Gaming & Leisure Properties, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. GLPI is a Pennsylvania REIT focused primarily on owning gaming real estate and leasing it to operators under triple-net leases. Its portfolio comprised 38 facilities across 14 states and was 100% occupied at quarter-end.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $244.5m | $233.3m | $730.6m | $589.5m |
| Operating income | $152.7m | $143.3m | $455.4m | $331.8m |
| Net income | $97.0m | $89.6m | $287.3m | $195.6m |
| Diluted EPS | $0.45 | $0.43 | $1.35 | $1.14 |
| Operating cash flow | — | $489.1m | $405.4m | |
| FFO (non-GAAP) | $122.7m | $113.0m | $363.2m | $266.3m |
| AFFO (non-GAAP) | $170.5m | $158.6m | $504.1m | $377.2m |
| Adjusted EBITDA (non-GAAP) | $223.4m | $209.5m | $664.6m | $503.2m |
Net revenue increased 4.8% in Q3 and 23.9% year to date. Operating income rose 6.6% and 37.3%, respectively; net income rose 8.3% and 46.9%. Operating margin on net revenue was approximately 62.5% in Q3 and 62.3% year to date, compared with 61.4% and 56.3% in the prior-year periods. These results reflect portfolio additions and lease income, not solely same-property growth.
At September 30, cash was $43.6m, total assets $7.33bn, and shareholders’ equity $2.49bn. Gross long-term debt was $4.49bn ($4.45bn net of unamortized issuance costs), down from $4.72bn gross at year-end 2016. The $700m revolver had no borrowings and approximately $699.6m of available capacity. Debt included $3.425bn of fixed-rate notes and $1.065bn of variable-rate credit-facility borrowings. The company reported compliance with its debt covenants.
Cash used in investing activities was $16.9m for the first nine months, including $83.3m of real estate acquisitions, offset in part by lease-receivable collections and loan repayments. Financing activities used $465.1m, including $395.2m of dividends and $325.1m of debt repayments, partly offset by $139.4m of net ATM equity proceeds and $100m of new debt. Dividends paid were $1.87 per share year to date; the company declared a fourth-quarter dividend of $0.63 per share, payable December 15, 2017.
Material changes and drivers
- Nine-month rental revenue and direct-financing-lease income rose $139.6m, primarily reflecting the Pinnacle real estate acquisition in April 2016, the Meadows lease, the May 2017 Tunica acquisition, rent escalators, and real estate tax pass-throughs. The Pinnacle acquisition makes year-over-year comparisons materially affected by different periods of ownership.
- The Tunica properties cost $82.9m and were leased to Penn for initial annual cash rent of $9.0m, subject to lease adjustments and escalators. Management cited improved variable rent at two Ohio properties as an additional contributor.
- TRS Properties net revenue increased modestly: higher gaming revenue at Hollywood Casino Baton Rouge was partly offset by reduced food and beverage revenue at Perryville following outsourcing of its outlets in Q1 2017.
- Operating expenses rose $17.5m year to date, mainly from real estate taxes and depreciation associated with acquired properties. Interest expense increased $30.9m year to date, primarily due to borrowings used to finance the Pinnacle acquisition.
Outlook, risks and unusual items
- No specific financial forecast or quantified guidance is provided. Management said it intends to pursue prudent gaming-property acquisitions and believes it may pursue complementary or non-gaming growth opportunities.
- Revenue is substantially dependent on Penn and Pinnacle leases. A default affecting one facility can trigger a default under the relevant master lease, making tenant/operator financial capacity and lease performance important risks.
- Interest-rate and refinancing exposure includes variable-rate debt and maturities in 2018, including $550m of notes and the Term Loan A; the revolving facility and Term Loan A also mature in October 2018. Rising rates could increase financing costs or constrain refinancing.
- Other disclosed risks include maintaining REIT qualification, access to capital, tenant compliance and performance, economic effects on gaming demand, acquisition execution and regulatory approvals. Routine legal proceedings were not expected by management to materially affect results, though outcomes and insurance sufficiency are not assured.
- GLPI expects to adopt the new revenue-recognition standard on January 1, 2018; it estimated an approximately $0.4m cumulative retained-earnings adjustment, mainly related to customer loyalty programs at its TRS properties. Most lease revenue is outside the standard’s scope.
Important facts for investors to verify
- Tenant credit quality, rent coverage, and concentration exposure to Penn and Pinnacle, including master-lease default and renewal provisions.
- Plans and funding for the 2018 maturities, variable-rate exposure, revolver availability, and ongoing covenant compliance.
- How much reported growth is attributable to acquisitions and pass-through taxes versus same-property rent and operating performance.
- Cash available for dividends relative to the $1.87 per-share year-to-date distribution, and the sustainability of future distributions.
- The assumptions behind non-GAAP FFO, AFFO, and Adjusted EBITDA, and the impact of the 2018 revenue-standard adoption.