Gaming & Leisure Properties, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; it also provides unaudited fourth-quarter results. GLPI is a Pennsylvania REIT that primarily owns gaming real estate leased to operators under long-term triple-net leases. At year-end, its portfolio included 38 gaming and related facilities across 14 states, was 100% occupied, and had approximately 15.2 million rentable square feet. The company’s two largest tenants were Penn National Gaming and Pinnacle Entertainment.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenue | $971.3 million | $828.3 million | +17.3% |
| Income from operations | $605.5 million | $480.6 million | +26.0% |
| Net income | $380.6 million | $289.3 million | +31.6% |
| Diluted earnings per share | $1.79 | $1.60 | +11.9% |
| Cash from operating activities | $598.7 million | $514.4 million | +16.4% |
| Interest expense | $217.1 million | $185.9 million | +16.8% |
Operating margin was approximately 62.4%, up from 58.0%; net margin was approximately 39.2%, versus 34.9%. These calculations use net revenue. Management also reported 2017 FFO of $481.7 million, AFFO of $669.5 million, and Adjusted EBITDA of $884.6 million; these are non-GAAP measures and should be considered alongside GAAP results.
Fourth quarter: Net revenue was $240.7 million versus $238.8 million in Q4 2016; operating income was $150.1 million versus $148.9 million. Net income was $93.3 million versus $93.7 million, and diluted EPS was $0.43 versus $0.45.
Balance sheet and liquidity: At December 31, 2017, cash was $29.1 million, total assets were $7.25 billion, and gross debt was $4.48 billion (reported debt net of issuance costs was $4.44 billion). The company had $699.6 million available on its revolving facility and reported compliance with debt covenants. The revolving facility and a $230 million term loan matured in October 2018; $550 million of notes matured in November 2018. Management expected to refinance the credit facility. Operating cash flow exceeded cash dividends paid of $529.4 million. Dividends were $2.50 per share for 2017, compared with $2.32 in 2016.
Material changes versus the prior period
- Rental revenue and income from the direct financing lease rose 21.2% to $829.2 million, primarily reflecting a full year of contributions from Pinnacle and the Meadows, the May 2017 acquisition of the Tunica properties, and lease escalators.
- GLPI acquired the Tunica real estate assets for $82.9 million and leased them to Penn for initial annual cash rent of $9.0 million.
- TRS Properties revenue declined $2.0 million year over year. Perryville’s food and beverage operations were outsourced in Q1 2017, reducing both revenue and expenses.
- Operating expenses increased 5.2%, including higher real estate taxes and land-rights/ground-lease expense. Interest expense increased as a result of debt used to finance the Pinnacle acquisition.
- Net cash used in financing activities was $606.9 million, mainly reflecting $529.4 million of dividends and $335.1 million of debt repayments, partly offset by $139.4 million of net ATM equity proceeds.
Outlook, commentary, risks and unusual items
- Management stated that operating cash flow, cash on hand and revolver availability were expected to cover anticipated debt service, capital expenditures, working capital and dividends. It gave no specific earnings or revenue guidance.
- The proposed Penn-Pinnacle merger was expected to close in the second half of 2018, subject to regulatory approval and other conditions. In connection with it, GLPI agreed to acquire Plainridge Park Casino and Belterra Park for approximately $315 million and to arrange a new Boyd lease for specified properties. Management estimated approximately $46 million of additional annual rent upon closing.
- Tenant concentration is a central risk: approximately 53% of collective rental revenue and direct-financing-lease income came from Penn and 45% from Pinnacle. Tenant operating weakness, default, consolidation, or failure to complete the proposed merger could affect rent, growth plans and distributions.
- Other highlighted risks include refinancing near-term maturities, interest-rate and capital-market exposure, gaming competition and regulation, REIT qualification and distribution requirements, environmental and casualty liabilities, and reliance on indemnities from Penn and Pinnacle.
- The Tax Cuts and Jobs Act prompted a $1.8 million reduction in the value of deferred tax assets, recorded as additional 2017 tax expense. The company said the law’s broader effect remained uncertain.
- GLPI reported no material environmental issue known to management, no off-balance-sheet arrangements, and ordinary-course legal matters not expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Progress on refinancing the $780 million of scheduled 2018 term-loan and note maturities, and the cost and terms of any refinancing.
- Completion, regulatory approvals, purchase price and lease terms for the Penn-Pinnacle-related property transactions and Boyd lease.
- Tenant rent coverage, financial condition and lease compliance, particularly given the concentration in Penn and Pinnacle.
- Whether AFFO and cash available for distribution sustain the dividend after debt service, capital needs and any future acquisitions.
- The realized effects of tax-law changes and continued compliance with REIT income, asset and distribution tests.