Gaming and Leisure Properties, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. GLPI is a Pennsylvania REIT that primarily leases gaming real estate to Penn National Gaming under a triple-net master lease; it also operates Hollywood Casino Baton Rouge and Hollywood Casino Perryville. Its portfolio comprised 21 gaming and related facilities across 12 states.
Financial performance
| Metric | Q3 2015 | Q3 2014, restated | Nine months 2015 | Nine months 2014, restated |
|---|---|---|---|---|
| Net revenues | $147.8 million | $146.9 million | $446.4 million | $446.0 million |
| Operating income | $65.3 million | $66.7 million | $193.0 million | $198.4 million |
| Net income | $33.2 million | $37.3 million | $98.3 million | $108.6 million |
| Diluted EPS | $0.28 | $0.32 | $0.83 | $0.92 |
| Dividends per share | $0.55 | $0.52 | $1.64 | $1.56 |
Operating margin on net revenues was approximately 44.2% for Q3 and 43.2% for the nine-month period, versus 45.4% and 44.5% in the respective prior periods. Net margin was approximately 22.5% and 22.0%, versus 25.4% and 24.4%.
- Cash flow: Nine-month operating cash flow was $266.8 million, compared with $221.0 million in 2014. Investing used $14.1 million, versus $302.2 million; financing used $246.0 million, versus $172.7 million. Cash ended at $42.7 million.
- Debt and liquidity: Debt was $2.54 billion, including $490 million outstanding under the $1.0 billion credit facility. Available revolver capacity was $509.1 million, net of letters of credit. The company reported compliance with debt covenants. Fixed-rate notes totaled $2.05 billion.
- Balance sheet: Total assets were $2.52 billion and total liabilities $2.75 billion at September 30, 2015; shareholders’ deficit was $236.6 million.
- Non-GAAP measures: Nine-month FFO was $170.2 million, AFFO $241.2 million, and Adjusted EBITDA $330.2 million. These company-defined measures are not GAAP measures.
Changes versus the prior period
- Q3 net revenue increased 0.6%; nine-month net revenue was essentially flat. Rental revenue rose 2.4% in Q3 and 2.1% year to date, aided by the addition of two Ohio properties to the Penn lease, rent escalation, improved variable-rent results, and a full nine months of Casino Queen rent.
- Gaming revenue fell 4.3% in Q3 and 5.5% year to date, primarily because of increased competition at Hollywood Casino Perryville. The Argosy Casino Sioux City closure also weighed on lease revenue.
- Operating income declined 2.2% in Q3 and 2.7% year to date; net income declined 11.0% and 9.4%, respectively. Higher G&A costs and interest expense contributed, while gaming and food-related expenses decreased.
- Operating cash flow improved year over year, partly because prior-year cash taxes included Spin-Off-related payments. Investment spending was substantially lower after the prior-year Casino Queen acquisition and Ohio development expenditures.
Outlook, risks, and unusual items
- Restatement: GLPI restated prior financial statements for lease accounting. Fixed or determinable percentage rent under the Penn master lease is now recognized straight-line over the lease term and reasonably assured renewals. This reduced 2014 rental revenue by $10.9 million for Q3 and $30.9 million for nine months, with corresponding deferred rent liabilities. The change affects revenue timing, not contractual rent or cash receipts.
- Pinnacle transaction: GLPI agreed to acquire substantially all of Pinnacle’s real estate assets, with consideration including 0.85 GLPI shares per Pinnacle share and assumption of approximately $2.7 billion of Pinnacle debt to be refinanced. The company expected closing in early 2016, subject to approvals and other conditions, and expected to issue debt and equity. The filing cites potential termination fees of up to $150 million in specified regulatory-failure circumstances and expense reimbursement of up to $20 million in a specified shareholder-vote circumstance.
- Meadows litigation: GLPI is suing Cannery Casino Resorts over the proposed Meadows acquisition, seeking return of $10 million paid under a consulting agreement, additional unspecified damages, and a declaration that it may be excused from closing. Outcome and timing are uncertain.
- Operating and financing risks: Most rental income depends on Penn’s performance under the master lease. Perryville faces competition, including the expected second-half 2016 opening of a Prince George’s County casino. Rising interest rates could increase variable-rate borrowing and acquisition or refinancing costs.
- Controls: Management identified a material weakness in controls over evaluating complex lease accounting and recording related revenue. Disclosure controls were deemed ineffective at September 30, 2015; remediation steps included a third-party consultant, with completion expected before year-end 2015.
- REIT and legal contingencies: Maintaining REIT status depends on continued compliance with technical tax requirements. The company also disclosed ordinary-course legal matters and uncertainty over indemnification obligations relating to Penn.
- No specific operating earnings guidance is provided. A fourth-quarter dividend of $0.545 per share was declared after quarter-end, payable December 18, 2015.
Key facts for investors to verify
- Progress, financing, approvals, closing conditions, and potential costs or dilution associated with the Pinnacle transaction.
- Performance and creditworthiness of Penn, the principal tenant, and compliance with master-lease obligations.
- Whether the Perryville competitive pressures and tax-rate changes continue to affect gaming revenue and margins.
- Resolution and potential recovery in the Meadows litigation, including any impact on the proposed transaction.
- Completion and effectiveness of remediation for the material weakness and the implications of the lease-accounting restatement.
- Debt refinancing needs, interest-rate exposure, covenant headroom, and the sustainability of dividends relative to cash generation.