Business context and reporting period
Gaming and Leisure Properties, Inc. (GLPI) filed this Form 10-Q for the quarter ended September 30, 2013. Penn National completed GLPI’s spin-off on November 1, 2013, after quarter-end. GLPI’s balance sheet at September 30 showed no assets or liabilities because the separation had not yet occurred; the filing’s operating results are principally historical combined results for Hollywood Casino Baton Rouge and Hollywood Casino Perryville, not post-spin-off GLPI results.
GLPI received real estate associated with 19 gaming and related facilities, alongside two operating casinos held in taxable REIT subsidiaries. Its post-spin-off strategy is to own and lease gaming real estate, initially with Penn Tenant as its sole tenant, and to pursue further acquisitions and diversification. GLPI expects to elect REIT status beginning January 1, 2014.
Financial results and liquidity
Amounts below are for the two operating casino subsidiaries; dollars in millions. The filing does not provide a consolidated income statement for GLPI as a standalone company for these periods.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $39.6 | $45.8 | $128.4 | $173.0 |
| Operating income | $5.7 | $8.2 | $21.6 | $39.1 |
| Net income | $2.7 | $4.5 | $10.6 | $20.8 |
| Operating margin | 14.3% | 17.8% | 16.8% | 22.6% |
| Net cash from operations | Not provided | Not provided | $13.2 | $21.0 |
Casino net revenue declined 13.5% in Q3 and 25.8% for the nine-month period year over year. Gaming revenue fell 13.6% and 25.8%, respectively. Management attributed the weakness mainly to new competition: a Baton Rouge riverboat casino and hotel opened in September 2012, while a large casino near Arundel Mills, Maryland, expanded in 2012 and added table games in 2013. Perryville’s table-game launch partly offset the pressure. The nine-month effective tax rate rose to 40.2% from 38.7%, primarily because of favorable prior-year tax adjustments.
For the nine months, operating cash flow was $13.2 million, investing cash outflow $3.0 million, and financing cash outflow $6.2 million. Casino-company cash was $18.6 million at September 30, versus $14.6 million at December 31, 2012. The real estate schedule reported net land and buildings of $2.004 billion at September 30, down from $2.008 billion at December 31, 2012.
After quarter-end, GLPI established a five-year credit facility comprising a $700 million revolver and a $300 million term loan, and issued $2.05 billion of senior notes: $550 million at 4.375% due 2018, $1.0 billion at 4.875% due 2020, and $500 million at 5.375% due 2023. The filing describes approximately $2.35 billion of indebtedness and $700 million of additional revolver availability. The facility has floating-rate exposure and financial covenants.
Material changes, outlook and notable items
- The Master Lease began November 1, 2013. It has a 15-year initial term and four tenant renewal options of five years each; it is triple-net, placing maintenance, insurance, property taxes and utilities on the tenant. Minimum rent disclosed for 2014 is $376.8 million; future rent also includes performance-based adjustments.
- All rental revenue initially depends on Penn Tenant, a Penn subsidiary. The filing highlights tenant credit and payment capacity as a central risk.
- GLPI estimated a special distribution of approximately $1.05 billion of accumulated earnings and profits to support REIT qualification, expected to be paid with at least 20% cash and the balance in GLPI shares. The filing describes this as an expectation, not a completed distribution.
- GLPI expects to fund real-estate construction costs of approximately $100.0 million for the Austintown, Ohio facility and $88.8 million for the Dayton, Ohio facility.
- Key risks include maintaining REIT qualification and meeting distribution requirements; reliance on Penn and gaming-sector performance; competitive, regulatory and licensing risks; interest-rate and refinancing exposure; and potential tax, indemnification, litigation, environmental and casualty liabilities. Management said ordinary-course proceedings were not expected to materially affect results, while noting outcomes and insurance coverage cannot be assured.
- Management reported effective disclosure controls as of September 30, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Post-spin-off rent terms, tenant coverage and Penn Tenant’s capacity to meet lease obligations, including performance-based rent adjustments.
- Actual funding and terms of the $2.35 billion debt package, covenant headroom, interest-rate exposure and use of proceeds.
- Whether the expected $1.05 billion earnings-and-profits distribution was made, its final cash/stock mix and its shareholder tax consequences.
- Progress, cost and funding requirements for the Ohio developments, including the stated $188.8 million combined real-estate construction estimate.
- Operating trends at Baton Rouge and Perryville as new competition affects revenue, margins and cash generation.
- GLPI’s successful REIT election and ongoing compliance with REIT, gaming-regulatory and spin-off tax requirements.