Gaming and Leisure Properties - Earnings Call - Q1 2017

Transcript

Speaker 0

Greetings and welcome to Gaming and Leisure Properties First Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like turn the conference over to your host, Hayes Croeschaw, Vice President of Finance.

Thank you, sir. You may now begin.

Speaker 1

Thank you, Manny. Good afternoon, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties first quarter twenty seventeen earnings call and webcast. The press release distributed earlier this morning is available in the Investor Relations section on our website at www.glpropinc.com. On today's call, management's prepared remarks and answers to your questions may contain forward looking statements as defined in the Private Securities Litigation Reform Act of 1995.

Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward looking statements include those related to revenue, operating income and financial guidance as well as non GAAP financial measures such as FFO and AFFO. As a reminder, looking statements represent management's current estimates, and the company assumes no obligation to update any forward looking statements in the future. We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non GAAP financial measures contained in the company's earnings release. On this afternoon's conference call, we're joined by Peter Carlino, Chairman and Chief Executive Officer and Bill Clifford, Chief Financial Officer of Gaming and Leisure Properties, Inc.

Also joining are Steve Snyder, Senior Vice President of Development Desiree Burke, Chief Accounting Officer and Brandon Moore, Senior Vice President, General Counsel and Secretary. Now I'd like to turn the call over to Peter Carlino. Peter?

Speaker 2

Thanks, Hayes, and good afternoon, everyone. Glad always happy to announce completion of a good quarter. We had an excellent quarter. You'll note we highlighted on Page one of our release that our Bally's closing is scheduled for May 1. It's a small transaction, but a nice one.

And, I think we have, if you look at page two of our release, pretty fairly outlined the improvements to net income, that explain much of what has happened this quarter. Looking around the table here trying to get volunteers to see who's gonna shed the real insight on where we're headed and what we're doing. I know Bill Clifford is just itching to, make a couple of comments, and we'll probably dragoon Steve Snyder to talk about future development. So, Bill, go ahead. Sure.

Relative to what we saw in the first quarter, we obviously had

Speaker 3

a good quarter and we exceeded our expectations relative to guidance. And that's primarily attributable to three factors, one of which is Ohio and the rents received from Penn relative to Columbus and Toledo as well, secondly, is Baton Rouge had a very good quarter, certainly exceeding our expectations, and that was a big part of it. And then the last piece is a little bit less corporate overhead than we expected. Part of that was because we were successful at Able and got a transaction done, and therefore, we're able to capitalize some of the expenses associated with the efforts that we had relative to the Tunica property. On the guidance, as we look forward, there's really two major components to what's accounting for the increase in our expected performance going forward.

One is the fact that we expect the Cynical properties to close on Monday. Obviously, that was a transaction we announced at the March, which we're very happily surprised well, somewhat surprised, but appreciative of the efforts that Mississippi did to approve a transaction in one of the gaming industry is is a lightning pace given that it's basically one month from the time the transaction was announced to when we were on the agenda and actually approved. The other component, which is favorable news that was not in our formal guidance, is that the pinnacle we are assuming for purposes of our guidance that they are going to pay us an escalator on the anniversary in May. So those two components are obviously helpful in terms of where we're going. We've announced the dividend for this quarter at $0.62 We will look at adjusting the dividend or relooking at the dividend in the quarter following that we had the first full quarter of results from Tunica and Pinnacle, which will be in the third quarter.

The only other piece of news I would reiterate that we are very happy about is that Penn National on their call this morning obviously had very good results. They preannounced some of their results previously, but again exceeded those numbers. And the rent coverages that they were had alluded to three months ago has improved dramatically to the point where they expect the end of the year to be just slightly south of the 1.8. And that's almost a full tenth better than where they were a month or basically three months ago. So not that's any of our accomplishments, but we definitely want to thank them for their efforts.

Speaker 2

We're wishing them well. We're very appreciative. Look, think there's reason for optimism. It's hard to know where a year is going go if a year has its own character. They are off to a great start, but one doesn't know how they're gonna finish.

But we have renewed hope that they're gonna close out the year in a very positive way. Steve, I'm not sure there's a whole lot we can tell this group, about what we're up to. You can assume as always that we are very active here, the entire team, everybody at this table, looking at the next, possibilities. Nothing, of course, that we can ever announce. But, we remain optimistic, looking for steady and continued growth in this business.

I think as I look at this, I think we're quite proud about what we've been able to accomplish since we created this REIT. It's been a nice move over these last few years. It's always about what's the next magic trick, and I can only say that we're working on that. So with that, any other comments? I'll open it for questions.

Operator?

Speaker 0

Thank you. We will now be conducting a question and answer session. Our first question is from Robin Farley of UBS. Please go ahead.

Speaker 4

Great. Just wanted to ask you a question that I was asking a similar company earlier today, which is Yes. Are you do you have any thoughts on whether the potential changes in corporate tax rate out there, changes to to the tax rate are impacting the likelihood or timing of sales if you talk to asset owners?

Speaker 2

Robin, we were actually kind of hoping to ask you and others on this call that that very question. You know, we poked around at NAREIT. We're trying to understand better through our lobbyists and others what is likely to happen. But it seems so premature right now. As anxious as we are, and maybe even concerned as we are, it's just too early to make, in my judgment, any guess of where this is going.

Steve, do you

Speaker 3

want to opine? No. But Robin, to your question, I mean, just as we are trying to figure out what impact the tax reform package that the President has now given us sort of a bullet point note on will affect our business, you can rest assured that sellers are also contemplating the same question. So I think more than anything, we're anxious to see clarity, whatever form it takes, whenever it takes. Yeah.

And relative to timing, I think the tax code implications are different for large strategic corporate type people versus maybe some of the people that we deal with, which can sometimes be privately held situations where the tax impact has much greater consideration for whatever they might do relative to transaction. So, I mean, I think the answer to your question is some have, expressed some concern or or desire to understand the the implications of potentially doing a transaction. Others are probably a little less sensitive to that.

Speaker 2

Capital gains improvement would maybe motivate some by our city on the sidelines. That would be a positive thing. One does wonder a bit about the notion of doing away with interest deduction. Could be intriguing in this business or any capital intensive business. You really I just don't think I think patience is gonna be necessary in this case.

But I I am confident everybody out there who has a business, is in business, owns a business, has shares in a business, is wondering where in heck this is all gonna go.

Speaker 4

Alright. Great. Thank you for the color. Thanks.

Speaker 2

In other words, we didn't tell you much.

Speaker 0

Thank you. Our next question is from Steve Wieczynski of Stifel. Please go ahead.

Speaker 5

Hey, guys. Good afternoon. So I just want to thank you guys for moving the conference call time. Think it's the first time any company has ever actually felt sorry for us lonely analysts on days like this.

Speaker 3

Anyway We're concerned we'd have crickets on the other side.

Speaker 5

Never. So with just, guess, Bill, first with you, with the TRS, obviously, a pretty good quarter there. And I think when you look at your revised guidance, it seems like all you really basically did was kind of flow through the beat from 1Q into the guidance. And think you're probably going give me the answer that Penn gave this morning is that for the remainder of the year, you're still taking a pretty cautious view around the TRS component?

Speaker 3

Well, listen, I think it's two properties, right? It's Perryville and Baton Rouge. So you know, to the extent that it's you know, probably don't put as much time and energy and effort into it as as Penn does relative to understanding trend lines. You know, it was a surprisingly good quarter, and and my history with surprisingly good quarters is that somehow or another, by the end of the year, things tend to come back to normal. So we've kind of we have taken credit for the beat in the first quarter and pretty much left everything the same going forward because we're not 100% sure we understand exactly why the first quarter was as good as it was.

Somehow or another, these things always have a way of normalizing themselves. I don't know that you know, we don't have properties that are really affected by weather or anything, so I don't it's not a weather attribute, but it but it could just be the excitement of Trump or the desperation of Trump or or whichever way you wanna look at it. Some people motivated different ways. Or it could be other factors that we just don't really feel like we have a great handle on why we did so well. So hard to get excited and say, well, we if we knew that it was some sustainable component that we felt really good was gonna, you know, was a new trend or a new thought process or a new way of doing, you know, just a new approach or whatever you wanna call it, we would have we might have been a little bit more aggressive.

But we felt like, okay, great. Let's take what we've got. We're going to leave it where we were because we don't really have any information to indicate that the rest of the is going be any different than what we originally thought it was going be.

Speaker 5

Okay. Got you. And then second question, guess, bigger picture question maybe for Peter. But you talked about how you continuously are out there looking for your next move or your next deal. But just maybe help us understand what does the environment look like out there at this point?

I mean, it still do you have potential deals coming to you kind of on a consistent basis? Or is it slowed down a little bit?

Speaker 2

I don't know if it was ever fast. And I'm not being cute about that. Everything we have done to date well, there's a couple of examples that have kinda come to us, like a Baton Rouge where we're asked to look at something. But the the largest transaction we did was Pinnacle. We went to it, if you will, to make that distinction.

I mean, made it happen. So I think there's not a lot of action. I can't tell you quite candidly that there's a 100 people knocking at our doors. There's a handful of properties around the country that we remain focused on, a handful of businesses that we kinda keep a very close eye on, keep in contact with. Steve's constantly on the phone every day working these things, and we wait for a break.

We wait for the opportunity to open up. But sadly, that's the nature of this business. And I will say, in anticipation of a question we always get, are you looking at anything else? I think we stepped up the pace at which we're looking at other possibilities. Absolutely nothing that we're willing to say makes sense for us today, but I think we're bound, as employees of this company to explore every possibility as we look to develop this business going forward.

Look, it's all about dividend growth. As a shareholder, that's the way I feel. We ain't going backwards, and we're anxiously looking for ways to safely go forward. So this is a kind of lame answer. Of course, there's one part of this call that I hate.

I wish we were in a business where we could say and you've heard me say it quarter after quarter. You know, Starbucks might be able to say we're gonna roll out 50 units next you know, with some predictability. It's not the nature of what we do. So all we need for you folks to understand is that we're not asleep here in the home office, and we're actively chasing down every possibility. But to suggest that there's somehow, you know, people hanging on the clothesline just go for the picking, That's not the case.

Speaker 6

Okay. Thanks, guys. Appreciate it.

Speaker 0

Thank you. The next question is from Shaun Kelley of Bank of America. Please go ahead.

Speaker 7

Hi, and thank you for taking my question. Maybe sort of on the whole M and A note and since these transactions are sort of difficult to talk about in the future, could you give us a little bit more color on just how the Tunica transaction came together? And just like sort of was that something you approached or they approached you? And just a little bit more on sort of the specifics of that deal?

Speaker 3

Sure. No. They approached us, about doing a transaction. You know, it's one of the benefits of being in a relatively small industry and that anybody who decided that it's time to do a transaction, even if we weren't even if we weren't calling them on a regular basis, They know that, you know, we're the certainly, one of the alternatives is who you can sell your casino to in a way that's gonna maximize your potential return. So we got a call, and, you know, we basically contacted Penn about doing a you know, to to fill out the transaction.

And and they were, without a doubt, the probably the only clear choice from our perspective in that they already had they were very familiar with the tunica market. They were prepared to put it into the master lease, which was a very important consideration for us. And they also had the benefit of being able to extract synergies because they already had a major property in the market. So between the two of us then, we were obviously able to get a transaction completed. And without a doubt, the sellers were motivated.

And I've said that probably on every call, is that the best, the only way we're really going to get transactions done is when we have individuals on the counterparties who are motivated to do a transaction, and they just want to get the best price that they can get, not motivated directly by price. Right? So when we approach people and say, well, how much does it take to get you to do something you don't want to do? It rarely works out very well for us. So, we've come to a recognition that we wanna be in touch with everybody to make sure that we're front and center of mind, and that we're, you know, expressing our extreme interest in doing a transaction, but we also recognize that we've got to get transactions done in a way that are going to be value enhancing.

And, typically, the problem, obviously, is when you approach somebody about a sale, the first thing they want to do is sell you their real estate at your company multiple. So that doesn't work for us. And so those conversations are fairly short. But I think I'm not sure I can really add much more color than that.

Speaker 7

No, that's helpful. Again, it's just given the lumpy nature of these, I think just understanding how the stories come together is useful. And then second question would be and this is also a follow-up to earlier. Peter, you mentioned that you may have stepped up. You're looking at different types of assets.

Could you give us any color or view on what types of classes of assets that you at least have under consideration? Are these going be things that are leisure in nature and somewhat tangential to gaming? Or can they go even further afield, restaurants or convenience stores, something like that?

Speaker 2

I guess the quick answer is it could go anywhere. I mean, we tend to be focusing on some leisure possibilities. I know Steve spends a lot of time in that space. But no, in the end, it's all about we're a finance business. I mean, in the end, that's what we are.

And finding reliable sources of cash flow is all that really motivate us. I mean, that's that's kinda it. Show us a reliable, source of cash flow that we can pay reason reasonably for, and we'll go there. It's as simple as that, if we have confidence that it's sustainable. So, I mean, that again, I I hate these kinda vague answers, but I I couldn't be clear that we're not stuck in a rut.

We're looking at anything that can move the needle and safely do so. So, Steve, would you No.

Speaker 3

I think that does it well. I mean, we're gonna continue to look at things that are consumer driven, that are tangential to gaming or just maybe a couple of steps away from gaming, but they're really in the consumer dominated market.

Speaker 7

Thank you very much.

Speaker 0

Thank you. The next question is from Carlo Santarelli of Deutsche Bank. Please go ahead.

Speaker 8

Hey guys, thanks. A lot of my questions have been asked, but if I could and this is just getting back to the recent acquisitions. When you go into a tougher market or a market that's been historically viewed as being one of the more competitive ones, and I think we can all agree that Mr. Klisbee certainly was certainly is one of those markets. Would you guys say that like your process of identifying what proper rent coverage needs to be etcetera is a lot different?

Or do you kind of rely on the historicals? And part of the reason for my question is if you think about some other stuff where new competition could potentially be coming in, does that kind of dependence on the history of the market relative to the history of competition, etcetera, help you make a more informed decision that you'd be more willing to do something ahead of a major competitive threat?

Speaker 2

Look, I think that is a terrific question, actually, because I think we do pride ourselves in bringing a unique underwriting ability to gaming assets. I mean, it's hard to find a corner of The United States that we don't understand or haven't had some dealings with, so that we could look objectively and carefully at a market like tunica, not anybody's first choice. But look, the price was right. We understand that market. There's some real opportunities for synergy.

And, yeah, we we that's a transaction that we were quite pleased to do. I mean, look at what we paid for it. We should be out of it fairly quickly. Bill, go ahead.

Speaker 3

No. I think, you know, listen. Think relative to Tunica, obviously, that's a a mature market that has, you know, obviously, coming from, you know, potentially way long term down the road, something in Tennessee. But Arkansas is clearly taking a bite out of the existing operators. Having said that, though, you know, we do think that it's shown some signs of stabilization, and the purchase price multiple was the right price.

And then combined with the synergies, we felt we got comfortable. And I'm not going to hide behind the fact that from GLPI's perspective, the fact that we have the lease for the property embedded in the Penn National with the trust collateralization and the protection of the rest of the Penn portfolio, ensuring that we can collect our rent, it makes it a lot easier. Clearly, had we done this transaction with an individual on a single lease basis, the rent coverage would have had to have been a lot higher. Right. There's a little bit of it's somewhat not always completely underwriting that specific asset.

It's underwriting that asset in the context of where it's going to end up and who our counterparty is going be and who's going to be the tenant and what kind of collateral and protection we're getting.

Speaker 2

Yes. So it was a credit decision in the end. But a fair one.

Speaker 8

Thank you, guys.

Speaker 3

I it's the right I think we got to the right answer for both.

Speaker 2

And I think Penn's going be very happy with that asset. The properties are actually pretty nice.

Speaker 8

Great. Thank you so much, guys.

Speaker 0

Okay. Thank you. The next question is from David Katz of Telsey Group. Please go ahead.

Speaker 6

Hi, afternoon. Since it sounds like you are taking attendance, you can put down one yes for the mid afternoon earnings call rather than stacking up early in the morning with someone else. My question is not dissimilar from Carlo's, which is thinking about these assets that you've acquired in Tunica from a much longer term perspective and an entirely different one from Penn's, which is more about the accretion and what it sort of does to our model, let's say over the next few years, how do you think mean, you are you comfortable with Tunica being a stable market? It's certainly not a growing one. But are you comfortable that this asset will be saleable at some point in the future should you choose to want to sell it?

Speaker 3

Well, we don't expect to sell it. We expect it to be a part of the Penn portfolio of assets for forever. So I don't think we look at it as an asset that we're coming in to be able to carve out. I mean, once it goes into the master lease, it kinda goes into the big big pile and stays there and etcetera, etcetera. So the I'm getting a note here.

Yeah. No. I mean, so I you know, as we look at it, we're we're feeling we feel perfectly fine. I mean, as I kinda indicated earlier relative to the Tunica piece, right, is that when an asset goes into the master lease and it's cross collateralized, the the risk profile of that asset is dramatically different than if it's a single one off asset with a tenant who's got the ability to then potentially hand it back. Had they had had we entered into a lease like that, I can assure you that both the rent coverage that we would have expected as well as potentially even the multiple that we would have paid may well have been different.

So it's a little bit of a way that we can get to a satisfactory outcome with very little risk to our shareholders. And quite candidly, end up with a transaction that works because there are enormous cost synergies potentially available in that market for that. So they're multiple. Certainly generate dramatic free cash flow improvement over with that transaction. And we'll have it more than paid off well before anybody would expect there to be a problem.

Relative to the tunica market itself, I think it's a mature market for sure. But I I think the tunica market is a market that's gonna, be around for a very, very long time. I think the likelihood of the Sudica market disappearing is, I think, remote. So with some other markets, you know, I mean, every market will survive at some level, but there are other markets that we look at across The United States that we think have a lot more downside to them over the long term and potentially finica. If you look

Speaker 2

at the rent coming from that property, obviously, if you add a new property, you've got to make a determination of what the rent additive will be, at a mode of all that and coverage that's acceptable to us. But once it goes into the pot, it's just part of a pot, you know, it's just part of the pot and never to be remembered again. So whether it's up, it's down, you know, having a portfolio of of properties as Penn does, one assumes that at a given time, this x is up, y is down, there'll be all this. But the beauty is the coverage that we have spread across the board. We'll never again think about specifically what Tunica's doing versus Ohio or any other place.

Well, I'd take Ohio back because we have we have escalators in here. So there are some that we do watch a little more closely. But generally, I think you get the idea. There's one rent, and that's it. Think that helps.

Speaker 6

It it it does. And your answer sort of led me right into my second question, which is, you know, our experience with hospitality REITs is that at some point or some stage of life, they, you know, become more of a balanced buyer and seller. And obviously, at the moment, you know, I think the list of, you know, buyers if you were a seller is short to nonexistent. At some point and under some set of circumstances, don't you need to become, you know, a seller? Not necessarily in a large way, but a trimmer or a trader as we've seen with other hospitality REITs.

And obviously, it would appear that, you know, Caesars is headed in the direction of joining the fray. How do you think about that evolution for GLPI over time?

Speaker 3

Well, I think to the extent that we would be a seller, and we're not, just to be clear, but if we ever got to a point where we wanted to be a seller, we would be we would be looking at the different leases that we have. And, obviously, and and, again, reiterate, we're not a seller, but we would look at it and say, well, how many independent leases do we have? We have because we obviously have 10, but that would be a huge lease to sell. Right? Pinnacle, that's a huge lease to sell.

You have the Casino Queen potentially as a lease that you could sell on a one off basis to somebody. You've got and we have the Meadows that we could turn off turn around and sell. So those those are four leases that theoretically are different in sizes that you could potentially sell, so to speak, if you ever got to the point where you wanted to do that. Now, we have some other limitations in that with the current tax law, we can't just turn around and sell anything without potentially creating the risk of an embedded gain that we have to pay tax on. So and that's the ten year period.

So or five years. Okay.

Speaker 6

I got

Speaker 3

it correct. I thought it was ten. But five year period. It used to be ten?

Speaker 4

Yeah.

Speaker 3

Okay. I feel a little better.

Speaker 2

So it used

Speaker 3

to be ten. It's now five. So you can't you basically can't turn around and sell an asset for for five years. And we'd be selling the lease. So at the end of the day, we'd have whatever properties are embedded in that lease.

There's no ability to carve up the lease without a negotiation with the tenant. In terms of you were to try to say, well, I want to take these six properties and separate them out, just like we have a right to object to that. The tenant would have a right to object to that if we said we wanted to take, let's say, we wanted to go to Pinnacle and say, hey, we've got somebody that would really like to own XYZ properties. We want to separate the lease agreement. That would involve a negotiation with them and they would have a right to object.

Maybe they would agree to it, maybe they wouldn't. I So guess it's a very long winded answer of saying that we sell the individual pieces or individual leases, but that's really not in any way, shape, or form in any part of our strategic thought processes as we sit here today.

Speaker 2

It's not. But I will say this. I think that possibilities will open over time as the investment world, the REIT world, gets to understand the stability of the cash flow that we have here. I mean, look, we consider ourselves grossly undervalued today for a couple of reasons, and I'm not gonna try to dissect those right now. But look, we have an extraordinarily stable cash flow that in itself would be appealing, I should think, to many, but certainly appealing to me, if that adds any color to this at all.

Speaker 6

No. Perfect. Thanks very much. Thank

Speaker 0

you. At this time, I would like to turn the conference back over to management for closing remarks.

Speaker 2

Not much to add. I think we said most of what we can this quarter, but thank you very, very much for joining us today. Desiree said he hated the afternoon, but we're taking votes. So Des, you might see us on an afternoon again. We'll see.

So we thank you all very much. See you next quarter.

Speaker 3

Thank you. Thank Thank you, ladies

Speaker 0

and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.