Gaming & Leisure Properties, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts below are in U.S. dollars; financial amounts are shown in millions unless stated otherwise.
Business context
GLPI is a Pennsylvania REIT focused on owning gaming real estate and leasing it to operators, mainly under triple-net leases. At quarter-end its 36 facilities across 14 states were fully occupied. Its portfolio included 18 facilities operated by Penn, 15 by Pinnacle, the Casino Queen, and two company-operated TRS casinos.
The 2016 comparison is materially affected by the April acquisition of substantially all Pinnacle real estate assets for approximately $4.8 billion and the September acquisition of the Meadows real estate for approximately $327.8 million. Pinnacle leases its acquired properties back from GLPI.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenues | $233.3 | $147.8 | $589.5 | $446.4 |
| Income from operations | $143.3 | $65.3 | $331.8 | $193.0 |
| Net income | $89.6 | $33.2 | $195.6 | $98.3 |
| Diluted EPS | $0.43 | $0.28 | $1.14 | $0.83 |
| Operating margin on net revenues | 61.4% | 44.2% | 56.3% | 43.2% |
For the first nine months, operating cash flow was $405.4 million, versus $266.8 million a year earlier. Investing activities used $3.235 billion, largely for the Pinnacle and Meadows acquisitions. Financing activities provided $2.813 billion. Cash at September 30 was $25.4 million.
At quarter-end, gross debt was $4.716 billion ($4.662 billion net of unamortized issuance costs and current maturities). The company had $534.1 million of available revolving-credit capacity. Total assets were $7.421 billion and shareholders’ equity was $2.450 billion. GLPI reported compliance with its credit-facility and notes covenants.
Quarterly dividends were $0.60 per share; the nine-month total was $1.72 per share. A fourth-quarter dividend of $0.60 per share was declared on November 4, 2016. Non-GAAP nine-month measures included FFO of $266.3 million, AFFO of $377.2 million, and Adjusted EBITDA of $503.2 million; these are company-defined measures and are not substitutes for GAAP results.
Material changes versus the prior period
- Net revenues rose 57.8% in Q3 and 32.1% for the first nine months, principally reflecting Pinnacle lease revenue, direct-financing-lease income, and tenant-paid real estate taxes; the Meadows contributed in September.
- Net income increased by $56.4 million in Q3 and $97.3 million for the nine-month period. The acquisition-driven revenue growth was partly offset by higher interest expense, up $21.7 million in Q3 and $41.8 million for nine months.
- TRS Properties net revenues declined $2.2 million in Q3 and $4.9 million for nine months, primarily because gaming volumes fell at Hollywood Casino Baton Rouge and Hollywood Casino Perryville.
- GLPI issued approximately 56 million shares as Pinnacle transaction consideration, alongside a public offering and ATM sales. Weighted-average shares increased substantially, so per-share results should be considered alongside dilution.
Outlook, risks and unusual items
- Management expects to pursue further gaming-property acquisitions and says it sees potential for growth beyond gaming. The filing provides no specific earnings or revenue guidance.
- GLPI depends significantly on Penn and Pinnacle and their subsidiaries for rent and other lease obligations. Tenant financial weakness, lease defaults, or inability to re-lease properties could affect cash flow and distributions.
- Management identifies execution and complexity risks from the expanded portfolio, access to financing, interest-rate exposure, REIT qualification and tax-law changes, and gaming-market conditions. The new casino resort near Perryville was scheduled to open December 8, 2016 and could adversely affect that property’s results.
- Debt totaled $4.716 billion, including $1.290 billion of variable-rate credit-facility borrowings; higher rates may raise borrowing and refinancing costs. Contractual obligations totaled $6.503 billion, including debt principal and interest and operating leases.
- The Pinnacle Master Lease is accounted for partly as an operating lease and partly as a direct financing lease. Management notes that lease classification depends on estimates such as asset fair value, lease term, borrowing rates, and residual values.
- GLPI could owe corporate-level tax on built-in gains in acquired Pinnacle assets sold within five years after the merger. The company also disclosed ordinary-course litigation; it did not expect a material adverse effect but noted outcomes and insurance coverage cannot be assured.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Assess Penn’s and Pinnacle’s financial capacity, rent coverage, and compliance with their master leases, given GLPI’s tenant concentration.
- Review acquisition funding, share dilution, debt maturities, variable-rate exposure, available revolver capacity, and covenant headroom.
- Track same-property performance at the TRS casinos, particularly Perryville after the nearby casino opening.
- Evaluate the assumptions underlying the direct-financing-lease receivable, including tenant creditworthiness and estimated residual values.
- Confirm the potential timing and magnitude of any built-in-gains tax, REIT distribution requirements, and future dividend coverage.