Gaming and Leisure Properties Inc (GLPI) 2016 Q2 法說會逐字稿

Greetings and welcome to the Gaming and Leisure Properties second-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Ms. Danielle Guterding with ICR. Thank you. You may begin.

Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties second-quarter 2016 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 including those related to revenue, operating income and financial guidance as well as non-GAAP financial measures such as FFO and AFFO. As 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?

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 million ATM program with the caveat, I think well-written and summarized in our release, that would expect to draw up to $168 million in equity for that Meadows transaction, but even that subject to circumstances at the time so we will be most cautious with that. We continue to look for, and aggressively look for, other opportunities, none of which we can to you about, but I can promise that you will be the first to know as things evolve.

Pretty straightforward this quarter and I'm going to go straight to questions so if you would, operator, please open the floor.

(Operator Instructions)

Joseph Greff, JPMorgan.

Good morning, everybody.

Hi, Joe.

Morning.

In the press release, obviously when you reference the ATM you talk about further reductions in leverage and then combining that with undistributed earnings that will allow you to finance smaller deals with that accessing the equity markets and any kind of volatility associated with accessing in the equity market. Do you have a fertile pipeline of smaller-ish kind of deals or can you talk about that a little bit?

(Laughter) I thought we said we weren't going to talk about that. 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. I can only tell you that we're pretty active now.

Look, it is not done until it's done and wouldn't even hazard a guess as what we will be able to accomplish over the next year, but we remain hopeful and positive. And look, I think out of the box on 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 nonspecific answer?

That's right in line with what I thought you would answer with. That's all for me. Thanks. (Laughter)

Thomas Allen, Morgan Stanley.

Hello, a couple of [malling] questions. In the second quarter TRS EBITDA came in line with your expectations with your [loring] 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 the cost savings? Why the more tempered outlook? Thanks.

The TRS actually came in under about $1 million for the second quarter versus our expectations. We offset that with some savings at the corporate level, in the corporate overhead line item 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 expectation.

Baton Rouge has had some up-and-down months. I think in the second quarter April and May were both rough months but June was much better. Now there's some instance going on in Baton Rouge that are creating a little bit of noise so I don't know that we're necessarily -- it's fair quarter to look at in terms of expected long run rate. Everybody recalls all the unfortunate situations that happened in Baton Rouge a couple months ago. At any rate, our outlook going forward is expecting that Baton Rouge has, without a doubt, been a more troubled market then Perryville and so we're expecting -- we reflected that in our outlook going forward. I wouldn't read a lot into [our two] (inaudible) properties in terms of what's going on in the regional gaming markets. I think you can look to the results for Penn and Pinnacle in terms of what their operating results are as a much better indicator of what's going on in the regional markets and what you'll see out of either Perryville or Baton Rouge, to be honest.

Helpful. Ohio came in slightly below your expectations for the quarter but for the rest year it's the same?

Basically what we do is we follow the expectations of our tenants. They give us -- submit what they believe how the property's going to perform and we reflect that in our guidance, absent us having some contrary view. Obviously they have a tremendous amount of better visibility into what's happening at their properties than we do. I think it was a rough month, right? Just as a reminder, our revenues in Ohio are 20% adjusted monthly so we clearly have -- that's where we have the most of [comparability] to our rent flow stream is quite candidly in the Ohio racetracks. That has generally been good.

I do know those the Columbus property, there's been some pretty decent amount of road construction that's been happening in and around that property on the main belt way 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're actually fairly encouraged with where we think Ohio is going to be going, going forward. Short story, our guidance reflects what our expectations are of our tenant.

Helpful. Thank you.

Shaun Kelley, BofA Merrill Lynch.

Hi, 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&A approach of others out there in the market, is there a minimal size property that sort of makes sense relative to how you need to split the cash flows for these types of sale lease-back transactions? 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?

Is hard to say how small is small. We will go pretty tiny. We'll do almost anything reasonable. It's got a be a solid property in a solid location and believe that it has a future and all that. But we will do little ones, keep going, because again, little ones can lead to big ones; they give us more outreach with new operators. There's a lot of strategic reasons for us to be poking around in some of these smaller properties right now so we'll do them. $0.01 here, $0.01 there, look, we knew perfectly 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. If we have to keep hitting singles, we're willing to do that until we finally hit one out of the park, which I fully expect in God's time we will.

Maybe bigger picture -- that's helpful, thank you. Bigger picture when we think about the ATM program from here. Is this sort of a prepared mechanism, you think, moving forward to store to 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.

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 a fully underwritten deal with the commissions you pay to the banks as well as the -- undoubtedly usually, anyway. We were very fortunate last time to get a slight premium on the final offer. Normally there some sort of performance discount there so being able to move stock out at the market prices on a very, I will call them, 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 will have leverage under 5.3 times by the end of the year on a pro forma basis. That gives us a little bit of cushion there, as well as having the ATM program. It does increase the size of transactions we can get done without having to worry about market volatility on the equity.

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 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 $100 million, $200 million, $300 million of equity. It also gives us the ability to take advantage of where we think our stock is fairly priced.

Relative to the larger transactions, I think what we have 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 with the Pinnacle transaction. I'm talking about really large transactions. There's really small transactions, which would be easy. Those actually wouldn't require any equity because we're going to be generating somewhere in the neighborhood of $120 million 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-size transactions, normally going forward just by nature of the fact that you've got the undistributed earnings and a little ATM supplemented and you wouldn't have to worry about it at all.

When you get a larger than that, you might have to accelerate the ATM program or obviously going $400 million as we plan to do, $168 million relative to Meadows, we'd probably have to re-up the program at some point in the future. We think this is a program that will get people very comfortable with our ability to finance transactions of a reasonable size and that they can quit worrying about equity overhangs.

No, I think it's a great mechanic. Last question, if I could, would be sort of targeting ending it at 5.3 times is probably actually a little less than sort we were -- or I was thinking previously. Is the 5 to 5.5 the right ball park? 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 movements for a specific transaction or when something's right in your sight.

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 originally we thought that we could have 6 times leverage and then bring it down and take it back to six. Clearly that hasn't been accepted very well by the rating agencies. 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 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. The way I would characterize the thought process is, if we find that we're under leveraged and somebody would make that determination, that's a problem that it's very easily solved. It takes about 30 days. You can fix your under leveraged problem really quickly.

If your overleveraged, obviously, you can spend a decade trying to get that fixed. We look at the fact that out in the outer years starting in 2018 we have roughly $1 billion 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 are way under leveraged -- but who knows where that will be in 2018 -- is we want to be in a position where the refinance ability of our maturities is without question. You can end up in a very bad cycle and we're highly focused on making sure that when we get ready to refinance our current debt maturities which start in 2018 that were in good shape to do that and hopefully at lower interest rates than where we are at the time we issued the debt.

Understood. Thank you very much.

Carlo Santarelli, Deutsche Bank.

Hi, everyone, good morning. Bill, Peter, whoever wants to opine, when you guys think about the discussions you've had in transactions that may or 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?

Why don't we give that to Steve. He's looking like he wants to take that. (Laughter)

Obviously, Carlo, 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. When you look at portfolio transactions, that competitor is a subsidiary of a larger parent, obviously is not going to be conducive to a sale leaseback transaction because the nature of their parent. 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.

I would add on -- I think, listen, the reality is right now that 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. Our view is that we have to be disciplined, because doing -- anybody can do a very rich transaction. We can announce four or five transactions a year, probably, if we had zero discipline on price. If the transaction is not accretive, it simply doesn't work. 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.

We're going to be disciplined and we're going to want 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, there are going to lumpy, irregular and they're going to happen when they happen. 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 were ready to go, that we're obviously aggressively looking for transactions when they're ready to go at the right time and the right price and most of that is motivations on the seller not because we're not knocking on the door offering too much money. When we have a motivated seller, I think there's 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. That's just not what we are about. Discipline is everything. I think that, and I feel that, we have a fiduciary responsibility to preserve our dividend structure, first and foremost. I'd rather do nothing than jeopardize that. We're willing to sort of inch along unless and until we can want something that is 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 can do anything about it. That's the first goal, to make sure that our dividends are perceived by the market as solid as a rock.

Great. Thanks, everyone.

(Operator Instructions)

David Katz, Telsey Advisory Group.

Good morning, all.

Morning.

I think any moron can make a bad deal is perfectly graceful. (Laughter) 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 is the posture feel like in terms of assuming deals are a function of recent comps, interest rates, forward-looking sentiment, where do you think the posture is and how do you think that progresses, let's say, in the next 6 to 12 months in general.

David, there's really no way to know. I think we've answer that 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, we are looking at things small, but there are 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 hostile 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 whack at that, but I haven't a clue.

I think the biggest motivator and has to be a seller whose motivated. Obviously, they want a good price. Anybody who is selling anything wants a good price, but their motivation can't just be that it's a price that so compelling that the can't say no to it. It should be a function of whatever -- it's family discord or it's a 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 a 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, well that's such a stupid price I have to take it.

That's where we're at. I think we look at incredibly large transactions and we've looked at what I would call infinitesimally small transactions. 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 passed on that we thought were too risky and that we thought that the future cash flow streams of the course of 20, 30 years were incredibly insecure or unsecure, so we passed on those types of transactions, but other than that I don't think there's 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 market for the seeable future and it was at a valuation that made sense.

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. (multiple speakers)

Or they want to exit the business, right, so it's either looking at this as a thought process to -- maybe they could be solving some internal political issues.

Take cash off the table --

Take cash off the table.

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, was a 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 from our own selfish purposes, but those ebb and flow. That changes over time. It is just a matter of time, matter of being patient.

Understood. Appreciate it. Thanks very much.

Sure.

James Kayler, Bank of America.

Hi, guys, how you doing?

Good, good.

Speaking of cheap debt, I just had one quick question to follow-up, Bill. 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 this sort of balancing strategy you laid out sort of taking leverage to the low fives, levering up to the mid-fives and doing transactions at the mid-fives -- do you think that is that the goalposts that the agencies have set for an eventual upgrade (inaudible)?

I don't know. Obviously, in my mind it is, but 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 six level that are investment grade, so you tell me by what alchemy they get what they get to.

Obviously, it is 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 moved leverage around, although quite candidly from my perspective when I looked at all of the comps in the REIT space, 6 times leverage is well within the sweet spot of investment grade. 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 and during that whole transaction we bounced between 5.5 and 6 times.

We ended up with significantly less than that and what the concept -- with the confluence of events that happened this year as well as the equity offering and up-sizing the equity, obviously some option proceeds from employees, some deleveraging, et cetera, et cetera, we're going to be well under the 5.5 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. I would hope that they find that to be a commitment to -- that's not just words, in other words that is real, and obviously by the next quarter we should have -- there be some -- we will make some progress. I am not going to guarantee that where they get the entire $168 million done by the end of the quarter. That might be a little -- way too aggressive, but we will certainly make some progress towards that, I would expect, and we'll see what happens when they give us their next update.

All right. Very good. Thank you.

Thank you.

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

Really 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. Thanks again. Have a great day.

Thank you.

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