Gaming and Leisure Properties - Earnings Call - Q2 2016

Transcript

Speaker 0

Greetings and welcome to the Gaming and Leisure Properties Second Quarter twenty sixteen Earnings 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 call is being recorded. I would now like to turn the conference over to your host, Ms.

Danielle Gutterding with ICR. Thank you. You may begin.

Speaker 1

Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties' second quarter twenty sixteen 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, forward 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 morning's conference call, we are joined by Peter Carlino, Chairman and Chief Executive Officer and Bill Clifford, Chief Financial Officer of Gaming and Leisure Properties. 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 Garlino. Peter?

Speaker 2

Thanks very much, Danielle, and good morning, everyone. I guess my summary comment about this quarter is that things went as well as planned. We happily and successfully closed of course our Pinnacle transaction. We are poised to close on our Meadows transaction in September if all the regulatory things come together as we hope and expect that they will. We launched a $400,000,000 ATM program with the caveat I think well written and summarized in our release that would expect to draw up to $168,000,000 in equity for that Meadows transaction, but even that subject to circumstances at the time.

So we'll be most cautious with that. And we continue to look for and aggressively look for other opportunities, none of which we can tell you about. But I can promise that you will be the first to know as things evolve. So pretty straightforward this quarter and I'm going to go straight to questions. So if you would operator please open the floor.

Speaker 0

Thank you. At this time, we'll conduct a question and answer session. A question this

Speaker 2

session.

Speaker 0

Our first question comes from the line of Joseph Greif with JPMorgan. Please proceed with your question.

Speaker 2

Good morning, everybody. Hi, Joe. Good morning. In the press release, obviously, when you referenced the ATM, you talk about further reductions in leverage and then combining that with undistributed earnings that will allow you to finance smaller deals without accessing the equity markets and any kind of volatility associated with accessing the equity market. Do you have a fertile pipeline of smaller ish kind of deals or can you talk about that a little bit?

Thought we said we weren't going to talk about that. Look, the only answer I can give is that we look at stuff big and we look at stuff small and we'll do big and we'll do small. If these things are complicated transactions, as you know, there are always regulatory issues of one sort or another, almost any state that we look at. And I can only tell you that we're pretty active now, but look, it's not done until it's done and wouldn't even hazard a guess as what we'll be able to accomplish over the next year, but we remain hopeful and positive. And look, I think out of the box from the time we began our spin, we've done some pretty remarkable things.

We may be able to do that again, maybe not, but I'm satisfied that we're moving forward pretty aggressively. How's that for a non specific answer? That's right in line with what I thought you'd answer with. That's all for me. Thanks.

Speaker 0

Thank you. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.

Speaker 2

Hi, a couple of modeling questions. In the second quarter, TRS EBITDA came in line with your expectations, but you're lowering the outlook for the year. I guess two questions on that, can you talk about the second quarter in general regional trends have been weaker, did you offset that with some cost savings and then why the more tempered outlook? Thanks. Well, the TRS actually came in under about $1,000,000 for the second quarter versus our expectations.

We offset that with some savings at the corporate level on the corporate overhead line items. So that's kind of why you're seeing the favorable there. I think generally speaking, Perryville is holding its own on the revenue side and we've done some more good things relative to expense control. And so Perryville is pretty much operating in line with our expectations. Baton Rouge has had some up and down months.

I think in the second quarter, April and May were both rough months and but June was much better. Now there's some incidents going on in Baton Rouge that are kind of creating a little bit of noise. So I don't know that we're necessarily it's a fair quarter to look at in terms of expected long run rate. Everybody recalls all of the unfortunate situations that happened in Baton Rouge a couple of months ago. Anyway, so our outlook going forward is expecting that Baton Rouge has without a doubt been a more troubled market than Perryville.

And so we're expecting we've reflected that in our outlook going forward. I don't I wouldn't read a lot into our two old properties in terms of what's going on with the regional gaming markets. I think you can look to the results for Penn and Pinnacle in terms of what their operating results are is a much better indicator of what's going on in the regional markets than what you'll see out of either Perryville or Baton Rouge, to be honest. Helpful. And then Ohio, is the was did Ohio came in slightly below your expectations for the quarter, but for the rest of the year, it's the same or?

Well, basically what we do is we follow the expectations of our tenants. They give us some what they believe we're going, how the property is going to perform and we reflect that in our guidance absent us having some contrary view. And with obviously, they have a tremendous amount of better visibility into what's happening at their properties than we do. I think they had it was a rough month, right. Our just as a reminder, our revenues in Ohio are 20% adjusted monthly.

So we clearly have that's where we have the most variability to our rent flow stream is quite candidly in the Ohio Racetrack. That has generally been good. I do know that those the Columbus property, there has been some pretty decent amount of road construction that's been happening in and around that property on the Main Beltway, which has had at times has been less than wonderful. I can't give you a whole lot of specifics on that, but just know that we were actually fairly encouraged with where we think Ohio is going be going forward. So our but in short story, our guidance reflects what our expectations are of our tenant.

Helpful. Thank you.

Speaker 0

Thank you. Our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch. Please proceed with your question.

Speaker 3

Hey, good morning guys. Peter, just to maybe follow-up on the first question that was asked, maybe in a slightly different light. Just thinking about the smaller properties that might be out there, I think as we compare what you guys might be willing to acquire with some of the M and A approach of others out there in the market, is there a minimal size property that sort of makes sense relative to how you kind of need to split the cash flows for these types of sale leaseback transactions or like what kind of scale do you sort of need to in a theoretical acquisition do you need to have before you think a property owner can really evaluate GLPI as a partner?

Speaker 2

Well, it's hard to say how small it's small. We'll go pretty tiny. Yes, was just going to say, we'll do almost anything reasonable. It's got to be a solid property and a solid location, got to believe that it has a future and all that. But yes, we'll do little ones, keep going because again, little ones can lead the big ones, they give us more outreach with new operators.

There's a lot of strategic reasons for us to be poking around at some of these smaller properties right now. So we'll do them and look, a penny here, penny there. Look, we knew professionally well when we did the Pinnacle transaction that moving the needle is going to be more challenging. But in the meantime, what we have said is that our job is to get our balance sheet down to fighting weight to be as fit as we possibly can. And look, and if we have to keep hitting singles or we're willing to do that until we finally get one out of the park, which I fully expect in God's time we will.

And

Speaker 3

just maybe bigger picture, that's helpful. Thank you. But bigger picture when we think about the ATM program from here, is this sort of a preferred mechanism you think moving forward to sort of help alleviate some of the equity overhang that was created in the Pinnacle transaction or is this the right avenue for Meadows and maybe for a single asset, but not correct for a portfolio? Just kind of how you think about how this fits into your toolkit? Okay.

Speaker 2

Go ahead. Yes. The way I'm thinking about it is we look at the ATM as a very cost efficient mechanism for raising equity. When you compare that against the fully underwritten deal with the commissions you paid to the banks as well as the undoubtedly usually anyway, we were very fortunate last time to get a slight premium on the filed offer. But normally, is some sort of form of discount there.

So being able to move stock out at the market prices on a very, I'll call it measured and disciplined approach. In other words, being able to obviously turn it on and turn it off as we see fit is a compelling opportunity. I think one of the things that we're looking at is, we'll have leverage under 5.3 times by the end of the year on a pro form a basis. That gives us a little bit of cushion there as well as having an ATM program. It does increase the size of transactions we can get done without having to worry about market volatility on the equity.

And listen, I think I talked about it last time, right, is that what we experienced through the Pinnacle transaction was gut wrenching, is probably the best description of watching your stock move by 30% from peak to valley and kind of retracing most of it fortunately, in the nick of time, but that is not something that we are particularly anxious to go down that path again on. The ATM program gives us adds more flexibility in terms of adding $600,000,000 of equity. It also gives us the ability to take advantage of where we think our stock is fairly priced. Relative to larger transactions, I think what we've indicated before is that really large transactions are going to require from our perspective equity take back from the seller to avoid what we experienced in the I'm talking about really large transactions. So it's kind of there's really small transactions, which will be easy.

Those actually wouldn't require any equity, because we're going to be generating somewhere in the neighborhood of $120,000,000 a year of free cash flow on undistributed earnings. You add in an ATM program to supplement that, so you can do fairly decent sized, almost meadow sized transactions normally going forward just by nature of the fact that you've got the undistributed earnings and a little ATM supplement and you wouldn't have to worry about it at all. When you get a little larger than that, you might have to accelerate the ATM program or obviously, it's only $400,000,000 and we plan to do $168,000,000 relative to the Meadows, we probably have to re up the program at some point in the future. But we think this is a program that will get people very comfortable with our ability to finance transactions of a reasonable size and I think quit worrying about equity overhangs.

Speaker 3

I think it's a great mechanic. And last question if I could would be sort of targeting ending at 5.3 times is probably actually a little less than sort of we were I was thinking previously. Is the five to 5.5 kind of the right ballpark? Would you ever dip below that opportunistically given if the stock price works? Or I mean just where do you really want to be independent of kind of movements for a specific transaction or when something is like right your sight?

Speaker 2

Mean, our my thoughts and obviously this is somewhat subject to change in market conditions and what's going on in the world is that we'd be comfortable what we've recognized is the reason we thought that we could have six times leverage and then bring it down and take it back to six. And clearly that hasn't been accepted very well by the rating agency. And it is our goal to get to investment grade. So the new thought process is 5.5% and bring it down below 5.5%, which will be at 5.3 by the end of this year, take leverage back to 5.5% or do transactions at 5.5% and really put ourselves in what I'll call a bulletproof balance sheet perspective and the way I would characterize the thought process is, if we find that we're under leveraged and some way we make that determination, that's a problem that's very easily solved, takes about thirty days. You can fix your under leveraged problem really quickly.

If you are over leveraged, obviously you could spend a decade trying to get that fixed. And we look at the fact that out in the outer years starting in 'eighteen, we have roughly $1,000,000,000 a year of maturities coming along. And the last thing we want to be doing in that situation is to have ourselves in a situation where our balance sheet or that the market for whatever reason and obviously today, we're way under leveraged, but who knows where that will be in 'eighteen, is we want to be in a position where the refinance ability of our maturities is without question. So you can end up in a very bad cycle and we are highly focused on making sure that when we get ready to refinance our current debt maturities, which start in 'eighteen, that we're in good shape to do that and hopefully at lower interest rates than where we are at the time we issued the debt.

Speaker 3

Understood. Thank you very much.

Speaker 0

Thank you. Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.

Speaker 4

Hey, everyone. Good morning. Bill, Peter, whoever kind of wants to opine, when you guys think about the discussions you've had in transactions that may or may not be serious today relative to kind of the tenor of those discussions maybe prior to a new competitor emerging, are you noticing any different dynamic in kind of the potential seller or potential other side of the table what they're asking for?

Speaker 2

Let me give that to Steve because they're funny. He's looking like he wants to take that. Well, obviously, Carl,

Speaker 5

there hasn't been any noticeable change on the seller side, because our principal competitor in our space has basically set a threshold that obviously is materially higher than what you've heard from us. And when you look at portfolio transactions, that competitor as a subsidiary of a larger parent obviously is not going to be conducive to a sale leaseback transaction because of the nature of their parent. So in terms of the tone or tenor of the negotiations or the dialogue with third party sellers, it really hasn't entered into the mix in terms of the environment that we're sort of circling around.

Speaker 2

Yes, I would add on. I mean, I think, listen, the reality is right now is markets are interest rates are at all time lows, credit availability seems to be at all time highs. And so people are looking at those and expecting they're still looking at valuations and expecting pretty rich valuations. And our view is that we have to be disciplined because doing anybody can do a very rich transaction. We could announce four or five transactions a year probably if we had zero discipline on price.

If the transaction is non accretive, it simply doesn't work. And even marginally accretive transactions can be troublesome because quite candidly, all you're doing is increasing your share count, which means at some point in time in the future when you do get a transaction that makes sense, all you've done effectively is negated the value of that transaction. So we're going to be disciplined and we're going to continue to pursue opportunities and I think there will be some opportunities. But as we've said since day one of launching the spin, they're going to be lumpy, irregular and they're going to happen when they happen. And quite candidly, sometimes it will take some patience, but our view is to make sure that we're in great we have a great balance sheet that we're ready to go, that we're obviously aggressively looking for transaction when they're ready to go at the right time and the right price and most of that motivations on the seller, not because we're knocking on the door offering too much money.

So when we have a motivated seller, I think there is a very, very high likelihood that we will be involved in the transaction. Yes, I think Bill said it very gracefully. I have said on previous calls a lot less gracefully that any moron can make a bad deal. And that's just not what we're about. So discipline is everything.

I think that and I feel that we have fiduciary responsibility to preserve our dividend structure. First and foremost, I'd rather do nothing than jeopardize that and we're willing to sort of inch along and lessen until we can find something that's going to move it in a bigger way. But if we're putting out $0.60 a quarter, let's say currently, it ain't going to be $0.59 not if we have been doing anything about it. So I mean that's the first goal to make sure that our dividends are perceived by the market as solid as a rock. Great.

Thanks everyone. Thank you.

Speaker 0

Our next question comes from the line of David Katz with Telsey Advisory Group. Please proceed with your question.

Speaker 6

Hi, good morning all. And I think any moron can make a bad deal is perfectly graceful. What I wanted your update on is that we've gone down the road and you've obviously completed some monumental tasks the past couple of years or few years. When you look out ahead or even where you are today, what does the posture feel like in terms of assuming deals are a function of recent comps, interest rates, forward looking sentiment, how where do you think the posture is and how do you think that progresses, let's say in the

Speaker 2

next six to twelve months in general? Steven, there's really no way to know. I think we've answered that in a couple of different ways that this is completely unpredictable, Bill uses the word lumpy, it is utterly unpredictable. We are looking at things large, are looking at things small, but there's so many factors. It takes a willing seller, somebody who really wants to get it done or somebody that perhaps can be approached, we're not adverse to more hospital approaches if it seems business sensible to do that.

We've always proven to be pretty smart about that. But in terms of Bill, take a look at that, but I haven't a clue. I think the biggest motivator has to be a seller who's motivated. Obviously, they want a good price. Anybody who's selling anything wants a good price, but their motivation can't just be that it's a price that's so compelling that they can't say no to it.

It should be a function of whatever it's family discord or it's desire to retire or estate planning or just general retirement and getting out of the business or whatever it is that's causing somebody that makes the decision or it's a private equity fund that's at the end of their expected life of the fund, whatever it is that's causing the motivation for the liquidation or the monetization of the cash, that needs to be the driving force behind the transaction, not because we're coming in and offering some price that somebody says, that's such a stupid price, I have to take it. And that's where we're at. So I think we look at incredibly large transactions and we've looked at what I would call infinitesimally I don't think we are in any way looking at a transaction saying it doesn't work for us, because it's of a size nature. We will look at there have been transactions that we've passed on that we thought were too risky and then we thought that the future cash flow streams over the course of twenty, thirty years were incredibly insecure or unsecured.

So we've passed on those types of transactions. But other than that, I don't think there is a gaming property in The United States that we wouldn't be interested in looking at if we thought it was in a good stable for the foreseeable future and it was at an evaluation that made sense.

Speaker 6

So the market forces within a normal band are really not the driver of this necessarily, it's really a function of a property owner wanting to pursue this type of model. At the

Speaker 2

point where they want to exit the business, right? So it's either looking at this as a thought process to take maybe they're solved, they could be solving some internal political issues. Take cash off the table. Take cash off the But still stay in the business. So many possibilities.

Right. But I think certainly up to and including they just want to get out of the business entirely and our model is the way that gets them the best price, right. They may want to deleverage, that's certainly been a motivator in one of our transactions with the company that was over leveraged. Actually that was the motivator for both two of the transactions, both the Queen and the Meadows were all about the parties having a little bit too much leverage. Right now, given where the debt markets are, that's not quite applying the level of pressure that we might find desirable for all selfish purposes.

But yes, those ebb and flow that changes over time. So just a matter of time, matter of being patient. Understood. Appreciate it. Thanks very much.

Sure.

Speaker 0

Thank you. Our next question comes from the line of James Kahler with Bank of America. Please proceed with your question.

Speaker 2

Hey guys, how are doing? Good, Speaking of cheap debt, I just had one quick question follow-up, Bill. I mean, obviously, it's hard to predict exactly what the agencies will do. I get that. And I know we've talked about that.

But just sort of big picture with the sort of balance sheet strategy you laid out sort of taking leverage to the low-5s, levering up to the mid-5s and doing transactions in mid-5s, do you think that, that is at the goalpost that the agencies have set for an eventual upgrade to IG? I don't know. Obviously, in my mind, it is, but it's not I'm somewhat irrelevant to that. Let me throw in, Bill, before you get started. The irony is there's plenty of companies at a sixth level that are investment grade.

So you tell me by what alchemy they get to what they get to. So obviously, it's a challenge. I think there was some concern from the rating agencies with the Pinnacle transaction and how that went down in terms of we kind of move leverage around. Although quite candidly from my perspective, when I looked at all of the comps in the REIT space, 6x leverage is well within the sweet spot of investment grade. And the concept that we would take it up into the sweet spot alarmed them, I guess, is the best way of describing because we had indicated somewhat that our target was 5.5 times.

During that whole transaction, we bounced between 5.5 times and six times. We ended up at significantly less than that. And with the concept with the confluence of events that have happened this year and as well as the equity offering and upsizing the equity, obviously some option proceeds from employees, some deleveraging, etcetera, etcetera, we're going be well under the 5.5 times and down to the 5.3 times. I would say we absolutely are worthy of getting an upgrade. However, my opinion is of little value and we will be anxiously awaiting to hear what the rating agencies have to say when after they've had a chance to digest this earnings call as well as the fact that we're putting in place an ATM and I would hope that they find that to be a commitment to that's not just words, in other words that it's real.

And obviously, by the next quarter, we should have there'll be some we'll make some progress. I'm not going to guarantee that we're going to get the entire $168,000,000 done by the end of the quarter. That might be a little way too aggressive. But we'll certainly make some progress towards that, would expect. And we'll see what ends when they give us their next update.

Very good. Thank you. Thank you.

Speaker 0

Mr. Carlino, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

Speaker 2

Well, none to make except thank you very much for joining us and let's hope we accomplish everything we wish through the next quarter and have a happy call then. So thanks again. Have a great day. Thank you.

Speaker 0

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.