Description

Here is a link to a PDF in case the pasted version below is not formatted well.  If you go to the download options on the right, you will be able to select "direct download" and not need to use DropBox.   

https://www.dropbox.com/s/zjkaow77jfbcvho/TRWH_10.22.2020.pdf?dl=0

The equity of Twin River Worldwide Holdings, Inc. (“TRWH,” “Twin River,” or the “company”) is a compelling opportunity and we expect the share price to reach $55 (145% upside) within 2 years and more than triple to $72 in 3-4 years.  The company has a long runway of profitable organic and inorganic growth ahead of it, and will be a compelling acquisition target itself once the management team and board have completed their buildout of the company.  Twin River occupies a unique space in the gaming market -- it has a sophisticated management team and is a consolidator, yet is smaller than the large gaming players.  This allows it to move the needle with accretive targets which are typically below the radar of larger players.  This situation is very similar to our 2016 Turning Point Brands thesis and writeup.  Similar to Turning Point Brands in 2016, Twin River today has a limited public history, is very misunderstood, and is backed by the same sponsor.  The market does not fully comprehend the (1) normalized free cash flow profile of the existing and announced (M&A) assets; (2) the quality of the management team and board and their track record of successful deals; (3) the company’s ownership of nearly all of its real estate; (4) deal synergy potential and the IGT JV economics; and (5) the large opportunity in sports betting and i-Gaming.       

Twin Rivers has evolved from a single property operator in 2013 to the operator of (pro forma for announced M&A) 13 casino properties across 9 states.  The company owns gaming and racing facilities, including slot machines and various casino table games, and restaurant and hotel facilities.    

We look at TRWH as having a base valuation consisting of the current and recently announced deals on an “as-is” basis.  We then layer in the following components which will be discussed below: deal synergies on recently completed and announced M&A, joint venture with IGT, expansion capex, and sports betting/i-Gaming. 

The pro forma free cash flow yield (based on our projected Q4 2021 run rate numbers) is 18% based on current assets and announced M&A (but excluding synergies from announced M&A and growth capex).  The corresponding “as-is” EBITDA multiple (based on $265 million of EBITDA which is net of estimated stock compensation expense) is 7.0x versus over 12x for Penn National.  Due to the efficiency of its operations and nature of its assets, the company has low maintenance capex requirements, with TEV / (EBITDA less maintenance capex) of 7.7x.  This scenario corresponds to the above-referenced $55 two-year price target which equates to a target 7.5% FCF yield.  While compelling, this scenario does not give the company any credit for its low-risk (IGT JV, for example) growth capex, highly probable (per track record) M&A synergies from recent and announced deals, additional assets, and any credit for sports betting and i-Gaming.  These elements are very real and layered in later in the writeup.    

Summary statistics

Twin River has been able to pursue opportunistic M&A and increase its NAV during a difficult period due to being more soundly financed than peers heading into the pandemic.  Below is the pre-pandemic balance sheet.  More details on the balance sheet are in the Balance sheet section.  The July 1, 2020 balance sheet takes the June 30, 2020 balance sheet and then includes a $230 million acquisition (KC/Vicksburg) which was consummated on July 1.  Cash below does not include restricted cash.     

The company has many moving parts due to having many locations across several states.  Before diving into the company history and discussing the locations, let us provide a P&L overview to help frame the subsequent discussion.    

The company acquired Dover Downs (shown as Delaware below) in Q1 2019, with Q1 including only a few days of Dover in the 2019 results.  Earlier we mentioned “as-is” EBITDA of $265 million.  This is substantially higher than the 2019 adjusted EBITDA per the company of $167 million.  Our 2019 EBITDA is $163 million as we do not back out stock compensation.  Below you can see how we get to “as is” EBITDA.  Our fully layered/comprehensive EBITDA models in the returns on growth capex, a reasonable estimate of sports betting and i-Gaming cash flows, and incremental corporate and stock expense.  We believe the company will be operating at a $300 million EBITDA run rate by Q4 2023.  The company tends to think of Biloxi as a $40 million EBITDA asset, whereas we model it higher based on recent trends.  On the other hand, the company feels KC/Vicksburg EBITDA can get to $42 million, whereas we model $34 million.  There is a large opportunity to take share in KC and Vicksburg.   

If some line items come in under our expectations, there is ample cushion: (1) our $300 million EBITDA forecast includes zero cost and revenue synergies from the $66 million of EBITDA from recently announced deals which will close over the next 12 months; (2) our $15 million sports betting/i-Gaming EBITDA is likely too low; and (3) the cost savings line item may prove to be understated (the company has talked about already-achieved permanent labor savings) as the whole industry has an opportunity to carefully reset promotions.  The CEO of Caesar’s, for instance, has discussed how free buffets cost $1-$2 million per year per location, and many locations are doing fine without them.  Operators also benefit on a relative basis from the permanent closure of many dining and entertainment competitors in their various locales.

History

B.A. Dario (1894-1996) was one of the largest Buick dealers in New England and had a passion for thoroughbred horses.  He started a breeding farm and then purchased a small horse race track named Pascoag Park Racetrack in Rhode Island.  Later he built the Lincoln Downs Race Track in Lincoln, RI which opened in 1947.  In 1976, he sold a majority interest in the race track to the Taunton Greyhound Association and the track was renamed Lincoln Greyhound Park, with greyhound racing commencing in 1976.  In 1989 Wembley plc purchased Lincoln Greyhound Park.  Dover Downs, which at this point was a separate entity, listed on the NYSE and then later spun off motorsports and relisted under the ticker DVD.  Due to competition from Foxwoods in CT, Rhode Island authorized video lottery terminals in 1992.  In 2005, BLB Investors (Waterford Group, Kerzner International, Starwood Capital) won a bidding war with MGM (Penn National had also expressed interest) and paid $455 million for 5 racetracks.  BLB then invested $220 million into the property and changed the name to Twin River Casino.  BLB filed for bankruptcy in 2009, and lenders led by BofA, Wells Fargo, and Sankaty (Bain Capital) took ownership.  Even without the benefit of hindsight, one can comfortably say BLB put an injudicious level of leverage (debt to EBITDA multiple in the teens) on the asset.  Twin River emerged from bankruptcy in 2011, and in November 2012, Rhode Island voters approved a referendum to allow live table games.  The Twin River casino operates on the former racetrack.  

In 2014, Twin River acquired Hard Rock Biloxi.  In 2018, Twin River announced the merger with Dover Downs and the Tiverton Casino Hotel opened in Rhode Island.  The merger closed in 2019, and the company listed under NYSE: TRWH.  

More recently, the company closed on the Black Hawk (CO), Kansas City (MO), and Vicksburg (MS) deals which were announced in 2019.  The company has been incredibly opportunistic during the pandemic, having recently announced the following additional deals which will close in 2021: Eldorado Shreveport, Mont Bleu, Bally’s (closing in Q4 2020), and Jumer’s.  As will be discussed below, the company’s sound financial position has enabled it to be opportunistic when many of its peers are retrenching and selling assets.  

Standard General (“SG”), an activist hedge fund with a long track record of strong risk-adjusted returns, is the largest shareholder and the managing partner of SG is chairman of the board.  This is SG’s largest position and the SG team is intensely focused on creating value for shareholders.  SG owns close to 40% of the company’s shares.  Less than half of the company’s shares are in the public float.  Apollo has a ~5% stake in TRWH.  

We are not employees/affiliates of SG, but we have found the firm to be an excellent steward of capital.  While SG’s positions are frequently less liquid than many other equities we purchase, that is more than compensated for by the firm’s value-with-a-catalyst style, long-term approach, and shareholder-friendly activism.     

Coronavirus 

In March 2020, TRWH’s operations were shut down and its employees were furloughed but continued to receive health benefits.  The company also created a fund to help employees needing extra assistance.  During the shutdown, the company developed a protocol for facility maintenance including chip and machine sanitization and social distancing practices.  The company has been working closely with state and local officials as well as public health experts in all its jurisdictions.  All locations require facemasks and social distancing, and the company has temperature checks and thermal imaging cameras.  In Rhode Island, the company views personal identification for contract tracing.  

The company today is cash flow positive even in the current environment.  As a regional gaming company, TRWH is much less dependent on foreign tourists and destination visitors.  Outside of Rhode Island (covid restrictions are higher in Rhode Island), the company is achieving run rate performance at about 65% of its historical revenues and 70% of its historical EBITDA.  July revenues in Rhode Island were about 60% of 2019 levels.  

Twin River was well-positioned for a shock since it essentially owns all of its real estate and has a sound balance sheet.  Because of this, the company went into lockdown with well over a year of liquidity, and much more than a year of liquidity if you take into account its ability to monetize real estate.  This contrasts sharply with less well capitalized players.  For instance, Penn National, whose stock is up 150% this year, sold the Tropicana (a property on the Las Vegas Strip) a few months ago for rent relief. 

In April the company announced it was acquiring three properties from Eldorado and Caesar’s.  In May, it closed on a $275 million additional term loan. By the end of June, essentially all properties had been reopened.  On July 1, the company completed the acquisition of the KC and Vicksburg assets.  On October 1, the company announced it was acquiring Jumer’s Casino & Hotel which is based in Illinois.  The company priced $125 million of 6.75% senior unsecured notes due 2027 on October 6.    

In going through the tedious exercise of closing down and then reopening, management has uncovered numerous efficiencies in advertising, marketing and labor, with an emphasis on labor.  While the advertising and marketing expenses will ramp back up over the time, a portion of the labor savings are expected to be permanent.  The company has simply realized it can generate the same revenues with fewer people.  The labor savings will not result in hundreds of basis points of improvements in EBITDA margin, but rather about $5-$6 million of permanent labor savings.  While the coronavirus presents an opportunity to lower promotions and marketing costs, we are not including savings from these items as competition will dictate the appropriate level of spend long-term.  

Management & board

We have found management to be solid and forthright.  They are strong, efficient managers, have done an excellent job acquiring and integrating assets, and are conservative in their approach.  CEO George Papanier is a talented operator and is supported by a skilled operational and marketing team.  CFO Steve Capp has deep financial and gaming industry experience and has excellent support from strong finance VPs Jay Minas and Joseph McGrail.  The CEO and CFO each hold about $8 million in shares.    

George Papanier has been the President and CEO since 2011.  From 2004 to 2011 he served as the COO.  He has more than 35 years of experience in the gaming industry and has a reputation as a strong operator.  He has worked in several gaming geographies, some of which overlap with TRWH’s acquisitions.  He started his career with Sands Hotel and Casino, and then worked in finance for the Trump Plaza Hotel in Atlantic City before serving in executive operations roles for Hemmeter Enterprises in Colorado.  He then had CFO positions for Sun International Hotels Limited in the Bahamas and Mohegan Sun Casino in CT before returning to Atlantic City in the late 1990s as COO of Resorts Casino Hotel.  He became the COO for Peninsula Gaming properties in Iowa and Louisiana before becoming the COO at TRWH.  

Steve Capp has been the CFO since January 2019.  He was a board member from 2012 to 2018.  From 2003 to 2011, he was the CFO of Pinnacle Entertainment.  From 1999 to 2003, he was a MD at Bear Stearns where he was highly regarded.  

Phil Juliano is an Executive VP and the Chief Marketing Officer at Twin River.  He is originally from Atlantic City and has been in the industry for 35 years.  He joined Twin River in 2009.  He has worked at Wynn, Trump, and Binion properties.  Phil has successfully evolved the company’s advertising, marketing, and promotional activities.  

Craig Eaton is an Executive VP and the General Counsel & Compliance Officer and has been with the company for 15 years.  

Marc Crisafulli joined the company in mid-2019 and is an Executive VP in charge of strategic development and government affairs.  He worked at GTECH, a gaming technology company which was acquired by Lottomatica of Italy in 2006.   

Jay Minas was the CFO of the Twin River Casino since 2006 and in 2013 became a VP Finance at Twin River Worldwide Holdings.  He is responsible for financial reporting and budgeting and was property CFO for a number of facilities at Pinnacle prior to Twin River.  

Joseph McGrail joined in January 2019 as executive director in charge of SEC reporting and is now a VP Finance and the Chief Accounting Officer.  Prior to Twin River he was the controller of United Natural Foods, a publicly traded food wholesaler.     

The board is also strong, particularly for a company with a sub-$1 billion equity market capitalization.  In addition to SG and George Papanier, board members include Terrence Downey (former president and COO of SLS Las Vegas, former president and GM of Aliante Gaming, and VP/GM at several Stations Casinos locations), Jeffrey Rollins (previous independent director at Dover Downs and current board member at DVD; long track record of investing and building companies), and Wanda Wilson (former senior executive at Tennessee Education Lottery Company and Georgia Lottery Corporation).  

SG has aligned the management team’s incentives with shareholders and the company’s long-term objectives.  CFO Steve Capp makes it clear on earnings calls that Twin River understands the NPV of all its decisions.  Twin River has obviously stopped share repurchases for the time being, but since going public in March 2019 the company has reduced its share count by over 25%.  In 2019, 9.1 million shares were repurchased at an average cost of $24.57.  No equity financing was needed this year despite facilities being closed for a period of time.  A meaningful portion of compensation is tied to EBITDA performance, hitting strategic objectives tied to accretive acquisitions, returning capital to shareholders, growth, and optimizing the balance sheet.  Senior executives do not get any special perks not generally available to other employees, and the company does not provide any officers a “gross-up” for golden-parachute excise tax obligations payable by executives in connection with a change in control.   

Property overview & acquisition record

Here is a status update on and overview of the properties (9 casinos and 1 racetrack across 6 states) that TRWH currently owns.  Recall that outside of Rhode Island where the covid restrictions are higher, the company is achieving, on a run rate basis, 65% of its historical revenues and 70% of its historical EBITDA.    

Rhode Island - Twin River Casino Hotel

Rhode Island consists of the Twin River Casino Hotel and the Tiverton Casino Hotel.  The Twin River Casino Hotel is the flagship property and is located in Lincoln, Rhode Island and is about 6 miles from Providence, RI and 60 miles from Boston.  This is the flagship property and a full-service 24/7 casino.  It has 162,420 square feet of gambling space, 4,108 slot machines, 111 table games (including 23 poker tables), 16 restaurants, 7 bars, and close to 30,000 of event space.  It also hosts simulcasting of thoroughbred and greyhound racing from around the U.S.  Two years ago, TRWH opened a new hotel on the Twin River Casino Hotel property which has 136 rooms.  Sports betting was introduced at Twin River Casino Hotel towards the end of 2018.  Twin River Casino was negatively impacted by the opening of Wynn’s Encore Boston Harbor in 2H 2019.  Promotional activity by Encore was significant and revenue at Twin River Casino was down over 20% in the most heavily impacted months.  By the end of the year this had moderated, and in early 2020 pre-covid, TRWH’s Rhode Island cash flows were on track to run rate at the same level as 2019.  The Tiverton property has helped offset the Encore impact.        

Rhode Island - Tiverton Casino Hotel

Twin River acquired the Newport Grand Casino for $21.8 million in July 2015.  In Q4 2016, the company received referendum approval to terminate the Newport Grand gaming license and have a new gaming license issued to a new casino to be developed in Tiverton, Rhode Island.  In May 2018, Twin River sold the land and building associated with the Newport Grand for $10.2 million.  On August 18, 2018, Newport Grand was closed and on September 1, 2018, the Tiverton Casino Hotel was opened.  The net cost to fully develop Tiverton was about $135 million which equates to less than 7x 2019 EBITDA of $20 million.  Tiverton is a good example of management having a vision and executing on it.  The company had a view that there was an opportunity for operational improvement and significant revenue growth, and it successfully executed on a greenfield development.  It was a complicated development that involved significant wetland and bedrock issues.  

The Twin River and Tiverton properties closed on March 14 and reopened on June 8, but in a very limited way due to Rhode Island restrictions.  The number of guests was capped and limited to invited guests, and the facilities were subject to limited hours, with fewer gaming and amenity options.  In June, Rhode Island posted slightly negative EBITDA for the company.  On June 30, the company received permission from the state to expand the number of guests (and get rid of the invite-only requirement), gaming options, and amenities.  Management said that July revenue will be around 60% of July 2019 revenues -- keep in mind this is with less than 50% of the slot machines and less than 25% of the table games available.       

Once we are on the other side of covid, we expect Rhode Island to recover to $125 million of EBITDA with a fully-ramped Tiverton.  This excludes the planned Rhode Island expansion (to be discussed below) which will add about $15 million of EBITDA in a low-risk way via a joint venture with IGT.          

Mississippi - Hard Rock Hotel & Casino (“Hard Rock Biloxi”)

Hard Rock Biloxi is a waterfront casino resort located in a desirable Gulf Coast location serving southern Mississippi and the Gulf Coast.  The licensing agreement with Hard Rock Hotel, Licensing, Inc. is through September 2025 and the company has the option to renew for two successive 10-year periods.  The property can be impacted by weather.  In 2005, before its opening, Hurricane Katrina did so much damage that the property had to be rebuilt.  Hurricanes Harvey and Nate also impacted visitation numbers three years ago.  Twin River pays a lease to the state for access to 5 acres of submerged tidelands.  The primary term ends in 2037 with TRWH having the option to extend for 30 years.  Hard Rock Biloxi also has a lease agreement with the city of Biloxi for parking rights and air space access.  This arrangement expires in 2043 and has a 25-year renewal at the company’s option.          

Hard Rock Biloxi is another illustration of management and the board’s ability to create value.  The company purchased the asset for $250 million (10x EBITDA) in 2014.  The company has invested about $10 million in capex, so the all-in $260 million cost translates into 7x 2019 EBITDA.  Hard Rock Biloxi had a strong start to the year which saw revenue and adjusted EBITDA up 13% and 35%, respectively, in the first two months of the year.  It closed on 3/16 and reopened on 5/21.  The property had a very encouraging June with gaming volumes up nearly 10% from June 2019 and overall revenues up 2%.  Adjusted EBITDA in June was $5.7 million, almost double that of June 2019.  The property has been able to optimize costs since the shutdown.       

Mississippi - Casino Vicksburg + Missouri - Casino KC

This transaction for these two casinos was announced in 2019 and closed July 1, 2020.  This was a $230 million acquisition from Eldorado.  The company is currently integrating systems and continuing to evaluate the markets beyond its initial work.  Casino Vicksburg is the rebranded Lady Luck Casino Vicksburg and Casino KC is the rebranded Isle of Capri Casino Kansas City.  Based on conversations we have had with industry veterans, we agree with management’s assessment that these properties expand the company’s footprint into solid markets and there is significant upside potential from property redevelopment and operational improvements.  In Vicksburg the team will improve the table game and slot offerings and add a sportsbook.      

At Casino KC, the plan is to invest $40 million of capex (you can see the renderings released by the company in mid-July 2019).  The property is very under-amenitized and will have restaurants, retail, and a sportsbook.  Management will improve the external appearance of the boat and also build a new building on land near the boat which will house many F&B, retail, and other amenities to create significantly more space on the vessel for gaming.  This will also allow for an indoor entrance directly from the parking garage on the second floor of the boat to create a better arrival experience.    

The EBITDA for these assets pre-acquisition was ~ $27 million (8.4x EBITDA entry).  The all-in cost (including growth capex) will be $270-$280 million and management is confident in getting EBITDA to $40 million for a 7x all-in multiple.  July results for these properties have been strong, with Casino KC revenue off just 10% year-over-year and Casino Vicksburg revenues up over 25%.        

Delaware - Dover Downs (“Dover”)

The Dover Downs acquisition not only enabled Twin River to be publicly listed, but it also had compelling economics and provided diversification.  Twin River purchased Dover in 2019 primarily via stock for about $100 million (9x EBITDA entry) net of cash acquired.  Dover shareholders got common stock in TRWH equal to about 7.2% of the combined company’s equity.  In 2018, Dover did $11 million of EBITDA.  As of early 2020, Dover was at a run rate of $23 million of EBITDA.  The bulk of the value creation was from relocating the table game area (the table games used to be upstairs and were not immediately noticeable) and refreshing the marketing programs.  The prior owner had a top-heavy management structure.  The 1970s style plain garden cafe was replaced by a Longo’s Meatballs & Martini’s and a Sugar Factory is also on the way.  Smoking has been banned in Delaware but the company is planning to add a smoking porch where one can smoke and gamble.  

Dover continued its momentum in the first two months of 2020.  It closed on 3/16 and opened on 6/1.  After opening, Dover is operating at 85% of prior year revenues and only slightly below prior year EBITDA. 

Colorado - Golden Gates Casino, Golden Gulch Casino, Mardi Gras Casino (collectively, “Black Hawk”)

Twin River completed the acquisition of these three casinos on January 24, 2020.  The company paid $51 million at a purchase multiple slightly above 10x EBITDA.  The management team has high conviction that through operational improvements EBITDA can rise to $7-$8 million, bringing the multiple below 7x.  With this deal Twin River also acquired the right to 3 sports betting licenses in Colorado with the passage of Proposition DD on November 5, 2019.  This is anticipated to conservatively add $3 million of EBITDA, bringing the total purchase multiple below 5x.  The company launched mobile sports betting in CO on May 1 in conjunction with strategic partners FanDuel and DraftKings.  The company also launched a retail sportsbook in connection with DraftKings at the Mardi Gras Casino.  The 3 casinos are close to each other along a half-mile strip of casino and hotel properties in the historic mining town of Black Hawk, CO.  Black Hawk closed on 3/16 and reopened on 6/17.  Slot machine adjusted gross proceeds (including casinos not owned by TRWH) in the region were off by only 15% in July year-over-year and by 5% in August year-over-year.    

Now we turn to pending deals, starting with the summary slide below. 

Announced deal: Louisiana - Eldorado Shreveport Resort and Casino + Nevada - Mont Bleu Resort Casino & Spa

This transaction was announced on April 24, 2020.  The company agreed to purchase these two assets from Eldorado for a total purchase price of $155 million (4.1x trailing EBITDA).  This transaction is expected to close in early 2021.  The company is acquiring Shreveport’s operations and real estate, and Mont Bleu’s operations.  The Shreveport property is a top-tier property which has been very well-maintained.  Some of you may recall this property used to be Hollywood Casino Shreveport before Eldorado owned it. 

The Mont Bleu acquisition gets Twin River into the Nevada market.  The company has entered into an agreement with Mont Bleu’s landlord to extend the lease term to 2035.  This Tahoe asset is an attractive property which just completed a $25 million renovation and a recently approved convention center is being built next to it.  The team is focused on cross-marketing and making this a destination property for its customer base, as well for Asian gamblers on the West Coast.  The company has had success making Biloxi a destination property for a certain segment of its customer base, and we believe the same can be done here.  As an aside, we asked management if they would ever consider something on the Las Vegas strip, and they responded that they are looking at everything purely from a shareholder perspective and will be opportunistic.  

Announced deal: New Jersey - Bally’s Atlantic City Hotel & Casino

The company also announced on April 24, 2020 that it entered an agreement with Caesars and Vici Properties to acquire Bally’s Atlantic City Hotel & Casino for $25 million, or 2.1x trailing EBITDA.  This will close mid to late Q4 2020 based on the timing of the company’s licensing process.  Many of us are familiar with this property given its AC location and proximity to NY.  The Bally’s name was not part of the deal, and per the purchase agreement with Caesars the company would have six months to make the name change.  But then last week on October 13 the company announced that it just purchased the Bally’s brand and will actually license the name back to Caesars for its Las Vegas property.  Bally’s AC is in a prime Boardwalk location and a room refurbishment (property has ~1,200 rooms) will start upon the deal closing and last a few years.  The Dennis Tower is part of the asset purchase.  Twin River will keep the indoor connections between Bally’s, Caesars, and the Claridge Hotel.  The company has the opportunity to add some unique restaurant brands and also take advantage of physical aspects of the property which have been underappreciated, such as the 80,000 square feet of convention and meeting space.  There are also opportunities to reestablish the once-prominent Bally’s spa.  They will have a corporate loyalty program to replace the Caesars awards program.  Phil Juliano is focused on getting the right offers to the right people at the right time and will cross market (with Dover, Rhode Island, etc.) whenever the opportunity arises.  We expect the Dover-AC link to be strong and Tiverton and Lincoln are not far away.  And then destination opportunities such as Biloxi and Tahoe will appeal to a certain customer segment.  This investment was incredibly cheap, gets the company into the large and lucrative NJ sports betting and online casino markets, and will also benefit from Atlantic City finally moving in the right direction.       

Announced deal: Illinois - Jumer’s Casino & Hotel

The company announced on October 1, 2020 that it will acquire Jumer’s Casino & Hotel in Rock Island, IL for $120 million, or 7.4x 2019 EBITDA.  This deal is expected to close in Q2 2021.  This transaction allows Twin River to get into the growing IL gaming market and capitalize on lucrative sports betting (physical and mobile) in the state.  The first legal sports wager in IL took place in March 2020 and the mobile went live this summer.  

Capital spending

In 2019, maintenance capex was approximately $20 million.  With all the recently closed and pending M&A, we are using $25 million for pro forma maintenance capex.

Here are the primary growth capex projects: 

1. The company will be spending up to $100 million on renovating and expanding the Twin River Casino & Hotel property in Lincoln, RI.  There will be a 40,000 square foot addition to the first-floor gaming area.  The capex will occur largely in 2H 2021 and end in early 2023.  There will be greater separation of the smoking and non-smoking areas of the gaming floor and some new entertainment concepts on the second floor.  This $100 million investment also includes investments in its slot machine joint venture (more on this below) with IGT. 

2. The company has earmarked $40 million for the KC expansion.  The company is currently at the tail end of the architectural phase.  Construction will start by the end of 2021 and take 14 months.       

3. TRWH will refresh approximately 1,000 rooms in the hotel at Bally’s over 3-5 years.  

IGT joint venture

TRWH currently has 5,108 slot machines in Rhode Island (4,108 at Lincoln, and 1,000 at Tiverton).  Rhode Island currently leases the machines from IGT, Scientific Games, and Everi, and pays them 7% of GGR to manage the machines.  The state shares the revenue with Twin River: Rhode Island pays Twin River a 28.85% revenue share on the first 3,002 units and then a 26% share on additional units.  IGT manages 77% of the floor (although IGT manages 77% of the floor, only 50% of the floor consists of IGT machines since IGT also sources from Scientific Games, Everi, Aristocrat, etc.).  This arrangement has not been ideal since IGT has little incentive to spend $25,000 on a new machine when it is receiving a nice annuity (7% of the 77%) from older machines.  Eager to prolong this setup, IGT went to the state and attempted to negotiate an extra 20 years of this arrangement.  Twin River raised objections, stating the current IGT arrangement was suboptimal for both Twin River and the state.  Rhode Island held hearings and Twin River and IGT have decided, subject to final budget approval (expected in November), that they will create a JV whereby Twin River ultimately ends up owning 40% of the slot machines in the JV and this JV will manage all the slot machines in the state.  So Twin River will be spending capital to first purchase machines from Everi and Scientific Games (basically buying out their 23% stake), and then eventually will purchase additional machines from IGT to get 40% of the JV economics.  The math for Rhode Island does not change.  In conjunction with this new arrangement, Twin River agreed to a large expansion/renovation at its Lincoln facility.  The total investment for everything will be $100 million.  Taking into account the investment and the 7% of GGR Twin River will earn on its share of the JV, we estimate that the JV creates $4+ of net value per share.  It is important to note that this agreement with Rhode Island will lock in Twin River’s rates through 2043.  This is not something that can be legislated away -- Twin River will not subject to the whims of Rhode Island and its $800 million budget shortfall.  We estimate that the $100 million expansion will result in $15 million of incremental EBITDA.                      

Real estate

A tremendous amount of value could potentially be unlocked for TRWH through selling and then leasing back its real estate.  Gaming REITs such as Vici Properties and Gaming and Leisure Properties trade at levels implying substantial real estate value for TRWH.  We agree with management’s preference to continue owning its real estate as doing so makes the company less fragile than peers.  The market should recognize this value via a much higher multiple.  

TRWH owns 300+ acres outside of Denver at Arapahoe Park in Aurora, CO.  The company has held this as an option play.  The Denver area continues to rapidly grow and if the casinos came out of the mountains, TRWH would be ready to go with land and licenses.  There is also extra land in Rhode Island which could be developed for retail or another use.  We assign $2 per share of value to the extra land in CO and RI, as well as some tax savings the company has generated.  

Sports betting and i-Gaming

There is substantial upside from sports betting and i-Gaming as they are the largest growth opportunities in the gaming industry.  States have seen how successful NJ has been in generating much-needed tax revenues from online offerings during covid, and this is accelerating adoption in other states.  Sports betting and i-Gaming require state licenses, and this allows gaming companies with a physical presence to be incredibly well positioned to partner with an online operator and essentially collect tolls.  

In 2018, the Supreme Court struck down the Professional and Amateur Sports Protection Act of 1992 which barred states from authorizing sports gambling.  The sports betting market is estimated to be a $6.2 billion market in the U.S. by 2024, which is supported by the experience of NJ to date.  This compares to about $900+ million (chart below) in revenues for 2019.  Currently 22 states and DC have legalized sports wagering and experts estimate that this will expand to another 17 states through 2024.          

Mobile is continuing to play a role in the growth of the market.  In NJ and PA, both early adopters of sports betting, mobile makes up 80% of sports betting volumes.  In late July, the Rhode Island legislature dropped the in-person registration requirement for all new mobile sports betting accounts.  This makes it easier to enroll in the company’s online offering and will result in more mobile play.  

The margins are higher in i-Gaming than in sports betting and some industry players like Tom Reeg have said they expect margins in the mid to high 30s over time.  It will be instructive to see how NJ i-Gaming revenues perform in 2021 since 2020 has benefited significantly from the pandemic.  The gaming taxes can vary significantly by state, with NJ having internet gaming taxes of 15% vs PA’s internet gaming taxes of 54% on slots and 16% on table games.  The LTM GGR in NJ for internet gaming has been an impressive $80 per adult NJ resident.  There will obviously be more competition over time, but the long-term opportunity is massive.  The company announced in early August that it signed a multi-year partnership with PointsBet, a well-known global sportsbook operator.  PointsBet has a popular proprietary online casino product it will launch for Twin River and this can commence once Twin River closes on Bally’s and gets the required approvals.  In late August, a partnership between Sporttrade and Twin River was announced whereby Sporttrade will launch its sports betting exchange product in NJ.  In 2H 2021, Score Media is launching its online casino product with Twin River in NJ.  The deal is structured such that Twin River will get a percentage of revenue from Score’s online casino operations in NJ, subject to annual guaranteed minimum amounts, an upfront fee, and a renewal fee.  The initial term is 10 years, with an option (exercisable by Score) to extend for 5 more years.  Each of these above agreements is immediately accretive to the company.    

The company has said that EBITDA from Colorado sports betting and i-Gaming will conservatively be $3 million.  We model this number, but suspect the potential in CO will be significantly higher.  Legalized, regulated sports betting began in CO on May 1, 2020.  That month the total amount wagered was close to $26 million.  In August the total amount wagered was nearly $130 million.  

Below is a monthly sheet we download from the CO Gaming Commission to track the CO sports betting market.  Taking into account the estimated win percentage, market size over time, the numbers of operators, etc., and then including i-Gaming, it is not hard to see TRWH far exceed $3 million in EBITDA from CO sports betting and i-Gaming. 

Nonetheless, sticking with management’s guidance of $3 million from CO, one can easily arrive at $15+ million of sports betting and i-Gaming EBITDA in 3 years for the whole company.  Given the pace of recent agreements, the modest size of the CO market relative to other markets such as NJ, and the company’s expansion into other states, the overall opportunity could be worth a large proportion of the company’s current equity market cap.  Lastly, it is notable that the company is keeping some licenses for itself.  This gives Twin River some additional options should it choose to develop its own technology or acquire a player in the space.               

Balance sheet

Earlier in the writeup we showed the July 1, 2020 balance sheet which had a revolver balance of zero.  The company fully drew on its $250 million revolver on March 16, 2020, but then fully paid down the revolver (in part with an expensive L+800 financing) to eliminate the financing contingency and close on the KC/Vicksburg deal, which is highly accretive.     

If we then layer in the recent bond financing (the bonds provide attractive absolute and relative value with a 650 bps spread for 6.5 year paper) as well as the Bally’s/Shreveport/Mont Bleu/Jumer’s deals, we get net debt to pro forma EBITDA of 4.25-4.5x.  This leverage multiple does not hit the balance sheet for growth capex but also does not include any benefit from projects and synergies.  Also recall that our EBITDA, all else being equal, does not match management’s adjusted EBITDA as we do not exclude stock compensation expense.  

The company has a cooperative bank group and we are comfortable with the covenants (both at the bank/bond level and the RI regulatory level).  If more than 30% of the capacity of the revolver is utilized (as was the case at March 30, 2020 but not June 30, 2020) the company must comply with maximum total leverage below 5.5x.  On April 24, 2020, the company got covenant relief from its lenders due to the pandemic which lasts until the company is required to deliver its financial statements for the March 31, 2021 quarter.  The relief stipulates a minimum liquidity requirement which at this point requires the company hold at least $50 million of unrestricted cash at month-end through March 31, 2021.  There are no substantial debt maturities before 2024 and the revolver is undrawn.

Bridge from “as-is” valuation to fully layered/comprehensive valuation

Towards the end of 2023 the company will be performing at the following annualized levels: $300+ million of EBITDA, $65 million of interest expense (included in this is an expensive L+800 note which will be refinanced), and $25 million of maintenance capex.  Assuming a Biden tax rate, a 7% FCF yield, and the $2 of value per share we ascribe to both extra land in CO/RI and one-time tax savings, we get a valuation corresponding to $72 per share.  This is a reasonable target FCF multiple, especially given that the company owns its real estate.  Once the current team and board have taken the company as far as they want to take it, TRWH will likely be sold to a larger player who can reduce costs (duplicative corporate expense, vendor costs, local organizational costs where geographies overlap) while rolling TRWH’s database into a larger rewards program.  SG is a long-term investor and owns a portion of the investment through a vehicle which has a long-life.  Nonetheless, the firm will be working to optimize the timing tradeoff between continuing to build versus exiting to a strategic player.

As a sanity check, a strategic player could pay $72 per share and earn a 10% return on its equity funds in year 1 assuming (1) Q4 2023 run-rate EBITDA of $300 million; (2) the strategic player can get $15 million of company-wide savings and revenue synergies which is achievable; and (3) a financing mix of 65/35 debt to equity with a blended debt cost of 6%.  

A financial player (shown below) demanding IRRs in the teens over 5 years could pay over $70 per share in 2023 assuming (1) no revenue/cost synergies; (2) 4% annual EBITDA growth; and (3) a financing mix of 65/35 debt to equity with a blended debt cost of 6%.  Additionally, a financial player could significantly enhance these returns by monetizing the owned real estate at a low cap rate and then reducing debt or paying a dividend.  For our purposes, we are more focused on what a public market shareholder or strategic could earn.    

Culture

We spoke to former employees that had worked in various locations.  These conversations essentially checked the boxes for us.  

• The employees at Twin River, even the office employees, make sure to spend sufficient time on the floor to stay in touch with their product and customers.  There is a culture of strict accountability for doing one’s job.    

• On the table game side, the company chooses floor people who are not only capable but also communicate well with the customer and reflect the type of customer in each jurisdiction.  This is crucial in a regional business with a lot of repeat customers. 

• Employees realize that all their competitors have slot machines and a slot machine is a commodity -- therefore, differentiation comes down to the experience.  Players come to spend time on the machine and have fun with their money.  Depending on the machine, customers can experience the highs and lows of extreme volatility, or they can have a machine which is less volatile and allows them to play for a long time.  The art of being a strong slot manager is getting this mix right, listening to what customers want, understanding placement within the casino, and understanding how to analyze whether a machine is contributing vis-a-vis another machine.  In Rhode Island, IGT is currently managing this (and the company will have more involvement with the creation of the aforementioned JV), but elsewhere the company is doing it.  

• We spoke to two retired slot operators who worked at Wynn properties and the Tropicana.  They conveyed how seemingly minor mistakes can cost tremendous amounts of money.  For instance, like a PM trading too frequently, some slot managers make mistakes by moving machines around too often.  They think they are optimizing the floor space, but they alienate regular customers who tire of tracking down the new locations of their favorite machines.  Also, when a machine is moved to another location on the floor, many customers assume you have lowered the payout ratio (“tightened” it).  Slots have changed tremendously over the years.  You are no longer carrying around 40-pound bags of coins.  With server-based games, one can change a large section of the slot floor very quickly.  Keeping up with the technological changes is crucial and Twin River understands this given its focus on slots.

• One recurring theme was that Twin River is very focused on providing value to its customer base.  The company has intelligently employed analytics to get promotions right.  The largest players are adept at this but not all of the small players optimize this.  For instance, you may have a relatively high ADT (average daily theoretical, or the average amount a gambler loses per day) player who spends less incrementally when presented with various promotions than a player with half that ADT.  The company does a solid job with analytics and is looking to expand its capabilities here as the network of assets and players grows.  

Risks/concerns

Coronavirus.  Hopefully the virus falls under much better control soon, but as we mentioned the company is already producing cash flow.  If the virus lingers longer than expected, the core thesis does not change but the timing is extended.  

Competition.  There is no new significant bricks-and-mortar competition on the way over the next few years.  The Massachusetts Gaming Commission has asked for public comment on whether it should open reopen the application process for a Region C (the SE MA region composed of Bristol, Plymouth, Barnstable, Dukes, and Nantucket counties) casino.  This remains unresolved as there are gaming saturation concerns and the MA government is moving incredibly slowly, so it is unlikely anything is built there over the next 5-10 years.  The Mashpee Wampanoag Tribe continues to fight to gain authorization to build a project in Taunton, MA.  The tribe has been at this for over 7 years and we are told it is unlikely that they will be approved. 

Addendum: Slot appeal and complexity

Slots is one of the most popular games despite the fact that it is the only gambling game where players do not know the odds.  For instance, players often have no idea how many stops there are on reels, how many symbols there are, and what the distributions of the reels are.  Game producers guard these key details.  Despite this, players are drawn to the ease and speed of play, the large number of games and themes, and the special sound and visual effects.  Moreover, the algorithms encourage players to keep gambling.  It is fascinating to see how the complexity of slots has evolved over the years.  

After seeing how poorly the average player truly understands modern slots, we wondered how well we could understand the mathematical parameters of a game if we played for a few days.  So as an exercise, we played a particular game online casually several times over a period of days.  We then needed to compare our intuition to the “solution.”  To do this, we created a MATLAB algorithm to play the game.  As each cycle (playing the game once) takes a certain amount of time, we accelerated data collection by constructing our program to create a large number of “workers” to simultaneously play many cycles in parallel in the cloud (Azure in conjunction with MATLAB Parallel Server) and then record, categorize, and analyze the outcomes.  Our conclusion was that it is very difficult for someone to get an accurate read on a game by playing it in a normal fashion over a reasonable time frame.  The MATLAB code was able to estimate various game parameters, and these were different from our earlier intuitive hunches.     

One must of course capture all the symbols and run the game long enough to compute the relative frequencies of the symbols.  We still did not know the number of stops and while one could estimate it based on rules of thumb in the industry, we used statistical techniques examining sequences of results to estimate it.  This gave us an estimate of the number of stops which provides insight into the accuracy of the other parameters.  We could then create a symbol distribution vector [a1,a2,…,an] for each reel indicating how many times each of the different n symbols appears.  And of course (a1+a2+…+an) equals the number of stops.  When modeling the game one must take into account subtle nuances; for instance, each reel can have a different number of stops which complicates the combinatorics.  We then needed to understand the paylines which involve numerous combinations including horizontal lines, vertical lines, oblique lines, and other schematics.  To do this, one must map the game to a grid and compute corresponding combinations and probabilities correctly.  We assume a rectangular jxk grid (which has jk points and jk-2k-2j+4 interior points).  One can show that the number of horizontal lines of length 3 or more in our grid is j(k-2)(k-1)/2, implying we have k(j-2)(j-1)/2 comparable vertical lines.  Our game also had oblique lines and since we had j<k, the number of oblique lines is (j-1)(j-2)[k-j+(2j/3-1)].  Games often also have triangular and other paylines and we modeled these as well.  All these factors impact the economics of the game.  We were able to get enough information to model something very comparable to a PAR sheet (probability accounting report), which is the manufacturer’s private document detailing hit frequency, payback percentage, odds, volatility index, etc.  Releasing PAR sheets doesn’t change the expected value of the game and is highly unlikely to impact revenues, but developers do not release them.  The primary point is that the complexity escalates quickly and it was unsurprising but humbling to see that our intuition, without access to a computer, was not great at approximating how the game really works (i.e., knowing the parameters).    

One cannot outsmart a slot machine, so the smart decision comes down to which machine to play.  When playing in a casino, it’s difficult to perceive which machine is best for you, and with just a quick software update changes can be made.  There is a thoughtful paper which was published in the Journal of Gambling Issues (June 2009).  Authors Kevin Harrigan and Mike Dixon at the University of Waterloo used the Freedom of Information and Protection of Privacy Act to obtain PAR documents for slot machines in use in Ontario.  They discuss several interesting points illustrating how the industry employs various features to encourage irrational thinking.  Some of their points include the following: having payout percentages which vary among otherwise identical looking games and machines, varying payout percentages over time (for example, an operator can have a higher payout percentage at the beginning of the week to encourage locals to come in throughout the week), giving the illusion of control (having a “bonus” round which allows a player to select certain options with small but musically touted payoffs), and our favorite feature which involves the machine providing the illusion of skill by communicating events as wins when mathematically they represent losses.   

Catalyst

1. The second half of 2021 will represent a more stable environment, making it easier for investors to value the company and understand the various moving parts.  As investors do the work, the stock will move higher.  

2. Continued accretive M&A and achieving anticipated synergies.  None of our price targets assume future acquisitions.         

3. TRWH ramping up its sports betting and i-Gaming offerings will result in a revaluation of the company as investors give the company credit for the nature (toll collecting, attractive growth profile) of these cash flows.  

4. Acquisition of TRWH by a larger industry player.  This is a long-term catalyst as the management team and board have several years of runway to build the company.  The future acquirer of TRWH will be getting a very efficient and diversified operation with strong local managers, and a robust multi-jurisdictional sports betting and i-Gaming business.   

5. TRWH throws in the towel and joins the $55 billion of unlevered SPAC capital (excluding another $18B in the filing process) by launching ICAS (ticker is available), an internet casino SPAC.