Gaming and Leisure Properties, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2019. GLPI is a Pennsylvania REIT whose primary business is owning gaming real estate and leasing it to operators, mainly under triple-net leases. At quarter-end, its portfolio included interests in 46 facilities across 16 states and was 100% occupied. Most earnings come from leases with Penn, Eldorado and Boyd; GLPI also operates Hollywood Casino Perryville and Hollywood Casino Baton Rouge.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $287.6 million | $254.1 million | $864.5 million | $752.4 million |
| Income from operations | $187.6 million | $164.8 million | $529.2 million | $469.9 million |
| Net income | $90.5 million | $104.8 million | $276.6 million | $293.6 million |
| Diluted EPS | $0.42 | $0.49 | $1.29 | $1.37 |
| Operating margin | 65.2% | 64.9% | 61.2% | 62.5% |
Q3 real estate income was $256.0 million, up 15.1%; nine-month real estate income was $766.6 million, up 17.9%. The nine-month figures include $21.6 million of interest income from mortgage loans. Net margin was 31.5% for Q3 versus 41.2% and 32.0% for the nine months versus 39.0% in the prior periods.
- Operating cash flow for the nine months was $583.7 million, versus $518.2 million. Investing activities used $2.0 million; financing activities used $581.9 million. Cash ended at $25.6 million.
- Dividends paid totaled $438.6 million for the nine months; the quarterly dividend was $0.68 per share, compared with $0.63 in 2018.
- At September 30, total debt was $5.80 billion gross ($5.75 billion net of issuance costs and discounts), compared with $5.90 billion gross at year-end 2018. Cash was $25.6 million. The company reported $1.115 billion of available revolver capacity.
- Assets were $8.50 billion and shareholders’ equity was $2.11 billion at quarter-end. Lease liabilities of $201.5 million were recognized following adoption of the new lease standard.
Material changes versus prior periods
- Revenue rose 13.2% in Q3 and 14.9% for the nine months, primarily reflecting the 2018 Tropicana transactions and Penn-Pinnacle transactions, rent escalators, and recognition of previously deferred rent. Changes to lease accounting also eliminated the gross-up of real estate taxes paid directly by tenants.
- Net income fell 13.6% in Q3 and 5.8% for the nine months, despite higher revenue and operating income. Higher interest expense and a $21.0 million loss on debt extinguishment were significant factors. Nine-month results also included a $13.0 million loan impairment and accelerated depreciation and land-right amortization following the Resorts Casino Tunica closure.
- GLPI issued $400 million of 3.35% notes due 2024 and $700 million of 4.00% notes due 2030. Proceeds funded a tender offer for $784.8 million of 4.875% notes due 2020 and repaid revolver and term-loan borrowings. The refinancing was intended to reduce borrowing costs and extend average maturities; it generated the $21.0 million extinguishment loss.
- Nine-month TRS Properties revenue declined 4.4%, primarily because of weaker Baton Rouge results following a local casino smoking ban and market deterioration, as well as lower admissions at Perryville.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management stated an intention to continue pursuing gaming-property acquisition opportunities on prudent terms.
- Key risks include reliance on a limited number of gaming tenants and their ability to meet lease obligations; gaming demand and consumer-spending weakness; interest-rate and refinancing exposure; access to capital; REIT qualification; regulatory approvals; and acquisition execution.
- Casino Queen’s operator defaulted under its senior credit agreement and GLPI’s unsecured loan. GLPI wrote off the $13.0 million loan principal in Q1 2019. Casino Queen was also in violation of its lease rent-coverage ratio at quarter-end, although lease payments remained current.
- Resorts Casino Tunica closed in June 2019. GLPI accelerated related depreciation and amortization, but stated the closure did not reduce rent under the cross-collateralized Penn Master Lease. Ground-lease termination was scheduled to take effect in February 2020, with no expected impact on operating results or net income.
- GLPI reported compliance with its debt covenants, no material off-balance-sheet arrangements, and effective disclosure controls. It stated there had been no material change to previously disclosed risk factors.
Important facts for investors to verify
- Tenant rent coverage, credit quality and concentration—especially Penn, Eldorado, Boyd and Casino Queen—and the status of Casino Queen’s lease default.
- Whether the Lumière Place mortgage loan is repaid or settled through acceptable property substitution by Eldorado, and performance and repayment terms of the Boyd mortgage loan.
- Debt maturities, variable-rate exposure, covenant headroom and the realized effects of the 2019 refinancing on interest expense.
- Comparable operating trends at the two TRS casinos, particularly Baton Rouge and Perryville, and any further effects of the Tunica closure.
- Cash available after dividends, the potential use of the $600 million ATM program, and the distinction between GAAP net income and non-GAAP FFO, AFFO and Adjusted EBITDA.