Gaming & Leisure Properties, Inc. — Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. GLPI is a Pennsylvania REIT whose principal business is owning gaming real estate leased to operators, primarily Penn National Gaming under a triple-net master lease. Its portfolio comprised 21 gaming and related facilities across 12 states, including two company-operated taxable REIT subsidiary properties.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $162.7 million | $158.3 million | +2.7% |
| Income from operations | $78.8 million | $74.3 million | +6.0% |
| Net income | $47.1 million | $44.3 million | +6.3% |
| Diluted EPS | $0.40 | $0.38 | +$0.02 |
| Operating margin on net revenue | 48.4% | 47.0% | +1.4 percentage points |
| Operating cash flow | $100.8 million | $79.7 million | +$21.0 million |
Rental revenue rose 5.7% to $124.9 million; gaming revenue declined 6.1% to $36.4 million. FFO was $71.0 million, AFFO $80.0 million, and Adjusted EBITDA $110.6 million. These are non-GAAP measures as defined by the company.
At March 31, cash was $45.4 million and debt was $2.576 billion. Debt included $525 million drawn on the credit facility and $2.05 billion of fixed-rate notes. The revolver had $474.1 million of available capacity. The company reported compliance with debt covenants. Shareholders’ deficit was $125.5 million.
Quarterly operating, investing, and financing cash flows were $100.8 million, negative $6.1 million, and negative $85.3 million, respectively. Dividends paid were $62.7 million; capital project and maintenance spending totaled $6.6 million. Cash increased $9.4 million to $45.4 million.
Material changes and management commentary
- Rental growth reflected the addition of Hollywood Gaming at Dayton Raceway and Mahoning Valley Race Course to the master lease and a Penn rent escalator. The closure of Argosy Casino Sioux City partly offset those increases.
- TRS gaming revenue weakened, particularly at Hollywood Casino Perryville amid increased competition. Lower gaming taxes helped offset the revenue pressure.
- Operating cash flow improved year over year, but the reported increase included working-capital and timing effects, including a $24.9 million increase in accrued interest.
- Management said it intended to pursue gaming and potentially non-gaming acquisitions. GLPI announced an offer to acquire Pinnacle’s real estate assets; the filing does not establish that the proposed transaction would close.
- GLPI’s agreement to acquire The Meadows Racetrack and Casino remained affected by litigation with seller Cannery Casino Resorts. GLPI sought return of $10 million paid under a consulting agreement and additional damages; outcome and timing were uncertain.
Outlook, risks, and contingencies
- No quantified earnings or financial guidance was provided. Management cautioned that first-quarter results are not necessarily indicative of full-year results.
- Tenant concentration is significant: substantially all leased properties are under the Penn master lease. Tenant performance, lease obligations, and gaming-market conditions therefore matter to rental cash flows.
- Management cited Perryville competition, including the expected opening of a Prince George’s County casino in the second half of 2016, as a risk to results. Perryville’s slot-machine purchases reduced its gaming tax rate effective April 1, 2015.
- Interest-rate exposure arises from variable-rate borrowings; $2.05 billion of notes carried fixed rates. Higher rates could raise borrowing, refinancing, or acquisition costs.
- Other material risks include REIT qualification, regulatory approvals, the outcome of the CCR litigation, access to capital, and the potential tax consequences of the Penn spin-off. GLPI reported no material change to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of March 31, 2015; no material change in internal control over financial reporting was reported.
Investor facts to verify
- Progress and financing terms, if any, for the proposed Pinnacle transaction, and the status and potential recovery from the Meadows/CCR litigation.
- Penn’s lease coverage and ability to meet obligations, given GLPI’s reliance on the master lease.
- Whether Perryville’s lower gaming-tax rate offsets competitive pressure and how the new Maryland casino affects its performance.
- Cash-flow sustainability after dividends and debt service, including the effect of accrued-interest and other timing changes.
- Debt covenant headroom, variable-rate exposure, and the availability of revolver capacity for future needs.