Greetings, and welcome to the Gaming and Leisure Properties’ Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Hayes Croushore. Thank you. You may now begin.

Thank you, Sherry, and good morning everyone. We’d like to thank you for joining us today for Gaming and Leisure Properties’ third quarter 2017 earnings call and webcast. The press release distributed earlier this morning is available in the Investor Relations section on our website at www.glpropinc.com. On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Forward-looking statements include those related to revenue, operating income and financial guidance, as well as non-GAAP financial measures such as FFO, AFFO and EBITDA. As a reminder, forward-looking statements represent management’s current estimates and the company assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward-looking statements contained in the company’s filings with the SEC and the definitions and reconciliations of non-GAAP financial measures contained in the company’s earnings release. On this morning’s conference call, we are joined by Peter Carlino, Chairman and Chief Executive Officer; and Bill Clifford, Chief Financial Officer of Gaming and Leisure Properties Inc. Also joining are Steve Snyder, Senior Vice President of Development; Desiree Burke, Chief Accounting Officer; and Brandon Moore, Senior Vice President, General Counsel and Secretary. Now I’d like to turn the call over to Peter. Peter?

Thank you, Hayes, and good morning, everyone. We are happy once again to report a good quarter. We received all of our escalators this quarter and we paid down some debt, which is a good thing in our business. We like to do that. I think all the comments I might make are very well encapsulated in the opening paragraph of our press release so I call your attention to that. And as our usual style I think we’re going to get very quickly to questions, unless Bill wants to add something.

I have nothing.

Okay. Then operator, we’re going to go straight to Q&A.

Okay, great. [Operator Instructions] Our first question is from Steve Wieczynski with Stifel. Please state your question.

Hey, guys good morning. Hope you both doing well. So here’s a question I don’t know if you’ll answer or you won’t answer. Let’s say, for instance, and I think you probably know where to go with this if two of your tenants were to explore some type of merger, what kind of say would you guys have in those proceedings? And then, if there was a need to find a new operator for certain property, in a certain market or other any market to the ownership restrictions, who would lead that process? I hope that makes sense.

Well, that’s the question we’d like to avoid. But I think we’ll get right at that. Look, we’ve seen the same things that you have seen. So we know where you are going with it. We like things frankly, at the moment precisely the way they are. But should such a thing occur, that is our tenants begin to talk with each other. We would have significant rights to – I hesitate to use the word Bill approved or Brandon but certainly, it would take our involvement for such things to occur. And the bottom line, for any such thing would be what it always is for us, what’s good for GLPI and our shareholders period. That’s the only guiding light frankly here. Bill do you want to…

Sure. Listen, I think the lease has certain terms in terms of our ability of what we can where we have rights relative to what’s in the lease. And if there – and I would go on to say obviously, we’re totally in the hypothetical and totally in the – because we don’t have any information that says anything’s been agreed to between any of these – either one of those two parties and for the benefit of everybody else is might be wondering what we are talking about there is newspaper article Bloomberg speculating that there was a combination discussion between Penn and Pinnacle. But our lease basically, where our rights would come in because they wouldn’t be able to extract the properties out of the leases for sales or for disposal if that was required by either a gaming regulator or by the FTC. So that’s where our rights to come into play. And I would say that we’re certainly would want to be supportive of anybody – any of our tenants who want to do things, because I think that’s a big part of what we try to emphasize as a landlord is that we want to be basically partners with our tenants and we want our tenants to be successful and if there’s things that our tenants want to get done, we would be supportive of that. However, obviously, we have to look at first and foremost, for the best interest of our shareholders. So that comes before that. But certainly, we would – we believe we have certain rights within the leases to the proposed hypothetical, theoretical rumors that are floating around out there. So I think I’ll probably leave it at that. Yes. So I think you’ve – that does a pretty good job. Farther than we probably preferred to go but I think the most important thing you said is that we will, our premonition is first and foremost, to work with our tenants and to be seamless in our partnership with them. But in the end, it’s it will be what is beneficial to our shareholders period. And I can’t emphasize that enough. So I hope that’s the answer because frankly, that’s all we can – or would have to say, we don’t – there’s nothing in front of us.

No. That’s great color. You probably said more than I thought. So that was great.

No, we thought we’re going to say too.

No.

And frankly that’s a testament to the thoroughness of your question.

I try to dance around as much as possible. Anyway, second question, it will be more straightforward and it’s going to be kind of generic. In every quarter you do a very good job of – Peter or Bill, can you give us on update on kind of what you see out there in terms of potential acquisition or what the environment actually looks like maybe both, in the gaming universe and then, maybe outside the gaming universe as well? Thanks.

Steve, why don’t you talk about kind of what’s out there and what may or may not be actionable?

Good morning, Steve. Others have commented either in the earnings call or in other call that they’ve had the M&A activity seems to be pretty robust. I can’t say, I don’t disagree with that. I think, so our expectations and valuations are probably a little extreme, most of, which we driven quite in terms of the separation of real estate assets from operating assets. But I would not disagree with what we’ve heard from other operators we recently heard yesterday in their presentation as a new entity that there does seem to be a longer runway right now in terms of opportunities out there. And rest assured from our perspective at GLPI, we do try and touch everything, stay in touch with everything and look for the right opportunities to produce accretive transactions for our shareholders.

Yes. My line over the years is pretty much been and it remains the same, but the lies on EBIT, you can count on us looking at it. So we’re not unaware, but finding transactions that are right for us shareholders as I often said, it seems like a bad deal. It’s tough to make a make a deal that’s going to be accretive for shareholders and that remains focus one, two and three. We’d rather be patience and do the right thing. So that’s pretty much our mantra for those who – of who followed us over the several years. I know that you’ve heard that line before.

Thanks guys. Appreciate the color.

Our next question is from Robin Farley with UBS. Please state your question.

Hi, thanks. This is actually Arpine Kocharian on behalf of Robin. Maybe asking the same question that was just asked in a slightly different way. Is there anything imminent given that to your end-year, we’re looking at Q4 that you’re kind of looking at in the transaction market that could make sense near term? And then, my second question, do you guys have any updates on your leverage target in terms of the price times you’ve given us before?

Look, there is nothing imminent that we’re aware off, in the full meaning of imminent, I mean the stuff that we look at, we talk about but there is nothing imminent. Bill do you want to…

Yes. I mean, listen I think there is nothing – well, first of all, there are no transaction that I think could happen where we get closed by the fourth quarter just given the whole regulatory approval timeline so even if we did get to the with the number of people that are out there nothing is going to close this year for sure. So, hopefully that answers that question. The leverage right now we’re projecting end of the year to be under 5.1 times on a leverage basis. I think we throw-off roughly $130 million a year of free cash flow that will continue to use to paydown debt. And obviously our target leverage level is 5. We’re going to take it below that in the interm, we would view that going below 5 as pre-funding for potential opportunities, basically pre-funding equity where we would – we stated before in a new transaction we would do as leverage as 5.5 on that transaction with the rest remaining equity clearly if our leverage is below 5 to the extend that we’re below 5 we take it back to 5. So we would do an acquisition which might have little bit higher leverage but still not taking the transaction effectively over the same levels that we’ve kind of indicated before.

That’s great. Thank you.

Thank you.

Our next question is from Thomas Allen of Morgan Stanley. Please state your question.

Hey, good morning. First question, how are you thinking about the 5-year PENN entries that out in late 2018?

Well, clearly that’s November of next year, we haven’t really given official guidance. I think I’ll say a couple of things. We know and we understand we acknowledge that primarily from two properties and that would have been Lorensberg as well as Chalmersgatan, both of those are affected by competition Lorensberg several years ago, Penn from both Maryland Live and then obviously National Harbor. So we do expect to have – when the revenue reset happens at the end of October of next year, we do expect that to be adverse to us and there will be a rent reduction. However, looking forward we believe that our rent or dividend with the payout ratio still at the 80% will be flat through that period. So we don’t see it having an adverse affect on the dividend. And obviously, it won’t be helpful to getting increases in the dividend but at least as we project out. And this is without any transaction obviously for able to get any accretive transaction down, we could impact these dividend increases. But certainly through the revenue reset period as we see it today we think about dividend will stay flat.

Helpful. Thank you.

Our next question is from Joe Greff with JPMorgan. Please state your question.

Good morning guys. Most of my questions have been answered. Maybe I could ask you, who’s going to be the next Manager of [indiscernible]. The one question with respect to the last comment on the dividend would you – absent any acquisitions would there be an inclination or willingness to increase the dividend on an absolute basis.

I mean in terms of increasing the payout ratio, because that’s obviously go down. I think for the foreseeable future our expectation would be to continue to paydown debt and anticipation of getting transactions done. We’re not in anyway despond in our ability to get transactions done, we think there will be opportunities and there will times where we will be able to put that capital to use on an acquisition basis. So I would say for now, at some point I think maybe but obviously we’ll get to a point where I can take the leverage to zero. So obviously at some point we would think about that. But in the interm period our attention would be to use it as pre-funding equity not increasing the dividend.

Look the question is and the answer is always the same, what gives more value to our shareholders is it increase dividend? Or a new transaction? So we’ll be where it’s best at the time.

I mean, the problem with taking out payout ratio off obviously, also – honestly, I think, I personally in discussions, but I personally be in more favor with buying equity if I had excess cash flow around rather than increasing the dividend because I think the one thing what people like about our story is stability and continual pattern of a nice stable dividend. So taking the payout ratio off and then turning around the potentially if you do a transaction. Then one, take back to 80% I think that would be adverse to the interest of what many of our investors are buying our shares for.

Excellent. Thank you.

Our next question is from Patrick Scholes with SunTrust Robinson Humphrey. Please state your question.

Hi, good morning. Thank you. Can this morning put out an EBITDA margin target for the future. My question is related to you folks is part of the way to get there via pulling back some promotional spend, how does that impact potential future escalators?

Actually good, in another words, margin improvement will certainly, which obviously, should translate into increased EBITDA will therefore translate into improved ratio – rent coverage ratios so that obviously will be good and increase the likelihood of escalators. Certainly, Penn has, over the course of the last several years, we’ve continually been right on the cusp, as evidenced again this year, we’re hitting 80% – 75% to 80% of the full escalator lease. That’s a projection. Obviously, we’ve got to wait and see what happens through the month of October. So that’s all good. The only negative obviously, potentially negative is if the sum of those marketing reductions, which might be improvements to EBITDA if they were on a net basis slightly less revenue, that would be less, we’d have to offset that with the escalators. In terms of if they do marketing programs that cause business volumes to drop but it’s actually good for their EBITDA, that’s not good for the revenue calculation. I don’t think that’s their intent. I think their intent is to figure out how to reduce marketing. And sometimes, you can reduce marketing that’s actually enhancements to our revenue because you’re giving out less free coin. So the less free coin you give out could turn around and cost people because they simply don’t have enough time on device to use up all the free coins, and they may not be constrained by their budget, so therefore, you might actually see a net increase to your net revenue.

Interesting. Thank you.

Our next question is from Shaun Kelley with Bank of America. Please state your question.

Hi, good morning. Just wanted to see if we could – I just want to touch on the dividend thing a little bit more around the possibility for the further reset with Penn. So Bill, just to – it is more of a clarification than anything else, but are the current assumptions then or the way you’re modeling or thinking about it, would it be that you can maintain the dividend flat but payout ratio actually goes up? Or can you hold the payout ratio here right around 80 with a way that sort of other numbers are coming, the numbers would come in?

It’s our expectation that we would be able to hold the payout ratio. I mean, we’re – today, we’re like closer to 79 than we are 80. so the ratio might increase nominally. But we don’t see it going above 80.5. I mean, not going to go above 81, let’s put it that way, in order to maintain the dividend. And in fact, I think it will be better than that. So we’re kind of talking switches here, but – and it’s obviously a little bit dependent on how well the economy does and how well the Ohio properties’ doing for Penn and how well we do with the Meadows and all the rest of it. But feeling on a conservative basis, we’re not going above 81 and we still maintain the dividend.

Understood. Bill just remind us, the way this calculation actually works, right? It’s a rolling – it’s like a trailing five year calculation, I believe. So it’s not a step function down, it’s sort of a kind of a slow grind down based on when the cannibalization of those properties wold have occurred?

Well, it’s a calculation of the average over the last five years, but it is a step down starting November 1 next year. So they would then have a lower rent payment due starting November 1. And then in the following year, not that I want to make sort of a negative into a positive, but in the following year, there would obviously – when we do the rent coverage calculation based on a lower rent level, so the likelihood of getting an escalator would improve, so in the following year, the certainty of getting a rent escalator would improve, so in the following year, the certainty of getting a rent escalator just to improve by – to the extent of the amount of the rent reduction in the previous year. Not that, that – that’s kind of trying to spin – I acknowledge that, that’s a spinning of a negative, but it is just math

Understood. And then just to go back to the sort of the M&A landscape, which it’s always difficult for us to ask about, but I’ll try anyways. Just basic big picture here is that is it your sense that seller expectations are – or the people are, let’s just say, testing the market based on what could be perceived as really good values? Or do you think there are some serious sellers out there given the discussion of what’s going on and things will actually transact over the next six to 12 months, whether that’s with or away from the OPI.

Shaun, this is Steve again. I think to some degree, you’re right. I think sellers are testing the market and seeing if some of the public market values can translate into private transactions. I do expect that you’ll see some prints over the next couple of quarters in terms of transactions because there are some circumstances by things that might not be simply value-driven. But there’s really no way to sort of standardize across the universe of what we’re seeing.

Thank you very much.

[Operator Instructions] Our next question is from Dan Donlan with Ladenberg Thalmann. Please state your question.

Thank you and good morning. I was just curious what the unused property that you sold at the Hollywood Baton Rouge was?

That was a – there was piece of land that was – formally housed the HR, and I think.[ 22.24]

Yes, it was several miles down the road. It was nothing that was integral to the operation of the facility. It was used, quite frankly, back after Katrina, because the business volumes down there were so extreme so it had no longer served any useful purpose.

it was actually land purchased in the original acquisition by Penn. And I think the fact that there was – we might be reacting to the fact that we took a loss. That’s because in the original purchase, I’m not sure. That dates way, way, way back. Remember, we’re talking about 15 years ago. That they did a proper job of allocating the land value. So in terms of between all the lands that they had. And so – because I don’t believe at the end of the day that the land that we sold for was – had depreciated to the level that we recognized a loss. However, the accounting is what it is. And that’s where we’re sitting on the books for and we sold it. And obviously, the amount we sold it for was less than what was on the books.

Sure, sure. I was just more or less curious because I mean, that’s something that you could’ve developed or what, and it sounds like [indiscernible], it wasn’t contiguous. So...

It wasn’t contiguous. It also had a dilapidated structure on it. A building with the roof caving in and other kinds of other fine attributes.

That’s why we’re saying we’re glad to get rid of it

Okay. And then just curious if you could how many properties Penn and Pinnacle have outside the master leases. And if any of those – your master leases have been – and if any of those properties would be of interest to you down the line or maybe could be some type of – something that you could get if negotiations change, but however their structure may change?

I mean, for Penn, the 2 biggest properties that they have – well, there’s 3, I suppose, that would be of main interest. One would be their Massachusetts property in Plainridge; potentially in Tropicana. They have a joint venture in Kansas that could be of interest. They also have a couple – they have a dog track but I don’t think that has particular value for us. Relative to Pinnacle, Penn also has a joint venture with a track in the Houston. Pinnacle has a race track in Ohio that we left behind as part of the spin transaction. And they’ve also, I think, have a partial interest in a track in San Antonio. So those are all potential opportunities. I mean, obviously, the last – the Texas stuff would involve – there has to be some kind of legislation pass to authorizing gaming. I think that’s quite far in the future.

Okay.

But would we be interested in such things? The answer is, of course.

Okay, perfect. And then just lastly, just because I didn’t want to ask it yet. I was just curious, the appetite or interest level for non-gaming properties. I think that you said in the past that runway still looks good for gaming. But just curious, your thoughts there, if you’ve gotten maybe closer than maybe you have in the past. Just curious about your 25.44

I think the quick answer is, we’re no closer to that. We remain open to it. We look through the republications on a monthly basis to see what’s going on out in the REIT world generally, but look, we’re still focused on this business. At home, nothing has crossed our desk that would be remotely attractive. So that’s really the – that’s the straight answer.

Okay, thank you.

[Operator Instruction] Okay. We have reached the end of our question-and-answer session. I would like to hand the conference back over to management for closing remarks.

Okay, operator, thank you very much. And thanks to all of you who have dialed in this morning. We will look forward to talking with you next quarter. Thanks again.

Thank you, this concludes today’s conference. You may disconnect your lines at your at this time. Thank you for your participation.