Gaming & Leisure Properties, Inc. — Q3 2014 10-Q
Reporting period: Three and nine months ended September 30, 2014. GLPI, spun off from Penn National Gaming on November 1, 2013, owns gaming real estate leased primarily to Penn under a triple-net master lease and operates two taxable REIT subsidiary casinos. Comparisons with 2013 are not like-for-like: GLPI Capital’s rental business was not operating in the prior-year periods.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $157.8m | $39.6m | $476.9m | $128.4m |
| Operating income | $77.6m | $5.7m | $229.3m | $21.6m |
| Net income | $49.9m | $2.7m | $141.2m | $10.6m |
| Basic / diluted EPS | $0.44 / $0.42 | $0.02 / $0.02 | $1.26 / $1.20 | $0.10 / $0.09 |
| Operating / net margin on net revenue | 49.2% / 31.6% | 14.3% / 6.8% | 48.1% / 29.6% | 16.8% / 8.3% |
| Adjusted EBITDA | $107.5m | $9.3m | $317.4m | $32.4m |
| FFO / AFFO | $73.2m / $81.2m | $2.7m / $5.5m | $211.4m / $233.2m | $10.6m / $18.9m |
Q3 2014 rental revenue was $119.8m, including $12.5m of tenant-paid real estate taxes reported with an offsetting expense. TRS gaming revenue declined 4.3% in Q3 and 7.2% year to date, reflecting competition and operating pressure; nine-month food, beverage and other revenue also declined 6.7%. The major year-over-year revenue increase reflects the post-spin-off rental business, rather than organic growth alone.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $221.0m, versus $13.2m in 2013. Investing used $302.2m, including $124.5m of project expenditures, $140.7m for the Casino Queen real estate acquisition and net loan funding of $35.0m. Financing used $172.7m, including $388.7m in dividends.
- Cash declined to $31.3m from $285.2m at year-end 2013. Long-term debt increased to $2.546bn from $2.350bn; net debt was approximately $2.515bn. Total assets were $2.595bn and shareholders’ equity was a deficit of $77.9m, following the large purging distribution and related equity activity.
- Debt comprised $2.050bn of fixed-rate notes and $496m outstanding under the variable-rate credit facility. The company reported $503.3m of available revolving capacity and compliance with all debt covenants. Notes mature in 2018, 2020 and 2023; the credit facility matures in October 2018.
- GLPI paid dividends of $0.52 per share in each of the first three quarters ($1.56 per share year to date). The February purging distribution totaled approximately $1.05bn in cash and stock.
Material developments, outlook and risks
- The two jointly developed Ohio facilities began operations in August and September 2014 and were added to the Penn master lease. GLPI’s construction costs were budgeted at $100.0m for Mahoning Valley and $89.5m for Dayton; $100.0m and $88.2m, respectively, had been paid or accrued by September 30.
- Argosy Casino Sioux City ceased operations following a licensing decision. GLPI estimated lost rent of about $1.1m in Q3, $1.6m in Q4 2014 and $6.2m annually going forward; the property was subsequently sold.
- The company was pursuing a purchase of The Meadows Racetrack and Casino. On October 27, 2014, it sued seller Cannery Casino Resorts, alleging fraud and breach of agreements, seeking return of $10m paid under a consulting agreement plus unspecified damages. The acquisition’s closing and litigation outcome were uncertain.
- GLPI and Penn had requested an IRS pre-filing agreement on the allocation of historical earnings and profits. The determination could affect an additional shareholder dividend required before December 31, 2014; the company expected to fund it in cash from its revolving facility. GLPI intended to elect REIT status for 2014, but qualification and tax treatment remain subject to applicable requirements and the IRS determination.
- Management cited the master lease and tenant/operator performance as key drivers. Substantially all leased-property rent depends on Penn and its subsidiaries. Perryville faced increased competition, including the August 2014 opening of Horseshoe Baltimore; a planned Prince George’s County casino is also expected to adversely affect Perryville. GLPI anticipated a reduction in Perryville’s gaming tax rate from 67% to 61% when it directly purchases slot machines in April 2015.
- Interest-rate exposure, access to capital, REIT qualification, regulatory approvals, litigation, tenant credit and gaming-market competition are among the disclosed risks. The filing provides no formal earnings guidance. Management said quarterly results are not necessarily indicative of full-year results.
Investor verification priorities
- Check the IRS allocation decision and the amount, timing and funding of any additional required distribution.
- Assess Penn’s ability to meet master-lease obligations and the concentration of rental income in Penn.
- Track the Cannery litigation, potential recovery of the $10m payment, and whether the Meadows transaction proceeds or is terminated.
- Review liquidity after dividends, Ohio development spending and any further distributions; confirm revolving capacity and covenant headroom.
- Monitor Sioux City rent impacts, competition and operating trends at Perryville and Baton Rouge, and the Ohio facilities’ performance.