Business context and reporting period
Gaming & Leisure Properties, Inc. (GLPI) filed this unaudited Form 10-Q for the quarter ended September 30, 2020. GLPI is a REIT whose primary business is owning gaming real estate and leasing it to operators under triple-net leases; it also operates two casino properties through taxable REIT subsidiaries. Its portfolio comprised interests in 46 facilities across 16 states and was reported as 100% occupied.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $307.6 million | $287.6 million | $853.0 million | $864.5 million |
| Operating income | $200.7 million | $187.6 million | $567.8 million | $529.2 million |
| Net income | $127.1 million | $90.5 million | $336.4 million | $276.6 million |
| Diluted EPS | $0.58 | $0.42 | $1.55 | $1.29 |
| Operating cash flow | Not separately presented for quarter | $310.5 million | $583.7 million |
Q3 revenue rose 6.9% and net income rose 40.4% year over year; nine-month revenue declined 1.3% while net income increased 21.6%. Operating margin was approximately 65.3% in Q3 versus 65.2% a year earlier, and 66.6% for the nine months versus 61.2% in 2019.
At September 30, 2020, total assets were $8.64 billion, cash was $105.9 million, and total debt was $5.80 billion gross ($5.75 billion net of issuance costs, premiums and discounts). The company had $424.0 million outstanding under Term Loans A-2, no revolver borrowings, and approximately $1.175 billion of revolver capacity available. It reported compliance with debt covenants. Nine-month dividends paid were $202.9 million; second- and third-quarter dividends of $0.60 per share were paid primarily in stock, with cash limited to approximately 20%.
Material changes versus the prior comparable period
- Real estate income increased 6.7% in Q3 and 2.0% for the nine months, supported by rent escalators, percentage rent at certain Penn properties after reopening, and noncash straight-line rent recognition. Some increases were offset by lower percentage rent resets and weaker Casino Queen rent.
- TRS gaming, food, beverage and other revenue increased 8.9% in Q3 but fell 27.3% for the nine months, reflecting mid-March closures and subsequent restricted reopenings.
- Nine-month operating expenses declined 14.9%, partly because 2019 included a $13.0 million Casino Queen loan impairment and higher depreciation and ground-lease costs. Q3 general and administrative expense included $6.8 million of severance and stock-compensation acceleration related to the former CFO’s departure.
- Interest expense declined 7.3% for the nine months, while 2020 included $18.1 million of debt-extinguishment losses. The company redeemed notes due in 2020 and 2021 and issued $700 million of 4.00% notes due in 2031, extending debt maturities.
- Operating cash flow fell by $273.2 million year over year for the nine months. The company cited lower tenant and customer receipts, including the effects of COVID-19 and the Tropicana Las Vegas transaction’s noncash rent-credit structure.
Outlook, risks and unusual items
COVID-19 forced casino closures beginning in mid-March. Most tenant casinos had reopened with capacity limits by the filing date, but Zia Park remained closed. GLPI said reopening performance had been encouraging, while warning that renewed closures, consumer weakness, unemployment and uncertainty about the pandemic could impair tenants’ ability to pay rent. Management reported contractual rent collected through October from tenants other than Casino Queen; it was collecting current rent from Casino Queen while discussing deferred rent for prior closed months.
Management said liquidity was ample and it did not anticipate needing further covenant relief, assuming tenants continued complying with their leases. It did not provide formal numerical earnings guidance. The company did not anticipate lease rent escalations being triggered in 2020 because of COVID-19 and lease changes. It also noted that 16% of 2019 cash rental income was variable rent, making future rent sensitive to tenant performance and reset provisions.
In April 2020, GLPI acquired Tropicana Las Vegas real estate in exchange for $307.5 million of rent credits, rather than cash. Deferred rent of $307.5 million was recorded; $272.5 million was recognized as revenue in the first nine months, including $141.7 million in Q3. GLPI intends to pursue a sale, but stated there is no assurance it will realize a return. Other notable events include the September acquisition of Lumière Place real estate in satisfaction of a $246.0 million loan, the May acquisition of Belterra Park real estate in satisfaction of a $57.7 million loan, and an October 1 acquisition of land at Penn’s Morgantown development for $30.0 million in rent credits.
Subsequent transactions disclosed include Penn’s exercise of five-year renewals under both master leases; a planned Caesars property exchange; and agreements for Twin River to acquire Tropicana Evansville operations and GLPI to acquire the property, as well as GLPI’s planned purchase of Dover Downs real estate. These transactions were subject to closing conditions, regulatory approvals or future completion. Other risks include tenant concentration, REIT qualification, refinancing and interest-rate exposure, and the expected LIBOR transition.
Important facts for investors to verify
- Whether casino reopenings and tenant liquidity remain sufficient to support full, timely rent payments, particularly if restrictions or closures return.
- The amount and timing of any Casino Queen deferred rent recovery, given its prior payment and covenant defaults.
- How much reported rental income and operating cash flow depends on noncash rent credits and straight-line accounting, including the eventual sale proceeds for Tropicana Las Vegas.
- Debt maturity, covenant and refinancing capacity, including variable-rate exposure and the LIBOR transition.
- The final terms, approvals and completion of the disclosed Caesars, Twin River, Dover Downs and Penn-related transactions, and their effects on rent and tenant concentration.
- The cash-versus-stock composition and sustainability of dividends, which were reduced from $0.70 to $0.60 per share quarterly after Q1 2020.