Gaming and Leisure Properties, Inc. — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016; comparisons are with the corresponding 2015 periods. GLPI is a Pennsylvania REIT focused on owning gaming real estate leased to operators, primarily under triple-net leases. Its portfolio comprised 35 facilities across 14 states and was 100% occupied at quarter-end. In April 2016, GLPI acquired substantially all of Pinnacle Entertainment’s real estate assets for approximately $4.8 billion and leased them back to Pinnacle.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $207.4 million | $149.9 million | $356.2 million | $298.6 million |
| Income from operations | $120.8 million | $62.9 million | $188.5 million | $127.7 million |
| Net income | $73.3 million | $32.0 million | $106.0 million | $65.1 million |
| Diluted EPS | $0.39 | $0.27 | $0.69 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $180.4 million | $108.6 million | $293.7 million | $219.2 million |
| AFFO (non-GAAP) | $135.1 million | $79.0 million | $218.7 million | $158.9 million |
Q2 net revenues rose 38.4% and net income rose $41.3 million year over year; six-month net revenues rose 19.3% and net income rose $40.9 million. The principal driver was the Pinnacle acquisition, supplemented by Penn rent escalators and variable rent. GLPI reported $61.8 million of Q2 net revenue contribution from Pinnacle, including $42.5 million rental revenue, $12.6 million direct-financing-lease income and $6.7 million in tenant-paid real estate taxes. TRS Properties revenue declined: gaming revenue fell 4.3% in Q2 and 3.5% for the six months, primarily due to lower volumes.
Operating margin, calculated as operating income divided by net revenues, was approximately 58.3% in Q2 2016 versus 42.0% in Q2 2015, and 52.9% versus 42.8% for the six-month periods. Higher interest expense partly offset operating growth: Q2 interest expense increased 55.3% to $45.9 million, and six-month expense increased 34.1% to $79.3 million, largely due to acquisition financing.
Cash flow, debt and liquidity
- Six-month cash from operations was $210.3 million, up from $162.1 million. Investing used $2.927 billion, principally for the $2.940 billion cash portion of the Pinnacle acquisition. Financing provided $2.699 billion, including $2.337 billion of debt proceeds and $825.2 million net equity proceeds; dividends paid were $179.1 million.
- Cash and cash equivalents were $23.7 million at June 30, 2016, down from $41.9 million at year-end 2015.
- Gross debt was $4.571 billion, compared with $2.541 billion at December 31, 2015. This included $3.425 billion of fixed-rate notes and $1.145 billion outstanding under the credit facility. Revolver availability was $679.1 million, after letters of credit.
- GLPI reported compliance with debt covenants at quarter-end. Its $700 million revolver and $300 million Term Loan A mature in 2018; the $825 million Term Loan A-1 matures in 2021. The company issued $400 million of 4.375% notes due 2021 and $975 million of 5.375% notes due 2026 to help finance the Pinnacle transaction.
- Dividends paid were $0.56 per common share in Q2. On August 3, GLPI declared a $0.60 per-share third-quarter dividend.
Outlook, commentary and risks
Management said it expects to pursue further gaming and potentially complementary or non-gaming acquisitions. The Meadows transactions—acquisition from Cannery Casino Resorts for a base price of $440 million and sale of its gaming operating assets to Pinnacle for $138 million—were expected to close in September 2016, subject to conditions. GLPI expected to retain the real estate and lease it to Pinnacle, with initial aggregate annual rent of approximately $25.5 million. No broader quantified earnings guidance is provided in the filing.
Key risks include substantial dependence on Penn and Pinnacle as tenants and rent sources; tenant ability to meet lease obligations; debt service, refinancing and interest-rate exposure; successful integration and management of the expanded portfolio; REIT qualification and tax matters, including potential tax on built-in gains in acquired Pinnacle assets; and regulatory approvals and conditions affecting the Meadows transactions. Management also noted that a new Maryland casino expected to open in late 2016 could adversely affect Hollywood Casino Perryville. The filing says the Meadows schedule was uncertain and subject to conditions outside GLPI’s control.
Most important facts for investors to verify
- Whether Pinnacle’s operating performance and rent coverage support the lease obligations, given GLPI’s dependence on its two largest tenants.
- Completion, final purchase-price and tax adjustments, and lease terms for the Meadows transactions.
- Debt balances, interest costs, covenant headroom, and refinancing needs after the acquisition-related increase in leverage.
- How much reported growth and AFFO reflect the acquisition and non-GAAP adjustments versus recurring comparable-property performance.
- Potential impact of competition on Perryville, REIT compliance, and any built-in-gain tax exposure from Pinnacle assets.