Business context and reporting period
Gaming & Leisure Properties, Inc. (GLPI) is a Pennsylvania REIT that primarily owns gaming real estate and leases it to operators under triple-net arrangements. This unaudited 10-Q covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The portfolio included 36 facilities across 14 states and was 100% occupied. Most revenue comes from Penn and Pinnacle master leases; GLPI also operates two taxable REIT subsidiary casinos.
Financial performance and changes
Amounts are in millions except per-share data. Year-over-year comparisons are significantly affected by the April 2016 Pinnacle real estate acquisition and the September 2016 Meadows acquisition.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenues | $242.7 | $148.8 | +63.1% |
| Operating income | $150.0 | $67.6 | +121.8% |
| Net income | $94.0 | $32.7 | +$61.2 |
| Basic / diluted EPS | $0.45 / $0.45 | $0.28 / $0.27 | Higher |
| Operating margin on net revenue | 61.8% | 45.5% | Derived |
| Net margin on net revenue | 38.7% | 22.0% | Derived |
| Operating cash flow | $184.7 | $103.9 | +$80.8 |
| Dividends per common share | $0.62 | $0.56 | Higher |
Rental revenue and direct-financing-lease income rose 82.7% to $204.7 million, primarily reflecting Pinnacle and Meadows, the Penn rent escalator, and tenant-paid real estate taxes. Pinnacle contributed $59.8 million in rental revenue, $17.8 million in direct-financing-lease income, and $9.6 million in real estate-tax revenue. TRS Properties revenue increased 2.9%, mainly from higher patronage at Hollywood Casino Baton Rouge; Perryville food and beverage revenue declined after outsourcing those outlets.
Operating expenses increased 14.2% to $92.7 million, including a $9.9 million rise in real estate taxes associated with the acquired properties. These taxes are presented as both revenue and expense. Interest expense rose 61.5% to $53.9 million, primarily due to borrowing to fund the Pinnacle acquisition. The effective income tax rate was 2.6%, versus 5.8%, reflecting additional REIT income not subject to income tax.
Non-GAAP measures increased: FFO was $119.0 million versus $56.4 million; AFFO was $165.8 million versus $83.6 million; and Adjusted EBITDA was $219.0 million versus $113.2 million. GLPI cautions that these measures are not GAAP measures and may not be comparable across companies.
Balance sheet, debt and liquidity
- Total assets were $7.314 billion and shareholders’ equity was $2.407 billion at March 31, 2017.
- Long-term debt was $4.621 billion gross, or $4.573 billion net of debt issuance costs, compared with $4.716 billion gross at year-end. Debt repayments during the quarter were $95.0 million.
- Debt included $3.425 billion of fixed-rate notes and $1.195 billion outstanding under the variable-rate credit facility. The facility had $629.1 million of available revolver capacity, net of letters of credit. GLPI reported compliance with debt covenants.
- Cash and cash equivalents were $23.4 million, down from $36.6 million. Operating activities provided $184.7 million; investing activities provided $22.1 million; financing activities used $220.0 million, including $129.3 million of dividends.
- Cash paid for interest was $8.7 million, versus $2.6 million in Q1 2016. Operating cash flow also reflected a $41.9 million increase in accrued interest.
Outlook, risks and notable items
- No specific earnings or financial guidance was provided. Management said it intends to pursue gaming-property acquisitions and potential growth opportunities outside gaming.
- On May 1, 2017, after quarter-end, GLPI acquired the Tunica properties for $82.6 million and leased them to Penn under the Penn Master Lease; stated initial annual rent is $9.0 million. The quarter-end balance sheet includes an $8.2 million acquisition deposit.
- On April 25, 2017, GLPI declared a second-quarter dividend of $0.62 per share, payable June 30, 2017.
- GLPI’s principal exposures include reliance on Penn and Pinnacle as major tenants, tenant ability to meet lease obligations, interest rates and refinancing, access to capital, acquisition execution and regulatory approvals, and maintaining REIT status. The revolving facility and Term Loan A mature in October 2018; the 2018 notes mature in November 2018.
- GLPI reported ordinary-course litigation and did not expect its outcome to materially affect financial position or results, while noting litigation and insurance outcomes remain uncertain. It also reported no material change in previously disclosed risk factors.
- GLPI made a new $13.0 million unsecured loan to a Casino Queen affiliate at 15% interest, following repayment of the prior loan. Management stated collectability was reasonably assured at quarter-end.
Important facts for investors to verify
- Tenant credit and lease coverage, particularly Penn and Pinnacle’s capacity to satisfy master-lease obligations and the impact of any operator stress.
- Debt refinancing plans for 2018 maturities, variable-rate exposure, and covenant headroom; the filing does not provide a clear numerical covenant cushion.
- Cash available after dividends and debt service, and whether acquisition funding will require additional debt or equity.
- Performance and integration of the acquired Pinnacle, Meadows and Tunica properties; Q1 growth is not a like-for-like comparison with 2016.
- Whether AFFO and other non-GAAP measures adequately reflect cash available for distributions, given the company’s lease adjustments and financing structure.