Gaming & Leisure Properties, Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2018, compared with the same periods in 2017. GLPI is a Pennsylvania REIT focused mainly on owning gaming real estate and leasing it to operators under triple-net leases. At quarter-end, its portfolio comprised 38 facilities across 14 states and was 100% occupied; most rental income came from Penn and Pinnacle. GLPI also operated Hollywood Casino Baton Rouge and Hollywood Casino Perryville through taxable REIT subsidiaries.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $254.1 million | $244.5 million | $752.4 million | $730.6 million |
| Operating income | $164.8 million | $152.7 million | $469.9 million | $455.4 million |
| Net income | $104.8 million | $97.0 million | $293.6 million | $287.3 million |
| Diluted EPS | $0.49 | $0.45 | $1.37 | $1.35 |
| Operating margin | 64.9% | 62.5% | 62.5% | 62.3% |
| Net margin | 41.2% | 39.7% | 39.0% | 39.3% |
Q3 rental revenue and direct-financing-lease income rose 6.2% to $222.4 million; gaming, food, beverage and other revenue fell 9.3% to $31.8 million. For the first nine months, operating cash flow was $518.2 million, compared with $489.1 million. Investing activities provided $21.9 million and financing activities provided $593.6 million, producing a $1.134 billion increase in cash. Cash and equivalents were $1.163 billion at September 30, versus $29.1 million at year-end 2017.
Net debt on the balance sheet was $5.449 billion, compared with $4.443 billion at year-end. Gross debt was $5.501 billion, including $4.975 billion of fixed-rate notes and a $525 million variable-rate term loan. No revolver borrowings were outstanding; approximately $1.100 billion of revolving capacity was available at quarter-end. The company reported compliance with debt covenants. It paid $0.63 per share in each of the first three quarters; a fourth-quarter dividend of $0.68 was declared after quarter-end.
Material changes versus prior periods
- Revenue increased 3.9% in Q3 and 3.0% year to date, primarily from lease escalators and increased direct-financing-lease income. Year-to-date growth also reflected the Tunica properties and improved variable rent at two Ohio properties.
- TRS property revenue declined, mainly due to weaker patronage and customer spending at Hollywood Casino Baton Rouge. Management cited general market conditions and the smoking ban effective June 1, 2018.
- Q3 operating expenses declined 2.7%; nine-month expenses rose 2.6%, including higher G&A associated with the former CFO’s retirement. Interest expense increased 10.7% in Q3 and 5.1% year to date following debt refinancing and new debt issuance. Nine-month results included $3.5 million of debt-extinguishment losses.
- Quarterly net income rose, but nine-month net margin was slightly lower year over year. The nine-month dividend was $1.89 per share versus $1.87 in 2017.
Outlook, management commentary, risks and unusual items
- No full-year earnings or revenue guidance is provided in the filing. Management stated it intends to pursue gaming-property acquisitions and may seek growth opportunities outside gaming.
- After quarter-end, GLPI completed the $964 million Tropicana real-estate acquisition and leased the five properties to Eldorado; initial annual rent is $87.6 million. GLPI also made Eldorado a $246 million mortgage loan, expected to generate $22.4 million in initial annual interest.
- On October 15, 2018, GLPI completed transactions accompanying Penn’s acquisition of Pinnacle. These included a $250 million Plainridge Park real-estate acquisition, a $57.7 million Boyd loan and new/modified leases. Management said initial annual real-estate income would increase by $45.3 million. Following these transactions, the portfolio comprised 46 properties in 16 states.
- The Penn-Pinnacle merger increases tenant concentration: GLPI warned that the majority of revenue after the merger depends on Penn and its subsidiaries. Tenant operating performance, rent-payment capacity, gaming regulation, economic conditions, acquisition execution, REIT qualification, access to capital and interest rates are material risks.
- GLPI disclosed a $14.0 million unsecured loan to CQ Holding Company, including accrued interest. CQ had a lender-reported covenant default; GLPI issued its own default notice, and a further payment default occurred after quarter-end. Interest was paid in kind. GLPI still expected full collection and reported that Casino Queen rent remained current, but the loan warrants monitoring.
- Debt refinancing and acquisitions increased leverage and interest costs. A $246 million Lumière Place mortgage loan is described as short-term; its mortgage and deed of trust terminate on the loan’s one-year anniversary, after which the loan continues unsecured. GLPI also disclosed potential built-in-gains tax on certain Tropicana assets sold within five years of acquisition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Routine legal proceedings were not expected to have a material adverse effect, although outcomes and insurance coverage are not assured.
Most important facts for investors to verify
- Post-merger tenant concentration and Penn’s ability to meet lease obligations, including the financial impact of the Penn-Pinnacle integration.
- Actual funding, debt levels, interest expense and returns from the Tropicana, Plainridge Park, Boyd and Eldorado transactions.
- Status, payment performance and recoverability of the CQ Holding Company and Eldorado loans, including collateral protections and the Lumière loan’s transition to unsecured status.
- Hollywood Casino Baton Rouge performance following the smoking ban and whether weakness in TRS revenues persists.
- Debt maturities, variable-rate exposure, covenant headroom, liquidity after acquisitions and the sustainability of dividends relative to cash flow and REIT distribution requirements.