Business context and reporting period
Gaming & Leisure Properties, Inc. (GLPI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015, with comparisons to 2014. GLPI is a Pennsylvania REIT focused on owning gaming real estate leased primarily to operators under triple-net leases. Its portfolio included 21 gaming and related facilities across 12 states; most leased properties were operated by Penn, while GLPI directly operated Hollywood Casino Baton Rouge and Hollywood Casino Perryville.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $163.8 million | $160.8 million | $326.5 million | $319.1 million |
| Operating income | $76.8 million | $77.4 million | $155.6 million | $151.7 million |
| Net income | $45.9 million | $47.0 million | $93.0 million | $91.3 million |
| Diluted EPS | $0.38 | $0.40 | $0.78 | $0.78 |
| Adjusted EBITDA | $108.6 million | $106.9 million | $219.2 million | $209.8 million |
| AFFO | $79.0 million | $77.9 million | $158.9 million | $152.0 million |
Operating margin on net revenue was approximately 46.9% in Q2 2015 versus 48.1% a year earlier, and 47.7% for the first half versus 47.5%. Net margin was approximately 28.0% versus 29.2% for Q2 and 28.5% versus 28.6% for the first half. AFFO and Adjusted EBITDA are company-defined non-GAAP measures.
For the six months, operating cash flow was $162.1 million, investing cash outflow was $11.3 million, and financing cash outflow was $155.6 million. Cash declined $4.9 million to $31.1 million. The company paid $125.5 million in dividends; dividends were $0.545 per share in each of the first two quarters.
At June 30, 2015, total debt was $2.566 billion, net of $31.1 million cash; shareholders’ deficit was $135.8 million. Debt comprised $2.05 billion of fixed-rate senior notes and $515 million drawn on the credit facility. The revolver had $484.1 million of available capacity, net of letters of credit. GLPI reported compliance with debt covenants. The facility matures in October 2018; senior notes mature in 2018, 2020 and 2023.
Material changes versus the prior comparable period
- First-half net revenue rose 2.3%, led by a 5.1% increase in rental revenue. Additions of Dayton Raceway and Mahoning Valley Race Course to the Penn master lease and a rent escalator contributed; closure of Argosy Casino Sioux City partly offset the increase.
- Gaming revenue fell 6.0% in the first half, primarily because of increased competition at Hollywood Casino Perryville. Lower gaming taxes partly mitigated the impact on operating results.
- General and administrative expense increased 11.8% in the first half, primarily due to Pinnacle transaction and Meadows litigation professional fees. Interest expense rose 1.8%, mainly reflecting higher revolver borrowings.
- First-half operating cash flow increased from $126.2 million to $162.1 million, helped by improved cash receipts, lower supplier payments and lower income tax payments than in 2014, when cash taxes included Spin-Off-related amounts.
- Debt declined by $43.0 million from year-end 2014. First-half capital project spending fell to $10.8 million from $55.5 million in 2014, when substantial Ohio joint-development construction was underway.
Outlook, risks and unusual items
- On July 21, 2015, GLPI agreed to acquire substantially all of Pinnacle Entertainment’s real estate assets through a transaction involving a Pinnacle operating-asset spin-off and merger. Consideration includes 0.85 GLPI shares per Pinnacle share; GLPI would assume $2.7 billion of Pinnacle debt, to be refinanced, and intends to issue equity for transaction costs. Closing was expected in early 2016, subject to approvals and other conditions. The filing identifies financing, dilution, execution, integration and transaction-cost risks, including potential termination payments of up to $150 million in specified circumstances and expense reimbursement of up to $20 million in another specified circumstance.
- GLPI’s pending dispute with Cannery Casino Resorts over the proposed Meadows acquisition seeks return of $10 million paid under a consulting agreement plus unspecified damages. Outcome, recovery and effect on the transaction remain uncertain.
- Revenue is concentrated in the Penn master lease, making GLPI dependent on Penn and its operating subsidiaries’ ability to meet lease obligations. REIT qualification, access to capital, interest-rate exposure, gaming-market conditions and tenant/operator performance are also identified risks.
- Perryville faced additional competition, including the planned Prince George’s County casino expected to open in the second half of 2016. Perryville’s slot-machine purchases reduced its gaming tax rate from 67% to 61% effective April 1, 2015; the filing cites a 62.5% 2015 effective tax rate.
- GLPI declared a third-quarter dividend of $0.545 per share on July 30, payable September 25, 2015. No full-year earnings or cash-flow guidance is provided in the supplied filing text.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, approvals, financing terms, equity issuance and closing conditions for the Pinnacle transaction, including potential termination costs and the resulting leverage.
- Penn’s financial condition and lease coverage, given the concentration of rental revenue under the master lease.
- Developments and potential recovery in the Meadows litigation, and any effect on a possible acquisition.
- Operating trends at Perryville and Baton Rouge, especially competition, gaming revenue and tax-rate changes.
- Debt maturities, variable-rate exposure, revolver capacity, covenant compliance and the sustainability of dividends relative to AFFO and cash flow.