Gaming and Leisure Properties, Inc. (GLPI) Q2 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Gaming and Leisure Properties' Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Hayes Croushore. Please begin.

Thank you, Darren, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' Second Quarter 2018 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 may include those related to revenue, operating income and financial guidance as well as non-GAAP financial measures, such as FFO and AFFO. 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 forward-looking statements contained in the company's filings with the SEC as well as the definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release. On this morning's conference call, we're joined by Peter Carlino, Chairman and Chief Executive Officer; and Steve Snyder, Senior Vice President of Development and Interim Chief Financial Officer; and Desiree Burke, Chief Accounting Officer. I'd like to turn the call over to Peter.

Well, thanks, Hayes, and good morning, everyone. As always, I think we have provided pretty detailed information that is there for your examination, and usually, I limit my comments to just a few things that might be helpful and leave to you to ask the questions that you would like. I might underscore that we previously announced the acquisition of Tropicana Entertainment earlier in the quarter. And significantly, we did complete a refinancing of our 2018 debt maturities, which is an issue that Steve Snyder will spend a few moments with you describing in just a moment. Additionally this quarter, I think that the company continues to work towards closing the Tropicana transaction along with the Penn National Pinnacle Entertainment transaction as well. Penn has announced publicly that they expect that transaction to close somewhere in the fourth quarter. And we're thinking that the Tropicana transactions would close before year-end as well. That adds and will add 8 new properties to our portfolio with an annual rent of approximately $156 million at a very attractive blended cap rate. Interestingly, for me at least, things moved quickly. This fall will be almost our fifth year as a REIT, having spun from Penn. I think I'm particularly pleased with what we've been able to accomplish over these last 5 years and adding these new properties is a terrific way to sort of round out the first 5. So with that, Steve, do you want to go ahead.

Yes. Thanks, Peter. Good morning, everybody. I just want to touch on a couple of highlights. In addition to today's press release, you will also see we filed our 10-Q earlier this morning. So any questions or any specific detail that anybody wants to drill down on, it's out there in the queue, which we filed with the SEC at 7:00 this morning. Just to touch on a couple of things from the press release, just a brief portfolio update. On the Penn master lease, as Penn National indicated in their earnings release last week, in the lease year -- in the current lease year through June 30 of this year through the end of the quarter, the rent coverage on the Penn master lease was 1.89x. As they indicated in their call and we've indicated in our guidance, we are coming up on the fifth anniversary of the lease on November 1, October 31 of this year. As of that fifth anniversary, the variable rent will be reset. The reset of that variable rent will be a onetime reduction of an annualized amount of approximately $11.5 million that will then prevail for the next 5-year variable rent period. So we won't see another reset on that variable component until 2023. The nice thing about that variable reset is, it slightly reduces the denominator, so it will actually help us modestly in realizing the escalator on the base building rent in the future. On the escalator itself, as Penn indicated in their earnings call and as reflected by our guidance, we do expect that the commencement of the next lease year, November 1, that we realize the full 2% escalator, which will be an annualized impact of a positive $5.5 million approximately on the Penn master lease rental payments. Moving on to the Pinnacle master lease, which is already reflected since that anniversary back in April, the annual escalator -- annualized amount of $5.8 million is reflected, and the variable reduction on the pinnacle master lease which occurs every two years, so it occurred this year and will occur again in 2020, was a reduction in the variable piece of $1.14 million. Also on the Pinnacle side, but not under the Pinnacle master lease, the separate Meadows lease, we did see in the first full year, the full escalator under that Meadows lease realized and that lease itself is actually running at coverage recently that is even slightly ahead of the Penn and Pinnacle master lease coverages. So the performance at the Meadows has really exceeded our expectations going in. I think the Pinnacle folks would acknowledge that as well. Lastly, in terms of the lease portfolio, Casino Queen, we did see the full lease escalator at the commencement of the current lease year, which was January. We do have a loan to Queen. We lent them $13 million at a 15% interest rate on a subordinated basis. As of the end of the quarter, they elected at the direction of their senior lender to pay in kind the interest expense for the quarter. So you will see on the balance sheet that balance increasing from $13 million to just under $13.5 million. We understand they're currently in negotiations with their senior lender on revising the existing covenants, so that we expect that they'll get back to cash paying here in the near future. The last item in the portfolio, of course, is the taxable REIT subsidiary. I think everyone is aware of how challenging the Baton Rouge market has been. June 1 of this year, they put in place a smoking ban in East Baton Rouge Parish. Our management team on the ground down there has been very active in terms of managing expenses and, even more importantly, in addressing the smoking ban. Our property was the first and until now it's still the only property in the market that does have an outdoor gaming area, which right now has 15 games, all of which are producing at well in excess of the house average; in fact, in some instances double the house average. So kudos to the management team at Baton Rouge for being proactive in addressing a very challenging environment. On the other side of TRS, Perryville has been sort of trending right on plan, modestly ahead of plan. As to the balance sheet update, Peter mentioned, the big activity in the quarter was completing the refinancing of all near-term maturities, so that we have no maturities before 2020 at this point in time. We did affirmatively elect to term out some variable interest rate exposure based on where interest rates are going. So we've now got a debt structure that has a weighted average maturity of right around 5 years and a weighted average coupon of just over 5% with 88% of our debt at a fixed rate of interest. The cash balance at the end of the quarter really reflects just the remaining redemption of those 2018 notes that were not tendered. Those notes will be retired pursuant to their optional early redemption at no premium here in the month of August. And then finally on the balance sheet, there was no ATM activity in the quarter. So you see that disclosed in the 10-Q that we still got about $215 million remaining under the ATM. So with that, Peter touched on the timing of the pending transactions. Just a quick comment on the financing of those pending transactions. As we get greater clarity on the specificity of the timing, we've got a number of tools available to us. We did, as part of the refinancing, increase the company's liquidity by taking the revolver up to $1.1 billion and extending the maturity of the revolver out to 2023. So with that revolver capacity, the ability to continue to access the senior unsecured note market, the ATM and possibly even an additional term loan given the maturity gaps that we have in our debt maturity ladder, we've got a number of tools that are available to us to complete the $1.6 billion in financing requirements that are necessary to complete the 2 transactions. So we feel we are positioned very well to get to closing on both transactions. With that, I would turn it back to you, operator, Darren, for any questions that might be in the queue.

[Operator Instructions]. Our first question comes from Thomas Allen of Morgan Stanley.

Thanks for all the incremental color this quarter. It kind of limits our questions. But shall we talk about the transaction environment a little bit. Does it feel like there are more potential deals in the market. What are the seller's expectations? And is there any increased competition for deals?

Well, you know the answer to your last question. Of course, there is increased competition. I don't think there's any huge change in the pace of a deal or 2 a year kind of floating around. Steve, I don't get any sense. We have things that we're working on as always. There's always something in the queue. But look, it's a competitive world.

Yes, I think Thomas' question is twofold, right? One is, are there more sellers today than there may have been historically? And I think the answer to that question, just given some of the valuations that have printed recently, I do think that we're seeing greater activity in terms of sellers exploring what a market clearing transaction might be for them. In terms of us, we are, as you would expect, myopically focused on getting the transactions that we have in the pipeline closed because we look at that high single-digit accretion in cash flow and high single-digit accretion in dividend as something that is absolutely critical. Peter, as our shareholder-in-chief, has always said, we're never going backwards, we're just going forward. So the answer to your question is, generally, there is a heightened sense of activity. There is heightened activity in the market as you've seen by the closings and as you would expect other sellers seeing those closings and seeing if they can replicate them. But you should expect us to continue to be completely disciplined about doing transactions that are absolutely accretive from day 1 for our shareholders.

Yes, look, I've said it this way. And I mean it as firmly as ever. We're not out about building monuments. We're about building value to shareholders. So Steve, well said, with sort of a mantra around here, we're going forward, we're never going backward. So nonaccretive transactions aren't part of our mix. We don't believe in the idea of strategic acquisitions. I mean, maybe the day will come when we can find something like that, but I haven't seen it yet. So I think that question is pretty well answered.

Helpful. And then just on Baton Rouge, I think we're all anticipating the smoking ban going into effect June 1. I guess what's going on in that market that drove that kind of expectation cut to the year?

Well, there are a number of micro issues. I'd say there is one principal micro issue, unique to the Baton Rouge market. You'll recall back in 2016, there was some severe flooding in Baton Rouge, which throughout the course of the end of '16, well into 2017, which is what we're now anniversarying, there was a lot of FEMA money and a lot of construction workers, who actually temporarily, as they're prone to do, moved into that marketplace. That's no longer there. So through the June 1 smoking ban, we saw, and you see it in terms of the volume reports, we saw that market decline pretty substantially relative to the rest of Louisiana. Not that it's much of a consolation, but we actually held and modestly increased our market share. And again, to the management team down there at the property, they were very proactive in anticipating the smoking ban, so that we opened on June 1, the outdoor smoking patio with gaming equipment in place. So we're doing what we can, but there are clearly activities or there are clearly phenomenon in that market that we just can't overcome.

Our next question comes from Carlo Santarelli of Deutsche Bank.

I just have one, as it pertains to how the market environment has changed. Obviously, you have your debt deals done, your revolver extended and expanded. And when you think about kind of funding for the $1.6 billion, Steve, that you mentioned, you had often talked about, with respect to at least the Tropicana deal, doing a predominantly debt deal. With the stock kind of where it currently sits, has your thinking changed at all about the way you go about it?

I think the change, Carlo, is that we're still not certain that the valuation fully reflects the accretion that will be generated as a result of the 2 transactions. So we are encouraged. But it really hasn't changed our thinking in terms of where the equity value currently trades.

Yes, another way of saying, I think we still think we are underappreciated. So let's get these transactions to closing. I'm excited about what it does for me as a shareholder, just personalizing it. And hopefully, the market will recognize a little bit more value.

[Operator Instructions]. Our next question comes from Robin Farley of UBS.

I wonder if you could just give us a little color on, there's another transaction in the market recently, the Margaritaville. Is that something that you had looked out but felt that the price is too high or didn't feel like it sounds strategically? Just kind of wondering, if that was something you looked at and why you ended up not doing that?

I'm going to answer this question because Peter has got 2 hats that he wears. So Robin, it's a fair question. Shreveport-Bossier is a market that we as a management team have had a lot of experience with, going back to the early 2000s when we bought the Hollywood Casino business while we were at Penn. You can rest assured that we looked at the transaction. We made a presentation, a proposal to our major tenant that we think was on economic terms that were not too dissimilar from the transaction that was announced. But we did so as we did with our Tunica tuck-in transaction with them a year ago, asked that, that be included in the master lease. So that, that property would be cross collateralized with all other properties under the Penn master lease. It appears they made an affirmative decision to -- the economics were palatable, but the notion of doing a single asset lease in Shreveport-Bossier City certainly had some appeal to them in light of what the Oklahoma Tribes continue to do and what may at some point in the future be expanded gaming in the State of Texas. So I commend them. I think they tiptoed into that market in a pretty conservative way. And they maintained for themselves much greater flexibility at the end of the lease term than they would have, had they come to us and bolted it on to the master lease.

[Indiscernible] such as that changes as you go forward, and there are a couple of large operators out there, if you already have agreements with them? Because this -- is that something that we would expect maybe future transactions not to be tucked into the master lease? Or do you think it was just kind of a one-off because of the risks of that market?

Well, I think it really depends on the transaction. It depends on the market. It depends on how aggressive or how conservative our competitors choose to be. So I don't -- I would not want to standardize. I will tell you, because it exists in our master lease, when one of our tenants does go ahead and buy a property in a market that is competing, and this clearly will compete with the Boomtown facility in Bossier, that we then set a floor under that component of the master lease payments that are attributable to that facility under the master lease that our tenant has now become a direct competitor of. So we do have protections. We have, I think, incentives for the tenants to come back to us. But at the end of the day, they're going to make a decision that's in their best business interest.

Our next question comes from John Massocca of Ladenburg Thalmann.

So just kind of one maybe long-term question. And I know we're kind of going back a little bit to talk about it too. But with regards to the TRS properties, given the nature of the original spin, is there ever going to be a time when you can sell the operations at those assets and turn them into maybe more kind of standard owned-building-leased-to-an-operator-type assets. And if so, what would be the time line for that?

There is no time line. I know Steve has a pretty stock answer for that. We would probably think about doing such a thing if that were to happen in conjunction with another transaction and there's something that's going to be tied into several additional properties. So we use it as base. But it's obviously a tool that we can use to leverage it into more business for us. In the meantime, look, we like being in this business. I mean, we're a gaming exclusive REIT. We like kind of being in touch with this business, the day to day. It gives us flexibility just in case we had to bring yet another asset into the TRS. So we can go either way. We remain completely flexible. It's going to be whatever is in our and shareholders' best interest at that time. So we could be in, we could be out. We just haven't seen the opportunity that would justify a sale right now.

From a tax and kind of legal standpoint, is there like a window that has to open?

I think we're there. Let Desiree...

Yes, there's no window or no safe harbor. It's a business decision. As long as we have a viable business alternative as to why we want to exit the business, from a tax perspective, we could exit the business. But we're still happy operating it, and we'll make that determination when the time comes. There's no black or white answer to your question.

No, but in terms of the timing, I mean, Baton Rouge was included in the spin because it was a continuing trade or business. The IRS tests a continuing trade or business by five years of ownership, historically. And obviously looking at it prospectively, we're beyond 5 years. So we think there are no restrictions from us exploring any and all opportunities with respect to the TRS because they've served their purpose and any restrictions have come and gone.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Mr. Peter Carlino for closing comments.

Well, thank you all for tuning in today. Let's -- we'll keep our eyes on now to the end of the year, hopefully get our transactions closed. And frankly, wind up a really terrific year here at GLPI. So thanks, again. See you next quarter.

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