Gaming & Leisure Properties, Inc. — Q2 2018 Form 10-Q
Business context and period. GLPI is a REIT focused primarily on owning gaming real estate and leasing it to operators under triple-net arrangements; it also operates Hollywood Casino Baton Rouge and Hollywood Casino Perryville. For the quarter ended June 30, 2018, its portfolio comprised 38 facilities across 14 states and was 100% occupied. Penn and Pinnacle were its principal tenants.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the same period in 2017.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $254.2 | $243.4 | $498.3 | $486.1 |
| Operating income | $153.2 | $152.7 | $305.1 | $302.7 |
| Operating margin | 60.3% | 62.7% | 61.2% | 62.3% |
| Net income | $92.0 | $96.3 | $188.8 | $190.3 |
| Diluted EPS | $0.43 | $0.45 | $0.88 | $0.90 |
| Operating cash flow | Not separately stated | Not separately stated | $305.6 | $292.2 |
Q2 rental revenue and direct-financing-lease income increased 5.4% to $218.3 million, while gaming, food, beverage and other revenue declined 1.1% to $35.9 million. For the first half, rental and direct financing income rose 3.8%; TRS Properties revenue fell 4.9%. Non-GAAP Q2 AFFO was $169.2 million and Adjusted EBITDA was $225.1 million; first-half AFFO was $337.9 million and Adjusted EBITDA was $446.5 million. The company cautions that these non-GAAP measures may not be comparable to similarly named measures used by other companies.
Cash and equivalents were $144.5 million at June 30, 2018, up from $29.1 million at year-end 2017. Gross debt was $4.558 billion ($4.507 billion net of issuance costs), versus $4.481 billion gross at year-end. The $1.1 billion revolving facility had no borrowings and approximately $1.100 billion available, subject to about $0.4 million of letters of credit. GLPI reported compliance with debt covenants.
Dividends paid were $0.63 per share in Q2 and $1.26 per share for the first half, compared with $0.62 and $1.24, respectively, in 2017. A $0.63-per-share third-quarter dividend was declared after quarter-end.
Changes, outlook and notable items
- Revenue growth primarily reflected Tunica properties added to the Penn Master Lease in May 2017, rent escalators, improved performance at two Ohio properties and increased recognized income from the Pinnacle direct financing lease. Operating income grew modestly, but net income declined as operating expenses and interest costs increased.
- General and administrative expense rose 69.3% in Q2, largely due to accrued retirement costs associated with the former CFO’s retirement. The filing identifies $13.1 million of retirement costs for the first half. Debt refinancing and tender activity generated $3.5 million of debt-extinguishment losses in the first half.
- In May, GLPI issued $500 million of 5.25% notes due 2025 and $500 million of 5.75% notes due 2028, using proceeds in part to repay term loans and tender for 2018 notes. It tendered for $393.5 million of those notes; the remaining $156.5 million was called for redemption on August 16, 2018.
- GLPI agreed to acquire six Tropicana real estate assets for $1.21 billion, plus approximately $40 million in taxes and fees. Eldorado is expected to operate them under a new lease with initial annual rent of $110 million. The transaction was expected to close by year-end 2018, subject to approvals; GLPI anticipated debt and equity funding, with the possibility of all-debt financing. Separately, planned Penn/Pinnacle-related transactions include approximately $315 million of property acquisitions and were expected to close in Q4 2018, subject to regulatory approval. No broader financial guidance is provided in the filing.
- GLPI disclosed a default notice under the senior credit agreement of CQ Holding, parent of Casino Queen. Payments to unsecured lenders were halted, and $0.5 million of loan interest was paid in kind. GLPI said it still expected full principal repayment and reported Casino Queen lease payments current; the loan stood at $13.5 million including accrued interest.
- Management highlighted tenant concentration and the risk of greater reliance on Penn if the proposed Penn-Pinnacle merger closes. The Tropicana transactions also carry regulatory, financing, execution and tenant-performance risks. Certain failure or termination circumstances could result in a $92.5 million termination fee payable jointly and severally by GLPI and Eldorado to Tropicana. The filing also cites REIT qualification, interest-rate, capital-market, tenant-credit and gaming-market risks.
- Hollywood Casino Baton Rouge revenue was pressured by market conditions and a smoking ban effective June 1, 2018; the company also cited increased competitor promotions. GLPI adopted the new revenue standard on January 1, 2018, with an approximately $0.4 million retained-earnings adjustment and immaterial revenue impact.
Investor verification priorities
- Track completion, regulatory approvals, financing terms and expected returns for the Tropicana and Penn/Pinnacle-related transactions, including resulting tenant concentration.
- Monitor Penn’s, Pinnacle’s and any new tenants’ financial health, rent coverage and ability to meet lease obligations; follow the CQ Holding loan’s payment status and recoverability.
- Review refinancing costs, maturities and interest-rate exposure, including redemption of the remaining 2018 notes and the effect of new higher-coupon debt.
- Assess whether recurring cash generation supports dividends and planned acquisitions; distinguish reported GAAP earnings from AFFO and Adjusted EBITDA.
- Monitor Baton Rouge operating trends and the impact of the smoking ban, local competition and consumer spending on variable rent and TRS results.