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Edited Transcript of **MTGA earnings conference call or presentation 9-May-19 3:00pm GMT

Q2 2019 Mohegan Gaming & Entertainment Earnings Call

Uncasville May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Mohegan Gaming & Entertainment earnings conference call or presentation Thursday, May 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Emlyn Jones

Mohegan Tribal Gaming Authority - VP of Corporate Finance

* Drew M. Kelley

Mohegan Tribal Gaming Authority - Senior VP & CFO

* Mario C. Kontomerkos

Mohegan Tribal Gaming Authority - CEO

* Michael Silberling

Mohegan Tribal Gaming Authority - SVP & COO

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Conference Call Participants

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* Anthony Marsala

* Eric Bourassa

* James Brett

Barclays Bank PLC, Research Division - Research Analyst

* James Forristall Kayler

BofA Merrill Lynch, Research Division - MD

* Michael Patrick Kerrane

SunTrust Robinson Humphrey, Inc., Research Division - Senior Fixed Income Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the second quarter earnings conference call for Mohegan Gaming & Entertainment. My name is Mary, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions)

At this time, I would like to turn the show over to Mr. Chris Jones. Please go ahead, sir.

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Christopher Emlyn Jones, Mohegan Tribal Gaming Authority - VP of Corporate Finance [2]

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Thank you, Mary. Good morning, everyone. Thank you for joining our call this morning.

Before we begin, I would like to remind everyone that our comments today may contain forward-looking statements made under the safe harbor provision of the federal securities law and actual results may differ materially from any predictions contained in these statements.

In addition, our comments may also refer to non-GAAP financial measures. A reconciliation of these measures to corresponding GAAP financial measures can be found in our press release available on our website under the Investor Relations section at www.mohegangaming.com.

One more comment about this quarter's earnings release and associated supplemental earnings deck also on our website.

On October 1, 2018, the company adopted the new revenue recognition accounting standard, ASC 606. By now, most investors within the gaming space should be familiar with this as most of our peers have already made the switch. However, to be explicitly clear, in today's earnings release and similar SEC filings, results from March 31, 2019, are presented in ASC 606, while prior year results for March 31, 2018, remain in ASC 605. While this is the proper accounting treatment, it does make quarterly comparisons difficult. Therefore, to review the provided results in ASC 606 for both periods, please see our supplemental earnings deck available on our website as well.

Please note that today's supplemental earnings deck -- within our supplemental earnings deck, there is a quarterly restatement of prior year quarterly operating results in ASC 606 from ASC 605 in the appendix.

Finally, all figures discussed in today's call will be on a comparable 606 basis. I would add that this is now intended, we intend to report the remaining fiscal 2019 and beyond this way.

With that said, I will now turn the call over to Mario Kontomerkos, President and Chief Executive Officer of Mohegan Gaming & Entertainment. Mario?

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Mario C. Kontomerkos, Mohegan Tribal Gaming Authority - CEO [3]

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Thank you, Chris. Good morning, everyone. Before we begin, I'd like to introduce the participants of today's call.

We have Michael Silberling, our Chief Operating Officer; Drew Kelley, our Chief Financial Officer; Peter Roberti, our Chief Accounting Officer; and Chris Jones, who you just heard from, our Vice President of Finance. In addition, we have a number of others in the room and on the phone that are available to answer any questions that you may have.

So as we begin today, I'll make some introductory comments followed by Mike, who will briefly discuss our operating results for the last quarter. And then Drew will review our financial and other results, after which we can open up the call for Q&A. So with that, let's get started.

Folks, absent some fairly adverse table hold percentage swings against us over the prior 3 months, we feel pretty good about the financial performance of our portfolio in the March quarter. Adjusting for hold, quarterly EBITDA in both Connecticut and Pocono would have been down only mid-single digits versus last year, an outcome we would have been very pleased with given the competitive environment in both of those properties. While combined, quarterly EBITDA at our managed properties, ilani Resorts and Paragon were up 86% year-over-year, not bad at all in our view.

Now this isn't happening by accident. The solid underlying fundamentals we see within the portfolio can largely be attributed to our very strong property leadership teams who continue to execute at a very high level every day and remain committed to the significant operational profit enhancement plan that we have outlined to you many times over the past 9 months. They have already delivered a very significant chunk of that plan, and we do not plan on taking our foot off of the accelerator anytime soon. Drew will speak more to that in his comments in just a moment.

So with that, let me turn it over to Mike for a more detailed review of our operations. Mike?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [4]

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Thank you, Mario. Before we get into property-specific performance, I wanted to start the call highlighting that revenue and adjusted EBITDA for the quarter on a comparable 606 basis decreased by 6.3% and 15.4%, respectively, in the second quarter of 2019. However, adjusting for the impact of abnormally low table hold, revenue and adjusted EBITDA for the quarter decreased by 2.6% and 0.5%, respectively. We are encouraged with the quarter's performance given it is the second full quarter of operations facing the new competition in the region and the gaming volume [and] nongaming performance are ahead of our overall expectations.

Looking at trends through the quarter. Overall positive momentum for the first quarter '19 carried into the early part of January up until the Martin Luther King long weekend, where revenue performance turned on us as the winter storm and polar vortex hit midway through the long weekend, impacting revenue performance in both Connecticut and Pennsylvania. Adding to these pressures, Mohegan Sun has had an unlucky start to the year that persisted until early March. Importantly, overall volume trends remained on track throughout the quarter and have persisted into the current third quarter 2019 while normalized hold returning in mid-March and has remained stable.

Moving to overall property EBITDA. There's more work to do. It was noted overall EBITDA performance was impacted by challenging hold in Connecticut and Pennsylvania.

With that, I will move to property-specific performance. Again, on a comparable 606 basis, net revenues at Mohegan Sun decreased by 7.4% while adjusted EBITDA decreased by 22.6%. Adjusting for table hold, net revenues and adjusted EBITDA would have decreased a more modest 3.1% and 7.4%, in line with our overall plan when -- contemplating the new competitive pressures in the market.

Now the table drop was also a modest 3.2% on a year-over-year basis, while slot handle was off 8.7%, both in line to better than contemplated going into this competitive period. Overall nongaming revenues were up 9.5%, reflecting a sequential improvement from 9.2% in the first quarter 2019, including both entertainment and other nongaming.

Entertainment revenues alone increased by 46.4%, benefiting from 5 more headliners in the quarter. While food and beverage revenues increased 7.3% and hotel revenues increased 1.1% in the quarter.

Collectively overall, nongaming continues to benefit from expanded Expo Center and the continued ramp-up of this important business.

Returning to entertainment. As previously highlighted, we had 5 more headliners in the quarter including 2 nights of Kelly Clarkson, Blake Shelton, a Night With KISS, and we closed out the quarter with Ariana Grande.

Mohegan Sun Arena in Connecticut continues to be impressive and ranked globally. First quarter Arena rankings for all size venues by Pollstar Magazine ranks Mohegan Sun now within the top 10 U.S. arenas at #8 compared to 16 last year and 17th worldwide compared to 26 last year. Imagine being the top 10 busiest and biggest venues. Currently ranking by -- VenuesNow magazine has us ranked #1 in the U.S. and #1 in the world for our size. We beat out Radio City Music Hall and every casino venue in Las Vegas, to name a few.

Looking into the current quarter. The schedule remains equally impressive with 2 nights of Justin Timberlake, Judas Priest, Lynyrd Skynyrd and several nights of AAC Conference Women's Basketball Championships.

Additionally, we will close out the quarter with the world famous Barrett Jackson auto auction.

Now let's move on to Mohegan Sun Pocono results. Net revenues at Mohegan Sun Pocono decreased by 8.1%, while adjusted EBITDA decreased by 10.2%. However, adjusting for table hold, net revenues and adjusted EBITDA would have decreased 5.9% and 5.8%, respectively. Net revenues declined at the property principally driven by lower table volumes. These headwinds were not helped by abnormally low table hold.

Fortunately, in the Poconos, we are starting to see trends stabilized, improving sequentially from January with aggressive marketing efforts from our closest competitor finally coming back to reality and the property anniversary of the 1% slot tax.

On the subject slot tax in Pennsylvania, we are especially pleased to hear that the Pennsylvania Supreme Court recently agreed that the increased 1% slot tax was unconstitutional and has stricken the provision. More to come for that but are currently expecting that to be a part of the contribution to third quarter 2019 performance.

Just a few words on our 3 managed properties, the ilani Resort and Casino just north of Portland, Oregon, Resorts Atlantic City and Paragon in Marksville, Louisiana.

At ilani, we recognized approximately $7.1 million in management fees which is $3.7 million higher than the prior year. We continue to be pleased with the property's performance and with its rapidly ramping revenue profile as its player database is [up] over 291,000 in March, up 5.8% from December and 36% from the prior year and continues to grow. For the calendar first quarter, net revenues increased 19.1% while EBITDA was up 12.1%. We recently expanded the property with the addition of a gas station and convenience store, which is already running ahead of plan. Additionally, we recently broke ground on a structured parking complex scheduled to open by year-end. This is a very important first step in ilani's evolution to becoming a world-class entertainment destination.

Moving to resorts in Atlantic City, where the reported quarter is their 2019 first quarter. While results reflect a direct impact of the 2 new competitors in market, we are proud to say that our resorts' overall GGR was up 10% in the quarter with GGR at $41.8 million, up $3.8 million, impressive by anyone's standards.

Slot handle resorts was up slightly, $6.5 million or 2% and gross slot [remained] flat. Resorts continues to benefit from the proximity to the new competition while also efficiently marketing to their loyal customer database. Gross slot hold for the quarter was roughly flat at 9.2%.

Table drop was at $12.4 million, 24.2%. And table win up $3.7 million or 45% -- 45.8% year-over-year. Hold was 18.7%, up relative to the 15.9% hold experienced in first quarter 2018.

Management fees earned by MGE in the quarter were approximately $511,000. And looking at current trends, April has looked a little bit challenging for the property dealer and especially challenging year-over-year comparison and calendar for the market.

Finally, at Paragon we had an especially strong quarter with win per guest up $5 year-over-year per visit and EBITDAM coming in at $5.6 million versus $3.3 million last year.

Now I would like to hand it to Drew for additional comments.

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [5]

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Thank you, Michael. With Michael's operational comments as backdrop, I'd like to provide a brief update on our strategic cost-containment initiative and revenue enhancement measures. As Chris previously mentioned, I will also note we have added detail in the supplemental earnings deck where we address the different segments of the plan.

As you will see, we continue and make progress with our overall program and the numerous individual initiatives. However, we remain in the early stages. Continuing with the baseball analogy I've frequently used here, I think we're now entering the third inning. In other words, most of our phase I initiatives have now been implemented, but several material ones are now launching as we speak.

Like any strategic plan of this detailed importance, some aspects take hold faster than others. To that end, the nongaming side of the equation has clearly taken hold, and we are only just getting started. As previously mentioned, nongaming revenue was especially strong this quarter. Driving a healthy portion of this growth was our recently opened $80 million Expo Center. We've cited this a few times already given the early success and the facility continues to drive significant mid-week and year-round visitation. The interest simply just gets better and stronger as we move forward. Since opening, 100% of the shows have exceeded the tenant targets and all have rebooked since -- in the next year.

As we stand here at the beginning of the fiscal third quarter, we are already at 95% of our fiscal '19 room revenue goal and confident we will exceed our budget this year.

Looking ahead, this equates to over 24,000 on the book room nights, all directly attributable to the Expo Center.

On a related note. Hotel revenue increased more than 1% in the quarter, a figure which somewhat understates the improved cash-generating performance of the facility given the reduction in comp room nights as cash rooms continue to improve by shifting from casino to transient customers, particularly on the weekend.

Looking ahead, we expect these nongaming improvement trends to be further supported in the coming days by a series of targeted capital-light nongaming enhancements. Elements such as our recently opened Comix Roadhouse, [that retail] redevelopment and expansion, the opening of our new upscale gaming lounge Novell, the expansion of CLAY PIPE and perhaps most notably, Game On!, our adult amusement venue, which will open this quarter just in time for Barrett Jackson. Further enhancements will then continue throughout the year and into fiscal 2020.

On the gaming front. We had similar successes, albeit the progress has been somewhat overshadowed this quarter given the unfavorable weather and table hold we referenced earlier. Obviously, this is just part of the business and not something unique to Mohegan this quarter from what we heard from others.

Fortunately, the gaming floor has numerous levers we can pull and therefore, we are evaluating the timing of certain programs set to roll out in fiscal '20 and '21, bringing certain initiatives forward in the calendar where appropriate.

One particular gaming initiative I'll make mention of today, which was also referenced in the earnings release, is the closure of the Casino of the Wind in anticipation of some future redevelopment. This particular area of the casino floor was one of the lower performing and table capacity was generally only opened on the weekend. More importantly, this move allows us to better focus our efforts on a more efficient overall gaming floor here in Connecticut, both in terms of gaming positions and associated labor.

We also relocated our poker room as part of this change and have witnessed a nice bump in activity in the short period since reopening in a new location.

Overall, we remain confident we will hit our target of more than $30 million in gaming improvements and will provide additional detail in the coming quarters.

Separately, we're making significant progress with labor adjustment, both in terms of our general staffing model and with overall FTE figures. Although the immediate savings to date continue to be offset somewhat by modest wage inflation and associated transition costs.

Overall, labor and marketing remain a particular focus of the team, giving us confidence here as the property is unique and [has a] demonstrated history of improvement.

On the labor front. Since fiscal '08 we've eliminated approximately $120 million in labor expenses. During the same period, we've reduced full-time employees to now less than 82% of the overall workforce.

Elsewhere, we've applied the same type of focus on the marketing front, where we've removed over $60 million in annual costs since '08, with marketing costs as a percentage of gross revenue decreasing a full 2 percentage points.

Now with Springfield through its initial opening phase, we continue to evaluate our marketing strategy to ensure that all dollars spent in this geographic area are appropriate and focused on profitable customers.

So again, we reiterate, our overall objectives remain intact and on schedule. And as Mario mentioned earlier, our foot remains on the gas pedal. Despite being closer to the start than the finish, we remain confident in our ability to deliver on the more than $100 million in benefit as outlined on day 1 of our Investor Day held last year.

Elsewhere, we continue to make progress on the Niagara -- excuse me, on the Niagara acquisition and related financing, with ownership transition already well underway as we prepare to assume operational control in June 2019.

On the financing side, we're currently entering the market with a very attractive financing structure, so I'll be somewhat limited on my comments at this point. But we believe the financing to be very advantageous to MGE, both on a stand-alone basis and with respect to long-term flexibility it provides as we look forward to refinancing MGE's existing credit obligations in the coming years.

Ultimately, Niagara represents one of several new sources of cash flow. And to that end, together with our joint venture partners, we continue to press forward with Tribal wins, our casino project in East Windsor. The project is [shovel-what] ready, and we are poised to kick off financing on this project in short order. We expect to share more detail on this project and related financing on the next quarterly earnings call.

Finally, let me provide a brief update on the balance sheet. Total leverage ratio calculated on a gross basis was 4.7x, a sequential but modest increase from the 4.6x in the prior quarter.

Total debt, however, as defined under the bank credit facility was $1.74 billion, which decreased sequentially, down $26 million from the prior quarter.

Elsewhere, $55 million was drawn on our $250 million revolver as of March 31. And after factoring outstanding letters of credit, we had approximately $193 million available for borrowing.

Cash and cash equivalents totaled $91.4 million, while overall liquidity totaled approximately $221 million net of bankroll and restricted cash at the end of the quarter.

Distributions to the Tribe remain consistent, totaling $12 million for the quarter.

Finally, capital expenditures totaled $25.4 million for the quarter, comprising the maintenance and development capital expenditures of $13.2 million and $12.2 million of CapEx or expansion CapEx related to the Inspire project.

With that, let me turn the call back over to Mario.

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Mario C. Kontomerkos, Mohegan Tribal Gaming Authority - CEO [6]

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Thank you, Drew. As you heard from both Mike and Drew, despite the headline numbers, this March quarter was a strong one for us. Not only have we've been successful in defending our properties from new competition here in the early days, but we've instituted and are implementing numerous additional initiatives that continue to position ourselves as the undisputed market leader for many months and many years to come.

Looking ahead to the next time we meet, we will be happy to have reported to you the achievement of several new and important milestones for Mohegan Gaming & Entertainment on our journey towards becoming the premier global gaming and entertainment company.

One of those occurs in June when we will have assumed operational control of the only 2 gaming assets at one of the most iconic travel destinations in the world, Niagara Falls. This transaction represents the next international expansion for MGE. We see enormous amounts of entertainment synergy between the Niagara properties and the Mohegan organization, both from an operational perspective and most importantly, from a people perspective.

It's not going to happen overnight, nothing ever really worth doing does. But we see a great opportunity to transform Niagara Falls into a premier global entertainment destination which will only benefit both organizations, their employees, their stakeholders and the greater Niagara community, both in the near term and in the long term.

So with that, I thank you all. And now I'll turn it over to Mary to open it up to Q&A. Mary?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from the line of James Kayler from Bank of America Merrill Lynch.

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [2]

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Maybe just I guess we can start on Connecticut. Can you give us a little more color around sort of what you're seeing with the database and with sort of customer behavior in terms of visitation versus spend? And if you think things have kind of stabilized post-opening of Springfield?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [3]

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Mike Silberling here. In relation to Connecticut, I think that we have seen strengths in our higher customer segments. I think we've been softer in the lower segments. I think the weekends have been stronger than mid-week. I think we've seen more reliance on incented visits than in unincented business. And I think that's pretty consistent when you do postal code analysis, we're losing convenience [shifts] to lower-end customers to new competition.

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [4]

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Very good. And then in terms of -- I think you did sort of comment on this, but I guess I just want to follow up in terms of the hold, just to be clear, like you -- it seems the hold is just pure luck. Like it's not -- it hasn't been a change in the mix of players or games. I guess, can we still kind of think about if we look over a long period the sort of historical hold as still kind of the expected hold.

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [5]

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Yes, sure. There's a lot of variables that were with competition, with weather, with some high-end losses. So tough to narrow it down specifically. Last year, we did well in craps. This year, we did poorly in some baccarat play. Certainly to the extent that the mix of lower-end players is stronger than the loss of higher-end players on slots. You see disproportionate mix changes to the higher-hold penny machines. So there's a few pieces moving around. I don't know if we have completely normalized with MGM, as more recently we've seen stronger marketing coming out of MGM as they seem to have underperformed on initial expectations so that marketing -- competitive marketing spend is another variable that's shifting. So a few moving pieces.

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [6]

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I guess just on that front. What are you seeing out of Fox in terms of their sort of competitive response? Have they remained sort of relatively rational in your...

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [7]

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Yes. I think that they had. I don't think we've seen massive shifts. Business as usual to a certain extent as you would. Rational marketing, I guess same as before. So...

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [8]

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Okay. Pretty good. I guess just changing gears. Can you give us maybe some update on project Inspire? Just in terms of -- I did see some a slide in the deck, but just in terms of sort of time line and how progress on the financing is going.

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [9]

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Sure. Again, taking a step back all the way into October. We put [about] $300 million into the bank. Then it's sitting there. It's done. We're not going to be putting any more towards the project. Since then, we're actually very pleased with the numerous objectives that we have accomplished, most notably on the construction and the development side. Essentially, we are shovel-ready with all permits, zoning and other in place. Our colleagues here, Richard and others have been there. They're nearly finalized with the GC selection, a very blue chip firm one that we certainly think has the ability and the interest in providing those services. We are also very close to completing the completion guarantee, which most notably from my perspective, in Korea, is a federally filed document. Meaning, when they say they will produce the project on time and on budget, they mean it. So we really feel like the combination of those factors have all but mitigated any and all construction risks to at least to the level we think is reasonable. And those objectives have just been accomplished or will be accomplished in the coming days.

So all that leads us to be able to start to move forward with the airport, who is for our practical purposes our partner, our landlord, to remind you. They're putting in $200 million of infrastructure and other improvements, which directly benefit our project specifically. And we're now in a position to start really breaking ground on our side of the equation in short order.

So with all of that being done here over the past several weeks and several quarters, we're now in a position to finalize the project financing. We've actually been encouraged by some inbound interest by some Korean lenders, which is what we're currently evaluating given we feel that, that's the right long-term approach. And obviously, there are costs and other benefits with financing onshore in Korea. And it's my belief that we will be finalizing or finalizing the selection of that aspect here in short order. So a lot of progress to date. Certainly, a lot of movement here recently. And we remain on track to open that property in the first half of 2022.

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James Forristall Kayler, BofA Merrill Lynch, Research Division - MD [10]

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Great. And then I guess my -- it sounds like maybe sort of more to come in terms of the Niagara transaction and sort of, I guess, the details of that as well as the financing. I'm curious if you could give any color and any update on whether it's expected to be part of a restricted group? Or in a different subsidiary?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [11]

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Sure. So again, I think as I've mentioned, historically there were certain obstructions in the current set of credit documentation at MGE that prohibited us from bringing that in immediately. Nonetheless, we have been designing several financing alternatives that we think put a little stress on the restricted group and, ultimately, have the ability and the flexibility to consider a number of options long term. I basically talked historically that at the most, we would put in CAD 75 million. I will basically say that as of today I think that number, you'll be pleasantly surprised that, that number is improving from a skinnier equity check. But again, I think what we are looking for is an opportunity to put forth a very attractive acquisition financing package that allows us to complete the acquisition on June 11. And whether that financing package remains in place for several years, or theoretically several days, that's for us to kind of evaluate on the merits after the transaction is done, but again, we're trying to diversify our revenue streams so as to otherwise incentivize or enhance the existing MGE-restricted group financing structure.

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Operator [12]

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Our next question is from the line of Eric Bourassa from Jefferies.

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Eric Bourassa, [13]

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So I guess just the first one. I just want to hope I could dig a little bit deeper into the Niagara transaction. I was just wondering if you can kind of go through what your expectations are for management fees? And what you envision kind of the dividends for the creditor group out of [the gaming]? And can you just remind us what the equity ownership that you guys will own in the JV is going to be?

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [14]

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Sure. So again I think things remain relatively consistent with prior conversations looking at the management fee, it remains 7% of EBITDAM, so unchanged there. We are again looking at a structure where MGE would on day 1 own 100% of the entity and would own that level for a period of time. Nonetheless, we have identified and are in the process of finalizing our relationship with the JV partner which we believe to be in the long-term benefit of MGE and this project and the properties in particular. We'll make some more mention of who they are and what they bring to the table down the road. But I will say again, they are a Canadian strategic entity that has had long-term roots in the area and brings with them not only those relationships but the desire to grow the opportunity in ways that we think are very advantageous to MGE and to our balance sheet. So I'll leave it at that.

But again, we'll probably -- certainly, will be in a position to talk more on next quarter. And we're very excited about the opportunity generally. Otherwise, the opportunity remains unchanged. I've always sort of suggested that given the 2 facilities and how they cater to the market, it should be generating a pretty significant amount of property [resource] for reasons being in the market, I'll refrain from giving too many specifics. But it is a material opportunity for us financially, putting aside what it brings in terms of our portfolio, our ability to move customers back and forth. And for those who have not been to Fallsview, in particular, we think it is a Tiffany quality asset and has a Tiffany quality management team. So we're very excited about the opportunity coming forward here in June.

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Eric Bourassa, [15]

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Fantastic. And if I could just kind of switch paths to the Poconos. I was wondering if you can kind of discuss the Poconos performance through the remainder of the year and your expectations there. I believe you guys are kind of lapping over that slot tax increase and you guys recently cited I guess in this presentation that you see the decrease in local competitive marketing. So just kind of curious how you envision the asset performance for the rest of the year?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [16]

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Yes. Look it's nice to see a cessation of [irrational] marketing spend from our competitor. It's nice to lap year-over-year the tax increase. We still have competition coming from a variety of areas, some of our table games customers and in our recent focus group we're talking about the better offers that they were getting from Atlantic City recently. But we are positive on [Poconos] going forward.

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Eric Bourassa, [17]

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Awesome. And then I was just curious about the Wind casino and then -- and your guys' plans to close that. I was wondering what you guys envision the impact of the cost structure that we could expect going forward. And what are your plans to do with that space?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [18]

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I think future plans are -- we're not yet ready to announce publicly. That was an underperforming area for us, and in the face of some volume declines rationalizing the number of units and expense from the area seem like a logical thing to do despite our overall cost saving, revenue enhancement plan, and we hope to come back as you've seen with Aspire and with Novell and with Game On! and with CLAY PIPE and a number of other development plans we have on the CapEx side that we think will help drive customer demand in the more competitive environment. We hope to come back with plans to do the same.

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Eric Bourassa, [19]

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Fantastic. And just one final question. I noticed that you guys paid down about half of your RCF balance during the quarter. Including Niagara, kind of how do you view the RFC draw throughout the rest of the year? And do you think we will be higher or lower kind of in that $50 million [or so draw] today?

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [20]

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Again, I think we remain focused on driving cash flow for debt repayment. That is ultimately my #1 job based on the [trials] of the management board. So putting aside again the investment for Niagara, the fact that the money has already gone to Inspire, I think we're really at a point where we start to reap the rewards and cash flow should continue to come in. Obviously, competition we've talked about, so we don't see too many material issues there.

And finally as -- on the heels of Michael's conversations, all of these initiatives that we talked about, nongaming enhancement or other, have all been capital-light or relatively de minimis in size. So we continue to think that the property looks as good as it did 2 decades ago, but we continue to enhance and refresh at a modest level of investment or certainly at an appropriate ROI-based investment. So for all those reasons, we have said quite frankly, the trends putting aside the investment in Niagara will continue and that will continue to be repaid as we move forward.

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Operator [21]

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Our next question is from the line of Anthony Marsala from Apollo.

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Anthony Marsala, [22]

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Maybe just a couple of quick follow-ups on the Casino of the Wind closure. Can you just give us a reminder of what the table and slot mix was there at the time you guys closed that? And how much that you guys are recapturing out of the [Winds] casino?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [23]

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Yes. We had a pit that was only open during the weekends. So I think that we are well positioned to continue there. And the number of units that we removed was 350, of which we are putting not all, but a number of them back into the existing facility. For example, I think a good story we -- recently, we opened and relocated our poker pit. But it's beyond the poker pit. We have more electronic table games. We have some slot machines, and we have a new poker pit which is performing sequentially much better than it was in its previous location. So there is going to be some portion, but not all of those machines will be relocated back to the main facility.

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Anthony Marsala, [24]

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Got it. That's helpful. And then I know you guys aren't disclosing too much around what the ultimate use of that space is going to be at. I guess I would just ask quickly on CapEx, it looks like the total budget for the year came down a couple of million. Is that kind of reflective of this closure? Or I guess do you guys already have baked in what you're planning on spending for some of the renovation of the space in the budget?

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [25]

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Yes, again, I think the long-term plan is just that, it is a long-term use or better use of the floor plan. So we do have preliminary thoughts as to how to use that space. But it is not likely a current fiscal year opportunity. So for all the operational efficiencies that Michael talked about, labor, redeployment of certain slots, et cetera, et cetera, it made sense to do it now. Obviously, there was the depreciation issue which is noncash. But kind of flashes a lot of the reason for the decline at the net income level. But it was not going to be any material dollars in the current fiscal year.

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Anthony Marsala, [26]

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Okay. Got it. And then just one more quick one on Pocono. I know you guys have kind of considered that there might eventually be some optionality there with the real estate. Just kind of checking in on whether that's still on the radar for you guys as a potential sale-leaseback just given that market has been open recently?

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Drew M. Kelley, Mohegan Tribal Gaming Authority - Senior VP & CFO [27]

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Yes. Again I think we've consistently looked at that opportunity. I was more concerned in December where -- with interest rates where they were, we would or wouldn't lose a market window. Here I think we continue to evaluate on one hand obviously, there are a lot of our public peers who have utilized the OpCo/PropCo structure for various reasons. Candidly, we look at it. But we also think that it is good, bad or otherwise a higher cost of debt in many ways which may limit our flexibility strategically, operationally and other.

So I'm not saying that we have made our mind up one way or another. It is -- if nothing else dry powder or a opportunity for us to continue to consider as we move forward. But we also do appreciate there are a few assets of that size and that quality today. And want to make sure that we use the best resources possible on the balance sheet, wherever they may be.

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Operator [28]

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(Operator Instructions) Our next question is from the line of Mike Kerrane from SunTrust.

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Michael Patrick Kerrane, SunTrust Robinson Humphrey, Inc., Research Division - Senior Fixed Income Research Analyst [29]

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Michael, you mentioned earlier in the call a postal code analysis that you did in Connecticut, and I was just wondering if there's any high-level information you can share on it in terms of postal code, the rated players and where those rated players live in relation to the Wynn Loss in Harbor which is expected to open?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [30]

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Yes. Look, I don't think there was any tremendous epiphanies from postal code analysis. We had a new competitor opened and revenue is performing lower in proximity to the new competitor [than] it is to areas that we are closer to them as far as Wynn is concerned I -- difference between MGM Springfield is Wynn is when MGM opened, there were customers that now had a casino that was closer to them than before. When Wynn opens, there are none of our customers that we will be closer to with. Like that -- all the customers that have Wynn as an option have another option besides Mohegan Sun that is closer to them. I don't know how eloquently I said that. But there [it] is. Yes.

So that's I guess from a high level, my perspective on that. There is no customer that is going to be cut off from us and we'll be suddenly closer to them as compared to another casino.

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Operator [31]

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Our next question is from the line of James Brett.

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James Brett, Barclays Bank PLC, Research Division - Research Analyst [32]

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Yes, it's Barclays. I just had a quick one. Just on the slides, I see the opening of the sports book at Pocono in the fall. Correct me if I'm wrong. I thought your comments were reasonably cautious about the potential to open a sports book at the property, just given the tax implications in the state around sports. But I was just kind of interested on what changed for you to do -- want to go forward with that in the fall?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [33]

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Well, in Pennsylvania, we are really state by state in our sports book strategy. In Pennsylvania, we have a third-party partner that is paying the licensing fee that we will partner with.

So we will have bricks-and-mortar sports book, and we'll be open for business hopefully for the fall season. I think there's a dependency on Pennsylvania to approve, which we will be standing in front of them this month. We hope that, that is a checkbox exercise. Nonetheless, we are -- we'll be there in the next few days to present our ability to do that. Given that is successful, then it's somewhat of a race to get ourselves open both in bricks-and-mortar, where we have got a nice spot picked out right by the front entrance as well as getting the online portion going.

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James Brett, Barclays Bank PLC, Research Division - Research Analyst [34]

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Will the economics of that partnership between online and brick-and-mortar be the same between your new partner?

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Mario C. Kontomerkos, Mohegan Tribal Gaming Authority - CEO [35]

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I think, James, what we can say is this. I think Mike gave you a lot of detail there about how we were able to look at the situation and move some of the capital risk off of our balance sheet. I think you could probably make the same assumption for the operating risks. So as you mentioned, there are tax rates there that are going to be a little bit more challenging than in other jurisdictions and we've taken that into account in our deal structure. And I think we're going to come out in a good place with that.

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Operator [36]

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We have one last question. Please provide your first and last name and your company name.

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Unidentified Analyst, [37]

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Hello? Hello? Sorry, [Bill Carter] I didn't know [if] it was me. As far as competitive activity in Pennsylvania, anything you can comment on, particularly with respect to a changeover at one of the properties if that impacts you at all? Thoughts on how that might change in the coming months?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [38]

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I'm so sorry. Could you repeat that question one more time?

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Unidentified Analyst, [39]

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Yes. Just if you could talk generally on competitive activity in Pennsylvania, a little more than you have, particularly with respect to some changeover of ownership at one of the properties and some capital spending by another operator in the state?

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Michael Silberling, Mohegan Tribal Gaming Authority - SVP & COO [40]

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Yes. Look, it's just the competitive environment is multivariable. And we are seeing people spending capital and marketing at different levels in a variety of places. So it's nice to be able to add a sports book and some other amenities there. But I don't think that the transfer of ownership is going to be a significant game changer to our market share. I think we define our immediate market a little bit closer than that. And from that perspective, seeing one of our competitors return to a more rational marketing is probably more relevant to me right now than change in ownership elsewhere. And as I mentioned earlier, there's pressures from Atlantic City and New York and elsewhere that continue to be as relevant. So...

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Unidentified Analyst, [41]

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And lastly, can you maybe provide some perspective on -- of your thoughts on possible other entrants in Massachusetts?

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Mario C. Kontomerkos, Mohegan Tribal Gaming Authority - CEO [42]

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Bill, I'll take that because, look, as far as we're anticipating right now, the entrants in Massachusetts are the ones that we all know to be there. As I said, there's been a lot of news in the media over the last couple of weeks about the licensing effort in Boston. Everybody is seeing the outcome there. So for the time being, that is going to be the situation that we deal with, and we're anticipating that's going to be the situation for the long term.

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Operator [43]

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There are no further questions. I will now turn the call back to Mr. Mario Kontomerkos. Please go ahead, sir.

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Mario C. Kontomerkos, Mohegan Tribal Gaming Authority - CEO [44]

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Okay. Thank you, Mary, and thank you, everybody, for joining us. We appreciate your support. We look forward to joining and talking with you again in about 3 months' time. Thank you very much.

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Operator [45]

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