Gaming & Leisure Properties, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; the filing also reports fourth-quarter results. GLPI is a Pennsylvania REIT primarily owning gaming-property real estate and leasing it to operators under long-term triple-net leases. At year-end, its portfolio included interests in 46 gaming and related facilities across 16 states; owned rental properties were 100% occupied.
Financial results and liquidity
- Revenue: $1.056 billion, up 8.7% from $971.3 million in 2017. Real-estate income rose 11.3% to $923.2 million; gaming, food, beverage and other revenue fell 6.7% to $132.5 million.
- Profit: Operating income was $593.8 million, down 1.9%; net income was $339.5 million, down 10.8%. Diluted EPS declined to $1.58 from $1.79.
- Margins: Operating margin was approximately 56.2%, versus 62.3% in 2017; net margin was approximately 32.2%, versus 39.2%. The decline reflects higher expenses, including a goodwill impairment.
- Non-GAAP measures: FFO was $465.5 million, AFFO $683.6 million, and Adjusted EBITDA $926.6 million. These company-defined measures are not GAAP substitutes and may not be comparable with other issuers.
- Cash flow: Operating cash flow increased to $654.4 million from $598.7 million. Investing used $1.510 billion, principally for property acquisitions and mortgage loans; financing provided $852.1 million. Cash and equivalents were $25.8 million at year-end. Maintenance capital expenditures were $4.3 million.
- Debt and liquidity: Gross long-term debt was $5.903 billion ($5.853 billion net of issuance costs, premiums and discounts), versus $4.481 billion gross at year-end 2017. The company had $4.975 billion of fixed-rate senior notes and $927 million outstanding under its credit facility, including $402 million drawn on the revolver; $772.6 million of revolver capacity remained available. Interest expense rose 14.1% to $247.7 million. GLPI reported compliance with debt covenants.
- Dividends: 2018 distributions totaled $2.57 per share, up from $2.50; cash dividends paid were $550.4 million. GLPI intends to distribute at least the REIT-required 90% of REIT taxable income, but distributions remain subject to board discretion and applicable covenants.
Material changes versus the prior comparable period
- In October, GLPI acquired five Tropicana properties for $964 million, exclusive of fees and taxes, and leased them to Eldorado under a new master lease with initial annual rent of $87.6 million. It also originated a $246 million mortgage loan to Eldorado.
- Following Penn’s acquisition of Pinnacle, GLPI amended the Pinnacle lease, transferred three properties to a new Boyd master lease, and acquired Plainridge Park for approximately $250 million. The related Boyd loan was $57.7 million. Management said these transactions added $45.3 million to initial annual real-estate income; the Eldorado lease and loan added stated initial annual rent and interest of $87.6 million and $22.4 million, respectively.
- GLPI’s real-estate income growth also reflected rent escalators, property performance, percentage-rent adjustments and partial recognition of previously deferred rent. The Amended Pinnacle Master Lease changed to operating-lease accounting, moving approximately $2.6 billion of assets from direct-financing-lease presentation to real estate investments.
- Operating expenses increased 26.3% to $461.9 million, including $59.5 million of goodwill impairment, higher depreciation from acquisitions and lease reclassification, and $13.1 million of accrued retirement costs related to the former CFO. Interest expense also increased following debt refinancing and acquisition-related borrowing.
- Fourth-quarter revenue was $303.3 million, compared with $240.7 million in Q4 2017; operating income was $123.9 million versus $150.1 million, and net income was $45.9 million versus $93.3 million. The quarter included the $59.5 million goodwill impairment.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash on hand and available credit were expected to meet anticipated debt service, capital expenditures, working-capital and dividend needs. It expects growth primarily from property acquisitions; significant future deals could require additional debt or equity financing. No specific earnings or revenue guidance was provided.
- GLPI attributed the Baton Rouge casino’s weaker outlook to regional market deterioration and a smoking ban effective in Q2 2018. The impairment reduced Baton Rouge goodwill to $16.1 million. Further impairment could result if forecasts are not achieved.
- Tenant concentration remains a key exposure: approximately 93% of 2018 real-estate income, excluding tenant-paid real-estate taxes and ground leases, came from Penn and its acquiree Pinnacle. GLPI relies on tenants’ operating performance and ability to pay rent; downturns, competition, regulatory changes or tenant financial stress could affect collections and dividends.
- Casino Queen’s affiliate had covenant and payment defaults on its senior credit agreement, restricting cash payments on GLPI’s unsecured $13 million loan. GLPI recorded a $1.5 million impairment of previously recognized paid-in-kind interest. Management expected principal repayment from a prospective sale of Casino Queen operations, but stated the sale was not certain; lease payments were current.
- The $246 million Lumière mortgage loan bears approximately 9% interest; its first-mortgage security is scheduled to terminate one year after the October 2018 closing, after which the loan continues unsecured to its October 2020 maturity. The parties anticipated repayment or substitution of acceptable Eldorado properties.
- Other material risks include leverage and variable-rate interest exposure, refinancing and capital-market access, gaming and landlord licensing, REIT qualification and distribution requirements, casualty and environmental liabilities, and dependence on tenants and indemnitors. GLPI reported no material off-balance-sheet arrangements and no litigation expected to have a material adverse effect, while noting outcomes and insurance coverage cannot be assured.
- The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Most important facts for investors to verify
- Track Penn, Eldorado and Boyd rent coverage, operating performance, lease compliance and the actual diversification of rental income after the 2018 transactions.
- Confirm that expected rent and interest from the Tropicana, Plainridge Park, Boyd and Eldorado transactions are realized, and assess the Lumière loan’s collateral transition and repayment or substitution.
- Monitor Baton Rouge operating results after the smoking ban and regional deterioration, including any additional impairment; follow the Casino Queen sale, loan principal recovery and lease status.
- Review debt maturities, floating-rate exposure, revolver availability, covenant headroom, refinancing costs and the sustainability of the $2.57 per-share distribution.
- Assess whether acquisition-driven growth can be funded on acceptable terms without undue leverage or shareholder dilution, while preserving REIT qualification.