Gaming & Leisure Properties, Inc. annual report, FY2015

Business context and reporting period

Gaming & Leisure Properties, Inc. (GLPI) filed this Form 10-K for the fiscal year ended December 31, 2015. GLPI is a Pennsylvania REIT that principally owns gaming real estate leased under triple-net arrangements; it also operates Hollywood Casino Baton Rouge and Hollywood Casino Perryville through taxable REIT subsidiaries. At year-end, its portfolio included 21 facilities across 12 states and was 100% occupied. Approximately 96% of rental revenue came from the Penn Master Lease.

Financial and operating results

Operating margin was approximately 44.8% of net revenue, compared with 43.7% in 2014; net margin was approximately 22.3%, compared with 23.5%. Interest expense was $124.2 million, up from $117.0 million, primarily reflecting amortization of Pinnacle bridge-financing fees. GLPI reported $509.1 million available under its revolving facility and compliance with debt covenants. Annual dividends were $2.18 per share; a $0.56 quarterly dividend was declared for payment in March 2016.

Non-GAAP measures: FFO was $223.8 million, AFFO $321.8 million, and Adjusted EBITDA $440.0 million, versus $231.6 million, $307.3 million, and $422.5 million, respectively, in 2014. These company-defined measures are not substitutes for GAAP results.

Material changes versus the prior comparable period

• Net revenue declined 2.7%; rental revenue from tenant rent increased $5.7 million, but gaming revenue fell $6.0 million, chiefly from competition affecting Perryville.
• A property-tax appeal refund reduced reported real estate-tax revenue and expense by about $15.5 million; management said it had no effect on operating income or net income.
• Operating expenses fell $14.9 million, partly due to lower gaming and real estate taxes, while G&A increased $4.8 million on transaction-related legal and consulting costs and compensation.
• Net income declined $10.7 million; higher interest expense and income taxes more than offset some operating savings. Operating cash flow increased $46.4 million.
• Investing cash outflow was $14.1 million, compared with $317.3 million in 2014, which included the Casino Queen acquisition and construction of two Ohio facilities.

Fourth-quarter 2015 net revenue was $128.7 million versus $145.1 million in fourth-quarter 2014, primarily reflecting the tax refund presentation; quarterly net income was $29.8 million versus $30.2 million.

Outlook, risks and unusual items

• Management expected operating cash flow, cash on hand and revolving-credit availability to cover anticipated debt service, capital expenditures, working capital and dividends at then-current operations. Significant acquisitions would likely require additional debt and equity financing; no quantified earnings guidance was provided.
• The proposed Pinnacle real estate acquisition was expected to close in April 2016, subject to shareholder, regulatory and other conditions. Consideration included 0.85 GLPI shares per Pinnacle share; GLPI expected to assume and refinance approximately $2.7 billion of Pinnacle debt. A committed $1.875 billion bridge facility was available, but GLPI said it expected to fund with debt and equity offerings instead. Certain termination scenarios could require a $150 million fee.
• GLPI amended its purchase agreement for the Meadows for a $440 million base price, including $10 million previously paid, and expected closing in the second half of 2016. The related litigation was settled and discontinued.
• Key exposures include tenant concentration in Penn, gaming-market competition, regulatory approvals and licensing, interest-rate and refinancing risk, REIT qualification and distribution requirements, and the execution and financing of pending acquisitions. GLPI specifically cited further Maryland competition, including a Prince George’s County casino then expected to open in late 2016.
• The 2014 REIT election reduced corporate-level tax on distributed REIT income, but TRS earnings remain taxable. Failure to maintain REIT status could materially increase taxes and impair distributions.
• The filing reports an unqualified audit opinion and effective disclosure and financial-reporting controls at year-end. Management said a material weakness involving measurement and recording of revenue under a complex lease was remediated during the fourth quarter.

Most important facts for investors to verify

• Whether Pinnacle and Meadows close on expected terms and timing, and the resulting equity dilution, debt, financing costs and tenant concentration.
• Penn’s capacity to meet lease obligations, given that approximately 96% of rental revenue depended on the Penn Master Lease at year-end.
• Trends in Perryville and other tenant gaming results, including the impact of new competing facilities and gaming-tax changes.
• Debt maturities, floating-rate exposure, covenant headroom and the availability and terms of acquisition financing.
• GLPI’s ongoing REIT compliance and distributions, and the assumptions supporting its impairment assessments for goodwill and the Perryville gaming license.
• Whether the remediated lease-revenue control weakness remains resolved; the filing does not describe a remaining material weakness at year-end.