Gaming & Leisure Properties, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited quarterly results; fourth-quarter figures are noted below. This is an annual report, not a standalone quarterly filing.
Business context
GLPI is a Pennsylvania REIT focused on owning gaming real estate and leasing it to operators under long-term triple-net leases. It also owns and operates two taxable REIT subsidiary (TRS) casinos. At year-end, its portfolio included 36 gaming and related facilities across 14 states; rental properties were 100% occupied. Substantially all rental income came from Penn and Pinnacle.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue | $828.3 million | $575.1 million | +44.0% |
| Income from operations | $480.6 million | $257.4 million | +86.7% |
| Net income | $289.3 million | $128.1 million | +125.8% |
| Diluted EPS | $1.60 | $1.08 | +48.1% |
| FFO | $384.9 million | $223.8 million | +72.0% |
| AFFO | $542.1 million | $321.8 million | +68.5% |
| Adjusted EBITDA | $721.4 million | $440.0 million | +63.9% |
Operating and net margins, calculated on reported net revenue, were approximately 58.0% and 34.9%, respectively, versus 44.8% and 22.3% in 2015. FFO, AFFO and Adjusted EBITDA are company-defined non-GAAP measures and are not directly comparable across companies.
Cash flow and capital spending: Operating cash flow was $514.4 million, versus $319.7 million in 2015. Investing cash outflow was $3.22 billion, primarily reflecting property acquisitions. Financing cash inflow was $2.70 billion, including debt and equity proceeds. Capital maintenance spending was $3.1 million.
Debt and liquidity: Gross debt was $4.716 billion ($4.665 billion net of unamortized issuance costs), compared with $2.541 billion gross at year-end 2015. Cash was $36.6 million, and $534.1 million remained available under the revolving facility. The company reported compliance with debt covenants. Debt included $3.425 billion of fixed-rate notes and $1.290 billion outstanding under its credit facility.
Dividends: GLPI paid $2.32 per share in regular dividends during 2016, totaling $428.4 million. It declared a $0.62-per-share quarterly dividend in February 2017.
Fourth-quarter results
Unaudited fourth-quarter 2016 net revenue was $238.8 million, operating income was $148.9 million, net income was $93.7 million, and diluted EPS was $0.45. Fourth-quarter 2015 net revenue was $128.7 million and net income was $29.8 million. The filing attributes the step-up principally to the Pinnacle and Meadows acquisitions; the periods are therefore not like-for-like.
Material changes and unusual items
- GLPI acquired substantially all of Pinnacle’s real estate assets on April 28, 2016, for approximately $4.8 billion, adding 14 properties. Consideration included approximately $3.0 billion cash and 56.0 million GLPI shares. The lease accounting split building assets into a direct financing lease and land into operating lease treatment.
- In September 2016, GLPI acquired the Meadows real estate for approximately $322.9 million and leased it to Pinnacle.
- Acquisitions drove a $257.1 million increase in rental revenue and direct-financing-lease income. Pinnacle contributed $164.7 million of rental revenue and $48.9 million of direct-financing-lease income in 2016; those figures reflect only the post-acquisition portion of the year.
- Interest expense rose $61.7 million to $185.9 million, mainly due to acquisition-related borrowing. GLPI issued $1.375 billion of new notes and drew an $825 million term loan A-1 facility.
- TRS gaming revenue declined $3.7 million to $138.6 million amid lower patronage at both Baton Rouge and Perryville. The filing expected the December 2016 opening of MGM National Harbor to pressure Perryville and Penn’s Charles Town property, potentially affecting Penn rent escalators and variable rent.
- Real estate taxes paid by tenants are recorded as both revenue and expense; this accounting presentation increases reported revenue without corresponding operating-income impact. In 2015, a property-tax refund reduced reported revenue and expense but did not affect operating income or net income.
- GLPI’s share count increased materially in 2016 through the Pinnacle stock consideration, public offering, ATM sales and option exercises. Weighted-average basic shares rose to 178.6 million from 114.4 million.
Outlook, risks and contingencies
Management stated that operating cash flow, cash on hand and revolver availability were expected to meet anticipated debt service, capital expenditure, working-capital and dividend needs at then-current operations. No specific earnings or revenue guidance was provided. Management expected future growth to rely primarily on acquisitions, potentially funded with additional debt or equity.
- Tenant concentration is a central risk: approximately 62% of collective rental revenue and direct-financing-lease income was attributable to Penn and 36% to Pinnacle; the stated percentages do not include a full year of Pinnacle and Meadows rent.
- GLPI has significant leverage, floating-rate exposure and substantial scheduled debt maturities, including $550 million of notes due in 2018 and $1.0 billion due in 2020. Higher rates or refinancing constraints could pressure cash available for dividends and acquisitions.
- REIT qualification requires ongoing compliance with technical tax rules and distribution requirements. Loss of REIT status could create significant tax liability and reduce distributions.
- Gaming regulation, competition, economic conditions, severe weather, environmental liabilities, tenant performance and the ability to obtain approvals for acquisitions or transfers could affect results. The filing identifies no environmental issue expected to have a material impact.
- GLPI may have uncapped indemnification obligations to Penn under the tax matters agreement if the Spin-Off’s tax-free treatment is jeopardized by specified company actions or breaches. Penn and Pinnacle indemnities for certain retained liabilities may not be fully collectible.
- Ordinary-course legal proceedings were disclosed; management did not expect their outcome to materially adversely affect consolidated financial position or results, while noting outcomes and insurance coverage remain uncertain.
Investor facts to verify
- Review Penn’s and Pinnacle’s current financial condition, rent coverage, and capacity to meet lease obligations, particularly after the portfolio expansion.
- Check debt maturities, floating-rate exposure, covenant headroom and refinancing plans against cash flow and dividend commitments.
- Assess the realized operating impact of MGM National Harbor on Perryville and Charles Town, including any effect on rent escalators or rent resets.
- Separate acquisition-driven growth from comparable-property performance and review the direct-financing-lease assumptions, including residual value and collectability.
- Monitor REIT qualification, required distributions, and potential tax or indemnification exposure related to the Spin-Off and Pinnacle transaction.