Caesars Entertainment Q3 2022 Earnings Call Transcript

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Provided by Quartr
November 1, 2022

Key Takeaways

  • Caesars delivered a new consolidated EBITDA record (excluding digital) of $1.05 billion in Q3, with Las Vegas driving $491 million of adjusted EBITDA (46% margin, excluding Rio rent) and Regionals setting a Q3 same-store record of $570 million, up 25% versus Q3 2019.
  • Caesars Digital trimmed its Q3 adjusted EBITDA loss to $38 million, its smallest since the sportsbook rebrand, as trading-engine upgrades, faster cash-outs and segmented marketing improved hold and promotional efficiency, inflecting to positive EBITDA in October.
  • The company permanently reduced ~$900 million of debt during Q3, completed a $3 billion syndicated credit facility, and expects to generate over $1 billion of free cash flow in 2023, with a potential $2.5 billion inflow when VICI exercises its Centaur option by late 2024.
  • Key capital projects include the opening of the Nobu Hotel Tower in Atlantic City H1 2023, Horseshoe Lake Charles on December 12, expanded casinos in Pompano, and temporary facilities in Danville (VA) and Columbus (NE) by mid-2023, plus a new tower and sports book in New Orleans.
  • Management remains optimistic for the rest of 2022 and into 2023, citing strong forward group-room pacing in Las Vegas (double-digit growth vs 2019), healthy consumer trends, and ongoing recovery of international and older demographic guests.
AI Generated. May Contain Errors.
Earnings Conference Call
Caesars Entertainment Q3 2022
00:00 / 00:00

There are 18 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Caesars Entertainment Third Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Thank you, Elizabeth, and good afternoon to everyone on the call. Welcome to our conference call to discuss our Q3 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended September 30, 2022. A copy of the press release is available on 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 Brett Yunker, our Chief Financial Officer and Eric Keshin, President, Caesars Sports and Online Gaming. 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 call. 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 2022 Q3 Financial Results. I will now turn the call over to Anthony.

Speaker 2

Thank you, Brian, and good afternoon to everyone on the call. In the Q3, we generated a new consolidated EBITDA record, excluding digital, of 1,050,000,000 Our Las Vegas segment continued to deliver strong results with $491,000,000 of adjusted EBITDA excluding the Rio rent payment. Our Regional segment delivered a new Q3 record with same store adjusted EBITDA of $570,000,000 Up 25% versus Q3 of 2019. Caesars Digital reported a $38,000,000 adjusted EBITDA loss, which was our smallest loss quarter Since rebranding to Caesars Sportsbook in August of 2021. In our Las Vegas segment, all areas of the business combined to contribute to the Strong EBITDA quarter.

Speaker 2

Excluding real rent payments, our Las Vegas segment generated EBITDA of 491000000 And a 46% EBITDA margin. Occupancy was strong reaching 94% driven by July September. Cash hotel revenue and profit set a new Q3 record. Gaming revenue also set a new Q3 record during the quarter. Group room nights during Q3 of 'twenty two represented approximately 12% of occupied room nights.

Speaker 2

Forward group revenue Pace for the remainder of the year and into 'twenty three is up over double digits versus 'nineteen. Results in our 50 I plus segment in Las Vegas were up again in Q3 to pre COVID, continuing the trend we experienced in the 2nd quarter. International travel continues to recover and remains a tailwind. Las Vegas has further runway for growth with many exciting new entertainment and events coming to the market over the next 18 months. In our regional markets, results strengthened in the 3rd quarter, Posting growth versus a strong Q3 last year, reported EBITDA of $570,000,000 was up 25% to Q3 of 2019 And up 30% when excluding Lake Charles, which remained closed during Q3.

Speaker 2

EBITDA margins improved 840 bps The 38% on a same store basis versus Q3 of 2019 excluding Lake Charles. Trends in our regional segment remain very consistent over the last few quarters. Turning to an update on our capital program. Renovations in AC will complete in the first half of twenty twenty three With the opening of the Nobu Hotel Tower and we're excited about the recent restaurant openings of Hell's Kitchen and Nobu at Caesars AC. Horseshoe Lake Charles is set to open on December 12th, and we look forward to showcasing this brand new land based facility.

Speaker 2

We also expect to open our expanded casino offering in Pompano in December as well. We expect to open temporary casinos in both Danville, Virginia and Columbus, Nebraska by mid year 'twenty three. Our expansion at Harris Hoosier Park is underway and should open by mid-twenty 23. And lastly, our construction on our new hotel tower and additional amenities at our New Orleans property is progressing well with the new sports book and poker room recently opened. As we look to the remainder of 'twenty two, we remain optimistic about our business as consumer trends remain healthy, especially versus 'nineteen.

Speaker 2

As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, the return of the international consumer, as well as the potential for the full recovery of our older demographic consumer who's been the most impacted by COVID-nineteen. I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, Their execution and their exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the Q3 performance in our digital segment.

Speaker 3

Thanks, Anthony. Our digital business reported revenue growth of over 120% and a smaller than expected EBITDA loss in the quarter. On the sports betting side, we recently started to realize the benefits from the efforts that we've made over the summer to improve the overall experience for our customers, Specifically improvements in cash out speed, customer service response times and our in play, parlay and alternative line offerings are all being well received by our customers. We've also created several analytical tools that provide real time assistance and insights for our trading team, allowing them to expand the number of markets we offer to our customers and to be more responsive during in play trading sessions. As a result, our hold volatility has declined and our overall expected hold levels have increased.

Speaker 3

During the quarter, we also began to see the results of our initial segmented marketing campaigns that allow us to reward our customers more directly for their loyalty and play with us. These efforts contributed towards our net revenue growth as they allowed us to improve our promotional spending efficiency. We anticipate continued enhancements in this important area over course of 2023. On the Icasino side, we hired a new leader for the vertical who started on October 1. In conjunction with our tech team, we have an aggressive product improvement roadmap identified with numerous enhancements for our customers that will be rolled out as completed With a full product targeted for the start of the second half of twenty twenty three, iGaming remains a critical component of our digital growth strategy.

Speaker 3

From an expansion standpoint, during the quarter, we launched our online sports betting product in Kansas and upgraded our tech package in Illinois, Pennsylvania and Washington D. See to our most current version. We now offer sports betting in 27 North American jurisdictions, 19 of which offer mobile wagering. In Q4, pending regulatory approval, we anticipate launching online sports betting in Maryland and on January 1 in Ohio. In addition, we plan on adding 2 new third party retail locations during the quarter.

Speaker 3

With that, I'll turn it over to Brett for some additional comments.

Speaker 4

Thanks, Eric. Q3 was another productive quarter from a balance sheet perspective as we permanently reduced approximately $900,000,000 of debt Using asset sale proceeds and free cash flow, we also successfully syndicated a new $3,000,000,000 credit facility Comprised of a $2,250,000,000 revolver and a $750,000,000 Term Loan A. 16 domestic and international banks to come in at approximately $800,000,000 which is also our current estimate for total 2023 CapEx spend across growth and maintenance. Finally, we announced that we will be pursuing a downstate casino license in New York with our partner SL Green. It will obviously be a very competitive process and we look forward to putting our best foot forward when the RFP begins.

Speaker 4

Given the inherent sensitivities around the bid process, We aren't in a position to go into details around project cost at this stage. However, we can tell you now that the project starts with an existing building And will be financed within a new joint venture that is not on our balance sheet. Caesars will brand and manage the asset under a long term management agreement And any equity investment into the joint venture will be very manageable relative to our free cash flow. Now I'll turn the call over to Tom.

Speaker 5

Thanks, Brett. I'm going to touch a little further on the quarter and I want to talk about October as well. In Las Vegas, very strong results in the quarter. Normal seasonality returned to Las Vegas In the Q3, we also had a couple headwinds that I would call out in utility Expenses for the quarter were extraordinarily high, particularly August. And we had The finish of the construction of the entrance, which caused some construction disruption, if you look at The impact of the 2 of those and added back, you'd ended up a little bit ahead of last year On an EBITDA basis and similar from a margin standpoint.

Speaker 5

As you look into October was the strongest month in the history of Las Vegas for Caesars, we did over $200,000,000 of EBITDA in October, Which is up double digits versus last year. On a consolidated basis, October EBITDA for bricks and mortar is pacing Double digit percentage above last year's October despite having 1 fewer weekend day In the 2022 period. Regional is obviously quite strong as well. I had a little bit of margin improvement there, Strongest Q3 that we've ever had in regionals. And then we've got, as Anthony touched on, we've got Charles coming.

Speaker 5

We've got temporary casinos in Columbus, Nebraska, Danville, Virginia that will hit Next year, we've got the completion of the Atlantic City spend as well. And the Harrah's Hoosier Park in Indianapolis, Outside Indianapolis should finish by the middle of next year. So a number of tailwinds, Cash that you allowed us to invest as shareholders that you're going to see the fruits of going into the rest of 2022 And into 'twenty three. I'd also like to touch on the Strip asset sale And say that we intend to keep all of our strip assets as we move forward. We ran into a market where the cash flow of the asset continued to increase.

Speaker 5

The ability of buyers Terese Financing made it a very easy decision for us to keep. I know that despite us talking about how This is and was a discretionary process for us. It created an unnecessary overhang in the stock. And I apologize to all of our shareholders for that. That was a self inflicted error and that was me.

Speaker 5

So we will be keeping our Vegas Strip assets as we move forward. In digital, October digital Inflected to positive EBITDA for us. So we are extremely pleased that's 12 months Ahead of the schedule that we anticipated. I think most of you are aware we've got a fairly high profile Liability out there with the Astros, so that will have a that will be a swing factor in whether 4th quarter is positive as a whole, but we'd expect that we have inflected and Digital will be a contributor as we move forward. So that's extremely exciting news for us.

Speaker 5

Great work by Eric and his team in digital and thank you to all of our shareholders for the capital invest in digital and the patients as we work through it, we continue to believe that on our $1,100,000,000 of cumulative EBITDA At maturity, we'll be doing in excess of 50% of that in annual EBITDA on a digital. That business continues to outperform our expectations and really, really inflected over the last 60 to 90 days. So we are quite pleased with that. With that, I'll flip back to the operator for questions.

Operator

Our first question comes from the line of Carlo Santarelli with Deutsche Bank. Carlo, your line is now open.

Speaker 6

Hey, guys. Good afternoon. Tom, appreciate the commentary on digital. Could you talk a little bit about how you foresaw or foresee going forward the promotional environment, Perhaps based a little bit on your experience in the 3Q as well as what you saw in October as we're now in the kind of the mid of football season. And then further, let's set aside the World Series liability.

Speaker 6

Could I take your comments to kind of infer that perhaps next year, you're looking at a positive EBITDA contribution from digital?

Speaker 5

Yes. For modeling purposes, Carlo, I'd expect you to be around breakeven, but I'd expect that We've got a really good shot that that's a contributor on a full year basis in 2023. Obviously, that's Subject to hold, but we feel very, very good about where we are. In terms of promotional environment, you've got We've talked for a very long time about how your customers as they come in, in new states, that's when they're taking advantage of Sign up offers, those are your highest that's your highest promotional spending. We've got Obviously, a mix this year of states, most of which are in their 2nd year, if not second full year, at least 2nd year of Operation during football season, so your promos are to your existing customers.

Speaker 5

That's typically a much smaller promotional bite than new sign ups. But I'd also say, We have the ability to segment customers now, which we didn't last year. We've got a full year of looking at, As you know, we had all spigots open in digital as we launched the business and launched the brand. Now we can look at various verticals and see what type of customer is coming in through the various channels And adjust our spend based on are we getting return on our investment. And we made some significant changes there Led by Eric in the last 60 days that have flowed virtually entirely basically shutting off Particular segments and that cash has flowed immediately to the bottom line with no degradation in Market position.

Speaker 5

So we feel very, very good about where we're at. As I told you, This is what we've done on the brick and mortar side is figure out how to invest more in your best customers and less in your Less profitable customers and that's really the basic blocking and tackling that we're doing in digital that has led to these results.

Speaker 6

Yes, I have noticed the latter personally. Thanks, Tom. I appreciate that. And then just one follow-up From the regional perspective, obviously, results were good against a difficult comparison. It looks like you guys were able to more or less keep OpEx kind of ex gaming taxes to the best of our estimation flattish.

Speaker 6

Are you kind of where you need to be? Are there any pressures that are kind of creeping there that we need to be aware of outside of Traditional labor inflation, things like that or is this a pretty good run rate in terms of OpEx?

Speaker 5

Yes, I'd say you're in a pretty good run rate. You've been around as long enough that we're never done. But we don't see any real cost that's on the sidelines. As you've touched on, we've got labor cost inflation That rolls through and that's been for quite some time and frankly the labor picture

Operator

Our next question comes from the line of Joe Greff with JPMorgan. Your line is now open.

Speaker 7

Hey, everybody. Tom, just starting off on the digital side, As you talk about increasing profitability in this segment, Can you talk about over the next few years, 2023, 2024 and beyond, the magnitude of Additional operating expenses coming out of that business, maybe particularly with some partnership expenses, And how this might be sort of, I want to say, low hanging fruit or easy to extract efficiencies from, but Can you talk about some of those that kind of get you to increasing profitability as you think about some of those partnership expenses winding down?

Speaker 5

Sure, Joe. As you look at current business, you've got for us what is a sports dominated business at this point Inflating to profitability, obviously, we have significant opportunity in front of us in Hi, Christina. We think we've now have the right leadership in place to attack that. So we think that will grow from What's a fairly small contributor today into a much more meaningful contributor? What I think you're referring to is As we launch and this is not unique to us, this is throughout the entire digital space.

Speaker 5

There were a number of Partnership deals signed up with media partners, with teams, with leagues that all kind of run 3 to 5 years in our case from, let's say, middle of last year. So you'll have some running off in a year, What you were willing to pay for those sponsorship opportunities, those partnership opportunities that were based on Customer generation, new customers to your platform, obviously, we've got much more data today than we had before. And you're not going to be in virtually all of these cases in a launch situation anymore. So for us, That's something that runs in north of $200,000,000 of annual expense. And you should expect as though and for now that's a fixed expense for us.

Speaker 5

As long as those contracts are in place, You should expect some of them will live in a form that may not be as expensive as it is today. A fair amount of those will go away entirely and that should flow straight to EBITDA for us if you're looking out in that 24, 25 timeframe that you laid out.

Speaker 7

Great. And Tom, just to clarify your comments, Switching over to Las Vegas, you'd mentioned the 3Q would have generated in Las Vegas EBITDAR north of last year and margins that are similar and that delta between what you reported and Those comments relate to those 2 headwinds, utility costs and disruption at CPLV. Can you Sort of break out magnitude of each and explains what maybe the elevated utility expenses. How do you think about that going forward? And Is it recurring?

Speaker 7

Is it one time? And then also tough enough to notice that corporate expenses were down a lot sequentially. Can you help explain that or was there an expense shifted out to the properties versus what may have been in the past sort of allocated to corporate?

Speaker 5

Brad will take corporate expense. I'll take things.

Speaker 4

On corporate expense, yes, we are a bit light to our typical run rate of $30,000,000 to $35,000,000 per quarter. That's due to a lack of transaction activity and a continued focus on all expenses.

Speaker 5

And for Vegas, Joe, if you normalize utilities, which was primarily rate in August alone, That's virtually the entire gap between Q3 of 2022 and Q3 of 2021. And then you have the construction disruption as well. To give you an idea, October on a preliminary basis, Vegas EBITDA margin was about 52% for us.

Speaker 7

Great. Excellent. Thanks, guys.

Operator

Our next question comes from the line of Steven Wieczynski with Stifel. Your line is now open.

Speaker 8

Hey, guys. Good afternoon. So Tom, you just mentioned that Vegas did, I think you said $200,000,000 in EBITDA in October. And I guess the most simplistic way I can ask this question is, Should the quarter end up being $600,000,000 in EBITDA? And I guess what I mean by that is obviously with there's some holidays coming up and whatnot, I just Want to make sure that expectations for the Q4 are rightfully set at this point and hopefully that makes sense.

Speaker 5

Sure, Steve. October is typically the strongest month in Q4. November is the weakest month. Thanksgiving is not A particularly strong holiday and your so November is the seasonal slowest in the 3rd in the 4th quarter And then you get New Year's in December. So if I were thinking about what does the quarter look like, October should be the best month, December should be slightly lower and November lower than that.

Speaker 8

Okay, perfect. Then second question, Tom, on the digital side of the business, and clearly there's been some significant progress made here in terms of getting that segment Profitable. And I guess my question is or maybe give us your updated kind of thoughts about down the road, Do you see any kind of scenario where you would want to potentially spin this business off at some point? And I understand there's There's probably a lot of value here with the business being tied so closely to the brick and mortar side, but just wondering if that would possibly make sense at some point down the road to help the leverage side of the equation.

Speaker 5

So I'd say that our competitive advantage here is Tying into the existing brick and mortar business and our Caesars Rewards database, and It would be my preference that remain 100% owned by the parent company. If you get to Different shareholder basis for the 2 business, there's a complexity introduced that you see in You can see that in some of our peers in terms of when you get to different shareholder bases in the same business. But I tell you, you know that we're constantly focused on how do we drive shareholder value if you get into A market where that ultimately makes sense and that's the way to increase the pie for shareholders in total, Certainly, that's something we would consider. In the recent market environment, there hasn't been much value placed on these Digital assets, so it's a very easy decision as we sit here today.

Speaker 8

Okay, got you. Thanks guys. Appreciate it.

Operator

Our next question comes from the line of Shaun Kelley with Bank of America. Your line is now open.

Speaker 9

Great. Good afternoon, everyone. I want to dig in on regionals a little bit. The Performance there in the quarter was obviously excellent and probably stronger than many of us were expecting. I was wondering if you could just kind of call out any key markets that may have driven that strength in the Q3.

Speaker 9

And specifically, if you could comment on Atlantic City, I feel like it's a big seasonal quarter for that market. But directionally, I think we've seen the Caesars properties on a gross revenue basis not performing as well as some of the other market participants. I was curious If you're doing something different there, focusing on margin, just kind of how that market is evolving specifically?

Speaker 5

Yes. Sorry. What I'd say we're doing differently is we've had most of our market torn up during the peak season. So we've had Rooms out of service both at Caesars and at Harrah's. And obviously, the intention As we began the project, that would be finished prior to peak season of 2022 and for There's obviously a well known story of what's happened to what happened to supply chain and we missed The peak season.

Speaker 5

So really the results you're seeing in Atlantic City are a function of The construction disruption that we've had going on in that market, that's not a we're making a conscious decision to run off revenue and Focus on margin. So Atlantic City on a relative basis to the regionals was an underperformer. In terms of over performers, New Orleans has come back quite nicely from Both the hurricane and the severe COVID restrictions that were in place in the city And then Northern Nevada continues to be extraordinarily strong. The levels of business that we're doing in Reno and Tahoe are frankly beyond what we ever dreamed when we were putting this thing together a few years ago.

Speaker 9

Great color. Thank you, Tom. And then just as my follow-up, switching to digital, if I could. Well, we have Eric. One thing that's been a discussion point in the market is obviously really strong hold levels across Much of the OSB landscape in the Q3, certainly in October sorry, in September.

Speaker 9

Kind of curious on Yes. The thoughts you made a call out on hold and that improving a bit over time. Just could you talk to us a little bit about relative to maybe what we're seeing in the market in September October, how much you think this is sustainable based on product and mix versus how much is really just a factor of game lock where we've definitely seen some outcomes

Speaker 5

Yes. So let me start this and I'll flip to Eric in terms of there's 2 pieces here, right? There's Just your normal luck and football season started pretty strong for all books. There's a couple of weeks so far that have been the reverse of that, but the bulk has been favorable to books. But when I'm saying we're positive in October, That's even adjusted for that hold.

Speaker 5

We've also made a number of changes that have Our own hold, but I'm going to flip to Eric to talk through.

Speaker 3

Yes. Thanks, Tom. We had higher than expected hold Towards the higher end of our range for the quarter, partially as Tom mentioned through luck that the football season has been fortunate to us so far. But beyond that, as I mentioned in the remarks, we did put a lot of tools in place. We're increasing Our uptime and our percentage of in play hold and in play volume, which naturally translates into a higher hold product.

Speaker 3

In addition, our percentage of parlays has steadily grown and really improved in the Q3 relative to the second and first quarter. A lot of that is due to some enhancements that we made on the tech side to improve the ability for customers to visualize and to place their parlayed bets. We also have our analytics team that's come over from the retail casino side that have put together a number of models That allow our traders to be able to keep the odds up during the game longer and then also to be more accurate With respect to their pricing. And so through a combination of all of those factors, we've really been able to reduce the volatility And you can see it when we get our results each day, even on days when we're not lucky with the outcomes, we still manage to pull off positive hold or at least Hold that's reasonable for a particular day. And then when we do get lucky, it really compounds and we can get some really solid double digit holds.

Speaker 3

So overall, we've put a lot of structural hold changes in place, but we were also a bit lucky in the 3rd quarter.

Speaker 5

We are huge Phillies fans for the next

Speaker 10

week. Thank you, everyone.

Operator

Our next question comes from the line of Barry Jonas With Truist, your line is now open.

Speaker 11

Hey, guys. Looks like you found the right structure to move Forward with a bid in New York, just curious if there are any other greenfield opportunities you're interested in either domestically or internationally?

Speaker 5

I mean, I would say Greenfield International, you never say never, but highly, highly unlikely. In the U. S, if you see a major market open like say Texas, you should expect that we're going to look for A way to participate there, you've seen us in Danville, Virginia, where the temporary will open next year, Columbus, Nebraska, which is smaller, where temporary will open next year. So we will pick and choose, but You should expect it to be domestic focused.

Speaker 8

Got it. Got it.

Speaker 11

And then just shifting to digital, you talked about Ohio Marilyn going live. Any expectations for you could share for other jurisdictions, whether that's Massachusetts, Nebraska, Puerto Rico. And then just for I Casino, I think the legislative movement has been Softer than people thought. Any progress on states making a push for iCasino that you're seeing?

Speaker 3

Yes, I'll take that one. You definitely listed off a lot of the ones that we're aware of. So in addition to Maryland, Which will hopefully be in November and then Ohio on October 1. You've also got Massachusetts. The date hasn't been finalized there, but it's looking pretty good for Q1.

Speaker 3

It sounds like the retail locations will open first and then online, We're participating in the online side of that. In addition to Massachusetts, Maine has been moving forward. That's probably going to be late This year, if not into sorry, late 2023 rather. We are planning to launch in Puerto Rico that could happen in the 4th quarter and might push So the Q1 and then as you mentioned with Nebraska as well, we will plan to have some kiosks up for our temporary casino there. And then we're going to launch a sports book at Casino Windsor up in Canada.

Speaker 3

That'll be kiosk later this Week and then early next year, we'll open a full book as well.

Speaker 11

Got it. And any movement on the You know, side that you're starting to see from the states?

Speaker 3

Yeah. The iCasino is A little bit more tricky. There really has to be a real coalition. There's a lot of competing interests from both within our industry and Ancillary businesses that sometimes compete with us and sometimes participate with us. At this point, it's certainly possible that there could be another state that Legalizes are 2 next year, but I wouldn't call out any particular state at this point.

Speaker 3

And just to add on to that one, when we think about the model that Tom's out laid, we really don't look at any incremental

Speaker 11

Perfect. Thanks so much.

Operator

Our next question comes from the line of John DeCree with CBRE Securities. Your line is now open.

Speaker 10

Hi, everyone. Thanks for taking my question. I covered a lot of ground, so I apologize, maybe this one's a little bit more granular On the October performance in Las Vegas, kind of record EBITDA levels, I think you've mentioned a low 50s percent margin, 52%, if I heard Correctly. I'm curious if you could kind of give us a little bit of insight into customer mix. It's typically a bigger group customer quarter, but it seems like everything's kind of Working with that margin, I think 12% group room nights in 3Q, curious if you could kind of unpack October a little bit in terms of customer mix And what kind of push that record performance from a customer perspective?

Speaker 5

Yes, I prefer not to go super deep there. But yes, John, groups Our big part of it, group business was strong in October, SEMA is here this week. So It's just a culmination of a significant wave of demand that has included now The group side and we're thrilled with the way things are coming together. We're going to do over $1,000,000,000 of Cash room revenue in Vegas, which for those that have been in the market in Caesars would have viewed that as impossible not that long ago. So we're really hitting on all cylinders here.

Speaker 10

Maybe a follow-up For the outlook, I think maybe Anthony mentioned that the group room nights are pacing above of 2019. With some big events next year, have you started to see the benefit in booking? We all see that kind of pricing for F1, But it's still a bit of ways away, I think a year now. I'm curious if you really started to get traction on some of the big events that you expect Next year, if you think there's an opportunity to have an acceleration in both group room nights and pricing for next year?

Speaker 5

Yes. Certainly, yes, we think Formula 1 is kind of a different animal. The demand for That particular event is well beyond what we were expecting and you saw as we rolled out rates yesterday, the pricing is Reflects that with a lot of the big events skewed toward the second half of the year beyond normal CES coming back, things like that. There's easy comps in the Q1 with omicron impacting 'twenty one I'm sorry, 22. But as you look further deeper into the bigger groups, it's a little early to talk about Traction, but it should all be extremely positive for room rates and occupancy in the market in 2022 2023, sorry.

Speaker 10

That's great. Thanks, Tom. I appreciate the additional color.

Operator

Our next question comes from the line of David Katz with Jefferies. Your line is now open.

Speaker 12

Afternoon, everyone. Thanks for taking my question. I wanted to just Go back to a topic I raised, I think last quarter about kind of normalized Las Vegas margins. And I think the discussion we had was around that 50% benchmark. It seems to me that what we saw was some seasonality as well as Some of the cost headwinds, were those attributable to Las Vegas?

Speaker 12

And if we can maybe take it a step further, That 50% level or neighborhood, is that a full year number implying that some may be higher and 3Q may be lower?

Speaker 5

Yes, that's accurate. And when I was talking about the utility impact that was entirely Las Vegas, so you're talking about if you normalize, we should have been between 48, 49 In Q3 and then you should see 1st and 4th quarter should be better than that, 2nd should be Somewhere around, let's say, high 40s. But again, we manage for Aggregate EBITDA, not EBITDA margin, that 50% that we're talking about It's really what falls out of the operating model, not necessarily a target for us.

Speaker 12

Understood. So there was 300 basis points or 400 basis points impact in the current quarter?

Speaker 5

I'd say not quite that much here at 46. I said we'd have been 48 to 49. So call it 200 to 300 basis points.

Speaker 12

Okay. Got it. And if I can ask one other longer term question with respect to digital, and this may not be the way you're thinking about it either. But When we start getting to a more normalized business level for digital, is there a sort of margin level That makes sense. And I'm just wondering whether it's accretive or dilutive to the aggregate on the company.

Speaker 5

So we can see what other mature what operators in other mature non U. S. Markets Generating EBITDA margins, we've got a pretty good track record of being a margin leader. So if you're seeing 25%, 30% away from us, I would expect that ultimately we're going to do better than that, Which should be around in line with the rest of the business.

Speaker 12

Got it. Perfect. Thank you.

Operator

Our next question comes from the line of Daniel Pulitzer With Wells Fargo, your line is now open.

Speaker 13

Hey, good afternoon, everyone. Tom, I think on the Interactive, you mentioned you still get back to that 50% return on the call it $1,100,000,000 investment. Can you maybe just bridge us from that few $100,000,000 that roll off from the partnerships How you get to that return? Is it iGaming? Is it sports betting?

Speaker 13

Is it just general growth of the industry?

Speaker 5

It's clearly the industry is continuing to grow. We know what's happening with our cost structure, what's going to happen With our cost structure and we make some assumptions on what we'll be able to do in terms of iGaming as we move forward and Very comfortable with that 50% plus return on an annual EBITDA to cumulative EBITDA loss measure.

Speaker 13

Got it. And then just moving to the balance sheet, you've certainly been generating some cash and Pulling some levers. What additional levers do you have to reduce your debt from here? How topical is Centaur in your mind right now, just given we're Coming up on a period where it might become more topical, and any other levers that we should be thinking about to reduce debt in short order? Thanks.

Speaker 5

Yes. So we should be doing something in the neighborhood, if not exceeding $1,000,000,000 of free cash flow in 23, you should expect that will be used to pay down debt. It has always been our expectation that Dietschy would choose to exercise the call option it has on the Centaur assets That opened in January of this year and closes toward the end of 'twenty four. So VICI has been very clear that they anticipate exercising that option for us. If you run that forward and assume they do it toward the end of that period, that should be about a $2,500,000,000 Inflow to us, so quite substantial.

Speaker 5

And by then, you'll have If we do nothing else, you should have another couple of $1,000,000,000 of free cash flow that we've generated. Between now and then, the vast majority we expect to use to pay down debt.

Speaker 13

Understood. Thanks for all the detail.

Operator

Our next question comes from the line of Stephen Grambling with Morgan Stanley. Your line is now open.

Speaker 14

Hi. As a follow-up to your comments on the digital business hitting the 50% ROI and I think you said 25% to 30% margins. How important is market share as an input in those assumptions or zooming out? How do you think about scale benefits for this business in general?

Speaker 5

We think there's clear benefits to scale in the business. And we expect that We're not going to remain static over time, particularly on the iGaming space. But our It's important to me personally that we prove that we can generate the returns that We've laid out for the investment that our shareholders allowed us to make before we're doing any Let's go out and try to grab significantly more share through promotions. So You should expect us to be living in this band of market share that we've been living in. That's market share is Ultimately not a target for us.

Speaker 5

It's can we get the return on investment that we're looking for As in the brick and mortar business, It's not an input.

Speaker 14

Makes sense. And then one other quick follow-up on, I think you said $1,000,000,000 in free cash flow next year. Within that assumption, do you anticipate being a cash taxpayer excluding any asset sales and perhaps just in general, when do you expect to be a cash taxpayer? Thanks.

Speaker 5

No, we should not be a we will not be a cash taxpayer in 2023. Brent, you want to talk?

Speaker 4

Yes, we've got multiple years of runway before we're a taxpayer.

Speaker 14

Helpful. Thanks so much.

Operator

Our next question comes from the line of Brandt Montour with Barclays. Your line is now open.

Speaker 10

Hey, good afternoon, everybody.

Speaker 15

Thanks for taking my questions. Just a quick follow-up on the digital side, whoever Wants to take it, but just curious on the iCasino roadmap that you just sort of started to sort of layout for us. How should we think about any Sort of incremental investment for that revised or new roadmap and is that manageable Within the existing OpEx that you're currently running in the business?

Speaker 3

Yes. I think, as Tom mentioned, this is a really And when you're growing at 120% quarter over quarter, we are going to continue to staff To handle state expansions, product improvements, those types of things, but not to the same pace as revenue and not even close to that Level. We will have some slight increases in capitalized labor associated with the Icasino product next year. And any impact to the actual P and L will be fairly minimal.

Speaker 5

And from a Promo perspective, it's a very different business than sports. So while you will see some Advertising activity around in local markets advertising, our casino product, it's a very different Scale in terms of launching the sports business. So certainly easily manageable within the numbers that I laid out earlier.

Speaker 15

Okay, great. Thanks for that. That's really helpful. And then as a follow-up on Las Vegas, I guess no one's asked This macro question, so I might as well take a shot. But Tom, what are you guys seeing in terms of Any sensitivity on the part of your fit customers related to the macro?

Speaker 15

And as a second part of that, as Las Vegas continues to Sort of evolve into a more sports friendly destination. What have you seen from sports focused travelers in terms of gambling habits? And is that Something that's a little bit of concern or is that something that seems to be in line with other patients in the market?

Speaker 5

Yes. So, Brent, we're we see the same macro Going forward, the others see in terms of fears of what happens with continued rate rises that crypto consumer, are we facing a recession? We're not we're certainly cognizant of what's out there. I can't point you to anything In our business in or out of Vegas, that shows any slowdown in the consumer. So We feel very good.

Speaker 5

October was obviously very strong. You see the Q3, we know what Investors are anticipating we're not seeing that in our business today nor in the forward metrics that we see That we look at in our own business. And then in terms of sports, sports is Digital for us, we are getting over $200,000,000 of Incremental brick and mortar casino play out of customers that were short sourced in digital, that number continues to grow. Sports in Vegas, the Raiders have been very, very good for the city, give us Additional length of the stays in on weekends that they're in town generates a lot of incremental Travel from visiting teams, so that's been really a home run from the city's perspective and we've been able to benefit.

Speaker 15

Perfect. Thanks so much, guys.

Operator

Our next question comes from the line of Chad Beynon with Macquarie. Your line is now open.

Speaker 16

Thanks for taking my question. Just one last follow-up on Vegas. I think we covered pretty much everything out there. But just on the piece with international, the opportunity to kind of Bring that back as a tailwind. What do you think it's going to take to get that business back?

Speaker 16

Is it passage of time? Is it FX related? Or is it really just The sports and the holidays that bring in that customer, maybe more on the VIP side. So When do you think this can kind of inflect? Thanks.

Speaker 5

Yes. We just started to see that business Start to come back over the last quarter or so. Obviously, this Chinese New Year will be The first without knock on wood without impact of the virus and with ability to travel. So that'll be something we're watching closely. As you know, here, we've got Adele starting In middle of November, and I can tell you she's an enormous draw Across the board, but appeals particularly to that international high end clientele.

Speaker 5

So we're excited about that. But Chad, it's been 2.5 years at this point, we understand that those people that were coming to Vegas To play, I don't think they stopped gambling. They found other places to do it when travel was Impacted and that's going to be a long road as we build it back.

Speaker 16

Thanks, Tom. Appreciate it.

Operator

Our next question comes from the line of Joe Stautz with Susquehanna. Your line is now open. Joe, your line is now open.

Speaker 17

Thank you very much. Thanks for fitting me in. I just had a question. I believe your annual rent adjusts maybe this month or Later this quarter, what does it without the CPI caps, can you just give us what that number adjusts to and from? And just wondering, you had mentioned that decision to keep the strip assets.

Speaker 17

And wondering if that changes the way you think about, say, your investments, do you have to Now invest maybe in some of those older properties, as a result of that. Thank you.

Speaker 1

Joe, on the VICI CPI escalator, it's 8.1%, which started on November 1. And so rent next year should be around $1,285,000,000 consolidated including GLPI. And

Speaker 5

In terms of investment, obviously, Joe, we're doing as much EBITDA as we've ever been as we've ever done here. The particular asset that we're talking about had some low hanging fruit that we were talking to potential buyers about. You shouldn't be surprised if we take advantage of that in the coming 12 to 18 months.

Speaker 17

Makes sense. Thanks

Speaker 10

a lot.

Speaker 5

That concludes We'll talk to you next quarter.

Speaker 14

Thanks a lot everybody.

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