Gaming and Leisure Properties - Earnings Call - Q4 2017

Transcript

Speaker 0

Greetings, and welcome to the Gaming and Leisure Properties Fourth Quarter twenty seventeen 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 conference is being recorded. I would now like to turn the conference over

Speaker 1

to your host,

Speaker 0

Mr. Hayes Kraushauer, Vice President, Finance for Gaming and Leisure Properties. Thank you. You may begin.

Speaker 2

Thank you, Melissa, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties fourth quarter seventeen Earnings Call and Webcast. The press release distributed earlier this morning is available in the Investor Relations section of 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, 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.

And now I'd like to turn the call over to Peter.

Speaker 3

Well, Hayes, and good morning, everyone. Well, we wound up with a good fourth quarter and I think an excellent year for some reasons that we'll highlight. Guess the most notable thing that occurred in the fourth quarter, of course, was the merger, proposed merger of Penn National and Pinnacle Gaming, which after a lot of discussion we and of course the sale of four properties to Boyd Gaming, which brings a new tenant into our fold. That transaction, as you have seen in our release, should increase our total rent by approximately $46,000,000 and will be accretive to our shareholders and to all of you. We also concluded a transaction in Tunica, which we earlier announced this year.

And again, although there's been some activity in the gaming space, we've been very careful. I think notable are the things we chose not to pursue in the end out there because our focus remains now and always to do and only do accretive transactions. So as we look at 2018, we trust that toward the end or the third, fourth quarter of this year that Penn will complete its transaction, which is terrific for us. And as to new things, there are some interesting prospects we're working on. Obviously nothing we can announce or talk about, but I think we're looking for a terrific 'eighteen and 'nineteen as we look ahead over the next couple of years.

So we think the future is pretty bright. Bill, do you want to highlight a couple of Sure.

Speaker 4

I think what I'll highlight is just a couple of items that affected the fourth quarter, none of which I think have any kind of a long term impact on our prospects as a company, but we're really kind of one offs in the quarter. We had roughly $1,900,000 for the bonus, which was the amount attributable to the fact that we had a accretive transaction, which is the Penn Pinnacle merger combined with Tunica, meant that we got a full new deal portion of our bonus. So really effectively what that means is that we've done more than $0.13 per share of accretive transactions, which is what caused us to take an extra charge in the fourth quarter. And the other piece that's meaningful that had an effect on the quarter is relative to our TRS, the new tax law, the Tax Cuts and Jobs Act, guess is what they call it, had an impact where our effective rate obviously will drop from 35 to 21. And for all of the deferred tax assets we have on the books, we had to recognize a charge relating to the fact that as those items come off and we use those to reduce our future tax liability that that'll be done at a lower rate of 21 versus 35.

And that was roughly 1,800,000.0 Offset just slightly with an interest expense, which we had a favorable variance of $500,000 somewhat affected obviously by the LIBOR curve, even though interest rates are going up, as well as the fact that we had an upgrade on our ratings from S and P that moved us up to investment grade, which caused a ratchet down in our bank facility lending rate, which took us from LIBOR plus 175 down to LIBOR plus 150. Those are basically the only things that I think are meaningful or worthy of really discussion in the fourth quarter. I will, I guess, maybe add on that Baton Rouge has a very tough comps in the fourth quarter, as well as the first quarter of this year, probably spending a little bit into the second quarter where last year we were the beneficiary of a lot of extra money flowing through the Baton Rouge economy related to the repairs and the insurance proceeds on the flooding that they've had in the previous August. And, so clearly that's had an impact. Looking forward to next year on Baton Rouge, we have a smoking ban that's coming in effect, in August or July or August, which we think going to have probably about a $2,000,000 impact on that property.

So Baton Rouge is going it's definitely a challenged property, mostly because it's working off incredibly tough comps plus it's got this headwind with smoking ban. That's it.

Speaker 3

Turns out that local disasters are very positive for us. They can be. A lot of federal money gets spent in the market. So we tease about that, but serious for the folks involved. But we've been very fortunate with that property in the past.

Speaker 4

Yeah. And it's not just for the record. It's not that everybody takes their insurance money and spends it in the casinos. What ends up happening is there's an awful lot of jobs that get created and a lot of people come into the market to assist with the repairs and the adjustments and all of that. And so you get an influx of people as well as a lot of extra discretionary jobs or extra work that's generally done at favorable hourly rates because they need the laborers to do the cleanup.

And that generates an awful lot of what I call discretionary income in the local market related to the cleanup from the hurricane.

Speaker 3

It's sort of a perverse result, but that is what happened. Well, with that, I think we've said what we wish to start with. So we'll open the floor to questions. Melissa, if you would do that, please.

Speaker 0

Thank you. Our first question comes from the line of Robin Farley with UBS. Please proceed with your question.

Speaker 5

Hi. I guess two questions. One is your guidance is assuming you'll run escalators in 2018. So I don't know if you just have any color to put on. Is it just National Harbor maybe still being down a little bit after anniversarying the opening or just some color around that?

And then just a bigger picture question, do you think it or in what way do you think it sort of changes like potential transaction or in the market overall having another gaming REIT out there now? Thanks.

Speaker 3

That's a fair question. Bill, why don't you take the first and I'll take away the second. Take the

Speaker 4

second one. Relative to the escalator, it's been our practice not to include the escalators until we get to the point where we've got high visibility. And certainly from PENS on the PENS escalator, which is in November of next year, I would highlight that we did that was one of the other, I guess, headwinds that we had is that at the end of the last quarter, we'd estimated that we were going to get out of a potential full escalator of 5.4, we'd estimated we would get four. When the actual results came in, were roughly 2,400,000. And so what that tells me is that obviously the escalators, when you're very close to the margin are incredibly variable relative to how much they are.

And for that reason, we've decided not to include escalators in our guidance. I think it leaves us, on a more conservative basis and therefore more likely that good news will come, down the road, so to speak. And even with the pinnacle escalator, which I think is probably in better shape candidly than the Penn Escalator, at least in terms of the cushion they have going in, you know, that would be a max escalator at 5,900,000.0 and that would kick in at April twenty eighth of 'eighteen. So I will highlight Penn has included in their guidance estimates that they think that their year end coverage ratio on the rent will be 1.85. If they in fact hit those targets, that would be a full escalator next year.

And that's not taking it just for purposes of clarity. There's a revenue reset set for November of next year, the five year revenue reset. The way that that calculation works is they would be calculating their rent coverage before the revenue reset. So the 1.85, and then they would obviously, when we have the reset, would give them additional cushion for '19. Hopefully, that's sufficient color on the escalator.

Speaker 5

Yes, that's great. Thanks. And then on the impact of having another gaming read out there?

Speaker 3

Yes, I think several of us might want to opine on that. Look, we like monopolies. I would have preferred that there were no other players in the field, of course. And it goes without saying what has occurred is inevitable. I'd rather think, and I think it's our current experience that each of us is kind of will and have found a niche where we can play.

Does it mean that the markets are going to be more competitive? People will, from our point of view, maybe overpay for some assets that we wouldn't. That could happen. So I

Speaker 6

think we have to it's too early yet. I think we have

Speaker 3

to wait and see how this all plays out. We know what we have on our plate looking at 18. We're encouraged by that. And beyond that, I think we just kind of have to wait and see. Steve, you deal with that every day.

Do want to offer some thoughts? No, I think your point is it is too early to see what the impact is going to be. It's too early to see where the newest kid on the block is going to focus their resources. And at the end of the day, we're going to continue to remain disciplined and only look at transactions that are accretive for our shareholders regardless of what third parties are doing or not doing.

Speaker 4

Yes. I would just add in that we've talked previously about our expectations of averaging $500,000,000 a year of transactions. I would say that last year with the combined effect of and I'm not talking about the actual analysis effect of the Penn transaction as well as the Sunica transaction that we effectively did transactions that would have been roughly equivalent to $1,000,000,000 worth of transactions. So I kind of look at it that we need to reset the clock again. As we've historically said, we would aspire to do $500,000,000 a year.

We've reset that with the original Pinnacle transaction. I would argue we've now reset that again with the Pinnacle transaction and the Tunica transaction. And as we look forward going towards the future, I'm still comfortable that over the long haul, we'll get our $500,000,000 a year that we've kind of said and delivered on effectively over the last four years and coming into the fifth year. So our track record of having gotten transactions done, think, is starting to get to a point where it's having delivered for in four years. Now we haven't done it on a nice smooth trajectory, which I would dream fantasize about that that's the way it worked for us.

That every year we'd have multitude of transactions and we'd be arguing about whether we got $400,000,000 or $600,000,000 done. That's just not the way it works in the gaming industry. But we're still I haven't lost my enthusiasm or commitment or expectations that we're going to hit that target.

Speaker 3

Well, let me add that, look, as a shareholder, and I am first and foremost a shareholder, totally focused on dividend growth. We've done a terrific job with that since inception. And I can only speak for as a voice of one, I've been a pretty happy camper with that result and looking forward to future growth. Again, that's kind of what it's about here. So the word discipline has been used by I think each of us at this table is kind of what we've been about forever and that's what will remain.

So it's protecting our core always as we step forward that matters most. So

Speaker 4

I hope that gives you, however vague, an answer about

Speaker 5

our view. That's great. Thank you very much.

Speaker 3

All right, Robin, thank you.

Speaker 0

Thank you. Our next question comes from the line of Joe Greff with JPMorgan. Please proceed with your question.

Speaker 4

Good morning, everybody. Maybe another way of asking for you guys to talk about the M and A or the acquisition environment at the present time. Peter, you mentioned earlier that you've been careful in things not to pursue, maybe talk about Centor. But other than a deal not being accretive for you, what are the characteristics of things that you would have failed to pursue or not pursue that's out there right now?

Speaker 3

Well, look, price is probably item one, two and three, and then stability and the quality of less the quality of the assets, the quality of the earnings. I mean, I try to

Speaker 4

make that

Speaker 3

point. I'm speaking again as a voice of one, much more focused on how reliable is the cash flow out of that asset than they really care what it looks like or what it is. So I I don't know if we can add a lot more, Bill, or if you want to

Speaker 4

No, I think, listen, I mean, do what I'll call a risk analysis on the long term prospects of whatever the target is and take a look at what we think is going to happen five, ten, fifteen, twenty years in a particular market. There's certainly markets out there that we feel very comfortable with. They're going to be nice stable cash flow machines, and we'd be quite comfortable in those markets. There's other markets where we're less so. Some of them are obvious, some of them may not always be so obvious.

And that's a big part of what we look at. And then what we want to make sure is that doesn't mean that we can't participate in more challenging markets. But we're not inclined to pay huge prices in challenging markets. Much be much more comfortable paying we can get comfortable with some price ranges in markets that are tougher. So it revolve around what one, the multiple two, the rent coverage that we were getting out of the get go and what we how we projected, what we might see as upside going forward, if there were upside at a particular property relative to being able to improve the rent coverage, aka back to the kind of going back to the meadows as an example.

Speaker 3

Or a tenant that we might want to work with.

Speaker 4

Or a tenant that we might want to work with, another factor. And whether it's cross collateralized, in other words, is this going to be an asset sitting in that might have some challenges, but if it's going to be cross collateralized with a number of other assets that we feel good about, we'll be more inclined to move forward with that type of transaction. So a little bit of art, not totally science. The science comes in as you take a look and you can see here's what how much rent I'm going to get and here's what I'm to pay for it. And what's the impact on AFFO per share?

That's that part science, but the rest of it, a little bit of a combination of science and art. Thank you.

Speaker 0

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

Speaker 7

Hey guys, good morning. Bill, could you just talk a little bit maybe holistically about how the changing federal tax structure has maybe altered the way that the industry would think about deals, maybe some of the opportunities that have fallen for it, some of the stuff that isn't so obvious that you guys have maybe discovered as you've kind of gone through your process?

Speaker 4

I think the most meaningful impact is the fact that the effective tax rate on the separation of assets, which is always a challenge for us when we start, because we're almost always looking at a target where they've got combined operations and land and building. And separating the operations from land and building in many, many cases, most cases has some kind of a tax consequence. So clearly reducing that, the rate that you have to pay is helpful. It can also be helpful, you know, in terms of, I guess people now know kind of where the tax laws are going to be for a while. And so people are starting to kind of make some decisions and they understand what the implications are.

I think that was, I'm not going to say completely prohibitive to getting transactions done, but I think it kind of set people of a mind that they would ignore the future tax that they could get a high enough price. Now they can take a look and say, well, I know what the tax consequences of my transaction is going to be. And that's the way that it kind of lays out the future and I can make a decision relative to what I might want to do in terms of monetizing an asset. And recognizing we've got a fairly stable outlook on taxes for the foreseeable future.

Speaker 7

So is it fair to say then that you guys believe that this would be overall that the policy should be helpful for the gaming REIT industry, at least kind of getting more transactions done on a go forward basis? Or at least you're on a better position today than you were a year ago at this time?

Speaker 4

Well, we are. And there's a couple of other little nuances that I think are helpful, which I'll highlight, which I think as people get more comfortable with that. There's some limitations on interest expense that companies can take, and rent expense is not included in that. So the reality is that the rent that they pay is fully tax deductible, whereas the interest expense that they might be incurring while they carry the assets on their books, for some people, not all, but for some people might not be tax deductible. So that could actually be also helpful looking into the future.

Speaker 7

Great, thank you very much.

Speaker 0

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

Speaker 4

Hey, this is Barry Jonas. First question, guidance has diluted share count increasing by over 2,000,000 in 2018. Is this share issuances using the ATM maybe to fund recent M and A or something else? No, that's the performance. Those are basically the restricted share timing vesting as well as the performance shares that were granted at the or granted in January relative to the fact that we performed in the top eightieth percentile of or north of eightieth percentile of the REITs over the last three year period.

Great. A couple of a few options, but there's not a lot of options expected in 2018. Okay. So not a material amount of cash coming in associated with increased share count? No.

Great. And then just wanted to get your thoughts on this rising interest rate environment we're in now. I mean, obviously, there's an impact to multiples for triple net. But maybe just talk about how you see it influencing your business directly, particularly from an M and A perspective? Well, obviously, you have to factor in interest rate expense as part of the calculus in terms of what you're going to pay for an asset as well as your own implied cost of capital associated with your equity.

And that's kind of what we were alluding to in the earnings release when we talked about acquiring assets that has to take into account interest rate environment and what your expectations are over the long term. Clearly, it's not great news from a triple net perspective. Obviously, of the triple nets have been hit in their stock price rather significantly over the course of the last three months. Ourselves included to a certain degree, although I've, knock on wood, we've had on a relative basis less impact than they have or the others have. But it's something we factor into what our expectations are.

And we're much more inclined to be looking at what we think where our ten year bonds are trading or our longer term debt's trading in terms of an implied cost of debt. And then you can just take a look at where your current stock debt for what the equity component of the transaction would be. Got it. Then last Just given how prevalent the gaming REIT model has become, I'm curious if you still if pushback from asset owners now is mostly valuation based, do you still have concerns around the model's viability in a recession?

Speaker 3

It's a hard one to answer. I don't think that's really affected owners thinking particularly. I mean, as you see some trades occur at numbers that we might not like, it certainly emboldens others to think that their less than wonderful property is really wonderful. Look, that's just the reality of it. We would wish in some senses things were different, but that's kind of the current reality.

We see enough stuff and think there's enough that we can do. So we're a long way from despair about getting meaningful transactions done. Just means, again, caution, patience. And as Bill has said on these calls and certainly most of his presentations, it gets to be, I mean, I guess some people will move for money, in most instances, it's when they want or need to sell for some reason or another that they kind of need to have a transaction. I don't know that we've converted anybody with just the theoretical phone call.

Hey, would you like to sell your asset to us? And we're I don't think we've actually gotten anybody to actually convert that was not otherwise looking to do something. That's probably what we're seeing out in the world.

Speaker 4

Yeah, I would add that I think, listen, I take encouragement. I mean, of the things that I think helpful long term is, there are three gaming REITs. The three, I would argue all of the largest gaming companies that are domestically oriented are completely invested in the real estate investment trust model for the ownership of their assets. And I don't think that's lost on the other players within the gaming industry. If you and I'm really just addressing your point about, is there a reluctance about the model and does it work?

Boyd Gaming is another one. I'm not saying that they've endorsed it completely for their own existing portfolio, but they've certainly endorsed it relative to the assets that they're acquiring from Penn and Pinnacle that transaction. Generally speaking, think it's to Peter's point and to kind of echoing what I've said before is, I don't think people are afraid of the model. It doesn't mean that they're going to turn around and all run out and do the transaction. I think it's again a concept of, are they at a stage for whatever reason that they're looking to monetize something and do they want to do a transaction or not?

I think people generally tend to stay, where they're at, and and they don't really make major decisions unless there's something compelling them to do that. Said another way, unless there's a reason to sell, they're not going to sell.

Speaker 3

Yes. I like that.

Speaker 1

Great. Thanks so much.

Speaker 0

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

Speaker 3

Hi, good morning. The Ohio variable rent has been, I think, have been a positive versus expectations this year. How are you thinking about

Speaker 4

it for 2018? Thanks. I think we one of the things that if I go back to the original Ohio and our original transaction, then I we always had very good expectations for Ohio. Unfortunately, it took a little while for those to kind of kick in, mostly because they put so much supply into Ohio within such a short period. And every time you have a new a brand new market, it the penetration takes longer than in mature markets.

And so your growth rates are better. I would expect that there will be continued to be pleasant surprises in Ohio going forward. I wouldn't necessarily think that they'll be at the same level as they were this year, but I do think that you'll see the Ohio rent climbing better than the rest of America. So that said another way that I would expect our Ohio percentage rent to be a better performer than the rest of the portfolio.

Speaker 3

Yes, all of Penn's Ohio properties are doing terrifically well. It's been a great year for them. And still answered it, I think no reason to expect that this next year won't be excellent at the same time.

Speaker 4

I will say just for people to give some color to what's in our guidance is we've reflected what Penn has included within their expectations, for how much rent they'll be paying us on the Ohio properties. From that perspective, correlates, at least our guidance correlates to theirs. They clearly have much better visibility as to what's going on with the individual properties than we do. So short of getting some insight that they don't have, gonna default to their numbers. And we do look at them to make sure they look reasonable, I think they do.

But that's kind of how we got to the numbers that are in our guidance.

Speaker 3

So what does your guidance imply in

Speaker 4

terms of revenue growth there in that line item? I Can you tell can't really I mean, that would I think you should ask the for one, those aren't my numbers. Two is that would I think fall into the class of information that's proprietary to Penn. So feel free to ask them.

Speaker 3

Perfect. And then just a quick follow-up question. Have you ever looked at underwriting or underwritten an international deal and kind of what are the gives and takes been of that?

Speaker 4

We have. We've definitely looked at some assets overseas. The gives and takes are obviously the stability of the cash flow. You've also got currency transactions and taxes are, and what the tax treaty might be with that individual country that the assets are in, and whether they recognize REIT income or REIT concepts or don't. And then how you manage to, how you can effectively, have a foreign now for US purposes, qualifies as REIT income.

So that from that perspective, it's clean. It's really a matter of what happens over in the foreign country and then how easy is it to get your money back into The US and how do you structure the transaction in such a way that it's still tax free and that's not always easy, I guess the best description. But we've spent some time, we spent some money looking at that. So we didn't get to a transaction, ironically not for the tax issues, but for other issues. So we definitely will look at that and we're open to that.

But it's a daunting task sometimes, especially if there's not a clear cut treaty between The United States and that country. It can really get tricky.

Speaker 3

Yeah, maybe that's a good point to emphasize that we remain open to any reliable source of cash flow wherever located. I mean, subject to the qualifications that Bill provided. So we do look at a lot of stuff, but we have yet to see something that outside this industry at least, and our current locations that would attract us.

Speaker 1

Thank you.

Speaker 0

Thank you. Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Speaker 1

Hi. Good morning, gentlemen. Good morning. Obviously focusing around the issue of what you would buy. And I think you did set some interesting boundaries.

And I'm wondering why single properties that are larger, whether they would or would not be on the acceptable list. I suppose I'm thinking along the lines of Las Vegas, where things tend to be on a bit larger scale. Do those how do you view those from a or Atlantic City for that matter? Do you view those with a different risk profile? Or have those opportunities just not presented themselves?

Speaker 4

I think it's a combination from my perspective. Las Vegas results have higher volatility to them in other words, when times are good, times are great. And when times are bad, times are horrible, in terms of the flow throughs and whatnot. So from a rent coverage perspective, that's something that we think about. The maintenance CapEx requirements in Las Vegas relative to the amount of EBITDA is generally higher than in regional gaming.

Now it's not necessarily important for us because we're not responsible for maintenance CapEx, but it does cause you some, concern relative to what the operator is going to be able to maintain in the building and make sure that, you know, they're going to be able to stay competitive. And then, you know, whatever reason, with those factors, which ironically, you would say in isolation that those factors say that multiple shouldn't be higher than in stable cash flow, but that's not the reality. The expectations and what people are willing to pay for something in Las Vegas are significantly higher than would seem to be justified by that model. However, what causes that is that Las Vegas is perceived as the Mecca or the center of gaming, in the world. And so therefore, there's a halo effect in terms of the long term expectations for Las Vegas.

And we have to recognize that, that that's part of what causes those multiples. Having said all that, I think we're open to doing a transaction in Las Vegas. You know, I don't, you know, I'm not, I don't know if you're alluding on the speculation that particular huge assets available for sale. But the likelihood that we could get there, because we're still not going to do a transaction in Las Vegas that's dilutive. You know, if the expectations around the sales price and whatnot, are anywhere near what kind of heard, I would say that the likelihood of us getting involved is pretty low.

Relative to Atlantic City, that's kind of has some of the same characteristics as Nevada in terms of volatility, but it has a lot of risk factors and there's a lot of, candidly, I think Atlantic City has experienced last couple of years, the benefits of a couple of properties or a few properties closing. I think as we look forward, I know that the TajHard Rock is gonna be reopening, I think that's gonna, you know, kinda revisit some of the tougher times in Atlantic City, and then there's obviously what may or may not happen with Rebel. So I think you have to look at Atlantic City and say, well, we've got some new supply coming in and I don't know that it's gonna necessarily grow the entire market very much. Having said that, once that's stabilized, I think Atlantic City is starting to look like once you if you can normalize for all of that, Atlantic City is looking kind of stable in terms of it's got competition everywhere. It's going to have it.

I don't see any there's no more surrounding states left to add gaming facilities. No new facilities really coming in. So you would, other than maybe potentially some more stuff in New York, but

Speaker 3

Or maybe, I say Northern Jersey one day will get there. They're going to have to, or seed all their business to New York. That's just my own view. That's just in the fullness of time, I predict you're going see gaming in North Jersey. So I guess the synopsis of that answer is we'd

Speaker 4

be interested in Las Vegas at the right price. We have no reservations about the general health of Las Vegas. It's just more the market dynamics in the sector nature or the ups and downs of what would be there and how viable we would think the operator would be in a downturn. And then Atlantic City, the nice thing is that the bloom is, there is no bloom in Atlantic City. So expectations in Atlantic City are much more reasonable, I guess is the right way of putting it.

Speaker 1

Right. Yeah. Okay. Sorry, go ahead.

Speaker 3

Well, was gonna add that I think the issue with Las Vegas is that just inadequate return on capital. So going back to our Penn days, we look at that and say, and look at the average return on capital invested in Las Vegas and say, you got to be kidding. There's no way we would do that. Let's pick a property. I could tell you real numbers, I won't.

But what we stuck in, just pick anyone. Toledo, Ohio, terrific property for the money spent. Performance better than 20% cash on cash. That's the kind of deal we get excited about. So look, you got to pick your poison.

And just more broadly, I would say that, look, we would do a deal with a shack on the beach. I'm speaking facetiously, if we were satisfied the cash flow was great and dependable. So I mean, I can't say it more plainly than that, that what's the bible line that many are called but few are chosen? Well, that's kind of the way I think we see it. Go ahead.

Speaker 1

Well, look, I wanted to just follow that up quickly. I know I've asked the question before and gotten the answer. But is there a set of circumstances around which you would consider wanting to sell anything?

Speaker 4

Us, sell assets? Sure. I mean, the set of circumstances would be somebody wants to offer some incredible price that it's absolutely in the best interest of shareholders. We'd happily do that. But I don't see us selling any of our leases

Speaker 3

at this point. Yes, we've worked hard to get the scale that we currently have. And looking at some of the things we have on the horizon, we intend to continue to grow. So we're certainly not interested in going backwards.

Speaker 1

Understood. Okay, thank you very much. Appreciate it.

Speaker 0

Thank you. Our next question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with your question.

Speaker 3

Good morning. Good morning. Good morning.

Speaker 6

So just quickly, kind of touching on Pennsylvania and the many casinos out there. I mean how do you weigh that as an opportunity versus a drain on revenue at Penn and Meadows?

Speaker 4

Well, think, The Meadows, I think is pretty well protected given the fact that there really can't be any casinos within a distance that would work within a range that would have an impact on The Meadows between Nemakol and the Downtown Pittsburgh facility, the rivers. The zones of protection are such that I think The Meadows is very well isolated and protected from Pennsylvania. Penn National on the other hand is obviously much more exposed. And we're going to have to wait and see how that works. We take some comfort that Penn secured, a license in the area that is probably the largest market for Penn National that can be affected by the new tax or the new Pennsylvania sites.

Doesn't mean that the process is over. I mean, they think they're going to get 11 sites or something like that. There's just not 11 sites that will fit in the state, in my mind. I think, you know, there's some more markets left that it will have some impact, could have some impact on Penn National.

Speaker 3

Not much though. I mean, if you look north and look west, there aren't cows out there. Mean, it really aren't, which is why Penn had to protect its market to the south. By the way, the largest I was going to you don't care about Penn, but you're an outsider coming in, that would have been the largest available market, the York, Northern Maryland kind of market that would be available in the state. So Penn did well to lock that up.

And in fact, yeah, I think with a very, very smart move on their part. So I don't think there's a lot of exposure because it's not a lot of places that people can go around Penn National. Further east, potentially, closer to where we are, somewhere between King Of Prussia and it's possible. But we're just going to have to wait and see. Think Penn itself its call this morning said that I think today, isn't there another Another auction.

Yeah, there's another auction today. It's going to be interesting to see how that all plays out. But Bill said it right, there are not enough spaces, just nowhere to go in the state.

Speaker 4

Not to fill out 11. There's two more sites. Yes, that sure will work.

Speaker 3

On the other hand, the state's done very well because they got way more on each site than they could ever have imagined. So economically, they're going to do fine.

Speaker 6

Understood. And then just as an opportunity for you guys, I mean, how does that market look now that you're going to have this additional competition in there? Is this something where you think there could be some attractive acquisition opportunities either with Penn or with some of the other operators coming in and bidding on these sites?

Speaker 4

There could be. We'll have to wait and see how that plays out. I don't I think they're going be relatively small facilities. I don't think these are going to be these are not your major huge, facilities by any stretch of the imagination with seven fifty slot machines and whatever tables they have. I think those will be relatively modest facilities.

But it could, listen, we look at it and say, is that something we'd be interested in? We could very well be interested. I mean, we have some limitations within our lease in terms of what we could participate in finance new transactions. We have a 60 mile zone relative to being able to, if it was somebody, a Greenfield type project that wasn't Penn National, that wasn't being done by Penn National or we would have, we couldn't participate if it was in 60 miles of a Penn facility.

Speaker 3

Right. And that protection works both ways. It works for the tenant, but it also works for us. I think we just have to wait and see where all of these facilities end up being placed and how they're capitalized. Okay.

Speaker 6

Makes sense. And then looking out to the future with Boyd, I know on their call, they said the lease structure is going to look pretty similar to PNK's existing lease structure at those four properties, but without the corporate guarantee. I mean, there any more negotiating to go with those leases or is that kind of set in stone

Speaker 4

the way it's It's been laid done. I think what to address the issue of the corporate guarantee, what we did instead is we got a much higher default rent coverage ratio. So that at the end of the day, if the assets, the only time you care about a parent guarantee is if the assets are struggling. And so what we've got in exchange for not having the parent guarantee there is a much, it's a higher ratio relative to when the lease goes into default. Which gives us pure rights and other abilities to have a negotiation much earlier, if those portfolio of assets aren't performing, than we would otherwise have with companies who've given Us parent guarantees.

Speaker 3

Remember, are outstanding assets that they well established strong players in their markets. They're about as safe and rock solid as you can get. And one will support the other. So I mean, I don't think there's much concern there.

Speaker 4

Yes, they are cross collateralized between them. So the assets that they got within that lease are all cross collateralized. So that makes sense.

Speaker 6

And then you're looking at guidance a little bit, straight line rent is going to kind of move around as well as the direct financing lease. Is timing of that just the P and K direct financing lease that will move down with the rent reset in April and then the straight line all that straight line kind of move down is with the Penn reset in November?

Speaker 4

No, the direct financing lease, Scott, doesn't have anything to do with the anniversary of it. It's just a straight line amortization that goes down over time. The, or that was the direct financing piece, sorry. And then the straight line rent is at $4.10. At the end of the five years, which we were originally required to take the proportion of the rent that was determined to be fixed, which was the original variable part, amortized basically recognized at over thirty five years.

So we've been, deferring straight line rent. That will flip on the five year anniversary because we'll then be through the initial five year lease period. It will then instead of being rent that we're deferring, we'll actually be recapturing rent that we've previously deferred. The net impact of all that, just for clarity, there'll be no impact to EBITDA or to AFFO. However, both FFO and net income will both increase dramatically, which you're seeing a portion of that in 2018 and will be much more meaningful in 2019.

Speaker 6

Understood on a straight line. So the deferred financing lease adjustment, that doesn't change at all? Because if you take the 1Q and you just run it out, it would be higher than the full year.

Speaker 0

The deferred financing lease adjustment will actually increase because instead of it being an add back to the receivable, it gets recognized in that deferred financing lease line as rental income. And that's really just due to Pinnacle rent reset occurring in 2018.

Speaker 6

Okay. Yes. That's what was saying. All right. That makes sense.

And that's it for me. Thank you very much.

Speaker 1

Thank you.

Speaker 0

Thank you. Our next question comes from the line of Andrew Berg with Post Advisory Group. Question.

Speaker 8

Hey guys, just a quick question. I recognize guidance excludes the Penn, Boyd, Pinnacle transactions. Do you guys care to speculate on when you think it may actually come in to the numbers this year and what it may contribute? I mean, it's on a pro form a basis.

Speaker 4

Yes. Mean, Penn has indicated that they expect it to close in the second half. They clearly have much better insight as to the timing. I think, I would, as a plus minus, I think it's probably in the middle of that, but I have no information that's in any way better than what they've got. They're certainly having all the meetings as they alluded to on their call with the FCC and with state regulators.

Not that we haven't also sometimes been invited to speak at the regulator meetings, but we're really more as a third party participant. And I think there's the combination of, obviously you've got three gaming entities, really two, but you've got Pinnacle who's kind of going, effectively going away, but you've got Penn who's gotta get licenses in the states. We have to get license in Massachusetts as well. But then you've got Boyd who's gotta get licensed in some states, which is a start from scratch. So I think it's gonna be, in the gaming industry, typically, takes anywhere from nine months to a year to get through the licensing process, particularly if it's a brand new entity that's getting licensed.

And if it's a complex entity, it's even more inclined to be longer than shorter. Let let me make this comment that we see no obstacles

Speaker 3

to getting this done at this time. Now I'm going to put our general counsel, who's sitting right next to me on the spot, who could offer without any inside knowledge a general view, September, October, I mean.

Speaker 9

It's tough to say. I mean, haven't been a part of the discussions that Penn and Boyd have been having. And clearly, the applications in those states are more on them than they are on us. With respect to Massachusetts, where we do have a direct contact and obligation, I certainly think we'll be within that timeline. And we're encouraged by the conversations we've had with them on their timeline.

But but, again, I think you'd have to defer to Penn or Boyd and or Boyd and the discussions they're having in some of the key states as to what what the ultimate timing would be. If I guess,

Speaker 4

it would be pure speculation. Right.

Speaker 3

That's fair.

Speaker 8

Got it. Got it. Yeah. I think I agree with you guys. It's a it's a when, not if on that.

But with respect to Massachusetts, given the the recent events that have occurred. Have you spoken with them since the wind stuff has popped up and whether or not that might slow things down on your side because of how they're trying to progress on that front?

Speaker 9

We have no reason to believe that the analysis they're doing with respect to the wind company will have any impact on the timing of our suitability review. Several of the folks that are here with our company now were previously reviewed in connection with Penn's review because that took place before the spin out of GLPI from Penn National Gaming. And so not everyone here is a stranger to Massachusetts. And we believe that we'll get the applications in quickly and that that won't have a significant, perhaps any impact on the timing for us.

Speaker 8

Great. Well, thanks a lot guys. Appreciate it.

Speaker 0

You. Thank you. Mr. Carlino, there are no other questions at this time. I'll turn the floor back to you for any final comments.

Speaker 3

Okay. Well, thank you very much. And thank you all for dialing in this morning. We're happy about our last year results and pretty excited about what we see on the horizon. So with that, see you next quarter.

Speaker 0

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