Gaming and Leisure Properties, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
GLPI owns gaming real estate, primarily leased to Penn National Gaming (Penn) under a 15-year triple-net master lease. It also owns and operates Hollywood Casino Baton Rouge and Hollywood Casino Perryville through taxable REIT subsidiaries. The portfolio comprised 22 gaming and related facilities across 13 states, including two Ohio developments and Casino Queen, acquired in January 2014. GLPI intends to elect REIT status for 2014.
Comparisons with Q1 2013 are not like-for-like: the spin-off from Penn closed November 1, 2013, so Q1 2013 results largely reflect the two operating casinos and include no master-lease rental revenue.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net revenue | $158.3 | $42.6 |
| Operating income | $74.3 | $6.8 |
| Net income | $44.3 | $3.2 |
| Basic / diluted EPS | $0.40 / $0.38 | $0.03 / $0.03 |
| Operating cash flow | $79.7 | $(3.8) |
| Cash and equivalents at period end | $48.3 | $17.2 |
- Q1 2014 rental revenue was $118.1, including $12.0 of tenant-paid real estate taxes presented as revenue with an offsetting expense. Gaming and food, beverage and other revenue were $38.8 and $2.8, respectively. TRS gaming revenue fell 5.7% year over year.
- Operating margin was approximately 47.0% and net margin approximately 28.0% in Q1 2014; corresponding Q1 2013 figures were approximately 16.0% and 7.5%. These comparisons reflect the post-spin business mix and are not directly comparable.
- Operating expenses were $84.0, including $26.5 depreciation, $20.9 general and administrative expense, and $12.4 real estate taxes. Interest expense was $29.0; income tax provision was $1.6, with a 3.5% effective tax rate versus 41.9% in Q1 2013, primarily reflecting the intended REIT election.
- Net cash used in investing was $210.0, including $140.7 for Casino Queen real estate, a $43.0 loan to Casino Queen (ending balance $41.0), and $24.0 of capital-project spending. Net cash used in financing was $106.7, including $270.0 in dividends, partly offset by net debt proceeds of $150.0.
- Total assets were $2,561.9; total liabilities were $2,629.9, resulting in a $68.0 shareholders’ deficit. Cash declined from $285.2 at year-end, principally amid the large distribution and investment activity.
- Debt was $2,500.0: $2,050.0 of fixed-rate senior notes and $450.0 outstanding on the credit facility. The facility had $550.0 available; it matures in October 2018. GLPI reported compliance with all debt covenants.
Material changes and notable items
- Net revenue increased $115.7 and net income increased $41.1 year over year, primarily because GLPI recorded $118.1 in rental revenue after the spin-off. Depreciation rose $22.9 and G&A rose $15.0, reflecting the expanded post-spin business and related costs.
- Casino Queen acquisition: GLPI paid $140.7 for the real estate, made a five-year $43.0 loan at 7% interest, and leased the property back on triple-net terms for approximately $14.0 annual rent. The lease has a 15-year initial term and four five-year renewal options.
- GLPI paid a special “Purging Distribution” of approximately $1.05 billion on February 18, consisting of cash and shares, to address pre-REIT accumulated earnings and profits. It also paid its first quarterly dividend of $0.52 per share on March 28. The balance sheet shows a sharp shift from positive equity at year-end to a deficit, principally in connection with the distribution.
- The Q1 2014 non-GAAP measures were FFO $67.9, AFFO $74.1 and Adjusted EBITDA $103.0. These are supplemental measures, not GAAP results.
Outlook, commentary and risks
- Management expected the Dayton and Mahoning Valley facilities to open in fall 2014 and join the master lease. GLPI’s real-estate construction budgets were $89.5 for Dayton and $100.0 for Mahoning Valley; approximately $39.1 and $35.5, respectively, had been incurred by quarter-end. These are stated expectations, not assurances.
- An Iowa regulator ruled Argosy Casino Sioux City must cease operations by July 1, 2014; management estimated a $3.1 reduction in rental revenue in the second half of 2014.
- Management cited planned Maryland casino openings and existing competition in Maryland and Baton Rouge as risks to TRS results. Q1 gaming revenue at Baton Rouge was adversely affected by the competing L’Auberge casino; Perryville also faced competition.
- Revenue concentration is material: a Penn subsidiary leases substantially all GLPI properties. Risks include Penn’s ability to meet lease obligations, regulatory approvals, development costs and timing, REIT qualification and tax treatment, interest rates, access to capital, and gaming-market competition. The IRS pre-filing request on allocating Penn’s historical earnings and profits could affect whether an additional dividend is required by year-end 2014.
- No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management said results for the quarter are not necessarily indicative of full-year results.
- GLPI reported no material change in disclosed risk factors, no material effect on internal controls, and no legal proceeding expected to materially affect results, while cautioning that outcomes and insurance coverage cannot be assured.
Important facts for investors to verify
- Whether the IRS determination on historical earnings and profits requires another distribution before December 31, 2014, and the potential cash and share impact.
- Penn’s financial capacity and lease coverage, given the concentration of rental income in the master lease.
- Progress, remaining costs, regulatory status and opening timing for both Ohio developments, and the effect of the Sioux City closure.
- Debt costs and covenant headroom, including the variable-rate exposure and availability under the credit facility.
- Whether competitive pressure continues to reduce TRS casino revenue and earnings.
- The basis and reconciliation of non-GAAP FFO, AFFO and Adjusted EBITDA when comparing GLPI with peers.