depending on which property it is, let's say, 3000 to 4000 So you're going to be down to, call it, 16000, 17000 rooms in the market. That's about a quarter of our existing capacity. So that's clearly going to have an impact in our ability To yield the remaining rooms, part of it's where do those rooms come out Of our system and you should expect that's going to be a factor in terms of How we decided which one that we would divest, The less we need to rely on OTA business to fill our rooms, the better both from A customer quality perspective and an ultimate profitability perspective and removing the 5000 or 6000 rooms from our system, while introducing all of those customers that came in through Eldorado should have an extremely positive effect on rates once we're once all the deals are closed.

Speaker 9

Got you. Thanks. It's very helpful. And then second question,

Speaker 8

I thought

Speaker 9

it was interesting to hear the history of all The acquisitions that you guys have made. And as you look back at those acquisitions and look at the improvement in the EBITDA generation of those properties, I'm not sure we're going to be able to do this, but is there any way you can help us think about how much of those EBITDA improvements are directly the result of total rewards being incorporated versus just the assets We're being poorly run before and that's no disrespect to some of your counterparts, but hope that makes sense. Just trying to parse out How much total rewards drives that versus what you guys have done?

Speaker 3

That's another one that's hard to answer, Steve, and I'm glad you like those comments because it started to feel a little like a rant as I went on and on there. But the

Speaker 10

what I

Speaker 3

would say is the bulk of what is the bulk of what's been generated is Removing the marketing to everyone and targeting your most profitable customers. And that sounds Simple, but as you know, that was not a particular strength of our industry until relatively recently. And that's the biggest impact and that's another that's to get back on the Digital Soapbox for a minute. That's the same problem that faces us in digital that we need to solve. Right now, we're marketing to the entire world that's going to stop and we're going to start marketing to the most profitable customers.

Speaker 3

But if you think about food and beverage, Steve, which was where a lot of that marketing took place, right? It was comped food and beverage. If you look at the Caesars Enterprise, in 2019, the combined Caesars, so including the Eldorado side, lost on a cash basis Over $200,000,000 in food and beverage. In 2021, we were Cash positive EBITDA in food and beverage. So about a $250,000,000 swing just in that lineup.

Speaker 9

That's great color. Thanks, Tom. Appreciate it.

Operator

Thank you. Our next question comes from Barry Jonas with Curtis, you may proceed with your question.

Speaker 11

Great. Thank you. Tom, any interest in the New York land based casino here? And I guess With that any other land based markets you're exploring?

Speaker 3

So New York, How do I answer this politely? New York is a difficult regulatory state. I think it's going to be extremely expensive to build there. I think it's going to be an extremely expensive license fee. And I think there's a likelihood that you're going to have to solve some other problem of the city in addition to Creating the jobs that you do in building a casino.

Speaker 3

So it's not going to be enough to pick a site, build a casino, Create the jobs and generate a return, there's going to have to be other investment there as well. So I would say on our balance sheet, it's extraordinarily unlikely that we make a material investment into New York land based. Now there are others that take a different view in terms of The investment opportunity there for a variety of reasons, if one of those developers Wants to talk to a manager that brings 65,000,000 reward members and powerful brands, we'd be very interested in having that discussion. Away from New York, we're doing the Columbus, Nebraska project, which is fairly small Track in the middle of the state that helps us get into digital in that state as well. There are Other states that are kicking around the possibility that might be interesting, but it's unlikely that Greenfield new license activity becomes a huge driver of value or a huge suck of our time From Caesars standpoint.

Speaker 11

I guess just to close the loop, gaming is now legal apparently in the UAE. Any chance we could Gaining at your property in Dubai?

Speaker 3

Well, that was the original thought when Caesars struck that deal In Dubai that maybe ultimately the UAE would have gaming that is a Caesars Palace in Dubai that we manage. So if there is an opportunity, you should expect that we would be active and our brand and building is already open.

Speaker 11

Great. Thanks so much, Tom.

Operator

Thank you. Our next question comes from Shaun Kelley with Bank of America. You may proceed with your question.

Speaker 12

Hi, good afternoon, everyone. Tom, I just wanted to dig in a little bit more on New York on the digital side and maybe just get your take Sort of how did the market play out as you got into the cadence of sort of the opening period here we saw? I think The promotional environment, the offers that we saw are probably not that different than what we've seen in other markets, but obviously, it seems like just the magnitude and number of customers was pretty dramatic. So I just want to get your sense on how did that play relative to your expectation and maybe does it require substantially larger investment than you originally outlaid just Given that the market is deeper than perhaps you thought initially?

Speaker 3

Yes. So how would I characterize it? When I was a kid, we used to drink out of the Garden hose, we're all playing outside. It was as if you were getting ready to drink from a garden hose and a tidal wave came and hit you. It was absolutely staggering, the demand in New York.

Speaker 3

To give you an idea, we had 75,000 inquiries to our customer service portals in the 1st 2 days Post launch in New York. As I said, it was 2x what we were expecting in terms of volume and our share was 2x of what we were expecting of that volume. In terms of the ultimate yes, we have more market share than we anticipated in New York. So the cost of that launch is more than we had originally modeled, but that's also part of the reason that we can Start to cut back on traditional media immediately and end up in about the same place Except with much more share than we anticipate.

Speaker 12

Great. And then maybe sort of the A corollary to that, if you can help us think through the revenue side of how this may play out over the next couple of quarters. When I look at digital revenue This reported quarter, I think it's actually down a little bit year over year and a lot of that probably has to do with promo timing. But just help us think about, yes, how revenues are going to come in, especially when you have a couple of these big market launches, New York in this quarter, Canada likely in next quarter, Before we start to maybe see some of that promo roll off, we actually start to see your success on the net revenue side.

Speaker 3

Yes. This quarter will look ugly. New York and Louisiana launches Are both in there. New York, the way that they account for promos is they hit before the net Between gross revenue and net revenue. So we'll take you through Offline in terms of how that flows through the financials, but you're going to see significant hits to net revenue from The New York launch in this quarter, it doesn't change the overall EBITDA number, but the way that it flows through the income statement is unique.

Speaker 3

But as you get out of this quarter, when we go into Pennsylvania to Illinois with Liberty, those will be much more modest launches in terms of costs and promo. Those are existing markets where we're going to have to claw share kind of 100 basis points at a time. So you're not going to see that dramatic day 1 impact that you saw in New York, Arizona, Louisiana, same thing with Ontario, high gaming. You won't see something that looks like those last three states I mentioned until Ohio and or Maryland come on, which sound like later this second half of the year is the tentative schedule there.

Speaker 12

Thank you very much.

Operator

Thank you. Our next question comes from David Katz with Jefferies. You may proceed with your question.

Speaker 8

Hi, good afternoon, everyone. Thanks for taking my question. I wanted to ask about the Las Vegas Strip. And I know it's not the most normal environs, But there's really yourselves and one other pretty large player that arguably are quite different, but still the biggest players on the same block. Can you help us think about the degree to which and I hesitate to use the word share shifts, But your successes aren't necessarily their failures and vice versa?

Speaker 8

Or Can you both succeed concurrently? Like how do we think about those puts and takes in this environment?

Speaker 3

I like that question, David, because I wanted to talk about this in both digital and land. The Vegas question, I want everybody to do well in Las Vegas. I don't view the way that we do well Is MGM or when Venetian doesn't do well? This market is everybody is going to have a good 'twenty two and 'twenty three as the group business comes back. And sure, we fight over Customers will fight over entertainers in terms of normal competitive atmosphere, but MGM as an example, I'm incredibly impressed with what Bill and his team have done At MGM, and it's great to see them get recognized for it in share price.

Speaker 3

And I expect them to continue to succeed as I expect us to continue to succeed. And flipping that into Digital, our ability to succeed from here in my view is dependent on our ability to do the blocking and tackling To target those valuable customers and service them and roll And meld that business into Caesars Rewards and into our larger brick and mortar business. Our business does not depend Somebody else failing or somebody else running out of money. There is enough room in this space For multiple success stories, I would say at least 3 or 4. We intend to be one of them, but we don't need anybody else to fail in Vegas or outside Vegas for us to succeed.

Speaker 8

Perfect. And if I can follow-up quickly, when we last saw each other in person, which was G2E, and we talked about The strip asset sale, I recall the perspective that time has been your ally. Would you say that it's still been your allies since then to now? Pardon the question, we have to be anxious About something in this job. So how are we doing there?

Speaker 3

I'd say no question. We're obviously, we had a first Quarter last year in Vegas that had significant restrictions on visitation, Social distancing, masking, it was a difficult operating environment. And As we market this asset, we're going to be able to market off a 12 month period that while it was not without Impact from COVID, it was a very different cash flow picture than the heavily COVID impacted times. And then if you look at the last two trades that I've seen in the Kind of the PropCoOpCo space was Craig's trade in Boston and Bill's traded the OpCo at Mirage, both of which are exceedingly good comps for anyone who wants to Market a center strip asset. So we feel like waiting to pursue this now was the right decision and we're excited about where we can get here.

Speaker 3

If you recall, we probably paid $17,000,000,000 for Caesars. I told you the synergy number. So with those synergies, we bought Caesars for less than 6 times EBITDA and the Vegas asset sale Is going to bring back 15% plus of those proceeds most likely back onto our balance sheet. So We couldn't be more pleased with the position we're in, in terms of selling the Strip asset.

Speaker 8

Great. Good luck. Thank you.

Operator

Thank you. Our next question comes from Dan Politzer with Wells Fargo. You may proceed with your question.

Speaker 5

Hey, everyone. Good afternoon. I just wanted to touch on regionals really quickly. Could you just give us an update? Are you seeing Any properties or regions with pockets of higher promotions?

Speaker 5

And I guess outside of Brockford and Omaha, maybe 1 or 2 other markets, Can you just remind us where we should be thinking about new competition coming online? And then just one other along those lines, just any update on February trends today? Thanks.

Speaker 3

Okay. In terms of promotional environment, I'd say there's Nothing to call out that would be material to our outlook as a company. In terms of competitive openings, Rockford is Temporary, you'll have Omaha temporaries presumably at some point in 'twenty We're working through obviously the Monarch addition in Colorado, but I should have hit on that one When I was talking about property performance, we took that property over doing $35,000,000 or so in EBITDA. It did over $60,000,000 last year in the face of Monarch opening across the street and Monarch's property is beautiful. So competitive opening is not necessarily the impact that you might expect.

Speaker 3

You had Spectacle opened their property in Gary on the interstate last year. Hammond has held in Exceedingly well since we since that open, actually flat to up in EBITDA. Anything else you can think of that's going to open? No. That's all I can think of.

Speaker 3

And in terms of February, Dan, February has been stronger than January. As I said, we were 75% occupied in Vegas in January 80% month to date in February forward looks strong as well. Super Bowl was really, really good and Presidents' Day weekend was really, really good as well.

Speaker 5

Got it. And then just one on the Strip. You've talked about margins kind of in that 50 ish percent level And group and convention coming back maybe later in the year. I mean, how should we think about is that still fair to kind of Think about it as kind of a normalized run rate going forward or are you kind of are you managing this to grow EBITDAR in absolute levels like some of your peers?

Speaker 3

I think you're going to see both. This quarter, if you treat the real lease like you treat all the other leases, we were 48% margin in a seasonally low quarter. So I'd say High-40s to low-50s, kind of straddling 50s, based on seasonality is a good expectation. And We just don't have the business that comes back for us with group business helps us In terms of rate compression, so hotel margin and also brings back a banquet business for us that's In excess of the overall Vegas margin. So we think it's accretive to EBITDA and margins as it comes back for us.

Speaker 5

Understood. Thanks so much.

Operator

Thank you. Our next question comes from John DeCree with CBRE. You may proceed with your question.

Speaker 13

Hey, Hey, everyone. Thanks for taking my question. Maybe a 2 part question, Tom, and appreciate the trip down memory lane that you took us earlier and All the success you've had in regional gaming M and A. So I wanted to ask if that strategy Could be part of Caesars future. I realize there's a lot less white space today, but given the success and I ask in the context of Looking into 2023 when the CapEx that you have currently starts to wind down, EBITDA and digital and flex, the balance sheet Should be delevered and as Brett talked about some opportunistic refinancing ahead, lots of free cash flow in our model.

Speaker 13

How do you think about deploying that in a Middle of 2023, not that far away and if regional gaming M and A could be a part of that strategy.

Speaker 3

So I'd say it does seem to be a core competency of ours in terms of squeezing more Cash flow out of assets that have been owned by others. So we recognize that. Obviously, it becomes Tougher from an antitrust perspective, the larger that you get. So That would certainly be a consideration. But I'd also say, until we inflect to EBITDA positive in digital, I don't anticipate any material buy side M and A from us.

Speaker 13

Fair enough. And would the same comment hold true for other uses As of capital, as we approach the Q4 of next year given the free cash that your portfolio is generating?

Speaker 3

Hard to project that far in the future on that question. Obviously, it's going to depend on What does the valuation look like? If I'm still getting negative $15 a share for digital, maybe I become a buyer of my stock. I would expect that we'll have corrected that at that time and We'll see how the stock behaves. We'll see how it performs as we delever.

Speaker 3

I think that's going to be Multiple enhancing, but by the timeframe that you're laying out, we'll know that answer and be better informed.

Speaker 13

Fair enough. Appreciate all the color today, Tom. Thank you.

Operator

Thank you. Our next question comes from Chad Beynon with Macquarie, you may proceed with your question.

Speaker 10

Good afternoon. Thanks for taking my questions. 2 on digital. 1, As you continue to come through the data, Tommy, you talked about inflection in Q4 'twenty 3, wondering if the 30% to 35% long term EBITDA margin still holds up in your view. And then secondly, Some of the other companies have expanded their digital offerings to marketplace and NFTs and that seems like a pretty high margin business to just offer Your users, is that something that you would consider exploring just as your DAUs and MAUs grow?

Speaker 10

Thanks.

Speaker 3

So Chad, on the second question, I would say absolutely not. I'll tell you what's a High flow through business and high margin business, it's the casino business. And that's what we operate outside of digital and we think it's An extremely strong complement to the digital business. The first quarter was the first question? 30 to 35.

Speaker 3

Oh, yes. So I mean and I appreciate that question, Chad. No, the answer the short answer is no. And I think that's there is a I think there's a mistake that's made in the investor community that conflates A low hold business with a low margin business. We know of states in our portfolio Where we've got strong market share in mobile, where we can operate Mobile sports betting well in excess of 50% EBITDA margins.

Speaker 3

And that's going to mix with other states, which For either competitive or regulatory reasons, the margin is going to be different. But this is a 5%, 6%, 7% hold business. If you think about the regional gaming business, Yes. A lot of that business is video poker business and hold on video poker games is 3%, 4%, 5%. And we run margins in those properties of 40%, 45%, 50% with the full operating costs of a physical property.

Speaker 3

So We're extremely bullish on what we'll ultimately be able to do margin wise in Digital, but that will evidence itself as you get out of this launch period and your customers are dominated by Existing customers versus brand new customers.

Speaker 10

Thank you very much, Tom. Appreciate it.

Operator

Thank you. Our next question comes from David Bain with B. Riley. You may proceed with your question.

Speaker 14

Great. Thank you. Very helpful commentary and Transparency. We agree the balance sheet activity is a near term catalyst for valuation. And I was hoping Maybe, Tom, you could big picture the balance sheet playbook that captures the William Hill proceeds, the Forrester Bassett sale, Free cash flow from operations, interest savings, is there a net leverage, kind of target or expectation by the end of Next year when you funnel those items in?

Speaker 3

Yes. So we have The entire the bulk of the capital structure that we would want or the debt structure, we want to target is available By the middle of this year, our unsecured debt in the current environment trades what, 5.25%, 5.5%. So that's our most expensive debt. The secured debt trades cheaper than that. Brett laid out What we're spending in interest expense, we think there is considerable opportunity to reduce our interest expense.

Speaker 3

We're at about $22,000,000,000 $23,000,000,000 of gross lease adjusted leverage. We're generating As it costs in the neighborhood of in this in the neighborhood of $2,000,000,000 of brick and mortar free cash flow, You know what's coming in from the William Hill transaction and you can make your own assumption on What a Vegas asset strip or Vegas strip asset sale would bring and then we'll spend some in terms of investment into Digital, but you could see us certainly within the next 18 months or so kind of Somewhere in the mid to high teens in terms of outstanding lease adjusted debt and our leverage would be Somewhere in the 4s when we inflect to positive in digital, when it would start to come down considerably. So You could see leverage get to relatively low levels pretty quickly, certainly in the next 18 to 24 months.

Speaker 14

Okay, great. Understand. And then just lastly, when looking at news impacting the stock market, including today, And the overall patron economic setup this year with indirect stimulus versus direct last year, how should we view the Kind of the macro setup overall, understanding there's specific catalysts that you mentioned like conventions coming and the older demographic coming back. But Just if you could big picture that as well, that'd be helpful.

Speaker 3

Yes. I'd say our Business, not just our business, the Eagle business since reopening has been highly correlated to Both. The COVID case counts and the coverage of COVID in general, When the coverage leads to fear, we see reduction in business. And when you get to where we appear to be getting to with Omicron, we tend to see pent up demand. We see no reason that, that would be a different scenario this time.

Speaker 3

The household savings rate is still at Extraordinarily high levels relative to history. The Fed obviously has a big job in front of them in terms of Managing inflation as we move forward and what they do with rates, and that's obviously an exogenous The fact that could impact wealth effect if they make a move that the markets don't like, but we feel Generally very positive with where our consumer is. That 55 plus customer It's still not back in anywhere near the levels of the younger crowd And that historically has been a key driver of business both in destination markets and region.

Speaker 14

Very good. Awesome. Thank you.

Speaker 3

Thanks, Dave.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Tom Reeb for any further remarks.

Speaker 3

Thanks, guys. That's all we got. We'll talk to you after Q1.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Caesars Entertainment Q4 2021
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