Gaming and Leisure Properties Inc (GLPI) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Gaming and Leisure Properties' third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Ms. Kara Smith, Investor Relations. Thank you. You may begin.

Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties' third-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 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.

Now I'd like to turn the call over to Peter Carlino. Peter?

Thank you Kara, and good morning everyone. As is our normal practice, my comments will be very brief. And we will quickly turn this over to you folks and find out what interests you today. I think our quarter is well summarized in our press release. But I would of course highlight quite happily that in this quarter we closed on the Meadows transaction. And we are pleased with that, signed an operating arrangement with Pinnacle Gaming, which is terrific. Really pleased about that.

We also raised some $46 million in equity under our ATM program, with an appetite for more at the right prices and as opportunity presents itself. And finally, and as always, we are scouring the earth for other appropriate transactions, which is about as precise as we can be about the things we're looking at and working on. We remain very active and busy as we work to grow this business.

With that, and those few comments, let's open it up for questions.

(Operator Instructions)

Steve Wieczynski, Stifel.

Hey, good morning, guys. Peter, I guess one of the things in the release you had a comment in there I thought that was pretty interesting where you said transactional activity remains pretty lumpy. Could you expand on that a little bit? And then maybe what you are seeing in terms of interest from smaller operators out there willing to sit down and have discussions with you guys?

Steve, lumpy characterizes the nature of our business. We're not buying shopping centers, which of course dot the highways and byways of every city and town in America. So There are limitless possibilities.

Gaming is much more limited. And we need to be more focused as we look state to state. It is the nature of things. You saw the Pinnacle transaction, admittedly a very unusual one, but a very large one. We will do some small ones, and the key is finding transactions that are accretive and that fit well with our stated goals. And to that end we remain focused.

I'll anticipate a question by saying that we have looked outside of gaming on occasion at other possibilities. Haven't yet seen something that makes sense for us. But look, we're not bound in a box. So we continue to remain focused on gaming properties around the United States. And have planted seeds, or even sometimes we've gone beyond that and trying to solicit interest.

We have looked outside the gaming business as well. This is always the frustrating part for us. Wish we could tell you a lot more on this call. But the only thing we can say is that we remain pretty focused on growth. Bill do you want to add anything to that?

No I think we are out talking to people. I think we have diligence, a couple of diligence meetings scheduled. But quite candidly, that is a long ways from getting a deal signed. I think the reality is we are active. Getting to a resolution is always tough. Sometimes it happens, sometimes it doesn't.

I would like to say that every time you did a diligence call or a meeting, that it is going to turn into a deal. But the reality is, is that I think you have to be practical about it and recognize that they'll happen. They'll probably happen either in surges or there will be periods where there is nothing happening. Quite candidly, we are always rooting for us to have six deals a month. That is not realistic.

But I think looking forward, as we have said before, there are transactions that will happen. Going way back to the spin, we had the $500 million a year worth of transactions. We said at the time that those transactions would be infrequent, and large and different sizes. If we look back since we did the spin, we've done well north of $500 million a year.

Bill says I think we are good for another six years.

We have like 4 or 5 years to go. Obviously we don't look at it that way. But I do think that if I were to reset the clock and say over the next 3 to 5 years, am I going to average $500 million a year in transactions? I feel very comfortable with that statement, saying yes we will.

I still think that our prospects are bright. And I think we have a really good opportunity to get some transactions done. They could be small, medium, or large. But as we look forward, we're as optimistic as ever that we are going to be able to continue to grow and to find transactions that will make sense for us.

That is our usual non-answer. And if I can paraphrase the Bible, many are called but few are chosen. We remain as discerning as ever. You should be sorry you asked that question, Steve.

Not really. But you did somewhat answer the second part of it, was -- and you touched on it a little bit. If you look, and I assume you're probably not going to answer this question. But as you say, you are starting to look, or you have looked outside of gaming. Would you even comment in terms of what kind of areas you are looking at?

I'm going to say no. Obviously we're going to start with leisure activities because it is in our name. But we will go beyond that. Again, it is just a question of where we can make a difference, pay a price that is still significantly accretive. You know the answer to that. Look, it is our challenge to be alert to any possibility.

We get that question all of the time. Would you go outside? And the answer, of course. Show us the right deal.

Call us tomorrow and share what you got, because we would be thrilled to look at it. I wish that I could give you a better answer. Obviously frustrating for us on these kinds of calls. But it is the nature of our business.

Sure. Last question. Real quick on the TRS. You guys always have pretty good color in terms of the general gaming consumer. Maybe give us your high-level comments there in terms of what you are seeing. And I guess maybe with Baton Rouge as well, I'm surprised that the TRS EBITDA in terms of your guidance has held up so well, given of some of the issues that they have seen down there. And the last part of that would be, I assume you guys are expecting no impact whatsoever at Perryville given the distance once National Harbor opens up?

That is a quick no for that.

I think taking your last question first. Relative to Perryville, we do expect that there will be -- we'll lose a trip. But over the course of a year, obviously everybody who is anywhere around the Baltimore-Washington area is going to make a trip to go look at the property. But I think given the distance that we are away that we wouldn't expect to lose any repeat customers. We're certainly not saying that you cannot lose somebody who becomes so infatuated with it, but at the end of the day I think the impact will be very small.

In Baton Rouge, we had, obviously as you said, we had some issues and Baton Rouge, none of which we are doing. Primarily the thing that impacted us the most was the flood in August. That was really a bad month.

We also, as a Company, decided to provide some support for our employees which amounted to roughly $300,000 of incremental expense that we spent in the third quarter helping our employees that were affected by the flood, Many of those people who lost their homes, lost all of their belongings, et cetera, et cetera. Obviously a very devastating event for them.

But as we look, so that is included in the results. But as September rolled around, it has bounce backed quite nicely. October is also very encouraging. Looks very good. Well, it's over. It was a very good month in October. That's somewhat the offset and the impact of, even though the event is a horrible event for the town and the city, there is been an awful lot of people from outside the town who have come in to help. Insurance claims have come in. Repair work's gotten done.

We see it because we're losing some employees, or have lost some employees who found opportunities to make more money in the clean-up process around the flood. So clearly there's an economic stimulus that happens in town. I don't know how long that will last. I don't think it'll be that long. What it is all said and done, we'll look back and I don't think that will be one of the things that we will, when we look back on the year, that we're going to say, wow, Baton Rouge was adversely affected by the flooding.

Generally across United States, I think it's kind of bumpy. There are ups and downs. Everybody always looking for the last fluctuation to determine if it is a trend.

Quite candidly, I don't see trends that are very concerning. I think we feel pretty comfortable and good. There have been some good months and some bad months. But that is generally the history of regional gaming. And as we see it, we think that, quite candidly, things are fine. Not spectacularly great, but steady.

That is fair.

Okay, great. Always good color, guys. Appreciate it.

Thanks.

Shaun Kelley, Bank of America Merrill Lynch.

Hey, this is Barry Jonas. Just a couple of questions. Is $168 million still the right number of where you're going to hit on the ATM? And when do you think you could get there?

That is for the total amount that we've set. I don't know that we look at that number as an absolute number we need to get to. Yes, it is in the $160 million, $170 million range. That a certainly our goal.

As far as part of ATM, and part of the downside of ATM is you're only allowed to be in the market during your open windows. So we are going to be looking at somewhere from November through early December. The most we've got is a month. I am not sure that we're going to be hyper-aggressive in the next month, given where our stock price is right now. We believe it will come back. I am not saying that we won't sell some shares, but I think we will be pretty disciplined about how many shares we put out. But we will get there.

I don't in any way want anybody to walk away thinking that we're not going to issue all of the shares. But I would expect that probably happen sometime first, second quarter. Maybe the third quarter next year. The pace of that may well be affected if we sign up a deal and we know a deal is coming, we may accelerate the pace a bit. We will be -- we are very focused that our activity in the market should not have any impact, other than psychological.

It is not going to have any actual impact on the trading price of our stock. That is our number one criteria that we give to our underwriter. That is the last thing we want to do, is to have them pushing out stock that would have an adverse impact on where our trading volumes are. To the extent that we ever see any trades that happen that look like it is impeding the market on that day, we will pull back. That has been our approach all along. And it will continue to be our approach.

Great. And just a follow-up on the strategic question. With another read out there and increased strategic competition, where are M&A multiples trending right now? And then maybe just on top of that, any general thoughts on the El Dorado acquisition of Isle of Capri?

It is hard to say where trends are. Hasn't been a lot of transactions to develop a trend. Certainly if you look at what we paid for the Meadows, but that was obviously under duress and bad circumstances. We ended up paying a little higher multiple than we normally pay.

I think it is all deal specific. At the end of the day, when we look at transactions and what multiple we are going to pay, is it part of a mass, is it a conglomerate of assets, Is it a one-off asset? What market is it in? What's its challenges? What its opportunities to grow the rent? All of those factors come into play.

I wouldn't necessarily walk away and say there is an exact defined multiple for transactions that are going to happen in the future. Certainly I think the prospect of the higher interest rates is actually, if anything, maybe caused some people to be a little more thoughtful about making sure they get a transaction. Or if they are going to do a transaction that there seems to be a little more openness to a transaction, given the prospect of rising interest rates. Because obviously rising interest rates will cause multiples to come down. There is no, if, ands, or butts about that in the triple net space.

I think smarter people are acknowledging that, and that is probably why you are starting to see transactions happen, not necessarily particularly in our space, but certainly in other spaces inside the REIT community.

Great. And then the El Dorado acquisition of Isles. Is that something you kicked the tires on? And any general thoughts there.

We certainly, I think, yes, we were involved. We spent good amount of time and energy and effort and diligence on Isle. I will say that I think they paid a very full price, not that we couldn't theoretically paid a fuller price. The challenge we had is the friction costs around the Isle transaction for us as a REIT were outrageously high.

That involves the tax bases of the assets and the separation of the assets, and other implications around tax that quite candidly caused, based on the price they paid plus those other incremental costs, to be a transaction that didn't work for us. Now, we'd been there earlier. I'm not going to say we were an active part at the very last minute. But we'd certainly looked at Isle and it come to our views on what was a fair price. And they got a price that, at least a headline number, that was higher than the price that we were willing to offer.

Great. Thanks so much, guys.

Thank you.

Cameron McKnight, Wells Fargo.

Good morning. Thanks very much. Just turning to fourth-quarter guidance that assumes the escalator's in operation in the fourth quarter. Can you talk to rental coverage for the third quarter and the last 12 months?

Sure. Rent coverage through the third quarter, which I won't actually talk about in the third quarter, but through the third quarter for PINN was basically what you are seeing in their press release, is that their expectation is that there will be a partial escalator, which tells you that after the rent is done is be exactly 1.80 for the end of the year. The Pinnacle rent coverage is also just slightly north of the 1.8, certainly rounds down to 1.80. But I don't really want to give exact numbers there.

First of all, we are early into the process. It has only been since the close of the transaction. It's really effectively for a full month was May. We were talking about four months. And I think we will have numbers again at the end of the fourth quarter, which I think will be much more relevant to whether we'll get an escalator out of Pinnacle or not out of their renewal.

But I think we are in good shape there. The Meadows obviously doesn't matter, or it is only a partial month anyway. I don't know if that helpful or not.

Got it. Thanks. And then back to the question of acquisitions. The bid-off spread has remained consistently wide in gaming. Do you think it could take another recession to really crack open some opportunities for you guys?

I would hope we don't have to have a recession to make that happen from a general perspective. I think it is hard to say. I have said this before and I will probably get hit over the head for saying it again. At the end of the day it takes a willing seller and a motivated seller who is not just looking for the biggest and highest price.

At the end of the day it is because it is at the end of fund's life. It is the at the end of the Management Team's life or the ownership's willingness and desire to run the business. There is family discord. There's any number of things that cause people to want to monetize a transaction, potentially being overleveraged.

And when that time comes, they recognize that it is time to sell. And yes, they are going to go look to get the very best price that they can get. But they are going to do a transaction. Right now what we're confronted is we're confronted with sellers who are saying, if you hit the right price, I am willing to sell. That's price is generally stupid. If you're willing to pay a stupid price, I am willing to sell. That generally doesn't yield transactions that make a lot of sense.

If, on the other hand, the guy says, I am selling and it is either going to go to you, party A or party B, I think we have an excellent chance of being the winning party. It didn't happen in Isle. But that's -- another party took a different view that I think was pretty optimistic. And potentially they'll -- and I am not saying they won't get there, but there is basically, I would argue, on their part some assumptions that are pretty much best case scenario.

Also the tax issues.

Right. We have tax issues, obviously, on the Isle. You combine the two of them, we did not win that one. But if we start losing transactions on a regular basis, then we will have to do some introspective looks at ourselves and say, what is happening? I don't think that is going to be the case, to be quite honest.

Bill says it well. Every deal that we ever did, and we purchased a lots of gaming assets over the years. There is a reason somebody was selling.

Maybe, as Bill highlights, the change in the circumstances or they want out to get out of the business or they're going to retire. There are 1,000 reasons. Or a family dispute. I could highlight a couple of those that we have benefited from.

Sometimes you work at it and your work at it, work at it. And you hang there long enough to get lucky. Waiting for the right timing. That is really the nature of this stuff. There's not a lot of this assets out there. It is a massaging process and being prepared.

Keeping your capital in the best possible shape so you be competitive and ready, which is something we are working very hard at. Just being on top of everything that sort of breathes that could be an opportunity. We're doing this. It is the same kind of non-answer that we give most of the time until we have another one.

I was just throw one more topic on for Isle. The Isle transaction was a transaction that happened where it is still assets that are still in play. Not to say that they're going to do a transaction whether it's in the near future, but it basically went to a company who now owns a lot more assets and real estate. And at some point in time down in the future there's the potential that they may do a transaction involving monetizing their land and building.

Had we done the transaction at the price we done it at, we would've done it at a price that we wouldn't have been very happy with and we would've never had an opportunity to ever get the assets again at a more reasonable price. Not to say that in the future we couldn't end up paying more than what we paid last time. But it will be a better price and we will be happier with when we pay it.

Got it. Understood. Thanks, guys. Just on leverages, is 5.5 a hard target or could you see yourselves going below that next year to give yourselves a little bit of dry powder?

It is our expectation that we're going to go below that. We have indicated where we're going to be at the end of this year. That is without any future ATM proceeds.

We do expect that the ATM proceeds, we'll have some more of those. And that will accelerate the deleveraging, as well as the free cash flow that we are going to basically generate over the course of the next coming years, will be used to delever, certainly get us down below 5.5. Again, it is a little bit of you have to measure in terms of the environment.

Our current thoughts, I don't think we would be looking to take it much below 5. But who knows? We will see when and if we get to that point, which it will take a while. A few years. We will revisit the topic at the time.

Somewhere in that period between the 5.5 and down. And I think having some cushion so that we can do a transaction on an all-cash basis and not have to worry about our leverage going above 5.5 is actually a very prudent position to take.

Perfect. Thanks very much.

Carlo Santarelli, Deutsche Bank.

Hey, guys. Good morning.

Good morning.

Bill, you made the statement earlier, you talked about conversion of diligence to actual deals. Could you talk maybe, or maybe just give us kind of an idea of how many deals you guys have gotten to the diligence stage on since going public?

There's different levels of diligence. There is diligence where you have conversations and you look at what I'll call some public information. And then there is getting into the a bit more -- you might find an NDA and get access to some non-public information. And then you get into the diligence level where you are hiring outside resources to help you, whether that is on the financial, tax, or legal side.

There has been a number of each category. I'm not really sure I want to go out and do a dissection of every opportunity we have ever looked at and why it failed or didn't fail, or why we were successful. Clearly, we try to not spend a lot of money on outside resources unless we think we have a deal that is likely.

To be fair, we did spent quite a bit of money on Isle over the course of time. That was one that didn't work. But I don't think it is it really that productive to get through, because some of these deals, even if they failed, doesn't mean they are over.

Understood. And if I could, obviously Casino Queen was involved in a transaction. You guys clearly have a relationship with them. My question is, you mentioned obviously the friction cost involved with Isle. Does any of that change with Isle having been acquired now with a new entity? Does that change the set-up from your perspective on a go-forward basis?

A lot of it will depend, quite candidly, there is going to be whole new tax characterization created on the transaction with the new acquirer. I don't know. We haven't done any work on terms of what they are doing, in terms of how they are accomplishing the merger between the two companies.

There would be a lot of steps in how they monetize and how they push down, whether they push down debt or whether they would do step-up bases in the asset. A lot of stuff will happen in the merger that, quite candidly, until it is completed, I doubt they even have that completely nailed down as we sit here today.

It is hard to say. It is hard to characterize. I would hope that if they are forward-looking that they would be taking advantage of the opportunity to fix some of the tax bases and some of the real estate that they are purchasing so that if and when they ever decided they want to monetize their assets that they would have done in a way that would be more tax efficient. Having said that, I have no idea whether they are doing that at all. But this might be a helpful hint.

Understood. Thank you very much.

Daniel Politzer, JPMorgan.

Hey, guys. To what extent do you think there's been any pause in sellers willing to transact because of the election? And it's kind of on a related note. Have you noticed any change in tone lately, given the somewhat choppy regional TGI numbers that have come out?

Can't say that we're seeing any of that. I'll let you or Steve Snyder around the table. Again, I am not sure that it is the economy or anything in that vein, or the election that really affects somebody's desire to sell.

There's usually a reason they want to sell. And Bill has highlighted this many times on the road. We're knocking on a couple of doors. Steve, I know you have. And I have a couple of things in mind where there's a perfectly good property, single asset in State X that we would love to get. The seller's got a lot of money. He's making a lot of money. Life is good. This is typical.

I'm talking apocryphally about any number of people in that category. It's a lot of cash, but I'm having a good time. Why should I sell? It is a process. You sow seeds and then you kind of keep at it and massage it. And hopefully get something out of the other, because over time attitudes change.

In the absence of a desire to sell, they don't have to do it. This is going to be, what's the word we use in our release? A lumpy process.

That is just the nature of things. There aren't 20 guys out there looking to sell their properties today. Probably aren't even 10. There might not be five at this given instance.

Our job is to be on top of everything that might be pried loose. Steve, do you have any comment about that? You're front line with these guys.

No. But an answering the question specifically, there is nothing about the election that has motivated people either to sell or not to sell. If there is tax policy that comes out in 2017 that looks like capital gains tax rates might go up, those are the kinds of things that could precipitate a little bit greater motivation on the parts of sellers. If people think that interest rates are going to go up dramatically, therefore cost of capital will rise and multiples will compress, those are the kinds of events that could lead people to rethink their strategy.

To Peter's point, the first question any seller always ask, if they are not really a seller, what am I going to do with the cash? And that is the way you should think about it. If people have better uses for the cash, they are going to come to the table as a willing and participating (technical difficulties).

Okay. And I'm not sure if you guys will answer this one, but I figured I could throw it out there. Has there been any additional ATM activity here in the fourth quarter?

Even if we wanted to, we couldn't. We are in a close window until the earnings release. The answer is no.

Got it. All right. Thanks a lot, guys.

Thank you.

At this time I'd like to turn the floor back over to management for any additional or closing comments.

Thanks, operator. We thank you all for tuning in this quarter. We look forward to seeing you again after the end of the year. Thanks very much.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.