Q2 2023 Caesars Entertainment Inc Earnings Call

Participants

Anthony L. Carano; President & COO; Caesars Entertainment, Inc.

Bret Yunker; CFO; Caesars Entertainment, Inc.

Brian Matthew Agnew; SVP of Finance, Treasury & IR; Caesars Entertainment, Inc.

Eric Hession; President of Caesars Digital; Caesars Entertainment, Inc.

Thomas Robert Reeg; CEO & Director; Caesars Entertainment, Inc.

Barry Jonathan Jonas; Gaming Analyst ; Truist Securities, Inc., Research Division

Brandt Antoine Montour; Research Analyst; Barclays Bank PLC, Research Division

Carlo Santarelli; Research Analyst; Deutsche Bank AG, Research Division

Chad C. Beynon; Head of US Consumer, SVP and Senior Analyst; Macquarie Research

Daniel Brian Politzer; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

David Brian Katz; MD and Senior Equity Analyst of Gaming, Lodging & Leisure; Jefferies LLC, Research Division

John G. DeCree; Director and Head of North America Equity & High Yield Research; CBRE Securities, LLC, Research Division

Joseph Richard Greff; MD; JPMorgan Chase & Co, Research Division

Shaun Clisby Kelley; MD in Americas Equity Research & Research Analyst; BofA Securities, Research Division

Stephen White Grambling; Equity Analyst; Morgan Stanley, Research Division

Steven Moyer Wieczynski; MD of Equity Research and Gaming & Leisure Research Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Presentation

Operator

Good day and thank you for standing by. Welcome to the Caesars Entertainment, Inc. 2023 Second Quarter Earnings Conference Call. (Operator Instructions). Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations.

Brian Matthew Agnew

Thank you, Josh, and good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2023 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2023. A copy of the press release is available on the Investor Relations section of our website at investor.caesars.com.
Joining me on the call today are Tom Reeg, our Chief Executive Officer; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our Chief Financial Officer; and Eric Hession, President, Caesars Sports and online gaming.
Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make forward-looking statements about the company's performance. These forward-looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission.
Caesars Entertainment undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found in the company's website at investor.caesars.com by selecting the press release regarding today's 2023 second quarter financial results. I will now turn the call over to Anthony Carano.

Anthony L. Carano

Thank you, Brian, and good afternoon to everyone on the call. We delivered another strong quarter with consolidated EBITDA exceeding $1 billion. Operating trends within our property portfolio remains strong. Despite a tough year-over-year comparison, driven by a single large convention event, our Las Vegas segment delivered its second best Q2 adjusted EBITDA of $512 million. Our regional portfolio delivered $508 million in adjusted EBITDA, down slightly to last year. And finally, our Digital segment reported $11 million of adjusted EBITDA, the segment's first quarter of profitability since we rebranded the Caesars Sportsbook in Q3 of '21.
Underlying demand trends in Las Vegas remained strong during Q2 with occupancy growth of 100 basis points to 97.6%. Total Las Vegas segment revenues were down 1% as a result of exceptional performance last year in our group segment. Excluding real rent payments, Las Vegas generated $523 million of adjusted EBITDA with a margin of 46.3%. Las Vegas continues to benefit from strong leisure and casino guest demand, the return of international guests and exciting events calendar and the continued strength of the group and convention segment in '23. While our group and convention segment EBITDA in Las Vegas was down year-over-year in the second quarter, pace for the remainder of '23 points to another record EBITDA year for the segment.
In our regional segment, revenues were up slightly and adjusted EBITDA declined 1% to $508 million. We were excited to open 2 new temporary facilities this quarter in Danville, Virginia and Columbus, Nebraska. Both properties opened a strong customer demand. While we faced new competition in a few markets during the quarter, customer demand trends remained stable and similar to prior quarters.
Our capital projects continue to deliver solid returns. Lake Charles and Pompano delivered strong quarters and early returns in Danville and Columbus are exceeding plan. We are excited to finish work on the Harrah's Hoosier Park expansion this fall and continue to make progress on the permanent facilities in Danville and Columbus. Work in New Orleans is progressing nicely, and we continue to target a late '24 opening.
Construction has started on the Versailles Tower rebrand in Las Vegas, which is expected to be completed by spring of '24. And finally, we recently opened a new show in Atlantic City called The Hook, which was accompanied by the opening of Superfrico Atlantic City as well. We have solid momentum heading into the second half of the year as we continue to deliver strong returns on project CapEx, drive profitability in our digital segment and remain focused on operational excellence in our property portfolio. I want to thank all of our team members for their hard work in the first half of '23. Our success is a direct result of their dedication our team members have and their commitment to delivering exceptional guest experiences every day. With that, I will now turn the call over to Eric Hession for some insights on the second quarter in our digital segment.

Eric Hession

Thanks, Anthony. During the second quarter of 2023, we delivered another significant improvement in the performance of our digital segment versus last year. Our business reported $11 million of adjusted EBITDA on $216 million of net revenue versus a $69 million EBITDA loss last year. Results this quarter represent our first full quarter of EBITDA profitability since rebranding to Caesars Sportsbook in Q3 2021. During the quarter, sports betting hold improved 180 basis points versus last year and iCasino volume increased 27% year-over-year. Our performance this quarter continues to demonstrate the effectiveness of our targeted promotional investment and overall lower level of marketing within our existing customer base as well as customers located in the new states.
We have recently introduced 4 significant pieces of new and exciting technology improvements that we expect will be well received by our customers.
First, our new iCasino product, Caesars Palace online, is now live in multiple states and pending regulatory approval in the others. The new iCasino product offers a significantly improved product and enhanced marketing capabilities, all combined with the compelling benefits of Caesars Rewards.
Secondly, we recently transitioned our Caesars app in Nevada to our flagship Liberty product, which delivers a significantly improved product for our customers. Pending regulatory approval, we anticipate converting our William Hill product and our retail sports books to the Liberty platform at some point later this year.
Third, we've started out rolling our net native iOS Sportsbook app and anticipate reaching 100% adoption in August. The new native app is receiving consistently higher performance feedback and will result in faster loading speeds, improved stability and enhanced development speed.
And fourth, we're on track to introduce our in-house player account management system, starting state by state later this year, which will ultimately lead to a shared wallet that we anticipate rolling out in 2024.
These 4 products have consumed significant amounts of technical resources over the past year, and we're very excited to introduce them to our customers. We now offer sports betting in 30 North American jurisdictions, 22 of which offer mobile wagering. We also operate iCasino products in 6 jurisdictions.
I'll now pass the call to Bret for additional comments.

Bret Yunker

Thanks, Eric. As you'll see in our earnings release and subsequent to the quarter end, we successfully acquired the remaining minority equity interest in Horseshoe Baltimore, which allowed us to fully repay its $250 million Term Loan B. Yielding significant interest expense savings given its high cost of debt.
Pro forma for its repayment and the most recent rate hike from the Fed, our average cost of debt sits just inside of 7%. With annual net cash interest expense of approximately $800 million, which is well positioned to decline going forward, given continued debt reduction alongside built-in spread adjustments tied to declining leverage in our loan agreements.
CapEx spend is also expected to crest in 2023 at just over $800 million with several growth projects being completed either later this year or in 2024. Coupling declining interest expense and CapEx with continued EBITDA growth sets up for accelerating free cash flow dynamics going forward. Over to Tom.

Thomas Robert Reeg

Thanks, Bret. Thanks, everybody, for joining us today. I'm very happy with the quarter, a strong quarter again for us. Starting in Las Vegas, keep in mind, we were up against the strongest quarter that we've ever had in Las Vegas. We were missing a large group that comes once every 3 years to Caesars properties that was in last year's numbers, not in this year's numbers. We telegraphed that last quarter. So that was known.
What you saw last week in the Nevada numbers was -- June hold in Baccarat was not as strong as it was in the prior year. We participated in that, I don't particularly like to talk about hold, but it's notable enough that I should in this quarter. We're in the gambling business. What we're looking for is the volumes to come through the property, and they came through. We just didn't hold in June like we did in the past June. Both the miss in that -- of the group from last year and the whole impact in June are dilutive to margins. Obviously, the group business for us is accretive to our overall Vegas margin and then clearly, revenue that would flow with normal hold is accretive as well. So as you're looking at margins on a year-over-year basis, keep that in consideration. As we look at forward, in Vegas continues to look very strong. We had a strong July. We feel very good about the remainder of third quarter. And then fourth quarter, you've got Formula One first quarter of '24. You've got Super Bowl, I've said in the past, I think Formula One is a 5% lift, not including whatever happens at the tables really just from increased hotel revenue that hotel and food beverage revenue, that still seems to be the right zip code for us. Demand for F1, particularly at the high end, has been very, very strong for us. We feel very good as to how we are positioned ahead of the event, and we're anxious like everybody else to see how this event plays in Las Vegas as we look to future years.
Super Bowl '24 is exceedingly strong from a demand standpoint where we sit today in terms of booked capacity versus a typical Super Bowl. We are dramatically ahead of and at higher rates than typically at this time ahead of the Super Bowl. And if you just anecdotally look at who's going to be getting our tickets, the average customer that will come to the game with us is substantially more valuable than prior Super Bowl. So Vegas remains very, very strong for us, feels very good, really no discernible impact in terms of any recessionary concerns, any concerns about the consumer as we look out. The only thing to call out, Anthony talked about the Jubilee Tower at Valley being converted to Versailles at Paris. We'd expect those rooms to be back online before the end of the year. We don't expect the entire project to be done until first half of next year, but there will be some disruption in that tower at Horseshoe now that we're underway.
If you look at the regional portfolio and really the whole quarter is a testament to diversification. We had what I'm talking about in terms of the group, the missing group in Vegas, and the whole impact in June in the regional business. We've got a number of properties that are under competitive pressure due to competitive openings. I'd call out Tunica is facing a property that opened about an hour closer to Memphis. That has pressured Tunica. We've got Council Bluffs has been a bit pressured by casino capacity being added in Nebraska. And then we have Chicago properties, both in Illinois and Indiana that are impacted by the expanded casino offerings in Illinois that have come online and continue to come online.
On the other side of that, what we've got is the fruits of our capital investment cycle that were, as Brett said, we're reaching -- we're cresting and reaching the end of. You've got new property in Danville, you've got projects in both Indianapolis tracks. You've got Lake Charles now open. You've got the Atlantic City spend. And as a result, our regional EBITDA despite a super strong comp, we're just about flat year-over-year, which I think is going to compare well with others that you'll see over the next couple of weeks. Again, as you look to third quarter off to a strong start, we're comping against an extremely strong third quarter of last year in regional and it looks like we'll be able to beat that this year through July. That's particularly encouraging for us.
Flipping to digital, digital was a loss last year. We've talked a lot about inflecting to positive and driving real EBITDA through that vertical and it's spectacular to see our first full quarter of positive EBITDA. As Eric detailed, I laid a pretty specific targets in terms of where we can be in digital, looking out to '25 on our last call, and then I went to some conferences where a lot of you told me there's no way we'll get there. I would tell you every number that I laid out 90 days ago or so, I'm 100% confident that we're going to hit them. Every metric that I look at going forward is at or above where we were 90 days ago when I laid out those targets. So I tell you, I'm reiterating those targets as we look forward.
Big -- on the tech side, those are big moves for us. It's very -- you put them in a list. And I don't really know that the impact is emphasized enough when we took over William Hill. William Hill had 1 employee working on iGaming. We were on old technology that was limited in the whole number of wins.
We soft launched Caesars Palace Casino about 2 weeks ago. We're waiting on approval in a couple of jurisdictions that I expect any day now, and then you'll see a full launch of the product, but I'd encourage you to go take a look. It's a casino first entry into our digital business. And in terms of capabilities, bonusing segmentation, proprietary games, live dealer. It is light years beyond what we've been operating under that, as Eric said, through iGaming revenue, 27% in the quarter. We are fully aware that we have significant competition in the iCasino space. We don't expect that we're just going to come in and run everybody over, but we feel like we've got the product to start to build market share and wrapping that into Caesars Rewards has been and will continue to be powerful for that business.
So if you look at the quarter, second quarter of last year, was the best second quarter that we ever had, the second best quarter that we had ever had and we topped it in EBITDA this year. So the turn in digital and regional holding its own, offset the loss of that group in Vegas. So this is exactly how we built this business. And it's great to see it come together. One more point on digital, moving to Liberty in Nevada is an enormous lift we were operating on the equivalent of a Commodore 64 computer in the old technology. And now we have the state-of-the-art Liberty app that we operate in all of our jurisdictions. This is a dramatic leap for us in Nevada. If you think about the Super Bowl happening and all of the visitors that will come to the state and our market position in the state, and now we have the app to -- that's competitive with what they've got at home, whether it's with us or somebody else. That's going to be a giant customer acquisition opportunity for us. So we're particularly excited about that. I would expect that 95% of our handle in Nevada will be on Liberty by the middle of this month and virtually all of it by kickoff of football season. So we feel really, really -- this is our third NFL kickoff since we launched our digital business. In terms of how I feel heading into the season, I think we are very, very well positioned as we head in.
So Bret talked about, we continue to pay down debt. Conventional leverage now is around 4x and going lower. I would expect that to go lower given where we are in the capital cycle where we are with the performance of the business. We're starting to look at what do you do with the free cash flow that will be generated in '24 and '25. And is there a return of capital piece? Or is there an external opportunity that could be interesting to us? I tell you, as sitting here today, 3 years after the Caesars transaction close, we're 30, 60 days beyond the first time where I'm feeling where we can be offensive from an external opportunity standpoint. So it has been a long road to get through everything that happened with COVID, the merger, we really, really feel like we're on strong footing as we head forward. And the cash flow machine here is going to continue to accelerate as results continue to improve. Digital continues to deliver improving cash flow. Interest expense goes down. We really feel strongly about where we sit today. And with that, I'll open it up for questions from the audience.

Question and Answer Session

Operator

(Operator Instructions). Our first question comes from Joe Greff with JPMorgan.

Joseph Richard Greff

Tom, given what you've said today tonight, about Las Vegas trends. How aggressive of a scenario is it for you to experience year-over-year net revenue growth in the 3Q? I would imagine the answer for that with respect to the 4Q is not aggressive to have an F1 booking? And then I have a follow-up on digital.

Thomas Robert Reeg

Yes, Joe, we feel good about third quarter. I'm looking at forward occupancy over the next 3 months in the range of let's call it, 96% to 98%, depending on the property. So we feel very, very good about third quarter. One thing to keep in mind in Vegas is that I didn't touch on in my remarks is Rio. We anticipate it will leave the portfolio October 1. As you're looking to kind of second and third quarter results at the Rio, that's a revenue producer but a drag on EBITDA. It doesn't produce enough EBITDA to offset its lease payment in the second and third quarter. So as that comes off in the fourth quarter, that will be accretive to EBITDA and margins.

Joseph Richard Greff

Great. On digital, maybe this is a question for Eric, but whoever wants to answer it. How do you think about the conversion of OSB and i -- gross gaming revenues in to the net revenue into next year? And then specifically on iGaming gross revenues, we noticed it increased sequentially $80 million in the 2Q versus $75 million in 1Q how do you think about the segment's growth going forward? Is iGaming presently EBITDA positive? And did it account for all or more than 100% of the 2Q EBITDA result?

Eric Hession

Yes, sure. Maybe I'll grab this one, Joe. So from a reinvestment perspective, and you can see this in the Q that was published simultaneously with the call today. Our reinvestment levels as a percentage of volume was around 1%, and our reinvestment as a percentage of gaming revenues was around 22% in total. That's on the lower end, I think, from a percentage of volume is where you'll see it going forward. The reinvestment for existing customers tends to be below that. And then depending on how many new customers we sign up, that will bring that number up slightly. Just generally because second quarter has fewer sign-ups given no football and no start of sports. So that range on a percentage of volume, I think, will range between that 1% and 1.25% kind of going forward.
So from a reinvestment perspective, that's kind of how I would think about it. From a volume perspective, from the iCasino side, and just from a general business side, as Tom mentioned, that's an area where we really feel quite optimistic about. We're finally going to have a competitive product out in the market that we can use to work with our existing database to have those customers that we know and that are loyal to the Caesars Rewards program move over to the online casino side. It was difficult to have that discussion with the customers when they had to go through the sports betting app each time to get to the casino. And so they won't have that.
In addition, some of the things Tom also touched on, we haven't been able to really do segmented marketing in any degree so far with the existing tech that we had. The new system that we have will allow us to create segmentation and it will allow us to reinvest like we do on the casino side and to use a lot of those experiences. So from that standpoint, when you look forward, we're very excited about the iCasino products and the ability to slowly grow some share and ultimately drive the profitability of the business towards those targets that Tom laid out.

Operator

Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli

Tom, obviously, kind of a little bit of a change in some of your thoughts around the ability to kind of be aggressive as you put it with external opportunities. Could you maybe talk a little bit about how you foresee needs for things that you think you guys could obviously do to enhance growth going forward, et cetera, and kind of the driver behind maybe that comment.

Thomas Robert Reeg

Yes. So we're -- key is we're getting towards the end of a capital cycle, right, as New Orleans runs off, we don't have the -- any of the chunky projects that we've had going really since the merger on our plate. There's some meaningful projects in particular markets, but you're not looking at the $300 million, $400 million, $500 million capital outlays. So from a balance sheet and cash flow perspective, you get to a point where you're going to be generating a lot of free cash flow and look at what do I do with it? We, as a team, have delivered a lot of value over the last decade to stakeholders through external opportunities. So of course, we're going to look for, therefore potential future opportunities now that we're in a position to tackle those, but don't read that as a lack of confidence in the growth potential of the existing portfolio.
As I said last quarter, we're on a run rate of about a little over $4 billion of trailing EBITDA. We think there's $0.5 billion plus available to us in the digital business and something similar to that in the brick-and-mortar business as we get returns from the projects that have recently come online and are still to come online, and that should push us toward a $5 billion company.
But as you look at where -- what do I do with cash flow when paying down leverage might be generating diminishing returns in terms of shareholder value, then you start to think. Am I distributing that cash flow in some form or fashion? Am I putting it to work elsewhere? And we've got a great track record of putting it to work elsewhere. So we'll explore that as we move forward.

Carlo Santarelli

Great. And if I could, just one follow-up. As you guys think about the various moving parts in Las Vegas through the back half of the year, you obviously have the Rio, which you noted is coming out that at somewhere in the ballpark of 100 basis points to margins. You have the labor negotiations that are ongoing presumably? And obviously, then you have Formula One, do you see the back half of the year as kind of being -- is flattish to up margins kind of net over the last 6 months of reasonable expectation?

Thomas Robert Reeg

Yes, I think that's a reasonable expectation, Carlo. And touching on the labor agreements, labor agreements expired by contract at the end of May. We're operating under everybody on the strip is operating under extensions. As we speak, there is work being done in terms of a new contract. I think that it's you're talking about complex stuff that takes a little while. But I'd expect that we'll have new agreements by the fall, and I'm not expecting a whole lot of drama around.

Operator

Our next question comes from Dan Politzer with Wells Fargo.

Daniel Brian Politzer

I wanted to touch on digital first. The hold, I think you called out was 6.4%. It was up 18 bps year-over-year. How do you think about sports betting hold and growing it over time? And what do you kind of see as kind of the guidepost as you kind of maybe get to that 2025 level where you would see that high EBITDA flow through.

Eric Hession

Yes. It's a great question. I think we've made a lot of improvements over the last kind of year, 1.5 years with respect to just the trading team getting more experience, but also on the tech side. So I think as we go forward, you will continue to see a higher percentage of customers not betting straight wagers. So whether that's an in-play or a player prop or same game parlay type wagers that generally have a higher hold percentage that's going to contribute to the increase. I suspect at this point, we're probably going to get to somewhere, say, 7.5% to 8%, which I think is a reasonable expectation given where we see the mix of our business. We do have a lower hold percentage here in Las Vegas and in Nevada, due to the size of the straight wagers that we take in the state that will drag it down a bit. But overall, I think getting to that 7.5% to 8% is a reasonable expectation.

Daniel Brian Politzer

Got it. And then just pivoting Horseshoe Baltimore, I know you've acquired the remaining stake in that. I think VICI has a ROFR option on that as well as one for Caesars, Virginia. So as you think about that deleveraging path and things are obviously moving in the right direction, can you maybe talk about other ancillary options as it relates to your regional portfolio and the possibility that there's maybe an avenue with VICI where you can get a bunch of cash in the door?

Thomas Robert Reeg

Yes. Look, Dan, I'm not short on cash. So that's really not something I'm targeting. There are ROFRs on both Baltimore and Virginia. I wouldn't anticipate either being exercised.

Operator

(Operator Instructions). Our next question comes from Steven Wieczynski with Stifel.

Steven Moyer Wieczynski

So okay, Tom, following up on Carlo's question, we've now have gotten a bunch of questions from investors about your commentary that you would take this excess free cash flow and in your words, put it to use elsewhere and have a great track record of doing that. So not sure what else you might say there, but can you elaborate a little bit more on maybe just what that means and maybe also give us some examples of that.

Thomas Robert Reeg

Short answer is no. I won't give you except maybe we'll buy Stifel. Steve, it's you know who's out there. You know what's possible. You know that there are -- at our size, it's not as easy to find targets that, a, move the needle and, b, are actionable from an antitrust perspective, but there's not 0 targets available out there. And as we get to the free cash flow levels that we get to, given what we have generated in the past in terms of returns, it shouldn't be surprising to anybody that we're going to look for opportunity to keep doing that again.

Steven Moyer Wieczynski

Okay. I didn't think you'd give me much of an answer, but that's great. I hope you do buy us, then I can come deal (expletive) for you on one of your casino.
So second question, Tom, you talked about June in Vegas, you had the negative hold you witnessed across backrest. Look, I know high end isn't super, super important to you guys. But can you just give us any color around what you're seeing -- business, especially on the international front? And maybe how those folks have or will be coming back into the market?

Thomas Robert Reeg

Yes, Ben, it has been very strong from a volume standpoint, our volumes at the high end, both domestic and international continue to build. We've put in quite a bit of effort. Caesars had a very strong international business when we arrived. Unfortunately, those players weren't traveling. It's great to see that come back.
In the interim, we've continued to build on the domestic business. So to give you anecdotal and axonal idea, Steve, I get a hit sheet every day. And in 2021, if I looked at it on a Saturday or Sunday morning, there might be 1 player there. That was a significant swing in our results. Now on a typical Saturday, Saturday, Sunday, I've got 5 to 10 players that are at a minimum, several hundred thousand line of credit. So you've got a much more balanced book. You've got a lot more volume. So it's really continued to build. Obviously, events in the second half in the fourth quarter with F1 and the first quarter with Super Bowl are fantastic high-end events. And as I said, in my remarks, demand for both of them at the high end is extremely encouraging of several months now.

Operator

Our next question comes from Stephen Grambling with Morgan Stanley.

Stephen White Grambling

2 follow-ups. First on the digital side. I think I heard you say there's some planned investment into the Caesars Palace app. Does that mean that we should be anticipating step up in marketing and increased promo spend on iGaming in the near term?

Thomas Robert Reeg

You should expect us to be visible in terms of promoting the app but nothing anywhere close to what you saw when we launched the sports app. So I would describe us right now in iCasino as, and for the last couple of years, as invisible from a marketing standpoint. We'll become visible in the next month or so, but that's in the -- all of the guideposts and markers that I've given, you should be expecting third quarter for the digital business, as I've said before, is it coin flip as to which side of breakeven we're on, but we should be close. The fourth quarter should be a significantly positive quarter, and then we should be positive from then on out.

Stephen White Grambling

That's helpful. And my follow-up, just taking one more crack at it on the going on offense comments. Is that comment more direct to domestic or international? And do you generally view that more on the digital or physical casino side?

Thomas Robert Reeg

So we are not -- obviously, we have little -- we have Canada as a property we manage internationally. We're entirely domestic at this point. But we are economic animals. If there's something that where it makes sense outside the U.S. that we're willing to get on a plane, but I would expect it would be domestic and I'm not thinking about a big digital acquisition.

Operator

Our next question comes from Brandt Montour with Barclays.

Brandt Antoine Montour

So Tom, just maybe some thoughts on the broader sort of U.S. leisure trends. You sounded obviously confident that you're not seeing any type of recessionary activity or anything. There's just a lot of sort of cross wins and lumpiness across the broader lodging landscape at the low end, and there's been a lot of talk from other hotel operators calling it normalization. Just curious if you think you're seeing any normalization in Las Vegas? And if it's -- if there's any difference at the low end of your database of your properties versus sort of the middle, more maybe the middle tier?

Thomas Robert Reeg

Yes, Brandt, we're not really seeing anything I can speak to, that's material in terms of softness at any level of property. The only property that, if you're looking at the next quarter, I'd expect to be soft as the Rio and that's because we're transitioning out of the property and a lot of the rated business has already come out of there, but that's obviously unique to that particular property. It feels really strong out here. We're out here today, volumes are as they've been for 1.5 years now, continue to be very strong. As I told you, I'm looking at forward occupancies depending on properties at 96% to 98%. So it's really hard to tell you anything that would give you a bearish stance on Vegas.

Brandt Antoine Montour

Great. That's super helpful. And then maybe just in Atlantic City, curious if you want to comment on how that's performed sort of through peak summer here. I think you're sort of disruption free this summer sort of versus your underwriting or expectations heading into the season.

Thomas Robert Reeg

Yes. We're kind of -- we are disruption-free really since right before fourth of July. We are finishing up the entrance to Caesars Palace. I was out there for the opening of the Hook and Superfrico and really pleased with the way the renovation work has turned out. All that's left is the Nobu Hotel Tower at Caesars, which should be done by the end of the year. I would say in terms of expectations, Atlantic City its not strong as I would have hoped it would be, but it's fine. And obviously, it's within that regional business that was flat in 2Q, and I'd expect to grow a little bit in 3Q.

Operator

Our next question comes from Shaun Kelley with Bank of America.

Shaun Clisby Kelley

Maybe first for just Eric, I just wanted to ask about on the digital side, maybe at a very high level, could you help us think about as you start -- as your expense base is increasingly normalized and you continue to get your product road map where you want it to be. How do you kind of think about flow-throughs in the digital business of sort of percentages in revenue to EBITDA what sort of either kind of a directional amount that makes sense? Or could you help us think about some of the key levers or line items that you could drive improvement from just as we get out into kind of '23, '24 and beyond.

Eric Hession

Yes, sure. I think if you go back to the prior discussions and calls we've had about the reductions in some of the expenses that we're currently incurring that we don't think will be burden with going forward from either the marketing, the team deals, some of the other fixed expenses like that, you can see those rolling off over time.
In terms of the balance of the expenses, I think those are going to -- might increase a bit like labor and some of the others. But broadly speaking, the true variable expenses that we have are really taxes, the reinvestment levels and then super variable things like credit card processing fees and so forth. And in aggregate, those should be around 50%. So that once you break the breakeven level like we have this past quarter and going forward, you should see quite strong flow-through on every incremental dollar that we get. And then for the next couple of years anyway, it will be juiced by the falloff of the fixed marketing expenses that we currently have in the cost structure.

Shaun Clisby Kelley

So 50% on variable and possibly greater than that when we factor in some of those fixed expenses if I'm kind of summarizing that right? Does that make sense?

Eric Hession

Yes, I think that's a good way to look at it. If you look at this quarter, it was over 100%. So that's because we're cutting more dramatically than I would anticipate going forward on that fixed side.

Shaun Clisby Kelley

Great. It makes a ton of sense. And then one sort of bigger picture one for Tom. Tom, you kind of mentioned in the prepared remarks a little bit about your longer-term goals from 90 days ago and standing by those. And I just sort of wanted to kind of hit it specifically, was there like something specific you had in mind? And maybe I'm just not it on the either the comment or the joke. But just was there a specific area that was that really directed at free cash flow? Was that directed at the 50% return on digital investment, sort of all of the above. Was there just something you were specifically trying to kind of get across relative to where we sat 90 days ago?

Thomas Robert Reeg

No, it's all of the above, 3 years ago, we told you we think we could generate better than 50% annual EBITDA return on the cumulative losses we generate in building the business. We got to about $1.1 billion of cumulative loss before we inflected to positive, which suggests $500 million, a little over $500 million of annual EBITDA at maturity which I defined as sometime in 2025. And when I laid those markers out last quarter, I got some skepticism back, and I would tell you 90 days later, I'm even firmer in my conviction that we meet or exceed those numbers in that time frame.

Operator

Our next question comes from Barry Jonas with Truist Securities.

Barry Jonathan Jonas

MGM just announced a comprehensive deal with Marriott. I know you guys have a partnership with Wyndham, but curious how you think about your overall positioning here?

Thomas Robert Reeg

I feel fine. Those types of partnerships are useful from a loyalty branding perspective for the databases at the scale of the company that we've got where there's nothing out there that we're missing that I expect would materially move the needle for us.

Barry Jonathan Jonas

Great. And then Q3 last year, we were talking a lot about rising energy costs. Curious to get the impact this quarter. And I'm also wondering how the heat maybe affected player visitation, if at all?

Thomas Robert Reeg

Yes. So you remember it correctly, August, September last year, in particular, we had some unhedged utility costs primarily in Nevada that bit us. We're in a much, much better position over the next 60 days, the same 60 days as last year. So I expect those costs to be lower.
In terms of weather, there's -- I can certainly probably come up with, weather that impacted us in various places during the quarter. Obviously, it's very hot. Everywhere recently, but there's nothing to point to as a reason for particular weakness or strength in our markets based on the weather recently.

Operator

Our next question comes from David Katz with Jefferies.

David Brian Katz

I'd like to just go back to the digital, if I may. And just looking at the Q and reflecting back on some of the discussions we had about some of the media partnerships, et cetera, there are still some meaningful commitments capital-wise in terms of those costs. If you could shed a little light on how much of that starting to roll off is important for hitting these targets, these profitability targets versus how much of it is just execution on getting the new apps rolled out and doing the business?

Thomas Robert Reeg

Yes. So we've talked in the past about going from 0 to 500 kind of a 3-legged stool with each leg similar in terms of impact.
One is continued execution in the OSB arena that we've discussed in terms of continuing to grow, continuing to drive EBITDA there.
The second piece is our iCasino share moving toward our OSB market share.
And then the third piece is the roll-off of partnership and talent contracts over the next 3 years.

David Brian Katz

And those are relatively equal in size?

Thomas Robert Reeg

Yes. I would say of the 3, just basic blocking and tackling is the largest, but it's not dramatically large than other 2.

David Brian Katz

Got it. Okay. And if I may, as my follow-up. Just focusing on the regional business and trying to think through what it's becoming where we look at CapEx and we're always a little sensitive to CapEx that may give the appearance of being defensive. As competition ramps up pretty much across the regions, I suppose what I'm asking is, is this what it is where it's not going to be a lot of growth, there'll be some capital redos that are necessary at some point. But for the most part, right, are what we're looking at today kind of is what it is, to repeat myself a little bit.

Thomas Robert Reeg

Look, that's really a macroeconomic question. Obviously, if you had asked that question 5 years ago, none of us saw what was coming from a virus standpoint and the structural improvements in the business in response to that. So it's hard for me to say yes, this just is what it is as far as the eye can see. We always -- so we do 52 quarterly reviews each quarter. So we're going through the P&L of each individual business with the leaders, and we are in properties that we have improved 2 and 3x EBITDA, we still see opportunity to continue to grow as we move forward. So we don't view this as there's not growth available to us in the regional portfolio. And then obviously, we've got project spend that comes online. And I'm careful in lumping defense, there's varying levels of defense, right? If I'm in a market where my property is just hasn't been touched in a long time, and that's impacting my performance levels. I can certainly see a case where you put in some money to change that. And you may characterize that as defensive. I think that's growth from where you're starting from. Now if you take a case of a property that let's use our Tunica property as an example. If a property opens an hour closer to the cedar market, there's very little I can do from an investment standpoint that's going to change that outcome. These are convenience-based properties to begin with. That was the realization that led us to changing the subsidies all the way back in the MTR days. But I don't view it as a mistake, and I'm not referring to us. I see others that are investing in properties that have been around a long time, but they're behind now. Based on what's brought to market, you can choose to continue to erode and see what you can do cost-wise or you can say, "I'm going to put some money in this and change my fortune." I can see people making different decisions faced with similar circumstances.

Operator

Our next question comes from Chad Beynon with Macquarie.

Chad C. Beynon

You've gotten a lot of digital, but I wanted to pile on that. So we get a lot of questions around live dealer given how big the demand is in Europe and the market cap of the leading player over there. So Eric, maybe for you as it relates to your optimism around iGaming in general, is this expected to be a major piece of the business going forward? And given, I guess, the branding, the marketing, some of the IP that you have, would you consider doing this in-house or use third-party exclusive vendors to have the Caesars experience?

Eric Hession

Yes, sure. I'd say it's definitely going to be a major part of the business going forward. If you look at our current Sportsbook app, which is -- or sorry, the Casino app, which is part of the Sportsbook, we have a disproportionately high percentage of table games action versus slot action. And -- though it's a high percentage of the live dealer just because of that larger denominator on the table game side.
Going forward, the stand-alone Caesars Palace app is going to have a higher percentage of slot business than table. But it's still going to have live dealer. And of the overall table games, we do expect that live dealer product to be a sizable percentage. So going forward, it's absolutely a key component of the business. I would say, previously, we haven't had as much exposure to that. We haven't had branded games, we haven't had dedicated games. We haven't had a lot of the product that's out there, just we haven't incorporated it into the app, which we will on the new Caesars Palace app.
In terms of the question about doing it in-house or through a third party, we're definitely going to want to have some branded customized games, but I don't see us bringing it in-house at this point in anywhere in the near future.

Chad C. Beynon

Okay. Appreciate it. And then just in terms of legislation that we should be keeping an eye on, I believe North Carolina is out there potentially talking about some expansion of land-based gaming. And then on the iGaming front, that will probably roll into Q1 of '24. Anything else that we should be watching or you're keeping an eye on in the legislative session?

Thomas Robert Reeg

Not in particular. I mean, from a jurisdictional standpoint, the most relevant to us in the near term is New York land-based license issuance and that's we're deep into that and hopeful.

Operator

Our next question comes from John DeCree with CBRE.

John G. DeCree

Maybe one for Bret on the balance sheet. I think you mentioned in your prepared remarks, what was the decision to pull the trigger on Horseshoe Baltimore, Obviously, the cost of debt made sense. The timing, was it contractual? Was it to negotiate it with the parameters of that buyout of your partner, something that you guys just kind of did on your own? And I don't know if you could share what you paid for the minority interest?

Bret Yunker

Yes. On the minority interest, always we're opportunistic around pulling in assets at the right valuation. So we took that in for a little under $70 million. So you'll see that in the Q. And once we collapse and owned 100% of it, if you look at that cost of debt, the term loan was prepayable at par, and was mid-9s on the interest rate with our nearest maturity. So in my land, that's called a no-brainer in terms of what to repay next with our free cash flow.

John G. DeCree

Perfect. And then maybe one for Tom or Eric, you've kind of covered a lot of ground on digital, but it looks like a pretty successful, world series of poker for you. Obviously, a great brand. Online poker isn't a big industry right now, but it's kind of one of your strong suits. As you think about your iGaming business going forward, are there some opportunities on the poker side and with World Series of Poker brands that you could see going forward?

Eric Hession

Yes. Look, you're absolutely right. It was an all-time record World Series of Poker, both from a prize money perspective, participants perspective, but also from the ability to really provide contribution to the properties that hosted it. We moved it to the Horseshoe last year. So it was kind of the first year that was branded as a Horseshoe, and it really drives a lot of activity to the property, a lot of food and beverage, a lot of hotel revenues. So it's really great for us from a portfolio perspective in addition to the direct revenues that it drives to the -- from the actual tournament itself.
From an online perspective, we really don't see much movement in terms of new states legalizing, so it's kind of a business that is kind of flat at this point. It vacillates between going up and down based on how customers go. But from a brand perspective, we think it's definitely accretive to the company and does provide these incentives for customers to come to the brick-and-mortar locations for the tournaments.

Operator

Thank you. I'd now like to turn it back to Tom Reeg for any closing remarks.

Thomas Robert Reeg

Thanks, everybody, for your time, attention and support, and we will talk to you in November if we don't see at a conference sooner.

Operator

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