Gaming and Leisure Properties, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 1, 2014. Amounts below are in millions except per-share data. Comparisons with 2013 are substantially affected by the November 2013 spin-off and are not like-for-like.
Business context and reporting period
GLPI owns gaming real estate, mostly leased to Penn National Gaming under a 15-year triple-net master lease, and operates two casinos through taxable REIT subsidiaries. At June 30, its portfolio included 22 gaming and related facilities across 13 states, including the Casino Queen property acquired in January 2014 and two Ohio projects under development. GLPI intended to elect REIT status for 2014.
Financial and operating highlights
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenues | $160.8 | $46.1 | $319.1 | $88.7 |
| Operating income | $77.4 | $9.1 | $151.7 | $15.9 |
| Net income | $47.0 | $4.7 | $91.3 | $7.9 |
| Diluted EPS | $0.40 | $0.04 | $0.78 | $0.07 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $126.2 | $6.4 |
- Q2 and six-month operating margins were approximately 48% in 2014, versus approximately 20% and 18% in 2013, respectively. These comparisons are distorted by the addition of rental operations after the spin-off.
- Company-defined non-GAAP measures for Q2 / six months: FFO of $70.3 / $138.2; AFFO of $77.9 / $152.0; and Adjusted EBITDA of $106.9 / $209.8.
- Rental revenue, including tenant-paid real estate tax reimbursements, was $119.7 in Q2 and $237.9 for six months. TRS gaming revenue declined 10.9% in Q2 and 8.4% for six months year over year, reflecting competition.
- At June 30, total assets were $2,581.7, cash and equivalents $41.7, long-term debt $2,526.0, and shareholders’ equity was negative $72.9. Debt comprised $2,050.0 of fixed-rate notes and $476.0 drawn on the credit facility; $524.0 remained available under that facility. The company reported compliance with debt covenants.
- Six-month investing cash outflow was $233.7, including $140.7 for Casino Queen real estate, net $36.0 of loan receivable outstanding, and $55.5 of Ohio project capital expenditures. Financing cash outflow was $136.1, including $329.2 of dividends. Cash fell from $285.2 at year-end 2013 to $41.7.
Material changes versus the prior comparable period
- Rental operations added $119.7 of Q2 and $237.9 of six-month revenue; there was no rental revenue in the 2013 comparison period because GLPI had not yet entered the leases.
- Higher depreciation, interest expense and corporate G&A followed the spin-off. Six-month depreciation rose $45.7 and interest expense was $58.1; neither period had interest expense in 2013. The prior Penn management-fee arrangement ended with the spin-off.
- TRS gaming revenue weakened at both Baton Rouge and Perryville amid increased competition. The company attributed lower segment earnings to competition and operating pressure, as well as interest expense.
- The 2014 effective tax rate fell to 3.7% for the first half from 40.2% in 2013, primarily due to the intended REIT election; taxes remain payable on TRS earnings.
Outlook, risks and unusual items
- GLPI agreed to acquire The Meadows Racetrack and Casino for $465 million, subject to Pennsylvania regulatory approvals. It was seeking a third-party operator, expected the transaction to close in 2015, and anticipated it would be immediately accretive upon closing.
- The Ohio projects were expected to open in August and mid-September 2014, subject to final regulatory approval, and join the Penn master lease when operating. GLPI’s real estate construction budgets were $100.0 million for Mahoning Valley and $89.5 million for Dayton.
- Argosy Casino Sioux City ceased operations at the end of July following a licensing decision; GLPI expected approximately $2.8 million less rental revenue in the second half of 2014. The associated real estate was fully depreciated.
- The February 2014 REIT-related Purging Distribution totaled approximately $1.05 billion in cash and stock. An IRS pre-filing request concerning allocation of Penn’s historical earnings and profits could affect whether GLPI must make another distribution before year-end.
- Key risks include dependence on Penn as the principal tenant, tenant/operator ability to meet obligations, REIT qualification and tax uncertainty, gaming competition and consumer demand, regulatory approvals and project execution, and interest-rate and refinancing exposure. Routine legal matters were not expected by management to have a material adverse effect, though outcomes and insurance coverage are uncertain.
Important facts for investors to verify
- Whether the IRS allocation process requires an additional 2014 distribution and whether GLPI satisfies all REIT requirements.
- Penn’s capacity to meet master-lease obligations and the rent-coverage conditions governing escalators.
- Final approvals, operator arrangements, closing terms and expected economics for The Meadows acquisition.
- Ohio project opening dates, remaining construction spending and commencement of rent under the master lease.
- Effects of the Sioux City closure and continued competitive pressure on Perryville and Baton Rouge.
- Debt maturities, variable-rate exposure, available credit and liquidity following the substantial dividends and investment spending.