Business context and reporting period
Gaming and Leisure Properties, Inc. (GLPI) filed this unaudited Form 10-Q for the three months ended March 31, 2018. GLPI is a Pennsylvania REIT whose principal business is owning gaming real estate and leasing it to operators, primarily under triple-net leases. Its portfolio comprised 38 facilities across 14 states and was 100% occupied. Most earnings came from leases with Penn and Pinnacle; GLPI also operated Hollywood Casino Baton Rouge and Hollywood Casino Perryville through taxable REIT subsidiaries.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Total revenue | $244.1 million | $242.7 million |
| Operating income | $151.9 million | $150.0 million |
| Net income | $96.8 million | $94.0 million |
| Basic and diluted EPS | $0.45 | $0.45 |
| Dividends per common share | $0.63 | $0.62 |
| Operating cash flow | $185.8 million | $184.7 million |
| Adjusted EBITDA (non-GAAP) | $221.3 million | $219.0 million |
| AFFO (non-GAAP) | $168.7 million | $165.8 million |
Revenue increased 0.6%; operating income rose 1.2% and net income rose 3.0%. Operating margin was approximately 62.2%, versus 61.8%; net margin was approximately 39.7%, versus 38.7%. Rental income and direct-financing-lease income rose 2.2% to $209.3 million. TRS gaming, food, beverage and other revenue fell 8.6% to $34.7 million. Interest expense was nearly unchanged at $54.1 million. Income tax expense declined to $1.5 million from $2.5 million, primarily reflecting the lower federal corporate tax rate and lower TRS income.
Operating cash flow was $185.8 million; investing activities provided $17.4 million, including $18.2 million of direct-financing-lease principal collections, partly offset by $0.8 million of maintenance expenditures. Financing activities used $186.8 million, including $134.7 million of dividends and $45.0 million of debt repayments. Cash rose to $45.4 million from $29.1 million at year-end.
Total assets were $7.22 billion and shareholders’ equity was $2.42 billion at March 31, 2018. Gross debt was $4.44 billion ($4.40 billion net of issuance costs), compared with $4.48 billion gross at year-end; approximate net debt after cash was $4.39 billion. The $700 million revolving facility was undrawn, with $699.6 million available after letters of credit. Debt repayments of $735.1 million were scheduled within one year, including $550 million of notes due November 2018; the Term Loan A and revolver mature October 2018. GLPI reported compliance with debt covenants. The company’s $3.425 billion of senior notes carried fixed rates; remaining facility borrowings were variable-rate debt.
Material changes, outlook and risks
- Higher rent and lease income reflected the Tunica properties added to the Penn Master Lease in May 2017, improved performance at two Ohio properties with variable rent, and lease escalators. TRS revenue declines reflected lower patronage at both casinos, especially Baton Rouge.
- Management said it intends to pursue additional gaming acquisitions and opportunities outside gaming. No quantified full-year earnings or cash-flow guidance was provided; the filing cautions that quarterly results are not necessarily indicative of full-year results.
- Pending Penn-Pinnacle transactions included GLPI’s agreed acquisitions of Plainridge Park and Belterra Park and lease arrangements involving properties to be transferred to Boyd. The transactions required regulatory approval and were expected to close in the second half of 2018.
- On April 16, 2018, GLPI agreed to acquire six Tropicana real estate assets for $1.21 billion, plus approximately $40 million in taxes and fees. Eldorado was to acquire the operating assets and lease the properties under a new master lease, with expected initial annual rent of $110 million. Closing was expected by year-end 2018, subject to approvals and other conditions. GLPI expected to use debt and equity, but said the deal could be fully debt-funded depending on market conditions. Certain termination circumstances could trigger a jointly and severally payable $92.5 million fee.
- Tenant concentration is material and would increase if Penn acquired Pinnacle. GLPI depends on tenants’ financial capacity and performance to meet rent and other obligations. Other stated risks include interest rates, access to capital, REIT qualification, regulatory approvals, gaming demand, and economic conditions. GLPI identified no litigation expected to materially affect results, while noting proceedings can be unpredictable and insurance may be insufficient.
- After quarter-end, CFO William J. Clifford announced his retirement, effective on or before August 31, 2018; Steven T. Snyder was to serve as interim CFO from May 4 while a search proceeded. The agreement provides for scheduled cash payments totaling approximately $12.75 million from September 2018 through January 2021, subject to its terms.
- Adoption of the new revenue standard produced a $410,000 cumulative retained-earnings adjustment; its impact on Q1 total revenue was described as immaterial. Management reported disclosure controls effective and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Progress, financing terms, approvals and closing conditions for the Penn-Pinnacle and Tropicana transactions, including expected rent and any resulting tenant concentration.
- Refinancing or repayment plans for the October 2018 credit-facility maturities and November 2018 notes, and the effect of acquisition funding on leverage and interest expense.
- Whether Penn, Pinnacle and other tenants maintain adequate operating performance and liquidity to satisfy lease obligations, particularly as TRS casino revenue declined.
- Dividend sustainability relative to AFFO, cash flow, REIT distribution requirements and planned acquisition funding; AFFO and Adjusted EBITDA are non-GAAP measures.
- Interim and permanent CFO transition costs, including the retirement agreement’s scheduled payments.