Business context and reporting period
Gaming & Leisure Properties, Inc. (GLPI) is a Pennsylvania REIT that owns gaming real estate, primarily leased to gaming operators under triple-net leases. This Form 10-K covers the fiscal year ended December 31, 2014; quarterly figures are unaudited. GLPI was spun off from Penn National Gaming on November 1, 2013 and intended to elect REIT status beginning in 2014. At year-end, its portfolio comprised 19 rental properties and two operating casino properties (the TRS Properties), across 12 states; properties were 100% occupied.
Comparisons with 2013 are substantially affected by the short post-spin-off period: 2014 includes a full year of real estate operations, while 2013 includes only November and December. The 2012 results reflect only the two TRS casinos.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net revenues | $635.9 million | $242.1 million |
| Income from operations | $303.4 million | $60.6 million |
| Income before income taxes | $188.8 million | $37.1 million |
| Net income | $185.4 million | $19.8 million |
| Diluted earnings per share | $1.58 | $0.17 |
| Cash from operating activities | $273.3 million | $80.6 million |
| Cash used in investing activities | $317.3 million | $16.3 million |
| Cash used in financing activities | $205.2 million | Cash provided: $206.3 million |
| Cash and cash equivalents at year-end | $36.0 million | $285.2 million |
| Total debt at year-end | $2.609 billion | $2.350 billion |
FY 2014 operating margin was approximately 47.7% of net revenues and net income margin approximately 29.2%. Net rental revenue was $481.8 million, including $50.5 million of real estate taxes collected from tenants and recorded as both revenue and expense. The TRS Properties generated $154.1 million of net revenue and $23.5 million of operating income; GLP Capital generated $481.8 million of net revenue and $279.8 million of operating income.
Funds from operations (FFO) were $278.1 million, adjusted FFO (AFFO) $309.0 million, and Adjusted EBITDA $422.5 million. These are non-GAAP measures defined by GLPI and are not substitutes for GAAP results. Capital project expenditures were $139.2 million, primarily for the two Ohio facilities; maintenance capital expenditures were $3.5 million.
At December 31, 2014, total assets were $2.565 billion and shareholders’ equity was negative $124.7 million, following substantial distributions. The $2.609 billion debt consisted of $558 million under the credit facility and $2.050 billion of fixed-rate notes, plus a small capital lease. The company reported $441.3 million of available revolving capacity and compliance with its debt covenants. Operating cash flow increased, but cash fell by $249.2 million during the year, principally reflecting distributions, acquisitions, construction spending and debt activity.
Debt includes $550 million of 4.375% notes due 2018, $1.0 billion of 4.875% notes due 2020, and $500 million of 5.375% notes due 2023. The credit facility matures in October 2018. The filing reports a minimum fixed-charge coverage covenant of 2:1 and maximum leverage and asset-coverage covenants.
Material changes versus prior periods
- Net revenues and operating income rose sharply year over year, largely because 2014 included 12 months of lease revenue versus two months in 2013—not because of comparable same-property growth.
- Rental revenue increased to $481.8 million from $76.6 million. Interest expense rose to $117.0 million from $19.3 million, reflecting a full year of post-spin-off borrowings and additional variable-rate debt. Depreciation rose to $106.8 million from $28.9 million, mainly due to a full year of real-estate depreciation.
- The intended REIT election contributed to a lower income tax expense of $3.4 million, versus $17.3 million in 2013; the effective tax rate was 1.8%, versus 46.6%.
- TRS gaming revenue declined 6.9% to $148.3 million, and TRS net income declined by approximately $5.0 million, amid competition and operating pressure in Maryland and Louisiana.
- GLPI acquired Casino Queen’s real estate for $140.7 million and leased it to the operator; it also provided a $43 million loan, with $34 million outstanding at year-end. The Ohio Dayton and Mahoning Valley facilities opened in 2014 and joined the Penn Master Lease.
- Argosy Casino Sioux City ceased operations in July 2014 after loss of its gaming license, reducing 2014 rent by $2.6 million and expected annual rent by $6.2 million.
Outlook, risks, contingencies and unusual items
Management stated that operating cash flow, cash on hand and available credit were expected to cover anticipated debt service, capital expenditures, working capital and dividends. GLPI expects future growth principally from property acquisitions, potentially funded with additional debt or equity. No specific earnings, revenue or acquisition guidance was provided. A quarterly dividend of $0.545 per share was declared in February 2015.
- Tenant concentration: Approximately 97% of rental revenue came from the Penn Master Lease. Penn’s ability and willingness to meet its obligations is a central risk. The lease is generally 15 years with four five-year renewal options; it is triple-net, with the tenant responsible for property taxes, insurance, maintenance and utilities.
- Competition: New and expanded casinos were pressuring Hollywood Casino Perryville and Hollywood Casino Baton Rouge. Management expected further pressure on Perryville from a planned Prince George’s County casino, anticipated to open in the second half of 2016. Perryville was expected to benefit from a Maryland tax-rate reduction to 61% when it directly purchased slot machines in April 2015.
- Acquisition dispute: GLPI sued Cannery Casino Resorts over the proposed Meadows Racetrack and Casino acquisition, alleging fraud and breaches of agreements. GLPI sought return of a $10 million consulting payment and unspecified damages; the transaction’s outcome and timing were uncertain.
- REIT and spin-off tax matters: Maintaining REIT status requires continuing compliance with complex income, asset, ownership and distribution tests. Failure could trigger corporate-level taxes and restrict re-election for four years. GLPI made a $1.05 billion cash-and-stock Purging Distribution in February 2014 and a further $37 million one-time distribution in December 2014 related to historical earnings-and-profits allocation and its IRS Pre-Filing Agreement process.
- Leverage and interest rates: Variable-rate borrowing exposes GLPI to higher interest costs; debt maturities include $1.108 billion in 2018. Debt covenants restrict borrowing, asset sales, acquisitions and certain distributions.
- Other risks: Gaming regulation and licensing, gaming-tax changes, weather and casualty events, environmental liabilities, tenant credit, acquisition competition and possible indemnification obligations to Penn may affect results. The filing identified no environmental matters expected to have a material operational impact. Goodwill and the Perryville gaming license were tested and reported as not impaired at October 1, 2014.
- Related-party matter: GLPI purchased office-campus land from an entity owned by its CEO and engaged a construction manager in which the CEO’s son had a material interest.
FY 2014 distributions totaled $14.32 per common share, including the Purging Distribution and the $0.40 per-share one-time dividend; this is not representative of recurring quarterly dividends. The fourth-quarter unaudited results were net revenues of $159.0 million, operating income of $74.1 million, net income of $44.2 million and diluted EPS of $0.38.
Important facts for investors to verify
- Assess Penn’s current financial capacity and lease coverage, given its contribution of approximately 97% of GLPI rental revenue.
- Separate full-year 2014 performance from the two-month real-estate contribution in 2013; examine property-level and comparable operating trends rather than headline growth alone.
- Review debt maturities, variable-rate exposure, covenant headroom and whether available revolver capacity and operating cash flow can support dividends and planned acquisitions.
- Track the Meadows litigation, the $10 million recovery claim and any effect on the proposed acquisition or future strategy.
- Verify continuing REIT qualification, distributions required for tax compliance and the final treatment of the spin-off-related tax matters.
- Monitor casino competition, gaming taxes and licensing developments affecting Perryville, Baton Rouge and other tenant markets.