Gaming and Leisure Properties - Earnings Call - Q4 2016

Transcript

Speaker 0

Greetings, and welcome to the Gaming Leisure Properties Fourth Quarter twenty sixteen Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Danielle Guerding.

Please go ahead, Danielle.

Speaker 1

Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties fourth 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 Carlino. Peter?

Speaker 2

Well, good morning, everyone, and, welcome to our year ending, call. First, I'd like to say that as we think about this past year, it's been a highly transformative, terrific year for gaming leisure properties. We have built, I think, in a very short order, a terrific company. We had great results and we remain pretty motivated as we look ahead to what we think we can do with this platform over time. As usual, not a whole lot of moving parts to report.

The numbers kind of speak for themselves. Obviously, there's a high degree of predictability in this business. I can tell you that we remain focused and looking at new opportunities always, always, always with caution in mind. If you followed us for many years, you understand that it's it's never hubris or ego. It's all about what can make sense in building value for shareholders.

That is our first, second, third, and total motivation. So with that, I'm gonna turn it immediately open to questions and see what

Speaker 3

we

Speaker 2

can see what you folks would like to know. So go ahead. Operator?

Speaker 0

Thank you. If you like to ask a question today, please press star one on your telephone keypad, and Our first question is from the line of Felicia Hendrix with Barclays. Please go ahead with your questions.

Speaker 4

Hi, good morning.

Speaker 3

Hi Felicia, good morning.

Speaker 4

Hent just said on their earnings call that they're not gonna hit their escalators this year. So I guess that would affect you in November, right, when you kind of it's because it's back it's a year backwards. So and I know it's only one month, but is that contemplated in your guidance?

Speaker 3

Yes. Our guidance has does not have any escalator for Penn, which would take into effect actually two months, November and December.

Speaker 4

Okay, November. That's good. And then just bigger picture, so I guess we all have more clarity now around the Caesars restructuring. And I'm just wondering how you're thinking about opportunities coming from the CEOC, OpCo, PropCo transaction.

Speaker 2

Well, quick answer is it's impossible to know, Felicia. You can imagine that we stay very, very, very close to that situation, But have allowed it to play out as it passed and so we'll have to see where all the chips fall. I can use that pun and then we'll see. Bill, do you have a thought about that?

Speaker 3

I would just add that I think they put out probably the most telling thing which indicates that they're on track is the fact they put out an eight k indicating that they got their PLR from the IRS. We haven't seen the the PLR, but you know, candidly, I'll be honest and say I'm I'm impressed that they were successful at getting that through with their with some of the what I thought were some would have been some challenging aspects to that request. But obviously, the PLR is done congratulations to them. In terms of opportunity for us, think that's gonna be on hold for a while. Clearly with the amount of momentum they have and the direction that they're going in and their full speed ahead progress relative to getting coming out of the getting the bank plan approved and going through the regulatory process.

I think our opportunities are pretty limited in the interim and I think most of our opportunities will avail themselves if there are any opportunities. Once they've completed their transaction which I understand they're targeting for June with an outside date of the end of the year. So I think they have a lot of work to get done between now and then. I'm not gonna give any commentary as to the feasibility of their deadlines or their dates. But clearly, they're moving forward and we're gonna continue to stay vigilant and mean, vigilant is not quite the right word, but we're gonna continue to pay attention and offer, you know, certainly be willing to be helpful if there should ever be an opportunity for us to get involved.

Speaker 2

Yeah. It's sufficiently big. I mean, look, they're gonna end up with a very highly levered product in the hands of a lot of people who are gonna wanna hold that product. So I mean, who knows? I that's the quick answer.

Who knows? You know that we'll be alert. There's a you know, crumbs fall off the tree. We'll be there to pick them up. So that's that's not all we can say.

Speaker 4

Okay. And just one more. And I know you guys just hold the real estate, but do you have any comments on Meadows performance in the quarter just according to the data that comes from the state was lower than we expected?

Speaker 3

No, no. We don't know. Yes, I mean, we're a little bit we have to kind of wait for the Pinnacle earnings release and whatever commentary they're going to give on that. And certainly, it'd be inappropriate even if we had a comment or had our information to share that at this point given that it's their their operations and their their property. So I'm gonna have to beg off on that one.

Speaker 4

Okay. That's fair. Thanks a lot.

Speaker 2

I'll say let me throw in this. My conversations with them more broadly have been that they're very pleased with the, with the acquisition and are making some significant improvements and, feel really good about it. So I'd be shocked, frankly, if we get to their call and we don't hear something along those lines that they're they're quite happy with it.

Speaker 4

Great. Thanks.

Speaker 0

The next question is from the line of Joseph Greff with JPMorgan. Please proceed with your question.

Speaker 5

Good morning, guys.

Speaker 2

Good morning. Good morning.

Speaker 5

I was hoping you guys can talk about in your more recent discussion with sellers of gaming real estate, how the two issues of higher interest rates and the prospect of corporate tax reform impact with those discussions?

Speaker 2

I think we're just finding out now what what that's gonna mean. Look. Our conversations with various people go on, But I I mean, I think rationally, depending upon what the Trump administration actually does or the congress actually gets around to doing, I don't know. I'd be kinda cautious if I were

Speaker 3

a seller. Right. I think, you know, I I would summarize it this way, which is that companies that were thinking about doing a transaction with us relative to how they might do a recapitalization And look are effectively saying, we really need to understand what the new rules are relative to what the tax, what the corporate tax rate is gonna be, what the deductibility of interest is gonna be, etcetera, etcetera. There's a number of things that are being bandied about in the public domain that may or may not come to be. And I think, candidly, any prudent person would say, well, let me understand what the new ground rules are before we start continuing the transaction.

On the other hand, if there's just like what we've probably said a number of times is that if you have a seller who's motivated to sell or wants to do a transaction for reasons other than optimizing or a great price or taking advantage of tax situation. Those those sellers are still going to be willing to talk to us. Now, obviously, that reduces the field dramatically in terms of the number of people that are where we can expect to get something done in the next several months. But I would expect that that's probably true in a number of M and A transaction environments in terms of people trying to understand what the implications of the revised tax code might be.

Speaker 5

Good enough. Thanks guys.

Speaker 0

The next question is from the line of Cameron McKnight with Wells Fargo. Please go ahead with your question.

Speaker 5

Good morning. Thanks very much. Good morning. Question for you, Peter or Bill. What sort of drop is contemplated at Charlestown in the guidance as you've thought about rental coverage for this year and the sensitivities around that?

Speaker 3

Well, I'm I mean, we were just listening in on the Penn call, we understand that they they did disclose what happened for the two months in terms of the rent coverage at 1.68. I would caution people not to be too alarmed by that because those are the seasonally two of the weakest months of the year. And every year that two month period versus the rest of the year is lower. Our guidance is we coordinate that with Penn. So our guidance ties into their guidance.

And for good reason, the reality is they have certainly all of the information. They have understanding what's going on. We get information but we really get it at the public level. Short of us thinking and I don't really wanna, first of I'm not in a position to comment on their guidance. But secondly, short of us feeling that their guidance is completely out of line, which I don't know how I would even come to that conclusion based on the information I have.

But short of that, would be our expectation that our guidance will tie into what they're guiding. And therefore having individual comments is a little challenging. I take them at their word to what they had on the call which is that Charlestown is doing really well for the since the opening of National Harbor and doing better than their expectations. I don't have information relative to how they've incorporated that out performance into the outer months of the guidance. So I don't know if left that at what they originally expected the next ten months to be or whether they've incorporated and seen some of their improvement that they've or better than expected results they've seen in the first two months, whether they've allowed for that in their guidance or not.

So I know that's kind of a compound and I apologize for that. But the reality is we are to a certain degree can reliant on their guidance. And candidly, short of us having better information, I don't I think that's probably the most prudent approach for us to take relative to giving our guidance going forward.

Speaker 2

Got it. They said they expect to end the year somewhat better than what they reported in those first two months. So we're expecting that they should, as we saw last year, have an upturn in December. Maybe not to to 1.8, but it's gonna move well in that direction. And I think we're optimistic or at least encouraged that the next year when all the everything comes together that that they they're gonna be close or they may be there.

So we haven't thrown in the towel on that yet, but Bill answered it perfectly. We obviously don't have that that crystal ball.

Speaker 5

Got it. And then just to circle back on your earlier comment, Bill. Did I hear this correctly that since Caesars came out with their, with their private letter ruling that conversations around deals have have cooled off a

Speaker 2

little bit. Is that is that fair to say?

Speaker 3

No. The, they're not related. In other words, the the the cooling of deals to the extent that it's with structural transactions with corporations is more related to the election of Donald Trump and the and the issues around what the what's in the public domain relative to tax reform. So Got that's that. The Caesar thing is simply are probably it's we're recognizing that with the momentum in their transaction that we don't see we think that it's gonna take them getting through their process before we would potentially have an opportunity related to the Caesars assets.

As Peter touched even when they're done, we don't believe that the Caesars real estate group is a group that's really long term dedicated REIT investors, let's put it that way.

Speaker 5

Got it. Okay, thank you. But that's very helpful. Our

Speaker 0

next question is from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.

Speaker 6

Hey guys, thanks for taking my question and good morning. If we just thought about potential opportunities out there, and I know you're not going to comment on any kind of specific transactions, but one of the things I was curious to get your view on is when you have a property or properties that you're potentially looking at and you do see the potential for a competitive threat down the road, how much comfort do you have given your experience in maybe going forward on a transaction like that where there could be future ambiguities created by competition?

Speaker 3

Well, I think that's a big part of what is is our our strength here at at PLPI relative to what it gives us an advantage relative to what I'll call non gaming REIT. Certainly people in the gaming industry have an understanding and I'm not gonna infer that we're have particular insights that other people who are on familiar with the gaming industry don't understand. But I do think that we passed on opportunities to be involved in markets where we saw long term threats that were gonna have a meaningful impact to the individual properties. And so for us to do one off type properties in tough markets, we look, we definitely will treat those differently than if it's a portfolio of assets or if it's in a market where we see a very stable customer base and a stable outcome or outlook for the industry. Certainly, I'm not going to comment on the individual markets that we've passed on, but I can think of at least three where there's been three three guys that that, you know, thought they might offer us up their land and building in a market that we just quite candidly passed on.

And so, you know, I think that's, part of being long term oriented, cautious and recognize that the first thing we wanna do is add to shareholder value not to detract. And even though something might look great for the first few years until something bad happens. We recognize that we're in this for the very long haul. Obviously when we enter into thirty five years, well basically 10 or 15 with renewals out to thirty five or thirty years, We've got to take a view that what's the competitive landscape look like over the next twenty years as an example or ten to twenty. And so I think that to me we'll always get it right.

But certainly going into situations where you know that there's real challenges to a market is probably something we'll be staying away from. You. Have stayed away from and we'll continue to stay away from.

Speaker 0

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

Speaker 7

Hey, good morning. Quick question, just what was the rationale with increasing the dividend slightly? Thanks.

Speaker 3

Well, our dividend policy has always been to pay out 80% of our AFFO as a dividend. We expect candidly the dividend increase reflects our expectations for 2017 in terms of what our AFFO is going to increase by. And that's a function of obviously the Meadows transaction, which was not incorporated into the fourth quarter as well as our deleveraging events that we expect to happen and so we expect AFFO to grow and therefore appropriately, we would expect the dividend to increase as well. We

Speaker 0

have time for one final question today coming from the line of Robin Farley with UBS.

Speaker 2

Operator, we're more than happy to take We'll take any questions until we're retired. We'll put that down anyway.

Speaker 8

Great. So two questions I have. They're both kind of follow ups. A couple of months ago, had described the market as kind of a softer transaction market and about five to 10 sellers out there. How would you characterize that number now?

Is it a similar number but just a different level of conviction maybe or has that kind of pool changed? And then also oh, go ahead. I'll yeah.

Speaker 2

Well, I don't know that we put up a number. I don't know. All of us are looking quizzically around the table, but I think the climate is exactly the same. Steve, why don't you just for fun.

Speaker 7

No. I I I think the climate, Robin, is is very similar. But to Bill's earlier point, there are sellers out there that are waiting to see what these first two hundred days of the Trump administration mean from a tax standpoint, from a a corporate tax standpoint. So I think anybody that has expectations that will be announcing a transaction in the next weeks while this uncertainty is still out there shouldn't get their hopes up. I think the flip side to that is the administration seems to be moving quickly on everything.

So we'll just have to wait and see. Yeah.

Speaker 3

And what Steve's talking about is with some kind of form of a corporate type restructuring transaction. For a sale, an outright sale. Right. But, you know, there may you know, we're we are certainly working on a couple of opportunities where I'm not promising anything,

Speaker 6

but there's a potential that we could

Speaker 3

be announcing a small transaction at some point in time here in the reasonable future. But deal's not done, and I can tell you each every phone call starts off, with, you know, some basically comments that, oh, boy. I don't know if we're gonna get there concept. So, we'll we'll see.

Speaker 8

Okay. Great. Fair enough. Thanks. And then my other question, also kind of a follow-up.

I don't know if you've actually said do you sort of have an idea of what you think the impact of National Harbor would be just sort of percentage wise when you look out to the year ahead now that it's been open for this few months kind of what kind of percent impact we should be thinking about?

Speaker 3

That's kind of a different way of getting back to the concept.

Speaker 8

I thought I would try.

Speaker 3

I I appreciate that.

Speaker 2

We don't know. In fact, I'll tell you the Penn folks have been very tight lipped about that. I mean, it's real clear that it is better. I was gonna say way better, but I I can't even characterize it that way, that it's pleasingly better. How's that?

Then what they what what yeah. Exactly. But they they are not saying that that's the picture for forever and ever. So my sense is we're gonna have to stay tuned over these next months until they get comfortable that the run rate that they're at today is better, worse, whatever it's gonna be. So, I mean, that's the most we can get out of them.

Speaker 8

Is is your sense that there that the days that were better in January because there I I think there was a storm in January, although it was generally a warm winter that that maybe made some comps easy on for some period of January. Is it your sense that things are pleasingly better outside of that event?

Speaker 3

That's that's the impression I got and then I got that safe. I think I would say that yes, even counting the storm effect from last year that they're happy with their results on a year over year comparison. But I may be putting I'll have to go back and read the transcript on the 10 earnings.

Speaker 2

No. I think that's safe statement safe statement, but they're very cautious because they don't wanna get caught having made a mistake or misled anybody and and hopefully not us as well. So I look. We're just gonna have to wait a few more months until they're willing to say, hey. This is where we are.

Speaker 3

Yeah. I was and and and as background,

Speaker 2

and I'm gonna go back to

Speaker 3

my old days back when I was over there, which is more than three years ago at this point, we did a lot of analysis in different markets in terms of trying to understand how long does it take for you to really have a good handle in terms of where you're gonna perform. And honestly, that really happens around the six month window is when you have pretty good data relative to how you think the impact of whatever transaction or whatever competition or whatever aspects gonna happen. That for for whatever reason there's there's miss misleading trends in the first few months many times. Sometimes they hold, sometimes they don't. But really when you wanna say what's my correlation now, I really did, it takes takes about six months after the event before you can get enough data to really start to say, okay.

I I could see where this is going.

Speaker 2

But I also think what Penn highlighted on their call was predictable. I mean, National Harbor is in a terrible location. Wonderfully central to a lot of populations. So and for those of us who have been there more than a couple of times, but the traffic and and there's a lot of ugliness in getting to it makes it still appealing, I think,

Speaker 3

for the a lot of

Speaker 2

the Virginia market to continue going over to Charles Town. So I was always optimistic that that we'd settle out into a good place. But, again, we won't know, but we'll know soon enough.

Speaker 8

Okay, great. Thank you very much.

Speaker 0

Your next question is coming from the line of David Hargreaves with Stifel. Please go ahead with your questions.

Speaker 9

Hi. Thanks for being, generous in taking the question. I'm just wondering if you, drawing on your your knowledge of what's going on in Pennsylvania, where do you think the last Racino license ends up? Seems a lot there'd be a lot of opposition to that in major markets. And what what do you think has to happen?

Where does it go?

Speaker 2

That's a very good question. I have not talked to the Penn guys in a while about that, except I do know that they're highly focused, of course, on keeping it where it kinda belongs out in the western part of the state. The reality is, and I'll be real clear about this, there's no place to put it. I mean, in our time at Penn, we exhaustively looked at every goddamn city, town, State College, Johnstown, whatever. There has been talk in the past of trying to move it to Gettysburg, but that's really Penn National's market.

Could be you know, obviously, wouldn't be a very good thing. The reality is that license and the two of them coming up should be retired. And there's gonna be a lot of pressure to try to get them to do it. There'll be pressure the other way to try to put it to look at the state, look at the map. The reality is there is no place to put those licenses.

And I know some of the politicians, even at my time that I spoke with, recognize that and were in favor of extinguishing those licenses. So nice to have them, but where are you gonna put them?

Speaker 9

Can it be viable where it is?

Speaker 2

Well, apparently not. I mean, I think

Speaker 7

No. It's Right? Because the original enabling legislation was adopted before Ohio passed. So the world changed with the the VLT legislation in Ohio. But to Peter's point, I mean, there are a number of people in Harrisburg and certainly a lot of people out in the western part of the state that do think it's a Western Pennsylvania license given the legacy that's taken place in Lawrence County.

So it's pure speculation at this point.

Speaker 3

Yeah. Don't know. But you

Speaker 2

can bet there's gonna be a lot of fighting around that around that point. But take it as a gospel. We've we've combed the state through our pen days and with an absolutely fine tooth comb, and there ain't no place. I'll just put it in the vernacular to put that license that makes any sense at all. And I don't say that in a self serving way.

There's no place to put it.

Speaker 9

Thanks very much for sharing your thoughts.

Speaker 0

Thank you. Gentlemen, there are no additional questions at this time.

Speaker 2

Okay. Well, I'm glad we squeezed in a couple more. Bill, any further comment? Well, look, we thank you very much for dialing in this morning. We're still excited about this business.

Sounds like we're gonna have to be a little bit patient till we see what mister Trump's doing. I'll just make one comment politically that I heard, speaker Ryan say this morning that he is not putting tax reform on the back burner, that he is absolutely in the republic Republican Party committed, but it's gonna be in the second tranche, I guess, but before June. So it won't be in this first round. They're gonna focus on, says he, on on health care because it's the biggest need. And then he's committed absolutely, says he, to tax reform.

So we'll see. And thanks very much. See you next quarter.

Speaker 0

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