PENN Entertainment, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2022. EXECUTIVE OVERVIEW Our Business PENN Entertainment, Inc., together with its subsidiaries (“PENN,” the “Company,” “we,” “our,” or “us”), is North America’s leading provider of integrated entertainment, sports content, and casino gaming experiences. As of March 31, 2023, PENN operated 43 properties in 20 states, online sports betting in 17 jurisdictions and iCasino in five jurisdictions, under a portfolio of well-recognized brands including Hollywood Casino®, L’Auberge®, Barstool Sportsbook®, and theScore Bet Sportsbook and Casino®. In 2023, PENN completed its acquisition of Barstool Sports, Inc. (“Barstool”). Barstool’s vast audience, combined with the reach and highly engaged user base of Score Media and Gaming Inc. (“theScore”), provide us with a significant digital footprint and growing customer ecosystem. PENN’s highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by its investments in market-leading retail casinos, sports media assets, technology, including a state-of-the-art, fully integrated digital sports and iCasino betting platform, and an in-house iCasino content studio. The Company’s portfolio is further bolstered by its industry-leading PENN Play TM customer loyalty program (the “PENN Play program”), which offers our approximately 27 million members a unique set of rewards and experiences across business channels. The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the AR PENN Master Lease, 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and Pinnacle Master Lease (as such terms are defined in “Liquidity and Capital Resources” , and collectively referred to as the “Master Leases”), with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) (“GLPI”), a real estate investment trust (“REIT”). Recent Acquisitions, Development Projects and Other On February 17, 2023, we acquired the remaining 64% of the outstanding shares of Barstool common stock not already owned by us for a consideration of approximately $405.5 million, which is inclusive of cash and common stock issuance, repayment of Barstool indebtedness of $23.8 million, transaction expenses and other purchase price adjustments in accordance with GAAP (the “Barstool Acquisition”). Prior to the acquisition, we held a 36% ownership interest, which was accounted for under the equity method. At the closing of the Barstool Acquisition, we obtained 100% of the Barstool common stock of which the fair value of Barstool was determined to be $660.0 million based on market participant assumptions. Upon the completion of the Barstool Acquisition, Barstool became an indirect wholly owned subsidiary of PENN. The acquisition provides us with a greater ability to execute our organic cross-sell strategy through Barstool’s resources, audience, and strong brand recognition. We issued 2,442,809 shares of our common stock to certain former stockholders of Barstool for the Barstool Acquisition (see Note 13, “Stockholders’ Equity and Stock-Based Compensation” in the notes to our unaudited Consolidated Financial Statements for further information) and utilized $315.3 million of cash to complete the Barstool Acquisition, inclusive of transaction expenses and repayment of Barstool indebtedness. See Note 6, “Acquisition s ” in the notes to our unaudited Consolidated Financial Statements for further discussion. On February 21, 2023, as described in “Liquidity and Capital Resources” , the Company and GLPI entered into an agreement to amend and restate the PENN Master Lease (the “AR PENN Master Lease”), effective January 1, 2023, to (i) remove the land and buildings for Hollywood Casino Aurora (“Aurora”), Hollywood Casino Joliet (“Joliet”), Hollywood Casino Columbus (“Columbus”), Hollywood Casino Toledo (“Toledo”), and the M Resort Spa Casino (“M Resort”), and (ii) make associated adjustments to the rent after which the initial rent in the AR PENN Master Lease will be $284.1 million, consisting of $208.2 million of building base rent, $43.0 million of land base rent and $32.9 million of percentage rent (as such terms are defined in the AR PENN Master Lease). Subsequent to the execution of the AR PENN Master Lease, the Company leases real estate assets associated with 14 of the gaming facilities used in its operations via a triple net master lease. The current term of the AR PENN Master Lease expires on October 31, 2033 and thereafter contains three renewal terms of five years each on the same terms and conditions, exercisable at the Company’s option. 38 Table of Contents Concurrent with the execution of the AR PENN Master Lease, the Company and GLPI entered into a new master lease (the “2023 Master Lease”), effective January 1, 2023, specific to the properties associated with Aurora, Joliet, Columbus, Toledo, M Resort, Hollywood Casino at The Meadows (“Meadows”) and Hollywood Casino Perryville (“Perryville”) and a master development agreement (the “Master Development Agreement”). The 2023 Master Lease has an initial term through October 31, 2033 with three subsequent five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The 2023 Master Lease terminated the individual triple net leases associated with Meadows and Perryville. The 2023 Master Lease and AR PENN Master Lease are cross-defaulted, cross-collateralized, and coterminous, and subject to a parent guarantee. The 2023 Master Lease includes a base rent (the “2023 Master Lease Base Rent”) equal to $232.2 million and the Master Development Agreement contains additional rent (together with the 2023 Master Lease Base Rent, the “2023 Master Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for an anticipated relocation of PENN’s riverboat casino and related developments with respect to Aurora (the “Aurora Project”) and (ii) a percentage, based on the then-current GLPI stock price, of any project funding received by PENN from GLPI for certain anticipated development projects with respect to Joliet, Columbus, and M Resort (the “Other Development Projects”). The Master Development Agreement provides that GLPI will fund, upon PENN’s request, up to $225 million for the Aurora Project and up to $350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Master Development Agreement. These funding obligations of GLPI expire on January 1, 2026. The 2023 Master Lease Rent will be subject to a one-time increase of $1.4 million, effective November 1, 2027. The 2023 Master Lease Rent will be further subject to a fixed escalator of 1.5% on November 1, 2023 and annually thereafter. The Master Development Agreement provides that PENN may elect not to proceed with a development project prior to GLPI’s commencement of any equity or debt offering or credit facility draw intended to fund such a project or after such time in certain instances, provided that GLPI will be reimbursed for all costs and expenses incurred in connection with such discontinued project. The Aurora Project and the Other Development Projects are all subject to necessary regulatory and other government approvals. We believe that our portfolio of assets provides us with the benefit of geographically-diversified cash flow from operations. We expect to continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and investments, and the development of new gaming properties. In addition, the acquisitions of Barstool and theScore reflect our strategy to continue evolving from the nation’s largest regional gaming operator to a best-in-class omni-channel provider of retail and online gaming and sports betting entertainment. Operating and Competitive Environment Most of our properties operate in mature, competitive markets. We expect the majority of our future growth to come from cross-sell opportunities between our retail casino, online sports betting and online gaming businesses, and new distribution channels within the advertising and commerce spaces; improvements, expansions or relocations of our existing properties; entrance into new jurisdictions; expansions of gaming in existing jurisdictions; and strategic investments and acquisitions. Our portfolio is comprised largely of well-maintained regional gaming facilities, which has allowed us to develop what we believe to be a solid base for future growth opportunities. We continue to adjust operations, offerings, and cost structures at our properties to reflect changing economic conditions. We also continue to focus on revenue and cost synergies from recent acquisitions, technology enhancements, and providing our customers with additional gaming experiences through our omni-channel distribution strategy. We seek to grow our customer database and loyalty program through the development of new properties and/or the expansion of recently-developed business lines as well as through partnerships with third-party operators, such as Live Nation Entertainment and Choice Hotels International, Inc. Acquisitions such as Barstool and theScore enable us to further our omnichannel strategy by adding additional revenue streams and customer acquisition. The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos; dockside casinos; land-based casinos; video lottery; iCasino and social casino; online and retail sports betting; sports media companies; gaming at taverns; gaming at truck stop establishments; sweepstakes and poker machines not located in casinos; the potential for increased fantasy sports; significant growth of Native American gaming, historic racing or state-sponsored i-lottery products in or adjacent to states we operate in; and other forms of gaming in the U.S. See the “Segment comparison of the three months ended March 31 , 2023 and 202 2 ” section below for discussions of the impact of competition on our results of operations by reportable segment. 39 Key Performance Indicators In our business, revenue is driven by discretionary consumer spending. We have no certain mechanism for determining why consumers choose to spend more or less money at our properties or on our online offerings from period-to-period; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers’ spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact than others. For example, decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as recessions, inflation, rising interest rate environments, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, high fuel or other transportation costs, and the effects of the COVID-19 pandemic. In addition, visitation and the volume of play have historically been negatively impacted by significant construction surrounding our properties, adverse regional weather conditions and natural disasters. In all instances, such insights are based solely on our judgment and professional experience, and no assurance can be given as to the accuracy of our judgments. The vast majority of our revenues is gaming revenue, which is highly dependent upon the volume and spending levels of customers at our properties. Our gaming revenue is derived primarily from slot machines (which represented approximately 84% and 81% of our gaming revenue for the three months ended March 31, 2023 and 2022, respectively) and, to a lesser extent, table games and online gaming consisting of online slots, online table games, and online sports betting. Aside from gaming revenue, our revenues are primarily derived from our hotel, dining, retail, commissions, media, program sales, admissions, concessions and certain other ancillary activities, and our racing operations. Key performance indicators related to gaming revenue are slot handle and table game drop, which are volume indicators, and “win” or “hold” percentage. Our typical property slot win percentage is in the range of approximately 7% to 11% of slot handle, and our typical table game hold percentage is in the range of approximately 15% to 28% of table game drop. Slot handle is the gross amount wagered during a given period. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Given the stability in our slot hold percentages on a historical basis, we have not experienced significant impacts to net income from changes in these percentages. For table games, customers usually purchase chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit-worthy customers) are deposited in the gaming table’s drop box. Table game hold is the amount of drop that is retained and recorded as gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional gaming markets, our table game hold percentages are fairly stable since the majority of these markets do not regularly experience high-end play, which can lead to volatility in hold percentages. Therefore, changes in table game hold percentages do not typically have a material impact to our results of operations and cash flows. Under normal operating conditions, our properties generate significant operating cash flow since most of our revenue is cash-based from slot machines, table games, and online gaming, including sports betting. Our business is capital intensive, and we rely on cash flow from our properties to generate sufficient cash to satisfy our obligations under the Triple Net Leases (as defined in “Liquidity and Capital Resources” ), repay debt, fund maintenance capital expenditures, repurchase our common stock, fund new capital projects at existing properties and provide excess cash for future development and acquisitions. Additional information regarding our capital projects is discussed in “Liquidity and Capital Resources” below. Reportable Segments We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate: Northeast, South, West, and Midwest. The Interactive segment includes all of our online sports betting, iCasino and social gaming operations, management of retail sports betting, media, and the operating results of Barstool (the remaining 64% of Barstool common stock, not already owned by PENN, was acquired on February 17, 2023). We view each of our gaming and racing properties as an operating segment with the exception of our two properties in Jackpot, Nevada, which we view as one operating segment. We consider our combined Video Gaming Terminal (“VGT”) operations, by state, to be separate operating segments. For a listing of our gaming properties and VGT operations included in each reportable segment, see Note 2, “Significant Accounting Policies,” in the notes to our unaudited Consolidated Financial Statements. 40 Table of Contents RESULTS OF OPERATIONS The following table highlights our revenues, net income, and Adjusted EBITDA, on a consolidated basis, as well as our revenues and Adjusted EBITDAR by reportable segment. Such segment reporting is consistent with how we measure our business and allocate resources internally. We consider net income to be the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures. Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDAR, and Adjusted EBITDAR margin; as well as a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDAR and related margins. For the three months ended March 31, 2023 2022 Revenues: Northeast segment $ 700.5 $ 658.5 South segment 314.8 341.4 West segment 129.7 140.9 Midwest segment 295.3 282.9 Interactive segment 233.5 141.5 Other (1) 5.8 7.3 Intersegment eliminations (2) (6.3) (8.3) Total $ 1,673.3 $ 1,564.2 Net income $ 514.4 $ 51.6 Adjusted EBITDAR: Northeast segment $ 212.9 $ 205.2 South segment 123.6 146.5 West segment 49.1 51.2 Midwest segment 125.6 125.5 Interactive segment (5.7) (10.0) Other (1) (27.3) (23.7) Total (3) 478.2 494.7 Rent expense associated with triple net operating leases (4) (146.0) (60.1) Adjusted EBITDA $ 332.2 $ 434.6 Net income margin 30.7 % 3.3 % Adjusted EBITDAR margin 28.6 % 31.6 % Adjusted EBITDA margin 19.9 % 27.8 % (1) The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, Sam Houston and Valley Race Parks, the Company’s joint venture interests in Freehold Raceway, and our management contract for Retama Park Racetrack. Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate or have not otherwise been allocated. (2) Primarily represents the elimination of intersegment revenues associated with our retail sportsbooks, which are operated by PENN Interactive. (3) The total is a mathematical calculation derived from the sum of reportable segments (as well as the Other category). As noted within “Non-GAAP Financial Measures” below, Adjusted EBITDAR, and the related margin, is presented on a consolidated basis outside the financial statements solely as a valuation metric. (4) For the three months ended March 31, 2023, pertains to the following operating leases: (i) AR PENN Master Lease; (ii) 2023 Master Lease; (iii) Margaritaville Lease; and (iv) Greektown Lease. For the three months ended March 31, 2022, pertains to the operating lease components contained within the (i) PENN Master Lease (specific to the land and building components associated with the operations of Hollywood Gaming at Dayton Raceway and Hollywood Casino at Mahoning Valley Race Course); (ii) Meadows Lease; (iii) Margaritaville Lease; (iv) Greektown Lease; and (v) Tropicana Lease (which terminated on September 26, 2022). 41 Table of Contents Consolidated comparison of the three months ended March 31, 2023 and 2022 Revenues The following table presents our consolidated revenues: For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Gaming $ 1,324.6 $ 1,291.2 $ 33.4 2.6 % Food, beverage, hotel, and other 348.7 273.0 75.7 27.7 % Total revenues $ 1,673.3 $ 1,564.2 $ 109.1 7.0 % Gaming revenues for the three months ended March 31, 2023 increased $33.4 million compared to the prior year period, primarily due to increases in our Interactive segment resulting from continued growth in our online revenues. Food, beverage, hotel, and other revenues for the three months ended March 31, 2023 increased $75.7 million compared to the prior year period, primarily due to increases in gaming tax reimbursement amounts charged to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access, as well as the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023 . See “Segment comparison of the three months ended Ma r ch 31, 2023 and 202 2 ” below for more detailed explanations of the fluctuations in revenues. Operating expenses The following table presents our consolidated operating expenses: For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Operating expenses Gaming $ 729.5 $ 686.6 $ 42.9 6.2 % Food, beverage, hotel, and other 244.3 171.9 72.4 42.1 % General and administrative 392.9 295.5 97.4 33.0 % Depreciation and amortization 107.5 118.2 (10.7) (9.1) % Total operating expenses $ 1,474.2 $ 1,272.2 $ 202.0 15.9 % Gaming expenses consist primarily of gaming taxes, payroll, marketing and promotional, and other expenses associated with our gaming operations. Gaming expenses for the three months ended March 31, 2023 increased $42.9 million compared to the prior year period, primarily due to higher third-party service provider fees from higher online gaming activity, higher payroll expenses, and an increase in gaming taxes resulting from the increase in gaming revenue s. Food, beverage, hotel, and other expenses consist primarily of payroll expenses, costs of goods sold and other costs associated with our food, beverage, hotel, retail, racing, and interactive operations, which is inclusive of media. Fo od, beverage, hotel, and other expenses for the three months ended March 31, 2023 increased $72.4 million compared to the prior year period, primarily due to increased volumes of visitors, which resulted in increases in payroll expenses and cost of sales, and increases in gaming tax reimbursement amounts charged to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access, as well as the inclusion of operating expenses related to Barstool subsequent to the Barstool Acquisition on February 17, 2023. General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and lobbying expenses, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include stock-based compensation expense; pre-opening expenses; acquisition and transaction costs; gains and losses on disposal of assets; insurance recoveries, net of deductible charges; changes in the fair value of our contingent purchase price obligations; expense associated with cash-settled stock-based awards (including changes in fair value thereto); and rent expense associated with our triple net operating leases. 42 Table of Contents For the three months ended March 31, 2023, general and administrative expenses increased by $97.4 million compared to the prior year period, primarily due to an increase in rent expense associated with triple net operating leases of $85.9 million stemming from the execution on February 21, 2023 of both the AR PENN Master Lease and 2023 Master Lease. The impact of these aforementioned lease transactions resulted in the classification of all land components and building components to be operating leases of which the associated rent expense is recorded to “General and Administrative” as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements. Depreciation and amortization for the three months ended March 31, 2023 decreased $10.7 million compared to the prior year period, primarily due to a $10.4 million decrease in amortization costs stemming from the execution on February 21, 2023 of both the AR PENN Master Lease and 2023 Master Lease. Prior to the execution of the aforementioned lease transactions, primarily all of the land components contained within the PENN Master Lease and the land and building components contained within the Perryville Lease (as defined in “Liquidity and Capital Resources” ) were classified as finance leases of which amortization of the lease right-of-use assets (“ROU”) were recorded to “Depreciation and Amortization” expense. The impact of these aforementioned lease transactions resulted in the classification of all land components and building components associated with the AR PENN Master Lease to be operating leases with the associated rent expense recorded to “General and Administrative” as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements. Other income (expenses) The following table presents our consolidated other income (expenses): For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Other income (expenses) Interest expense, net $ (113.0) $ (161.3) $ 48.3 (29.9) % Interest income $ 10.4 $ 0.5 $ 9.9 1,980.0 % Income from unconsolidated affiliates $ 2.6 $ 8.7 $ (6.1) (70.1) % Gain on Barstool Acquisition, net $ 83.4 $ — $ 83.4 N/M Gain on REIT transactions, net $ 500.8 $ — $ 500.8 N/M Other $ (1.0) $ (40.7) $ 39.7 (97.5) % Income tax expense $ (167.9) $ (47.6) $ (120.3) 252.7 % N/M - Not meaningful Interest expense, net decreased by $48.3 million for the three months ended March 31, 2023 as compared to the prior year period, primarily due to a net decrease in Master Lease interest costs due to changes in lease classifications as a result of the amendment of the PENN Master Lease, as described in “Liquidity and Capital Resources” , of $65.1 million, partially offset by an increase in interest expense on our Senior Secured Credit Facilities of $16.2 million, related to an overall increase in interest rates. Interest income increased by $9.9 million for the three months ended March 31, 2023 as compared to the prior year period, primarily due to executing on our short term investing strategy utilizing money market funds which commenced during the year ended December 31, 2022. Income from unconsolidated affiliates relates principally to our investment in Barstool (prior to the Barstool Acquisition on February 17, 2023) and our Kansas Entertainment and Freehold Raceway joint ventures. The $6.1 million decrease for the three months ended March 31, 2023, compared to the prior year period, is due to a lower income earned from our investments in unconsolidated affiliates and only including income from Barstool from January 1, 2023 through February 16, 2023. Gain on Barstool Acquisition, net relates to the gain on our acquisition of all the outstanding shares of Barstool common stock not already owned by us on February 17, 2023 as described in Note 6, “Acquisition s ” in the notes to our unaudited Consolidated Financial Statements. The gain consists of $66.5 million related to the remeasurement of our equity investment immediately prior to the acquisition date and $16.9 million related to the acquisition of the remaining 64% of Barstool common stock. Gain on REIT transactions, net relates to the amendment and restatement of the PENN Master Lease which resulted in the (i) derecognition of $1.6 billion of financing obligations and (ii) derecognition of $1.1 billion of Property and Equipment, net. In conjunction with entering into the 2023 Master Lease, the individual triple net leases associated with the Meadows Lease (as such terms are defined in “Liquidity and Capital Resources” ) and the Perryville Lease (as such terms are defined in “Liquidity and Capital Resources” ) were terminated which resulted in a $6.5 million loss from the derecognition of ROU assets and lease 43 Table of Contents liabilities. See Note 9, “Leases” to our unaudited Consolidated Financial Statements for additional details on both of these transactions. Other primarily relates to realized and unrealized gains and losses on equity securities, held by PENN Interactive, unrealized gains and losses related to certain Barstool shares (prior to the Barstool Acquisition on February 17, 2023) as well as miscellaneous income and expense items. Equity securities were provided to the Company in conjunction with entering into multi-year agreements with sports betting operators for online sports betting and iCasino market access across our portfolio. For the three m onths ended March 31, 2023, other income primarily consisted of an unrealized holding loss of $3.2 million compared to an unrealized holding loss of $38.7 million for the three m onths ended March 31, 2022. Income tax expense was $167.9 million for the three months ended March 31, 2023, compared to $47.6 million for the three months ended March 31, 2022. Our effective tax rate (income taxes as a percentage of income from operations before income taxes) including discrete items was 23.8% for the three months ended March 31, 2023 as compared to 48.0% for the three months ended March 31, 2022 . The change in the effective rate for the three months ended March 31, 2023 as compared to the prior year period was primarily due to the increase in pre-tax income. Our effective income tax rate can vary each reporting period depending on, among other factors, the geographic and business mix of our earnings, changes to our valuation allowance, and the level of our tax credits. Certain of these and other factors, including our history and projections of pre-tax earnings, are considered in assessing our ability to realize our net deferred tax assets. Segment comparison of the three months ended March 31, 2023 and 2022 Northeast Segment For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Gaming $ 629.3 $ 599.1 $ 30.2 5.0 % Food, beverage, hotel, and other 71.2 59.4 11.8 19.9 % Total revenues $ 700.5 $ 658.5 $ 42.0 6.4 % Adjusted EBITDAR $ 212.9 $ 205.2 $ 7.7 3.8 % Adjusted EBITDAR margin 30.4 % 31.2 % -80 bps The Nort heast segment’s revenues for the three months ended March 31, 2023 increased by $42.0 million over the prior year period, primarily due to an increase in visitation at the Northeast segment’s properties’ casinos, hotels and food and beverage outlets, partially offset by a decrease in total revenues at our Hollywood Casino Lawrenceburg property due to increased competition in the tri-state region. For the three months ended March 31, 2023, the Northeast segment’s Adjusted EBITDAR increased $7.7 million, and Ad justed EBITDAR margin decreased to 30.4%, primarily due to increased gaming and non-gaming revenues which resulted in increased labor costs and cost of sales. 44 Table of Contents South Segment For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Gaming $ 252.1 $ 278.6 $ (26.5) (9.5) % Food, beverage, hotel, and other 62.7 62.8 (0.1) (0.2) % Total revenues $ 314.8 $ 341.4 $ (26.6) (7.8) % Adjusted EBITDAR $ 123.6 $ 146.5 $ (22.9) (15.6) % Adjusted EBITDAR margin 39.3 % 42.9 % -360 bps The South segment’s revenues for the three months ended March 31, 2023 decreased by $26.6 million from the prior year period, primarily due to a decrease in visitation at many of our properties. During the three months ended March 31, 2022, there were COVID restrictions in place in downtown New Orleans which increased visitation to our Hollywood Casino Gulf Coast, Boomtown New Orleans, and L’Auberge Baton Rouge properties. Additionally, significant ice storms at Hollywood Casino Tunica and tornados near Ameristar Vicksburg affected visitation at those properties during the three months ended March 31, 2023. Furthermore, L’Auberge Lake Charles was affected during the three months ended March 31, 2023 by a new competitor beginning operations in December 2022. F or the three months ended March 31, 2023, the South segment’s Adjusted EBITDAR decreased $22.9 million and Adjusted EBITDAR margin decreased to 39.3% primarily due to the decrease in gaming revenue described above. West Segment For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Gaming $ 94.4 $ 94.1 $ 0.3 0.3 % Food, beverage, hotel, and other 35.3 46.8 (11.5) (24.6) % Total revenues $ 129.7 $ 140.9 $ (11.2) (7.9) % Adjusted EBITDAR $ 49.1 $ 51.2 $ (2.1) (4.1) % Adjusted EBITDAR margin 37.9 % 36.3 % 160 bps The West segment’s revenues for the three months ended March 31, 2023 decreased by $11.2 million from the prior year period, primarily due to the three months ended March 31, 2023 not including any revenue for Tropicana Las Vegas as the operations were sold on September 26, 2022, partially offset by an increase in revenue at Zia Park Casino. For the three months ended March 31, 2023, the West segment’s Adjusted EBITDAR decreased $2.1 million primarily due to the sale of Tropicana Las Vegas, discussed above. For the three months ended March 31, 2023, the West segment’s Adjusted EBITDAR margin increased to 37.9% primarily driven by increased revenues at Zia Park Casino. 45 Table of Contents Midwest Segment For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Gaming $ 265.9 $ 256.5 $ 9.4 3.7 % Food, beverage, hotel, and other 29.4 26.4 3.0 11.4 % Total revenues $ 295.3 $ 282.9 $ 12.4 4.4 % Adjusted EBITDAR $ 125.6 $ 125.5 $ 0.1 0.1 % Adjusted EBITDAR margin 42.5 % 44.4 % -190 bps The Midwest segment’s revenues for the three months ended March 31, 2023 increased by $12.4 million over the prior year period, due to increased visitation at the Midwest segment properties’ casinos, hotels, and food and beverage outlets. For the three months ended March 31, 2023, the Midwest segment’s Adjusted EBITDAR increased $0.1 million primarily due to increased gaming and non-gaming revenues, partially offset by higher labor costs and cost of sales, reflected in A djusted EBITDAR margin, which decreased by 190 basis points to 42.5%. Interactive Segment For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Gaming $ 82.9 $ 62.9 $ 20.0 31.8 % Food, beverage, hotel, and other 150.6 78.6 72.0 91.6 % Total revenues $ 233.5 $ 141.5 $ 92.0 65.0 % Adjusted EBITDAR $ (5.7) $ (10.0) $ 4.3 (43.0) % Adjusted EBITDAR margin (2.4) % (7.1) % 470 bps The Interactive segment’s revenues for the three months ended March 31, 2023 increased by $92.0 million over the prior year period, due to the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023 as well as an increase in gaming revenue related to operating in additional jurisdictions, inclusive of the launch of theScore Bet in April 2022. Additionally, revenues are inclusive of a tax gross-up of $92.3 million for the three months ended March 31, 2023, compared to $50.3 million for the three months ended March 31, 2022, respectively. For the three months ended March 31, 2023, the Interactive segment’s Adjusted EBITDAR increased primarily due to increases in total revenues due to operating in additional gaming jurisdictions over the prior year. Adjusted EBITDAR margin increased due to revenues increasing at a greater rate year-over-year than the rate at which operating expenses increased. Other For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Revenues Food, beverage, and other $ 5.8 $ 7.3 $ (1.5) (20.5) % Total revenues $ 5.8 $ 7.3 $ (1.5) (20.5) % Adjusted EBITDAR $ (27.3) $ (23.7) $ (3.6) 15.2 % Other consists of the Company’s stand-alone racing operations, as well as corporate overhead costs, which primarily includes certain expenses such as payroll, professional fees, travel expenses and other general and administrative expenses that 46 Table of Contents do not directly relate to or have not otherwise been allocated. Revenues for the three months ended March 31, 2023 have decreased as compared to the prior ye ar corresponding periods, primarily due to a decrease in racing revenues. Changes in Adjusted EBITDAR for the three months ended March 31, 2023 primarily relate to an increase in payroll expenses. Non-GAAP Financial Measures Use and Definitions In addition to GAAP financial measures, management uses Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDA margin, and Adjusted EBITDAR margin as non-GAAP financial measures. These non-GAAP financial measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. Each of these non-GAAP financial measures is not calculated in the same manner by all companies and, accordingly, may not be an appropriate measure of comparing performance among different companies. We define Adjusted EBITDA as earnings before interest expense, net; interest income; income taxes; depreciation and amortization; stock-based compensation; debt extinguishment charges; impairment losses; insurance recoveries, net of deductible charges; changes in the estimated fair value of our contingent purchase price obligations; gain or loss on disposal of assets; the difference between budget and actual expense for cash-settled stock-based awards; pre-opening expenses; and other. Adjusted EBITDA excludes (i) non-cash gains/losses associated with REIT transactions (including our transactions with GLPI entered into on February 21, 2023 as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements); and (ii) non-cash gains/losses associated with partial and step acquisitions as measured in accordance with ASC 805 “Business Combinations” (including the Barstool Acquisition). Adjusted EBITDA is inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as interest expense, net; income taxes; depreciation and amortization; and stock-based compensation expense) added back for Barstool Sports, Inc. (prior to our acquisition of Barstool on February 17, 2023) and our Kansas Entertainment, LLC joint venture. Adjusted EBITDA is inclusive of rent expense associated with our triple net operating leases with our REIT landlords. Although Adjusted EBITDA includes rent expense associated with our triple net operating leases, we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our consolidated results of operations. We define Adjusted EBITDA margin as Adjusted EBITDA divided by consolidated revenues. Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We present Adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, and to fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare operating performance and value companies within our industry. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their Adjusted EBITDA calculations certain corporate expenses that do not relate to the management of specific casino properties. However, Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a commonly used measure of performance in the gaming industry and that it is considered by many to be a key indicator of the Company’s operating results. We define Adjusted EBITDAR as Adjusted EBITDA (as defined above) plus rent expense associated with triple net operating leases (which is a normal, recurring cash operating expense necessary to operate our business). Adjusted EBITDAR is presented on a consolidated basis outside the financial statements solely as a valuation metric. Management believes that Adjusted EBITDAR is an additional metric traditionally used by analysts in valuing gaming companies subject to triple net leases since it eliminates the effects of variability in leasing methods and capital structures. This metric is included as a supplemental disclosure because (i) we believe Adjusted EBITDAR is traditionally used by gaming operator analysts and investors to determine the equity value of gaming operators and (ii) Adjusted EBITDAR is one of the metrics used by other financial analysts in valuing our business. We believe Adjusted EBITDAR is useful for equity valuation purposes because (i) its calculation isolates the effects of financing real estate; and (ii) using a multiple of Adjusted EBITDAR to calculate enterprise value allows for an adjustment to the balance sheet to recognize estimated liabilities arising from operating leases related to real estate. However, Adjusted EBITDAR when presented on a consolidated basis is not a financial measure in accordance with GAAP, and should not be viewed as a measure of overall operating performance or considered in isolation or as an alternative to net income because it excludes the rent expense associated with our triple net operating leases and is provided for the limited purposes referenced herein. 47 Table of Contents Adjusted EBITDAR margin is defined as Adjusted EBITDAR on a consolidated basis divided by revenues on a consolidated basis. Adjusted EBITDAR margin is presented on a consolidated basis outside the financial statements solely as a valuation metric. We further define Adjusted EBITDAR margin by reportable segment as Adjusted EBITDAR for each segment divided by segment revenues. Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures The following table includes a reconciliation of net income, which is determined in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures, as well as related margins: For the three months ended March 31, (dollars in millions) 2023 2022 Net income $ 514.4 $ 51.6 Income tax expense 167.9 47.6 Income from unconsolidated affiliates (2.6) (8.7) Interest expense, net 113.0 161.3 Interest income (10.4) (0.5) Gain on Barstool Acquisition, net (83.4) — Gain on REIT transactions, net (500.8) — Other expenses 1.0 40.7 Operating income 199.1 292.0 Stock-based compensation (1) 16.5 17.0 Cash-settled stock-based award variance (1)(2) (2.9) (2.9) Gain on disposal of assets (1) — (0.1) Contingent purchase price (1) 0.3 (0.1) Pre-opening expenses (1) — 1.5 Depreciation and amortization 107.5 118.2 Insurance recoveries, net of deductible charges (1) — (8.8) Income from unconsolidated affiliates 2.6 8.7 Non-operating items of equity method investments (3) 4.5 1.8 Other expenses (1)(3)(4) 4.6 7.3 Adjusted EBITDA 332.2 434.6 Rent expense associated with triple net operating leases (1) 146.0 60.1 Adjusted EBITDAR $ 478.2 $ 494.7 Net income margin 30.7 % 3.3 % Adjusted EBITDA margin 19.9 % 27.8 % Adjusted EBITDAR margin 28.6 % 31.6 % ( 1) These items are included in “General and administrative” within the Company’s unaudited Consolidated Statements of Operations. (2) Our cash-settled stock-based awards are adjusted to fair value each reporting period based primarily on the price of the Company’s common stock. As such, significant fluctuations in the price of the Company’s common stock during any reporting period could cause significant variances to budget on cash-settled stock-based awards. (3) Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with Barstool prior to us acquiring the remaining 64% of Barstool common stock (see Note 6, “ Acq uisition s ” in the notes to our unaudited Consolidated Financial Statements), and our Kansas Entertainment joint venture. (4) Consists of non-recurring acquisition and transaction costs, and finance transformation costs associated with the implementation of our new Enterprise Resource Management system. 48 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity and capital resources have been and are expected to be cash flow from operations, borrowings from banks, and proceeds from the issuance of debt and equity securities. Our ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, acquisitions or investments, funding of construction for development projects, and our compliance with covenants contained under our debt agreements. For the three months ended March 31, Change (dollars in millions) 2023 2022 $ % Net cash provided by operating activities $ 147.7 $ 224.9 $ (77.2) (34.3)% Net cash used in investing activities $ (378.2) $ (39.6) $ (338.6) 855.1% Net cash used in financing activities $ (83.0) $ (239.2) $ 156.2 (65.3)% Operating Cash Flow Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but can be affected by changes in working capital, the timing of significant interest payments, tax payments or refunds, and distributions from unconsolidated affiliates. Net cash provided by operating activities decreased by $77.2 million for the three months ended March 31, 2023, primarily due to a negative impact in changes in working capital related to accrued racing liabilities, accrued capital expenditures, payroll related liabilities, and timing of payments to third party service providers. Investing Cash Flow Cash used in investing activities for the three months ended March 31, 2023 of $378.2 million is primarily due to consideration paid for the Barstool Acquisition, net of cash acquired, of $314.6 million and capital expenditures of $63.2 million. For the three months ended March 31, 2022, cash used in investing activities of $39.6 million primarily related to capital expenditures of $65.6 million offset by Hurricane Laura insurance proceeds. Capital Expenditures Capital expenditures are accounted for as either project capital (new facilities or expansions) or maintenance (replacement) which is inclusive of projects such as our Barstool branded retail sportsbooks, our cashless, cardless and contactless technology and hotel renovations. Cash provided by operating activities, as well as cash available under our Amended Revolving Credit Facility and Revolving Facility, was available to fund our capital expenditures for the three months ended March 31, 2023 and 2022, as applicable. Capital expenditures for the three months ended March 31, 2023 and 2022 were $63.2 million and $65.6 million, respectively. For the year ending December 31, 2023, our anticipated capital expenditures, inclusive of insurance proceeds, are approximately $413 million, which include capital expenditures of $63.2 million incurred for the three months ended March 31, 2023 and capital expenditures required under our Triple Net Leases, which require us to spend a specified percentage of total revenues. Financing Cash Flow For the three months ended March 31, 2023 and 2022, net cash used in financing activities totaled $83.0 million and $239.2 million respectively, primarily related to repurchases of our common stock of $50.0 million and $175.1 million, respectively. At March 31, 2023, we had $2.8 billion in aggregate principal amount of indebtedness, including $1.5 billion outstanding under our Amended Credit Facilities, $400.0 million outstanding under our 5.625% senior unsecured notes, $400.0 million outstanding under our 4.125% senior unsecured notes, $330.5 million outstanding under our 2.75% Convertible Notes, and $163.5 million outstanding in other long-term obligations. No amounts were drawn on our Amended Revolving Credit Facility. We have no debt maturing prior to 2026. As of March 31, 2023 we had conditional obligations under letters of credit issued 49 Table of Contents pursuant to the Amended Credit Facilities with face amounts aggregating to $23.5 million resulting in $976.5 million available borrowing capacity under our Amended Revolving Credit Facility. Covenants Our Amended Credit Facilities, 5.625% Notes and 4.125% Notes require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Amended Credit Facilities, 5.625% Notes and 4.125% Notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the AR PENN Master Lease, the 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and the Pinnacle Master Lease (all of which are defined below), each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an/ acceleration of payment terms. As of March 31, 2023, the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with the SEC. See Note 8, “Long-term Debt,” in the notes to our unaudited Consolidated Financial Statements for additional information of the Company’s debt and other long-term obligations. Share Repurchase Authorization On February 1, 2022, the Board of Directors of PENN approved a $750.0 million share repurchase authorization, which expires on January 31, 2025 (the “February 2022 Authorization”). On December 6, 2022, a second share repurchase program was authorized for an additional $750 million (the “December 2022 Authorization”). The December 2022 Authorization expires on December 31, 2025. The Company plans to utilize the remaining capacity under the February 2022 Authorization prior to effecting any repurchases under the December 2022 Authorization. Repurchases by the Company will be subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the Company is required to repurchase and the repurchase authorization may be suspended or discontinued at any time without prior notice. During the three months ended March 31, 2023, the Company repurchased 1,646,963 shares of its common stock in open market transactions for $50.0 million at an average price of $30.36 per share under the February 2022 Authorization. The cost of all repurchased shares is recorded as “Treasury stock” within our unaudited Consolidated Balance Sheets. Subsequent to the quarter ended March 31, 2023, the Company repurchased 647,319 shares of its common stock at an average price of $29.21 per share for an aggregate amount of $18.9 million. The remaining availability under February 2022 Authorization and our December 2022 Authorization was $80.4 million and $750.0 million, respectively, as of May 3, 2023. Triple Net Leases The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the AR PENN Master Lease, 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and Pinnacle Master Lease (as such terms are defined in Note 9, “Leases,” in the notes to our unaudited Consolidated Financial Statements, and collectively referred to as the “Master Leases”), with GLPI. We refer to the Master Leases, Perryville Lease (where applicable), the Meadows Lease (where applicable), the Margaritaville Lease, the Greektown Lease, the Tropicana Lease (terminated September 26, 2022) and the Morgantown Lease, collectively, as our “Triple Net Leases”. The Company’s Triple Net Leases are accounted for as either operating leases, finance leases, or financing obligations. On February 21, 2023, as described in Note 9, “Leases” in the notes to our unaudited Consolidated Financial Statements, the Company and GLPI entered into the AR PENN Master Lease, effective January 1, 2023, to (i) remove the land and buildings for Aurora, Joliet, Columbus, Toledo and the M Resort, and (ii) make associated adjustments to the rent after which the initial rent in the AR PENN Master Lease will be $284.1 million, consisting of $208.2 million of building base rent, $43.0 million of land base rent and $32.9 million of percentage rent (as such terms are defined in the AR PENN Master Lease). Subsequent to the execution of the AR PENN Master Lease, the Company leases real estate assets associated with 14 of the 50 Table of Contents gaming facilities used in its operations via a triple net master lease. The current term of the AR PENN Master Lease expires on October 31, 2033 and thereafter contains three renewal terms of five years each on the same terms and conditions, exercisable at the Company’s option. Concurrent with the execution of the AR PENN Master Lease, the Company and GLPI entered into the 2023 Master Lease, effective January 1, 2023, specific to the properties associated with Aurora, Joliet, Columbus, Toledo, M Resort, Meadows, and Perryville and the Master Development Agreement. The 2023 Master Lease has an initial term through October 31, 2033 with three subsequent five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The 2023 Master Lease terminated the individual triple net leases associated with Meadows and Perryville. The 2023 Master Lease and AR PENN Master Lease are cross-defaulted, cross-collateralized, and coterminous, and subject to a parent guarantee. The 2023 Master Lease includes the 2023 Master Lease Base Rent equal to $232.2 million and the Master Development Agreement contains additional rent (together with the 2023 Master Lease Base Rent, the “2023 Master Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for the Aurora Project and (ii) a percentage, based on the then-current GLPI stock price, of any project funding received by PENN from GLPI for the Other Development Projects. The Master Development Agreement provides that GLPI will fund, upon PENN’s request, up to $225 million for the Aurora Project and up to $350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Master Development Agreement. These funding obligations of GLPI expire on January 1, 2026. The 2023 Master Lease Rent will be subject to a one-time increase of $1.4 million, effective November 1, 2027. The 2023 Master Lease Rent will be further subject to a fixed escalator of 1.5% on November 1, 2023 and annually thereafter. The Master Development Agreement provides that PENN may elect not to proceed with a development project prior to GLPI’s commencement of any equity or debt offering or credit facility draw intended to fund such a project or after such time in certain instances, provided that GLPI will be reimbursed for all costs and expenses incurred in connection with such discontinued project. The Aurora Project and the Other Development Projects are all subject to necessary regulatory and other government approvals. Under our Triple Net Leases, in addition to lease payments for the real estate assets, we are required to pay the following, among other things: (i) all facility maintenance; (ii) all insurance required in connection with the leased properties and the business conducted on the leased properties; (iii) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (iv) all tenant capital improvements; and (v) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Additionally, our Triple Net Leases are subject to annual escalators and periodic percentage rent resets, as applicable. See Note 9, “Leases,” in the notes to our unaudited Consolidated Financial Statements for further discussion and disclosure related to the Company’s leases. Payments to our REIT Landlords under Triple Net Leases Total payments made to our REIT Landlords, GLPI and VICI, were as follows: For the three months ended March 31, (in millions) 2023 2022 AR PENN Master Lease $ 71.1 $ — 2023 Master Lease 58.0 — PENN Master Lease — 119.2 Pinnacle Master Lease 84.1 82.5 Perryville Lease — 1.9 Meadows Lease — 6.2 Margaritaville Lease 6.4 5.9 Greektown Lease 12.8 12.8 Morgantown Lease 0.8 0.8 Total (1) $ 233.2 $ 229.3 (1) For the three months ended March 31, 2022, rent payable under the Tropicana Lease was nominal. Therefore, it has been excluded from the table above. The Tropicana Lease was terminated on September 26, 2022. Outlook Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our Amended Credit Facilities, will be adequate to meet our anticipated obligations under our Triple 51 Table of Contents Net Leases, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, our ability to generate sufficient cash flow from operations will depend on a range of economic, competitive and business factors, many of which are outside our control. We cannot be certain: (i) of the impact of global supply chain disruptions, price inflation, rising interest rates on the U.S. economy, slowing economic growth, geopolitical uncertainty, and instability in the banking sector following multiple bank failures; (ii) that our anticipated earnings projections will be realized; (iii) that we will achieve the expected synergies from our acquisitions; and (iv) that future borrowings will be available under our Amended Credit Facilities or otherwise will be available in the credit markets to enable us to service our indebtedness or to make anticipated capital expenditures. We caution that the performance and trends seen across our portfolio may not continue. In addition, while we anticipated that a significant amount of our future growth would come through the pursuit of opportunities within other distribution channels, such as media, retail and online sports betting, iCasino, and social gaming; from acquisitions of gaming properties at reasonable valuations; greenfield projects; development projects; and jurisdictional expansions and property expansion in under-penetrated markets; there can be no assurance that this will be the case. If we consummate significant acquisitions in the future or undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. See Part I, Item 1A. “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 2022 for a discussion of additional risks related to the Company’s capital structure. We have historically maintained a capital structure comprised of a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally-generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity. CRITICAL ACCOUNTING ESTIMATES A complete discussion of our critical accounting estimates is included in our Form 10-K for the year ended December 31, 2022. Other than discussed below, there have been no significant changes in our critical accounting estimates during the three months ended March 31, 2023. Leases The assessment of lease classifications of land and building components contained within each of the AR PENN Master Lease and the 2023 Master Lease (as described in Note 9, “Leases,” in the notes to our unaudited Consolidated Financial Statements) required management to make significant estimates and assumptions. These included estimates for the (i) fair value of the land and building assets; (ii) the term of the lease, including whether any renewal terms are reasonably assured of being exercised; and (iii) the discount rate (collateralized incremental borrowing rate) over the lease term. Additionally, management assessed whether the agreements should be accounted for as a separate or combined contract and whether the AR PENN Master Lease should be considered a lease modification or a new lease. Business Combination In connection with the Company’s acquisition of Barstool (as described in Note 6, “Acquisition s ” in the notes to our unaudited Consolidated Financial Statements), valuations were completed to determine the allocation of the purchase price. The factors considered in the valuation include data gathered as a result of the Company’s due diligence in connection with the acquisition, projections for future operations, and data obtained from third-party valuation specialists, as deemed appropriate. We allocated the business combination purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values is recorded as goodwill. Accounting for this business combination required management to make significant estimates and assumptions, including our estimate of intangible assets, such as the Barstool trade name, advertising relationships, other tradenames and brands, and customer relationships. Although we believe the estimates and assumptions made have been reasonable and appropriate, they are inherently uncertain. The most significant of the assumptions used in the valuations included: (1) revenue growth; (2) discount rates; (3) effective income tax rates; (4) future terminal values; and (5) gaming royalties for the use of the Barstool tradename assumptions. These assumptions were developed based on historical trends in the current competitive markets in which Barstool and PENN operate as well as projections of future performance. Significant assumptions with respect to our trade names and customer relationships involved selecting the appropriate royalty rates and cost estimates for replacement cost analyses. Advertising relationships were valued utilizing a with-and-without method. Where a relief-from-royalty method was utilized, significant assumptions included projecting revenues attributable to the asset, royalty rates, obsolescence factors, estimated synergies and discount rates. Where a replacement cost method was utilized, significant assumptions included estimating cost and time required to replace, determining the opportunity cost over the replacement period, and estimating a mark-up on development costs. Where a with-and-without method was utilized, significant assumptions included projecting 52 Table of Contents revenues with direct advertising relationships and projecting revenues without direct advertising relationships, and determining discount rates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS For information with respect to new accounting pronouncements and the impact of these pronouncements on our unaudited Consolidated Financial Statements, see Note 3, “New Accounting Pronouncements,” in the notes to our unaudited Consolidated Financial Statements. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward-looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “goal,” “seeks,” “may,” “will,” “should,” or “anticipates” or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward-looking statements include, but are not limited to, statements regarding: the Company’s expectations of future results of operations and financial condition, the assumptions provided regarding the guidance, including the scale and timing of the Company’s product and technology investments; the Company’s anticipated share repurchases; the Company’s expectations regarding results, and the impact of competition, in retail/mobile/online sportsbooks, iCasino, social gaming, and retail operations; the Company’s development and launch of its Interactive segment’s products in new jurisdictions and enhancements to existing Interactive segment products, including the content for the Barstool Sportsbook and Casino and theScore Bet Sportsbook and Casino apps and the migration of the Barstool Sportsbook into both our proprietary player account management system and risk and trading platforms; the Company’s expectations regarding its acquisition of Barstool Sports Inc. (“Barstool”) and the future success of its products; the Company’s expectations with respect to the integration and synergies related to the Company’s integration of Score Media and Gaming, Inc. and Barstool; the continued growth and monetization of the Company’s media business; the Company’s expectations with respect to the ongoing introduction and the potential benefits of the cashless, cardless and contactless (3C’s) technology; the Company’s development projects, including the prospective development projects at Hollywood Casinos Aurora, Joliet, Columbus, and the M Resort Spa Casino; our ability to obtain financing for our development projects on attractive terms; and the timing, cost and expected impact of planned capital expenditures on the Company’s results of operations; the actions of regulatory, legislative, executive or judicial decisions at the federal, state, provincial or local level with regard to our business and the impact of any such actions. Such statements are all subject to risks, uncertainties and changes in circumstances that could significantly affect the Company’s future financial results and business. Accordingly, the Company cautions that the forward-looking statements contained herein are qualified by important factors that could cause actual results to differ materially from those reflected by such statements. Such factors include: the effects of economic and market conditions in the markets in which the Company operates; competition with other entertainment, sports content, and casino gaming experiences; the timing, cost and expected impact of product and technology investments; risks relating to international operations, permits, licenses, financings, approvals and other contingencies in connection with growth in new or existing jurisdictions; and additional risks and uncertainties described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 , subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the U.S. Securities and Exchange Commission. The Company does not intend to update publicly any forward-looking statements except as required by law. Considering these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q may not occur.