Gaming & Leisure Properties, Inc. — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; GLPI completed its spin-off from Penn National Gaming (Penn) on November 1, 2013. GLPI owns gaming real estate, principally leased to Penn under a 15-year triple-net master lease, and operates Hollywood Casino Baton Rouge and Hollywood Casino Perryville through taxable REIT subsidiaries. The portfolio comprised 21 gaming and related facilities across 13 states, including two Ohio developments. Because GLPI’s independent real-estate operations began only with the spin-off, annual comparisons with 2012 largely compare different business and financing structures.
Financial results and key metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net revenues | $242.1 million | $210.6 million |
| Income from operations | $60.6 million | $43.7 million |
| Net income | $19.8 million | $22.9 million |
| Diluted EPS | $0.17 | $0.20 |
| Operating cash flow | $80.6 million | $26.7 million |
| Cash used in investing | $16.3 million | $4.8 million |
| Cash provided by (used in) financing | $206.3 million | $(24.5) million |
- FY 2013 net revenues included $76.6 million of master-lease rent, including $7.6 million of real-estate taxes presented as both revenue and expense. Rent began November 1; all GLP Capital segment revenue in 2013 came from Penn.
- Gaming revenue at the two TRS properties declined 21.3% to $159.4 million. TRS operating income fell to $26.2 million from $43.7 million. GLP Capital reported $34.3 million of operating income for its partial year of operations.
- GAAP operating margin was approximately 25.0% of net revenues in 2013; net margin was approximately 8.2%. These annual margins are affected by the spin-off and are not directly comparable with prior-year standalone TRS results.
- Management’s non-GAAP measures were Adjusted EBITDA of $91.0 million, FFO of $34.7 million and Adjusted FFO of $46.8 million. The filing cautions that these measures are not GAAP and may not be comparable across companies.
- At December 31, 2013, cash was $285.2 million, total assets $2.61 billion, debt $2.35 billion and shareholders’ equity $142.4 million. Debt included $2.05 billion of fixed-rate notes and $300 million drawn under a term loan; the $700 million revolver was undrawn. The company reported covenant compliance.
- FY 2013 interest expense was $19.3 million. Fixed-rate notes bear rates of 4.375%, 4.875% and 5.375%, maturing in 2018, 2020 and 2023; the term loan matures in 2018 and has a variable rate.
- Cash and equivalents increased from $14.6 million to $285.2 million, principally reflecting debt issuance proceeds and spin-off funding flows. Total debt obligations, including scheduled interest and other commitments, were reported at $3.23 billion.
- Fourth-quarter 2013 net revenues were $113.8 million, operating income $39.0 million and net income $9.2 million. The quarter included master-lease rent, spin-off costs, added real-estate depreciation and new debt interest.
Material changes versus the prior comparable period
- Net revenues increased 14.9%, primarily because of $76.6 million of rent recorded after the master lease began. This was partly offset by a $45.1 million decline in TRS net revenues.
- Net income decreased $3.1 million, or about 13%, despite higher operating income. New interest expense, spin-off transaction costs, increased depreciation and a higher effective tax rate weighed on earnings.
- General and administrative expense rose $18.2 million to $43.3 million, including $13.5 million of spin-off-related legal, consulting and other fees. Depreciation increased $14.8 million, principally from real estate transferred at the spin-off.
- Cash from operations increased by $53.9 million, reflecting rental receipts and lower operating cash outlays, among other factors. Investing outflows increased with Ohio development spending.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow, cash on hand and credit-facility availability to cover anticipated debt service, capital spending, working capital and dividends. It anticipated future growth mainly from property acquisitions, potentially financed with additional debt or equity.
- GLPI expected to spend approximately $137.4 million in 2014 on its Dayton and Mahoning Valley, Ohio projects, which it anticipated completing and leasing to Penn in fall 2014. The company disclosed a further potential commitment of up to $418.5 million for two Penn projects if Penn were selected to develop them.
- Management intended to elect REIT status beginning in 2014. REIT qualification requires ongoing compliance with technical income, asset, ownership and distribution rules, including annual distributions of at least 90% of REIT taxable income. Failure could cause substantial corporate taxes and restrict future REIT re-election.
- On February 18, 2014, GLPI paid a $1.05 billion pre-REIT “Purging Distribution,” consisting of approximately $210 million in cash and the remainder in stock; approximately 22 million shares were issued. The first quarterly dividend was declared at $0.52 per share. The company stated a distribution policy targeting approximately 80% of Adjusted FFO, subject to the REIT minimum.
- In January 2014, GLPI acquired the Casino Queen real estate for $140 million, made a $43 million, five-year loan at 7% to the operator, and leased the property back for approximately $14 million annual rent.
- Tenant concentration is material: substantially all leased properties and all rental revenue at year-end depended on Penn. Under the master lease, a default relating to one facility can trigger a portfolio-wide default. Gaming competition, regulation, licensing, gaming taxes, interest rates, construction execution and access to capital are significant risks.
- Additional competition had already pressured Baton Rouge and Perryville. Management cited the new Baton Rouge casino and Maryland competition, with further Maryland casino openings expected to affect Perryville. An Iowa license dispute could ultimately lead to closure of Argosy Casino Sioux City and reduced rent.
- GLPI disclosed potential tax indemnification exposure to Penn if the spin-off’s tax-free treatment is challenged or specified actions breach the tax matters agreement. Environmental, litigation, insurance and other liabilities also pose risks; management said routine proceedings were not expected to materially affect results.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls were effective, but the filing did not include management’s assessment or the auditor’s attestation on internal control over financial reporting because of the new-public-company transition period.
Most important facts for investors to verify
- Review Penn’s financial capacity and rent coverage, master-lease terms, guarantees and the consequences of any tenant default.
- Track REIT election and continuing qualification, including the tax treatment and share dilution from the $1.05 billion distribution.
- Reconcile reported cash and operating cash flow with debt-service needs, covenant limits, Ohio construction funding and the large post-year-end distribution.
- Assess TRS property performance amid regional competition, including Maryland expansion and the Iowa license litigation.
- Confirm project completion, costs and lease commencement for the Ohio developments, and evaluate the economics and funding of the Casino Queen acquisition and loan.