Gaming & Leisure Properties, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. GLPI is a Pennsylvania REIT whose main business is owning gaming real estate and leasing it to operators, principally Penn National Gaming and Pinnacle. At quarter-end, its portfolio included 38 gaming and related facilities across 14 states and was 100% occupied.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $243.4 million | $207.4 million | $486.1 million | $356.2 million |
| Operating income | $152.7 million | $120.8 million | $302.7 million | $188.5 million |
| Net income | $96.3 million | $73.3 million | $190.3 million | $106.0 million |
| Diluted EPS | $0.45 | $0.39 | $0.90 | $0.69 |
| Adjusted EBITDA (non-GAAP) | $222.2 million | $180.4 million | $441.2 million | $293.7 million |
| AFFO (non-GAAP) | $167.8 million | $135.1 million | $333.6 million | $218.7 million |
- Operating margin, calculated as operating income divided by net revenue, was approximately 62.7% in Q2 2017 versus 58.3% in Q2 2016, and 62.3% for the first half versus 52.9%.
- Six-month operating cash flow was $292.2 million, up from $210.3 million. Investing activities used $35.6 million and financing activities used $263.7 million; cash declined by $7.0 million to $29.5 million.
- At June 30, total debt was $4.566 billion ($4.521 billion net of unamortized issuance costs), compared with $4.716 billion gross at December 31, 2016. Cash was $29.5 million and revolver availability was $684.6 million. GLPI reported compliance with debt covenants.
- Six-month dividends were $1.24 per share; $261.1 million was paid. The company reported a third-quarter dividend declaration of $0.63 per share, payable September 22, 2017.
Changes versus the prior comparable period
- Net revenue rose 17.4% in Q2 and 36.5% in the first half; net income rose 31.5% and 79.5%, respectively. Management attributed the gains primarily to the Pinnacle real estate transaction completed in April 2016, the Meadows acquisition, rent escalators and the May 2017 Tunica acquisition. The periods are not directly like-for-like because the 2016 first-half comparison included only part of the Pinnacle lease contribution.
- Rental revenue and direct financing lease income increased 21.5% in Q2 and 45.8% in the first half. Gaming, food, beverage and other revenue was down 2.3% in Q2 and approximately flat for the first half; Perryville’s food-service outsourcing reduced its revenue, partly offset by stronger Baton Rouge results.
- Operating expenses increased 4.8% in Q2 and 9.3% in the first half, chiefly due to real estate taxes associated with acquired properties; tenant tax reimbursements are also recorded as revenue. Interest expense rose 19.0% in Q2 and 36.9% in the first half, mainly reflecting borrowing used to finance the Pinnacle acquisition.
- GLPI acquired Tunica real estate for $82.9 million; Penn operates the properties and leases them under the Penn Master Lease, with initial annual cash rent of $9.0 million. The ATM equity program generated $139.4 million net proceeds from 3.86 million shares sold in Q2, partly funding acquisitions and debt repayment.
Outlook, risks and notable items
- No quantified full-year earnings or cash-flow guidance is provided. Management said it intends to pursue additional gaming real estate acquisitions and explore growth opportunities outside gaming.
- Revenue is substantially dependent on Penn and Pinnacle and their ability to meet lease obligations and sustain operating performance. The master leases create tenant and operator concentration exposure.
- Interest-rate and refinancing risk is material. The $550 million 4.375% notes mature in November 2018; the revolving facility and Term Loan A mature in October 2018. Most notes are fixed-rate, while credit-facility borrowings are variable-rate. Subsequent to quarter-end, GLPI repaid the $15 million revolver balance and paid down $45 million of Term Loan A.
- Other disclosed risks include maintaining REIT qualification, access to capital, acquisition approvals and execution, tenant liquidity, economic conditions affecting gaming demand, and legal and environmental exposures. Management said ordinary-course litigation was not expected to materially affect results, while noting outcomes and insurance coverage cannot be assured.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Investor verification points
- Assess how much reported growth reflects acquired assets and lease accounting versus comparable-property performance, and review Penn and Pinnacle rent coverage and financial capacity.
- Review 2018 maturities, refinancing plans, variable-rate exposure, covenant headroom and the impact of subsequent debt repayments.
- Reconcile AFFO and Adjusted EBITDA, which are non-GAAP measures, with GAAP cash flow and dividend payments; evaluate whether the dividend remains supported after capital needs and debt service.
- Check the economics and funding of acquisitions, including Tunica rent terms, remaining ATM authorization and the dilution from equity issuance.
- Consider the gross presentation of tenant-paid real estate taxes and the direct-financing-lease cash receipts recorded against the lease receivable when interpreting revenue and cash flow.