Gaming & Leisure Properties, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are to the corresponding 2018 periods. GLPI is a Pennsylvania REIT focused on owning gaming real estate leased primarily to casino operators under triple-net agreements. At quarter-end, its portfolio included interests in 46 facilities across 16 states and was 100% occupied.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $289.0 million | $254.2 million | $576.9 million | $498.3 million |
| Income from operations | $170.8 million | $153.2 million | $341.5 million | $305.1 million |
| Net income | $93.0 million | $92.0 million | $186.0 million | $188.8 million |
| Diluted EPS | $0.43 | $0.43 | $0.86 | $0.88 |
| Operating margin, approximate | 59.1% | 60.3% | 59.2% | 61.2% |
- Revenue grew 13.7% in Q2 and 15.8% in the first half. Real estate income rose 17.1% and 19.4%, respectively; TRS Properties gaming, food, beverage and other revenue declined 7.4% and 6.2%.
- Operating income increased 11.4% in Q2 and 12.0% in the first half. Net income was nearly flat in Q2 and declined 1.4% for the first half, as higher interest and operating expenses offset revenue growth.
- Operating cash flow was $364.1 million for the first half, up from $305.6 million. Investing activities used $1.4 million; financing activities used $363.8 million, including $292.4 million of dividends. Cash declined to $24.7 million from $25.8 million at year-end 2018.
- At June 30, total debt was $5.84 billion gross ($5.80 billion net of issuance costs and discounts), compared with $5.90 billion gross at year-end. Cash plus $834.6 million of available revolving-credit capacity provided reported liquidity. Mortgage loans receivable totaled $303.7 million.
- GLPI paid dividends of $0.68 per share in each of the first two quarters, versus $0.63 per share in each comparable 2018 quarter.
Material changes and unusual items
- Revenue growth primarily reflected the 2018 Tropicana transactions and Penn-Pinnacle transactions, rent escalators, and recognition of amounts previously deferred. These gains were partly offset by the first percentage-rent reset under the Penn Master Lease and the removal of real-estate-tax gross-ups under the new lease accounting standard.
- Interest expense increased 34.1% in Q2 and 37.9% in the first half, principally reflecting debt issued or drawn to finance the 2018 transactions. First-half depreciation rose to $126.4 million from $55.5 million, reflecting acquired assets, lease-accounting changes and accelerated depreciation.
- GLPI adopted ASC 842 on January 1, 2019, recording $203 million of right-of-use assets and lease liabilities. The adoption changed presentation, including removal of tenant-paid real estate tax gross-ups; management said minimum lease payments did not change.
- Casino Queen’s operating performance deteriorated and a proposed sale process faltered. GLPI wrote off its $13.0 million unsecured loan in Q1. Casino Queen’s rent remained current at quarter-end, but it violated a lease rent-coverage requirement; GLPI notified the tenant and its secured lenders.
- The tenant closed Resorts Casino Tunica on June 30, triggering accelerated depreciation of $10.3 million and land-right amortization of $6.3 million. GLPI stated this closure would not reduce Penn Master Lease rent because the lease is cross-collateralized.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said it intends to pursue additional gaming-property acquisitions and leasing opportunities on prudent terms.
- Key exposures include tenant/operator ability to meet lease and debt obligations, concentration in major operators (particularly Penn), gaming demand and local market conditions, regulatory approvals, REIT qualification, access to capital, interest rates and refinancing costs.
- GLPI reported compliance with its credit-facility and senior-note financial covenants. The $1.175 billion revolver matures in 2023; the $525 million Term Loan A-1 matures in 2021. Senior notes total $4.975 billion, with $1.0 billion due in November 2020 and $400 million due in April 2021.
- Management reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors. Ordinary-course legal proceedings were not believed likely to materially affect results, though outcomes and insurance coverage remain uncertain.
Most important facts for investors to verify
- Whether Penn, Eldorado, Boyd and other tenants sustain operating performance and rent coverage, and meet contractual obligations.
- The status and expected recovery, if any, of the Casino Queen loan exposure and the tenant’s lease-coverage default.
- Debt maturities, interest-rate exposure, refinancing access and continued covenant compliance, especially around the 2020–2021 maturities.
- How much reported revenue and cash-flow growth reflects acquired properties and accounting/presentation changes versus underlying rent growth.
- Whether declines at the TRS Properties, including effects of the Baton Rouge smoking ban and lower Perryville admissions, persist.