Summary
- In our last article on the regional gaming space, we assessed how long Penn National could sustain lock-downs on their liquidity alone.
- Now that Penn have reported Q1 earnings, we have the data we need to get a more accurate picture of their cash burn.
- Even though casinos will reopen shortly, as seen in extreme case of Macau, casino activity will be negligible and essentially net the same as during lock-downs.
- We conclude that there is a buffer of 90 days of negligible activity that Penn can survive, which is something since may casinos are re-opening, but maybe not enough.
- Capitalisation from PE or public markets will come at massive Penn shareholder cost, but for GLPI, they can be rather sure that somehow their tenant will stay solvent.
Nevada has started to proceed with setting the rules for casino operation in the wake of coronavirus lock-downs. This marks what will likely be the beginning of a wave of re-openings as states desperately try to recoup some of their outflows to healthcare and welfare programmes with casino tax revenues. Although states are incentivised to get things moving again, they can do nothing to force patrons to return, so for a while we are likely to see depressed activity. Operators like Penn National (PENN) rely mortally on traffic to fuel the cash generation that they need to pay both their highly invested creditors and Gaming & Leisure Properties (GLPI), whose properties they occupy. With this depressed activity, lock-down activity levels will continue, so we apply the framework we used in our previous article to ascertain how long Penn's net liquidity can sustain them, and hence how likely it is that GLPI sees its main tenant come through the crisis.
Liquidity Injections
The first thing we should discuss is the liquidity situation. As mentioned in our last article, effective cash grew with the help of GLPI's acquisition of Penn's Las Vegas Tropicana property in exchange for rent credit of $337 million. This brought the liquidity levels to $257 million over 2020 contractual obligations. With the first quarter Penn results, we saw that pre-obligation operating cash flow did not cause reductions in cash balances, but the Barstool acquisition cash consideration of $135 million did. Considering as well that Penn managed to bring down its cash burn after suspending salaries of furloughed employees to $83 million a month, we calculate that as of May 1st, excess liquidity is down to $39 million.
First of all, using our model from last article, an $83 million cash burn a month means that Penn's operating leverage is somewhere just above 25%. This leverage may not have been the case in March, but seems to be the hemorrhage after all the mitigation measures were put in place.
