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 September 30, 2023, PENN operated 43 properties in 20 states, online sports betting in 18 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 August 2023, PENN entered into a transformative, exclusive long-term strategic alliance with ESPN, Inc. and ESPN Enterprises, Inc. (together, “ESPN”) relating to online sports betting within the United States. In November 2023, pending regulatory approval, the existing Barstool Sportsbook will be rebranded and launched across all online platforms in the United States as ESPN BET, and our online product will include a Hollywood-branded integrated iCasino where permitted. PENN’s ability to leverage the leading sports media brands in the United States (ESPN) and Canada (theScore) will position us to significantly expand our digital footprint and efficiently grow our customer ecosystem. This highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by our investment in market-leading retail casinos, sports media assets and technology, including a proprietary state-of-the-art, fully integrated digital sports and iCasino betting platform and an in-house iCasino content studio. PENN’s portfolio is further bolstered by our industry-leading PENN Play TM customer loyalty program, which offers our over 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 with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) (“GLPI”), a real estate investment trust (“REIT”), and include 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”). Recent Acquisitions, Dispositions, Development Projects, and Other On February 17, 2023, we acquired the remaining 64% of the outstanding shares of Barstool Sports, Inc. (“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 and determined the fair value of Barstool to be $660.0 million based on market participant assumptions, and Barstool became an indirect wholly owned subsidiary of PENN. See Note 6, “Acquisitions and Dispositions” and Note 13, “Stockholders’ Equity and Stock-Based Compensation” in the notes to our unaudited Consolidated Financial Statements for further discussion. On August 8, 2023, PENN entered into a Sportsbook Agreement (the “Sportsbook Agreement”) with ESPN, which provides for a long-term strategic relationship between PENN and ESPN relating to online sports betting in the United States. Pursuant to the Sportsbook Agreement, PENN will rebrand its existing Barstool Sportsbook across all online platforms in the United States as ESPN BET (the “Sportsbook”) and will oversee daily operations of the Sportsbook. The Sportsbook will be deeply integrated within the broader ESPN editorial, content, digital product and sports programming ecosystem, with access to ESPN’s industry leading audience and database. In addition to the Sportsbook Agreement, on August 8, 2023, PENN and ESPN, Inc. entered into an Investment Agreement (the “Investment Agreement”) providing for the issuance to ESPN, Inc. of certain warrants to purchase shares of PENN common stock, par value $0.01 per share, and setting forth certain other governance rights of ESPN, Inc., as discussed in Note 12, “Commitments and Contingencies” in the notes to our unaudited Consolidated Financial Statements. In connection with PENN’s decision to rebrand our online sports betting business from Barstool Sportsbook to ESPN BET pursuant to the Sportsbook Agreement as discussed above, PENN concurrently entered into a stock purchase agreement with 44 Table of Contents David Portnoy (the “Barstool SPA”) pursuant to which PENN sold 100% of the outstanding shares of Barstool to David Portnoy in exchange for nominal cash consideration (one dollar) and certain non-compete and other restrictive covenants. Pursuant to the Barstool SPA, PENN has the right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool. In connection with the Barstool SPA, we recognized a pre-tax loss on disposal of $923.2 million (inclusive of $714.8 million in goodwill and intangible assets write-offs and a $70.0 million indemnification liability) during the third quarter of 2023. See Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements. For information on the tax-related impacts from the Barstool transaction, see Note 11, “Income Taxes” in the notes to our unaudited Consolidated Financial Statements. 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. 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 up to $225 million for the Aurora Project and, upon PENN’s request, 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 acquisition of theScore and our Sportsbook Agreement with ESPN reflects 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; 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. 45 Table of Contents We continuously adjust operations, offerings, and cost structures 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, the expansion of properties and other business lines as well as through partnerships with third-party operators, such as Live Nation Entertainment and Choice Hotels International, Inc. Acquisitions such as theScore and our Sportsbook Agreement with ESPN 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; iCasinos and social casinos; 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 and nine months ended September 30, 2023 and 2022” section below for discussions of the impact of competition on our results of operations by reportable segment. 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 85% and 83% of our gaming revenue for the nine months ended September 30, 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, 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 (loss) 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. 46 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. We owned 36% of Barstool common stock prior to the February 17, 2023 Barstool Acquisition (as defined in Note 6, “Acquisitions and Dispositions ” ), pursuant to which we acquired the remaining 64% of Barstool common stock. On August 8, 2023, we entered into the Barstool SPA, and we sold 100% of the outstanding shares of Barstool common stock. 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. 47 Table of Contents RESULTS OF OPERATIONS The following table highlights our revenues, net income (loss), 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 (loss) 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 (loss) to Adjusted EBITDA and Adjusted EBITDAR and related margins. For the three months ended September 30, For the nine months ended September 30, 2023 2022 2023 2022 Revenues: Northeast segment $ 687.0 $ 685.4 $ 2,075.5 $ 2,028.8 South segment 308.2 329.8 931.3 1,009.8 West segment 135.1 156.5 394.8 451.2 Midwest segment 293.4 298.4 882.0 877.6 Interactive segment 196.3 158.7 687.3 455.1 Other (1) 4.5 4.2 16.5 17.4 Intersegment eliminations (2) (5.1) (8.0) (19.9) (23.8) Total $ 1,619.4 $ 1,625.0 $ 4,967.5 $ 4,816.1 Net income (loss) $ (725.1) $ 123.2 $ (132.6) $ 200.9 Adjusted EBITDAR: Northeast segment $ 208.3 $ 217.9 $ 638.5 $ 637.5 South segment 136.6 139.9 381.1 429.7 West segment 54.7 60.5 153.4 171.4 Midwest segment 123.8 129.4 376.5 386.2 Interactive segment (50.2) (49.3) (68.7) (80.1) Other (1) (28.1) (26.5) (80.7) (73.6) Total (3) 445.1 471.9 1,400.1 1,471.1 Rent expense associated with triple net operating leases (4) (146.6) (31.5) (439.0) (119.6) Adjusted EBITDA $ 298.5 $ 440.4 $ 961.1 $ 1,351.5 Net income (loss) margin (44.8) % 7.6 % (2.7) % 4.2 % Adjusted EBITDAR margin 27.5 % 29.0 % 28.2 % 30.5 % Adjusted EBITDA margin 18.4 % 27.1 % 19.3 % 28.1 % (1) The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, Sam Houston and Valley Race Park, 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. Corporate overhead costs were $27.0 million and $26.5 million for the three months ended September 30, 2023 and 2022, respectively, and $78.1 and $74.9 million for the nine months ended September 30, 2023 and 2022, respectively. (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 and nine months ended September 30, 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 and nine months ended September 30, 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 Gaming at 48 Table of Contents Mahoning Valley Race Course); (ii) Meadows Lease; (iii) Margaritaville Lease; (iv) Greektown Lease; and (v) Tropicana Lease (which terminated on September 26, 2022). Consolidated comparison of the three and nine months ended September 30, 2023 and 2022 Revenues The following table presents our consolidated revenues: For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 1,252.1 $ 1,317.5 $ (65.4) (5.0) % $ 3,869.5 $ 3,934.3 $ (64.8) (1.6) % Food, beverage, hotel, and other 367.3 307.5 59.8 19.4 % 1,098.0 881.8 216.2 24.5 % Total revenues $ 1,619.4 $ 1,625.0 $ (5.6) (0.3) % $ 4,967.5 $ 4,816.1 $ 151.4 3.1 % Gaming revenues for the three months ended September 30, 2023 decreased $65.4 million compared to the corresponding prior year period, primarily due to a decrease in visitation in the South segment, decreases in online gaming revenues in our Interactive segment, and the sale of the Tropicana Las Vegas operations in September 2022 . The prior year quarter included Tropicana Las Vegas revenues through the sale on September 26, 2022, compared to none in the current year quarter. Gaming revenues for the nine months ended September 30, 2023 decreased by $64.8 million compared to the corresponding prior year period, primarily due to a decrease in visitation in the South segment and the sale of the Tropicana Las Vegas operations in September 2022 . The prior year period included Tropicana Las Vegas revenues through the sale on September 26, 2022, compared to none in the current year period. Food, beverage, hotel, and other revenues for the three and nine months ended September 30, 2023 increased $59.8 million and $216.2 million, respectively, compared to the corresponding prior year periods, primarily due to the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023, until the disposition on August 8, 2023, as well as 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 . See “Segment comparison of the three and nine months ended September 30, 2023 and 2022” 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 September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Operating expenses Gaming $ 709.0 $ 757.9 $ (48.9) (6.5) % $ 2,149.1 $ 2,158.1 $ (9.0) (0.4) % Food, beverage, hotel, and other 261.4 199.2 62.2 31.2 % 773.5 557.9 215.6 38.6 % General and administrative 406.4 277.9 128.5 46.2 % 1,179.6 847.2 332.4 39.2 % Depreciation and amortization 105.8 148.7 (42.9) (28.9) % 323.9 417.2 (93.3) (22.4) % Impairment losses — 104.6 (104.6) N/M — 104.6 (104.6) N/M Loss on disposal of Barstool 923.2 — 923.2 N/M 923.2 — 923.2 N/M Total operating expenses $ 2,405.8 $ 1,488.3 $ 917.5 61.6 % $ 5,349.3 $ 4,085.0 $ 1,264.3 30.9 % N/M - Not meaningful 49 Table of Contents Gaming expenses consist primarily of gaming taxes, payroll, marketing and promotional, and other expenses associated with our gaming operations. Gaming expenses for the three and nine months ended September 30, 2023 decreased $48.9 million and $9.0 million, respectively, compared to the corresponding prior year periods, primarily due to the decreases in gaming revenues as described above, partially offset by increased payroll costs. Food, beverage, hotel, and other expenses consist primarily of payroll costs, costs of goods sold, and other costs associated with our food, beverage, hotel, retail, racing, and interactive operations. Fo od, beverage, hotel, and other expenses for the three and nine months ended September 30, 2023 increased $62.2 million and $215.6 million, respectively, compared to the corresponding prior year periods, primarily due to the inclusion of operating expenses related to Barstool subsequent to the Barstool Acquisition on February 17, 2023, until the disposition on August 8, 2023, as well as increases in gaming tax reimbursement amounts related to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access. 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. For the three and nine months ended September 30, 2023, general and administrative expenses increased by $128.5 million and $332.4 million, respectively, compared to the corresponding prior year periods, primarily due to an increase in rent expense associated with triple net operating leases of $115.1 million and $319.4 million, respectively, 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 and nine months ended September 30, 2023 decreased $42.9 million and $93.3 million, respectively, compared to the corresponding prior year periods, primarily due to a decrease in depreciation and 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 building components of the PENN Master Lease were classified as financing obligations of which depreciation of the associated property and equipment assets were previously recorded to “Depreciation and amortization” expense. Additionally, 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. Impairment losses for both the three and nine months ended September 30, 2022 primarily relate to impairment charges at our Hollywood Casino at Greektown property for goodwill and other intangible assets of $37.4 million and $65.4 million, respectively, as a result of an interim impairment assessment during the third quarter of 2022. See Note 7, “Goodwill and Other Intangible Assets” to our unaudited Consolidated Financial Statements for further discussion. There were no impairment losses for the three and nine months ended September 30, 2023. Loss on disposal of Barstool relates to the loss on the sale of 100% of the outstanding shares of Barstool to David Portnoy in exchange for nominal cash consideration (one dollar) as described in Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements. 50 Table of Contents Other income (expenses) The following table presents our consolidated other income (expenses): For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Other income (expenses) Interest expense, net $ (117.5) $ (198.5) $ 81.0 (40.8) % $ (346.1) $ (554.7) $ 208.6 (37.6) % Interest income $ 10.2 $ 5.2 $ 5.0 96.2 % $ 30.5 $ 7.0 $ 23.5 335.7 % Income from unconsolidated affiliates $ 7.2 $ 6.6 $ 0.6 9.1 % $ 17.0 $ 17.1 $ (0.1) (0.6) % Gain on Barstool Acquisition, net $ — $ — $ — N/M $ 83.4 $ — $ 83.4 N/M Gain on REIT transactions, net $ — $ — $ — N/M $ 500.8 $ — $ 500.8 N/M Loss on early extinguishment of debt $ — $ — $ — N/M $ — $ (10.4) $ 10.4 N/M Other $ (0.3) $ (8.8) $ 8.5 (96.6) % $ 4.5 $ (67.3) $ 71.8 N/M Income tax benefit (expense) $ 161.7 $ 182.0 $ (20.3) (11.2) % $ (40.9) $ 78.1 $ (119.0) N/M N/M - Not meaningful Interest expense, net decreased by $81.0 million and $208.6 million for the three and nine months ended September 30, 2023, respectively, compared to the corresponding prior year periods, 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 $93.7 million and $255.2 million, respectively, partially offset by an increase in interest expense on our Senior Secured Credit Facilities related to an overall increase in interest rates. Interest income increased by $5.0 million and $23.5 million for the three and nine months ended September 30, 2023, respectively, compared to the corresponding prior year periods, 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 Kansas Entertainment and Freehold Raceway joint ventures, as well as Barstool (prior to the Barstool Acquisition on February 17, 2023). The change in income from the corresponding prior year periods is due to fluctuations in earnings from our investments in unconsolidated affiliates. 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, “Acquisitions and Dispositions” 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 liabilities. See Note 9, “Leases” to our unaudited Consolidated Financial Statements for additional details on both of these transactions. Loss on extinguishment of debt relates to the refinancing of the previous Senior Secured Credit Facilities in the prior year. See Note 8, “Long-term Debt” in the notes to our unaudited Consolidated Financial Statements for further discussion. 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 September 30, 2023 and 2022, other income primarily consisted of unrealized holding losses of $11.6 million and $10.8 million, respectively. For the nine m onths ended September 30, 2023 and 2022, other income primarily 51 Table of Contents consisted of unrealized holding losses of $8.5 million and $66.4 million, respectively. In addition, during the three and nine months ended September 30, 2023, these losses were partially offset by dividend income received. Income tax benefit (expense) was a benefit of $161.7 million and $182.0 million for the three m onths ended September 30, 2023 and 2022, respectively, and an expense of $40.9 million as compared to a benefit of $78.1 million for the nine m onths ended September 30, 2023 and 2022, respectively. Our effective tax rate (income taxes as a percentage of income from operations before income taxes), including discrete items, was 19.0% and 226.7% for the three months ended September 30, 2023 and 2022, respectively, and 1,698.9% and (62.9)% for the nine months ended September 30, 2023 and 2022, respectively. The change in the effective rate for the three and nine months ended September 30, 2023 compared to the corresponding prior year periods was primarily due to the projections of pre-tax income, changes to the valuation allowance, and the Barstool transactions discussed in Note 6, “Acquisitions and Dispositions” and Note 11, “Income Taxes.” Excluding the Barstool transactions, the Company’s annualized effective tax rate for the nine months ended September 30, 2023 would have been approximately 28%. 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. Additionally, as a result of the Barstool SPA entered into in August 2023, the $115.9 million deferred tax liability associated with the Barstool tradename and other intangibles was written off to income tax expense, which had a material impact on our unaudited Consolidated Statements of Operations and unaudited Consolidated Balance Sheets, as discussed in Note 11, “Income Taxes” to our unaudited Consolidated Financial Statements. Segment comparison of the three and nine months ended September 30, 2023 and 2022 Northeast Segment For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 610.8 $ 616.8 $ (6.0) (1.0) % $ 1,856.6 $ 1,837.3 $ 19.3 1.1 % Food, beverage, hotel, and other 76.2 68.6 7.6 11.1 % 218.9 191.5 27.4 14.3 % Total revenues $ 687.0 $ 685.4 $ 1.6 0.2 % $ 2,075.5 $ 2,028.8 $ 46.7 2.3 % Adjusted EBITDAR $ 208.3 $ 217.9 $ (9.6) (4.4) % $ 638.5 $ 637.5 $ 1.0 0.2 % Adjusted EBITDAR margin 30.3 % 31.8 % -150 bps 30.8 % 31.4 % -60 bps The Nort heast segment’s revenues for the three months ended September 30, 2023 increased by $1.6 million due to an increase in hotel and food and beverage revenues, primarily due to the completion of room renovations at our Hollywood Casino at Greektown property, as well as increased visitation to our food and beverage outlets, offset by a reduction in gaming revenues, primarily at our Hollywood Casino Lawrenceburg and Ameristar East Chicago properties due to increased competition. The Northeast segment’s revenues for the nine months ended September 30, 2023 increased $46.7 million, primarily due to increases in gaming and non-gaming revenues at our Hollywood Casino at Greektown property due to the completion of room renovations, an increase in non-gaming revenues as visitation to our food and beverage outlets increased, and strong visitation in the first quarter of the year. These increases were partially offset by decreases in gaming revenues at our Hollywood Casino Lawrenceburg and Ameristar East Chicago properties as described above. For the three months ended September 30, 2023, the Northeast segment’s Adjusted EBITD AR decreased $9.6 million primarily due to the decrease in revenues at our Hollywood Casino Lawrenceburg and Ameristar East Chicago as described above. Ad justed EBITDAR margin decreased to 30.3%, primarily due to increases in payroll and other operating costs at our food and beverage outlets driven by increased volumes as discussed above. For the nine months ended September 30, 2023, the Northeast segment’s Adjusted EBITDAR increased $1.0 million, primarily due to increased gaming and non-gaming revenues. Ad justed EBITDAR margin decreased to 30.8% primarily due to increased payroll costs. 52 Table of Contents South Segment For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 236.8 $ 260.0 $ (23.2) (8.9) % $ 728.0 $ 807.6 $ (79.6) (9.9) % Food, beverage, hotel, and other 71.4 69.8 1.6 2.3 % 203.3 202.2 1.1 0.5 % Total revenues $ 308.2 $ 329.8 $ (21.6) (6.5) % $ 931.3 $ 1,009.8 $ (78.5) (7.8) % Adjusted EBITDAR $ 136.6 $ 139.9 $ (3.3) (2.4) % $ 381.1 $ 429.7 $ (48.6) (11.3) % Adjusted EBITDAR margin 44.3 % 42.4 % 190 bps 40.9 % 42.6 % -170 bps The South segment’s revenues for the three and nine months ended September 30, 2023 decreased by $21.6 million and $78.5 million, respectively, compared to the corresponding prior year periods, primarily due to a decrease in visitation at many properties, partially due to increased competition that affected our L’Auberge Lake Charles and Margaritaville properties and inclement weather during the first half of the year. During the prior year periods, particularly in the first quarter, 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. For the three months ended September 30, 2023, the South segment’s Adjusted EBITDAR decreased $3.3 million, primarily due to the decrease in gaming revenue combined with increased payroll costs and cost of sales, partially offset by the receipt of business interruption insurance proceeds related to the loss experienced in 2020 due to Hurricane Laura, resulting in an overall increase in Adjusted EBITDAR margin of 190 basis points. For the nine months ended September 30, 2023, the South segment’s Adjusted EBITDAR decreased $48.6 million and Adjusted EBITDAR margin decreased to 40.9%, primarily due to the decrease in gaming revenues as described above, combined with increased payroll costs. West Segment For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 94.5 $ 102.8 $ (8.3) (8.1) % $ 281.3 $ 295.8 $ (14.5) (4.9) % Food, beverage, hotel, and other 40.6 53.7 (13.1) (24.4) % 113.5 155.4 (41.9) (27.0) % Total revenues $ 135.1 $ 156.5 $ (21.4) (13.7) % $ 394.8 $ 451.2 $ (56.4) (12.5) % Adjusted EBITDAR $ 54.7 $ 60.5 $ (5.8) (9.6) % $ 153.4 $ 171.4 $ (18.0) (10.5) % Adjusted EBITDAR margin 40.5 % 38.7 % 180 bps 38.9 % 38.0 % 90 bps The West segment’s revenues for the three and nine months ended September 30, 2023 decreased by $21.4 million and $56.4 million, respectively, compared to the corresponding prior year periods, primarily due to the sale of the Tropicana Las Vegas operations in September 2022, partially offset by an increase in revenues at Zia Park Casino. The corresponding prior year periods included Tropicana Las Vegas revenues through the sale on September 26, 2022, compared to none in the current year periods. For the three months ended September 30, 2023, the West segment’s Adjusted EBITDAR decreased $5.8 million, primarily due to the sale of Tropicana Las Vegas, discussed above. Adjusted EBITDAR margin increased to 40.5% primarily resulting from the sale of Tropicana Las Vegas which had a negative impact on margins in the prior year qua rter. For the nine months ended September 30, 2023, the West segment’s Adjusted EBITDAR decreased $18.0 million primarily due to the sale of Tropicana Las Vegas, as discussed above. Additionally, Adjusted EBITDAR margin increased to 38.9% primarily due to the sale of Tropicana which had a negative impact on margins in the prior year period. 53 Table of Contents Midwest Segment For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 260.1 $ 268.7 $ (8.6) (3.2) % $ 787.5 $ 792.2 $ (4.7) (0.6) % Food, beverage, hotel, and other 33.3 29.7 3.6 12.1 % 94.5 85.4 9.1 10.7 % Total revenues $ 293.4 $ 298.4 $ (5.0) (1.7) % $ 882.0 $ 877.6 $ 4.4 0.5 % Adjusted EBITDAR $ 123.8 $ 129.4 $ (5.6) (4.3) % $ 376.5 $ 386.2 $ (9.7) (2.5) % Adjusted EBITDAR margin 42.2 % 43.4 % -120 bps 42.7 % 44.0 % -130 bps The Midwest segment’s revenues for the three months ended September 30, 2023 decreased by $5.0 million, compared to the prior year quarter, primarily due to a decrease in gaming revenues as new competition in the region negatively impacted several properties within our Midwest segment, partially offset by increases in non-gaming revenues due to increased visitation at our hotel, and food and beverage outlets. The Midwest segment’s revenues for the nine months ended September 30, 2023 increased by $4.4 million, compared to the corresponding prior year period, primarily due to increased visitation at our hotels, and food and beverage outlets, partially offset by declines in gaming revenues due to new competition in the region. For the three months ended September 30, 2023, the Midwest segment’s Adjusted EBITDAR decreased $5.6 million primarily due to a decrease in gaming revenues. A djusted EBITDAR margin decreased to 42.2% primarily due to a decrease in gaming margins driven by an increase in payroll costs, For the nine months ended September 30, 2023, the Midwest segment’s Adjusted EBITDAR decreased $9.7 million primarily due to increase in payroll costs, partially offset by increased non-gaming revenues, reflected in A djusted EBITDAR margin, which decreased to 42.7%. Interactive Segment For the three months ended September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Gaming $ 49.9 $ 69.2 $ (19.3) (27.9) % $ 216.1 $ 201.4 $ 14.7 7.3 % Food, beverage, hotel, and other 146.4 89.5 56.9 63.6 % 471.2 253.7 217.5 85.7 % Total revenues $ 196.3 $ 158.7 $ 37.6 23.7 % $ 687.3 $ 455.1 $ 232.2 51.0 % Adjusted EBITDAR $ (50.2) $ (49.3) $ (0.9) N/M $ (68.7) $ (80.1) $ 11.4 N/M Adjusted EBITDAR margin (25.6) % (31.1) % N/M (10.0) % (17.6) % N/M The Interactive segment’s revenues for the three months ended September 30, 2023 increased by $37.6 million, compared to the corresponding prior year period, due to the inclusion of 100% of the operating results of Barstool, until the disposition on August 8, 2023, partially offset by a decrease in U.S. online gaming revenues during the transition period prior to the launch of ESPN BET. Additionally, revenues are inclusive of a tax gross-up of $102.6 million and $63.0 million for the three months ended September 30, 2023 and 2022, respectively. The Interactive segment’s revenues for the nine months ended September 30, 2023 increased by $232.2 million, compared to the corresponding prior year period, due to the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023 until the disposition on August 8, 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 $283.4 million and $168.7 million for the nine months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2023, the Interactive segment’s Adjusted EBITDAR decreased primarily due to the inclusion of 100% of the operating results of Barstool until the disposition on August 8, 2023 and a decrease in U.S. online 54 Table of Contents gaming revenues driven by minimal external marketing of the existing platforms in the U.S. Additionally, the third quarter results were negatively i mpacted by increased expenses related to ramping and preparing for the November launch of ESPN BET . Adjusted EBITDAR margin increased due to revenues increasing at a greater rate year-over-year than the rate at which operating expenses increased. For the nine months ended September 30, 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 September 30, Change For the nine months ended September 30, Change (dollars in millions) 2023 2022 $ % 2023 2022 $ % Revenues Food, beverage, and other $ 4.5 $ 4.2 $ 0.3 7.1 % $ 16.5 $ 17.4 $ (0.9) (5.2) % Total revenues $ 4.5 $ 4.2 $ 0.3 7.1 % $ 16.5 $ 17.4 $ (0.9) (5.2) % Adjusted EBITDAR $ (28.1) $ (26.5) $ (1.6) N/M $ (80.7) $ (73.6) $ (7.1) N/M 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 do not directly relate to or have not otherwise been allocated. Revenues for the three and nine months ended September 30, 2023 have increased and decreased respectively, compared to the prior ye ar corresponding periods, primarily due to fluctuations in racing revenues. Changes in Adjusted EBITDAR for the three and nine months ended September 30, 2023 primarily relate to an increase in payroll costs. 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; loss on disposal of a business; non-cash gains/losses associated with REIT transactions as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements; non-cash gains/losses associated with partial and step acquisitions as measured in accordance with ASC 805 “Business Combinations”; and other. 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 the remaining 64% of Barstool common stock 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 55 Table of Contents 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. 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. 56 Table of Contents Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures The following table includes a reconciliation of net income (loss), 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 September 30, For the nine months ended September 30, (dollars in millions) 2023 2022 2023 2022 Net income (loss) $ (725.1) $ 123.2 $ (132.6) $ 200.9 Income tax (benefit) expense (161.7) (182.0) 40.9 (78.1) Interest expense, net 117.5 198.5 346.1 554.7 Interest income (10.2) (5.2) (30.5) (7.0) Income from unconsolidated affiliates (7.2) (6.6) (17.0) (17.1) Gain on Barstool Acquisition, net — — (83.4) — Gain on REIT transactions, net — — (500.8) — Loss on early extinguishment of debt — — — 10.4 Other (income) expenses 0.3 8.8 (4.5) 67.3 Operating income (loss) (786.4) 136.7 (381.8) 731.1 Loss on disposal of Barstool 923.2 — 923.2 — Stock-based compensation (1) 35.2 13.6 71.4 45.1 Cash-settled stock-based award variance (1)(2) (2.9) (3.8) (12.0) (16.2) Loss (gain) on disposal of assets (1) — (0.2) — 7.0 Contingent purchase price (1) 1.3 0.1 1.8 (0.9) Pre-opening expenses (1) — 0.5 — 4.1 Depreciation and amortization 105.8 148.7 323.9 417.2 Impairment losses (3) — 104.6 — 104.6 Insurance recoveries, net of deductible charges (1) (0.3) (1.9) (13.9) (10.7) Income from unconsolidated affiliates 7.2 6.6 17.0 17.1 Non-operating items of equity method investments (4) 1.0 2.6 6.4 4.7 Other expenses (1)(5) 14.4 32.9 25.1 48.4 Adjusted EBITDA 298.5 440.4 961.1 1,351.5 Rent expense associated with triple net operating leases (1) 146.6 31.5 439.0 119.6 Adjusted EBITDAR $ 445.1 $ 471.9 $ 1,400.1 $ 1,471.1 Net income (loss) margin (44.8) % 7.6 % (2.7) % 4.2 % Adjusted EBITDA margin 18.4 % 27.1 % 19.3 % 28.1 % Adjusted EBITDAR margin 27.5 % 29.0 % 28.2 % 30.5 % ( 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 ) Amount primarily relates to a $102.8 million impairment charge in the Northeast segment. (4) Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with our Kansas Entertainment joint venture and Barstool, prior to us acquiring the remaining 64% of Barstool common stock (see Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements). (5) Consists of non-recurring acquisition and transaction costs, and finance transformation costs associated with the implementation of our new Enterprise Resource Management system. 57 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 nine months ended September 30, Change (dollars in millions) 2023 2022 $ % Net cash provided by operating activities $ 540.7 $ 760.0 $ (219.3) (28.9)% Net cash used in investing activities $ (586.0) $ (180.0) $ (406.0) 225.6% Net cash used in financing activities $ (257.9) $ (705.2) $ 447.3 (63.4)% Operating Cash Flow Trends in our operating cash flows tend to follow trends in income before taxes 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 $219.3 million for the nine months ended September 30, 2023, primarily due to a decrease in income before taxes and additional cash paid for income taxes. Investing Cash Flow Cash used in investing activities for the nine months ended September 30, 2023 of $586.0 million is primarily due to consideration paid for the Barstool Acquisition, net of cash acquired, of $314.6 million and capital expenditures of $207.8 million. For the nine months ended September 30, 2022, cash used in investing activities of $180.0 million primarily related to capital expenditures of $189.6 million and the acquisition of a $15.0 million cost method investment, offset by insurance proceeds received for losses incurred due to Hurricane Laura in 2020. 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 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 nine months ended September 30, 2023 and 2022, as applicable. Capital expenditures for the nine months ended September 30, 2023 and 2022 were $207.8 million and $189.6 million, respectively. For the year ending December 31, 2023, our anticipated capital expenditures, inclusive of insurance proceeds, are approximately $368.0 million, which include capital expenditures of $207.8 million incurred for the nine months ended September 30, 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 nine months ended September 30, 2023, net cash used in financing activities totaled $257.9 million, primarily related to repurchases of our common stock of $149.8 million, as well as $64.4 million in principal payments on our finance leases and finance obligations and debt repayments of $28.1 million. For the nine months ended September 30, 2022, net cash used in financing activities totaled $705.2 million, primarily related to $510.1 million common stock repurchases, net debt repayments of $28.1 million, $18.2 million in debt issuance costs, and $129.4 million in principal payments on our finance leases and finance obligations. At September 30, 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 $172.6 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 September 30, 2023 we had conditional obligations under letters of 58 Table of Contents credit issued pursuant to the Amended Credit Facilities with face amounts aggregating to $21.8 million resulting in $978.2 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 September 30, 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 During the second quarter of 2023, we completed our $750.0 million share repurchase authorization approved by the Board of Directors on February 1, 2022 (the “February 2022 Authorization”). On December 6, 2022, a second share repurchase program was authorized for an additional $750.0 million (the “December 2022 Authorization”). The December 2022 Authorization expires on December 31, 2025. The Company utilized the capacity under the February 2022 Authorization prior to effecting any repurchases under the December 2022 Authorization. Repurchases by the Company are 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 Rule 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. No shares of the Company’s common stock were repurchased during the three months ended September 30, 2023. During the nine months ended September 30, 2023, the Company repurchased 5,438,221 shares of its common stock in open market transactions for $149.8 million, at an average price of $27.54 per share under the February 2022 and December 2022 Authorizations. The cost of all repurchased shares is recorded as “Treasury stock” within our unaudited Consolidated Balance Sheets. No shares of the Company’s common stock were repurchased subsequent to the quarter ended September 30, 2023. As of November 1, 2023, the remaining availability under our December 2022 Authorization was $749.5 million. 59 Table of Contents Other Factors Affecting Liquidity ESPN BET Sportsbook Agreement On August 8, 2023, PENN entered into the Sportsbook Agreement with ESPN which provides for a long-term strategic relationship between PENN and ESPN relating to online sports betting in the United States. In November 2023, pending regulatory approval, the existing Barstool Sportsbook will be rebranded and launched across all online platforms in the United States as ESPN BET, and our online product will include a Hollywood-branded integrated iCasino where permitted. The Sportsbook Agreement has an initial 10-year term and may be extended for an additional ten years upon mutual agreement of PENN and ESPN. In consideration for the media marketing services and brand and other rights provided by ESPN, PENN will pay $150.0 million per year in cash pursuant to the Sportsbook Agreement for the initial 10-year term and issue the warrants pursuant to the Investment Agreement (see Note 12, “Commitments and Contingencies” for additional information). 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 with GLPI, and include 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”). 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 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 up to $225 million for the Aurora Project and, upon PENN’s request, 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 60 Table of Contents 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 September 30, For the nine months ended September 30, (in millions) 2023 2022 2023 2022 AR PENN Master Lease $ 71.1 $ — $ 213.1 $ — 2023 Master Lease 58.0 — 174.1 — PENN Master Lease — 120.2 — 360.0 Pinnacle Master Lease 85.3 84.2 254.2 250.1 Perryville Lease — 1.9 — 5.8 Meadows Lease — 6.2 — 18.6 Margaritaville Lease 6.6 5.9 19.6 17.8 Greektown Lease 13.2 12.8 39.0 38.5 Morgantown Lease 0.8 0.8 2.4 2.3 Total (1) $ 235.0 $ 232.0 $ 702.4 $ 693.1 (1) For the three and nine months ended September 30, 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 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 nine months ended September 30, 2023. 61 Table of Contents 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, “Acquisitions and Dispositions” 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 was 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 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 anticipated share repurchases; 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 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 ESPN BET and theScore Bet Sportsbook and Casino apps and the relaunch of the Barstool Sportsbook as ESPN BET on our proprietary player account management system and risk and trading platforms; the expected timing of the rebrand of Barstool Sportsbook; the benefits of the agreement between the Company and ESPN; the Company’s expectations regarding its Sportsbook Agreement with ESPN 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 theScore and the continued growth and monetization of the Company’s media business; the Company’s 62 Table of Contents 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; collective bargaining activity and strikes; the Company may not be able to achieve the anticipated financial returns from the Sportsbook Agreement with ESPN, including due to fees, costs, taxes or circumstances beyond the Company’s or ESPN’s control; the rebranding of the Barstool Sportsbook as ESPN BET may be delayed, or in certain jurisdictions may not occur at all, for reasons beyond our control, including due to any delays in the receipt of, or failure to receive, any required regulatory approvals; potential adverse reactions or changes to business or regulatory relationships resulting from the announcement or performance of the Sportsbook Agreement with ESPN or the divestiture of Barstool Sports; the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the Company and ESPN to terminate the Sportsbook Agreement between the companies; liabilities, costs and fees in connection with the divestiture of Barstool Sports and the transition from the Barstool Sportsbook and other uses of intellectual property of Barstool Sports, including in the Company’s retail locations; the ability of the Company and ESPN to agree to extend the initial 10-year term of the Sportsbook Agreement on mutually satisfactory terms, if at all, and the costs and obligations of such terms if agreed; the outcome of any legal proceedings that may be instituted against the Company, ESPN or their respective directors, officers or employees; the ability of the Company or ESPN to retain and hire key personnel; the impact of new or changes in current laws, regulations, rules or other industry standards; 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.