Gaming and Leisure Properties Inc (GLPI) 2017 Q3 法說會逐字稿

Greetings, and welcome to Gaming and Leisure Properties Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host, Hayes Croushore. Thank you, you may begin.

Thank you, Sherry, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' Third Quarter 2017 Earnings Call and Webcast. The press release distributed earlier this morning is available in the Investors 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. Forward-looking statements include those related to revenue, operating income and financial guidance as well as non-GAAP financial measures such as FFO, AFFO and EBITDA.

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're joined by Peter Carlino, Chairman in 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. Peter?

Well, thank you, Hayes, and good morning, everyone. We are happy once again to report a good quarter. We received all of our escalators this quarter and we paid down some debt, which is a good thing in our business. We like to do that. I think all the comments I might make are very well encapsulated in the opening paragraphs of our press release, so I call your attention to that. And as our usual style, I think we're going to get very quickly to question, unless Bill wants to add something.

I have nothing...

Okay. Then, operator we're going to go straight to Q&A.

(Operator Instructions) Our first question is from Steve Wieczynski with Stifel.

So here's a question. I don't know if you'll answer or you won't answer it. But let's say for instance, and I think you probably know where I'm going to go with this, if 2 of your tenants were to explore some type of merger, what kind of say would you guys have in those proceedings? And then if there was a need to find a new operator for a certain property in a certain market or other -- any market due to ownership restrictions, who would lead that process? I hope that makes sense.

Well, that's a question we'd like to avoid, but I think we'll get right at that. We've seen the same things you have seen, so we know where you're going with it. We like things, frankly, at the moment, precisely the way they are. But should such a thing occur, that is our tenants begin to talk with each other, we would have significant rights to, I hesitate to use word, Bill, approve, or Brandon. But certainly, it would take our involvement for such a thing to occur. And the bottom line for any such thing would be what it always is for us, what's good for GLPI and our shareholders, period. That's the only guiding light, frankly, here. Bill, do you want to?

Sure. Listen, I think there -- the lease has certain terms in terms of our ability on what we can -- what we have rights relative to what's in the lease. And if there -- and I would go on to say, obviously, we're totally in the hypothetical and totally in the -- because we don't have any information that says anything's been agreed to between any of these -- either one of those 2 parties. And for the benefit of everybody else who might be wondering what we're talking about, there's a newspaper article in Bloomberg speculating that there was a combination discussion between Penn and Pinnacle. But our lease basically, where our rights would come in is because they wouldn't be able to extract any of the properties out of the leases for sale or for disposal if that was required by either a gaming regulator or by the FTC. So that's where our rights would come into play. And I would say that we're certainly would want to be supportive of anybody -- any of our tenants who want to do things because I think that's a big part of what we try to emphasize as a landlord, is that we want to be basically partners with our tenants and we want our tenants to be successful. And if there's things that our tenants want to get done, that we would be supportive of that. However, obviously, we have to look out, first and foremost, for the best interests of our shareholders. So that comes before that. But certainly, we would -- we believe we have certain rights within the leases to the proposed hypothetical, theoretical rumors that are floating around out there. So I think I'll probably leave it at that.

Yes. No, I think you've -- that does a pretty good job. Farther than we've probably preferred to go, but I think the most important thing you said is that we will -- our predilection is, first and foremost, to work with our tenants and to be seamless in our partnership with them. But in the end, it will be what is beneficial to our shareholders, period. And I can't emphasize that enough. So I hope that's the last question on that subject because, frankly, that's all we can -- or would have to say. We don't -- there's nothing in front of us.

No, that's great color. And you probably said more than I thought you were, so that was great, so.

More than we thought we're going to say, too, so. And frankly, that's a testament to the thoroughness of your question.

I try to dance around it as much as possible. Anyway, second question, it will be more straight forward. It's going to be kind of the generic. Every quarter, you do a very good job of -- Peter, Bill, if you can give us an update on kind of what you see out there in terms of potential acquisition or what the environment actually looks like, maybe both, in the gaming universe, and then maybe outside the gaming universe as well.

Well, Steve, do you want to -- why don't you talk about kind of what's out there and what may or may not be actionable?

Sure. Good morning, Steve. Yes, others have commented either in their earnings calls or in other calls that they've had that the M&A activity seems to be pretty robust. I can't say I don't disagree with that, I think. So our expectations and valuations are probably a little extreme, most of which, we've driven, quite candidly, in terms of the separation of real estate assets from operating assets. But I would not disagree with what we've heard from other operators as recently as yesterday. Caesars, in their sort of presentation as a new entity, that there does seem to be a longer runway right now in terms of opportunities out there. And rest assured from our perspective at GLPI, we do try and touch everything, stay in touch with everything and look for the right opportunities to produce accretive transactions for our shareholders.

Yes. My line over the years has pretty much been and remains the same, if it's alive and breathing you can count on us looking at it. So we're not unaware. But finding transactions that are right for our shareholders -- as I have often said, I mean, it's easy to make a bad deal. It's a lot tougher to make a deal that's going to be accretive to shareholders, and that remains focus 1, 2 and 3. We'd rather be patient and do the right thing. So that's pretty much our mantra. Those who of you who followed us over the years, know that you've heard that line before.

Our next question is from Robin Farley with UBS.

This is actually Arpine Kocharyan on behalf of Rob. Maybe asking the same question that was just asked in a slightly different way. Is there anything imminent given that through end-year, we're looking at Q4 that you're kind of looking at in the transaction market that could make sense near term? And then my second question, do you guys have any updates on your leverage level targets in terms of the 5x you have given us before?

Well, look, there's nothing imminent that we're aware of. In the full meaning of imminent, I mean, there's stuff that we look at, we talk about, but there's nothing imminent. Bill, do you want to...

Yes, I mean, listen, I think there's nothing -- well, first of all, there are no transactions that I think could happen where we get closed by the fourth quarter just given the whole approval timeline. So even if we did get to a definitive agreement, with a number of people that are out there, nothing's going to close this year for sure. So hopefully that answers that question. The leverage, right now, we're projecting the end of the year to be under 5.1x on a leverage basis. I think we throw off roughly $130 million a year of free cash flow that we'll continue to use to pay down debt. And obviously, our target leverage level is 5. We're going to take it below that in the interim, but we would view that going below 5 as pre-funding for potential opportunities, as basically pre-funding equity where we would -- we've stated before that any new transactions we would do, with leverage at 5.5 on that transaction. With the rest remaining equity, clearly, if our leverage is below 5, to the extent that we're below 5, we'd take it back to 5. So we'll obviously do an acquisition, which might have a little bit higher leverage, but still not taking the transaction effectively over the same levels that we've kind of indicated before.

Our next question is from Thomas Allen with Morgan Stanley.

First question, how are you thinking about the Penn -- the 5-year Penn rent reset that's coming up in late 2018?

Well, clearly, that's November of next year. We're not really giving official guidance. I think I'll say a couple of things: We know and we understand and we acknowledge that primarily from 2 properties, and that would've been Lawrenceburg as well as Charles Town, and both of those were affected by competition. Lawrenceburg, from several years ago; Penn from both Maryland Live! and then obviously, National Harbor. So we do expect to have -- when the revenue reset happens at the end of October of next year, we do expect that to be adverse to us. In other words there'll be a rent reduction. However, looking forward, we believe that our rent or our dividend, with the payout ratio still at the 80%, will be flat through that period. So we don't see it having an adverse effect on the dividend. Obviously, it won't be helpful to getting increases at the dividend, but at least as we project out, and this is without any transactions. So obviously, if we're able to get any accretive transactions done, we could fact see dividend increases. But certainly, through the revenue reset period as we see it today, we think our dividend will stay flat.

Our next question is from Joe Greff with JP Morgan.

Most of my questions have been answered. Maybe I could ask you who's going to be the next manager of the Yankees. But the one question is with respect to the last comment on the dividend, would you -- absent any acquisitions, would there be an inclination or a willingness to increase the dividend on an absolute basis?

You mean in terms of increasing the payout ratio? Because that's basically effectively what happens, obviously if we go down, right? I think for the foreseeable future, our expectation would be to continue to pay down debt in anticipation of getting transactions done. We're not in any way despondent on our ability to get transactions done. We think there will be opportunities and there'll be times where we'll be able to put that capital to use on an acquisition basis. So I would say, for now, at some point, I think maybe, but obviously, we'll get to a point where we're not going to take leverage to 0. So obviously, at some point, we'd think about that. But in the interim period, our intention would be to use it as pre-funding equity, not increasing the dividend.

Yes, look, the question is -- and the answer is always the same, what gives more value to our shareholders, an increased dividend or a new transaction? So we'll do what is best at the time.

Well, I mean the problem with taking the payout ratio up, obviously, also is, honestly, I think I personally, and we haven't had any -- we didn't have these discussions. But I personally would be one in favor of buying back equity if I had excess cash floating around rather than increasing the dividend, because I think the one thing that people like about our story is the stability and continual pattern of a nice, stable dividend. So taking the payout ratio up and then turning it around and potentially if we do a transaction, then, [one], to take it back 80%, I think that would be adverse to the interest of what many of our investors are buying our shares for.

Our next question is from Patrick Scholes from SunTrust Robinson Humphrey.

Penn, this morning, put out an EBITDA margin target -- put out EBITDA margin targets for the future. My question as it relates to you folks is if part of the way they get there is via pulling back on, say, promotional spend, how does that impact potential future escalators?

That's actually good. In other words, margin improvements will certainly -- which obviously should translate into increased EBITDA, would therefore translate into improved rent ratio or rent coverage.

Rent coverage.

Rent coverage ratios. So that would obviously be good and increase the likelihood of escalators. Certainly, Penn has, over the course of the last several years, we've continually been right on the cusp, as evidenced again this year, we're getting 80% -- 75% to 80% of the full escalator lease. That's a projection. Obviously, we've got to wait and see what happens through the month of October. So that's all good. The only negative obviously, potentially negative is if the sum of those marketing reductions, which might be improvements to EBITDA if they were on a net basis slightly less revenue, that would be less, we'd have to offset that with the escalators. In terms of if they do marketing programs that cause business volumes to drop but it's actually good for their EBITDA, that's not good for the revenue calculation. I don't think that's their intent. I think their intent is to figure out how to reduce marketing. And sometimes, you can reduce marketing that's actually enhancement to our revenue because you're giving out less free coin. So the less free coin you give out could turn around and cause people, because they simply don't have enough time on device to use up all the free [play] coins, and they may not be constrained by their budget, so therefore, you might actually see a net increase to your net revenues.

Our next question is from Shaun Kelley with Bank of America.

Just wanted to see if we could -- I just want to touch on the dividend thing a little bit more around the possibility for the reset with Penn. So Bill, just to -- it is more of a clarification than anything else, but under current assumptions then or the way you're modeling or thinking about it, would it be that you can maintain the dividend flat but payout ratio actually goes up? Or can you hold the payout ratio here right around 80% with the way that sort of other numbers are coming, the numbers would come in?

It's our expectation that we would be able to hold the payout ratio. I mean, we're -- today, we're like closer to 79 than we are 80, so the ratio might increase nominally. But we don't see it going above 80.5. I mean, not going to go above 81, let's put it that way, in order to maintain the dividend. And in fact, I think it will be better than that. So we're kind of talking switches here, but -- and it's obviously a little bit dependent on how well the economy does and how well the Ohio properties do for Penn and how well we do with the Meadows and all the rest of it. But feeling on a conservative basis, we're not going above 81 and we'd still be able to maintain the dividend.

Understood.

[1.0].

Understood. And Bill, just remind us, like the way this calculation actually works, right? It's a rolling -- it's like a trailing 5 year calculation, I believe. So it's not a step function down, it's sort of a kind of a slow grind down based on when the cannibalization at those properties would have occurred.

Well, it's a calculation of the average over the last 5 years, but it is a step down starting November 1 next year. So they would then have a lower rent payment due starting November 1. And then in the following year, not that I want to make sort of a negative into a positive, but in the following year, there would obviously -- when we do the rent coverage calculation based on a lower rent level, so the likelihood of getting an escalator would improve, so in the following year, the certainty of getting a rent escalator just improved by -- to the extent of the amount of the rent reduction in the previous year. Not that, that -- that's kind of trying to spin -- I acknowledge that, that's a spinning of a negative, but it is just math.

Understood. And then just to go back to the sort of the M&A landscape, which it's always difficult for us to ask about, but I'll try anyways. Just basic big picture here is that is it your sense that seller expectations are -- are the people are, let's just say, testing the market based on what could be perceived as really good values? Or do you think there are some serious sellers out there given the discussion of what's going on and things will actually transact over the next 6 to 12 months, whether that's with or away from the OPI.

Steve, why don't...

Shaun, this is Steve again. I think to some degree, you're right. I think sellers are testing the market and seeing if some of the public market values can translate into private transactions. I do expect that you'll see some prints over the next couple of quarters in terms of transactions because there are some circumstances where sellers are motivated by things that might not be simply value-driven. But there's really no way to sort of standardize across the universe of what we're seeing.

(Operator Instructions) Our next question is from Dan Donlan with Ladenberg Thalmann.

I was just curious what the unused property that you sold at the Hollywood Baton Rouge was?

That was a -- there was piece of land that was -- formally housed the HR, and I think...

It was remote. It was a warehouse storage.

Several blocks down the road.

Yes, it was several miles down the road. It was nothing that was integral to the operation of the facility. It was used, quite frankly, back after Katrina, because the business volumes down there were so extreme so it had no longer served any useful purpose.

Well, it was actually land purchased in the original acquisition by Penn. And I think the fact that there was -- we might be reacting to the fact that we took a loss. That's because in the original purchase, I'm not sure, that they, way, way, way back, remember, we're talking about 15 years ago, that they did a proper job of allocating the land value. So in terms of between all the land that they had. And so -- because I don't believe at the end of the day that the land that we sold for was -- had depreciated to the level that we recognized a loss. However, the accounting is what it is. And that's what it was sitting on the books for and we sold it. And obviously, the amount we sold it for was less than what was on the books.

Sure, sure. I was just more or less curious because I mean, that's something that you could've developed or what, and it sounds like it was down the road, it wasn't contiguous. So...

It wasn't contiguous. It also had a dilapidated structure on it. A building with the roof caving in and other kinds of other fine attributes.

That's why we're saying we're glad to get rid of it.

Okay. And then just curious if you could update us on how many properties Penn and Pinnacle have outside the master leases. And if any of those -- your master leases with them -- and if any of those properties would be of interest to you down the line or maybe could be some type of -- something that you could get if negotiations change or however their structure may change?

I mean, for Penn, the 2 biggest properties that they have -- well, there's 3, I suppose, that would be of main interest. One would be their Massachusetts property in Plainridge; potentially is the Tropicana. They have a joint venture in Kansas that could be of interest. They also have a couple -- they have a dog track but I don't think that has particular value for us. Relative to Pinnacle, Penn also has a joint venture with a track in the Houston. Pinnacle has a race track in Ohio that we left behind as part of the spin transaction. And they've also, I think, have a partial interest in a track in San Antonio. So those are all potential opportunities. I mean, obviously, the last -- the Texas stuff would involve -- there would have to be some kind of legislation passed that's authorizing gaming. I think that's quite far in the future.

But would we be interested in such things? The answer is, of course.

Okay, perfect. And then just lastly, just because no one has asked it yet. I was just curious, the appetite or interest level for non-gaming properties. I think that you said in the past that runway still looks good for gaming. But just curious, your thoughts there, if you've gotten maybe closer than maybe you have in the past. Just curious about process there.

I think the quick answer is, we're no closer to that. We remain open to it. We look through the republications on a monthly basis to see what's going on out in the REIT world generally, but look, we're still focused on this business. At home, nothing has crossed our desks that would be remotely attractive. So that's really the -- that's the straight answer.

(Operator Instructions) Okay. We have reached the end of our question-and-answer session. I would like to hand the conference back over to management for closing remarks.

Okay, operator, thank you very much. And thanks to all of you who have dialed in this morning. We will look forward to talking with you next quarter. Thanks again.

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