Gaming and Leisure Properties Inc (GLPI) 2018 Q3 法說會逐字稿

Greetings and welcome to the Gaming and Leisure Properties' Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Hayes Croushore, Vice President in Finance. Thank you, you may begin.

Thank you, Christine, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' Third Quarter 2018 Earnings Call and Webcast. The press release distributed earlier this morning is available in the Investor Relations section of our website at 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 may 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 forward-looking statements contained in the company's filings with the SEC as well as 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 and Chief Executive Officer; and Steve Snyder, Senior Vice President of Development and Interim Chief Financial Officer. Also joining me are Desiree Burke, Chief Accounting Officer; and Brandon Moore, Senior Vice President, General Counsel and Secretary.

Now I'll turn the call over to Peter. Peter?

Well, thanks, Hayes and good morning to all who have dialed in. At the risk of being repetitive, let me highlight comments that I offered this morning -- in this morning's press release because I think they're noteworthy and worth repeating.

On September 26 of this year, we completed our very successful $1.1 billion note offering with the benefit of our recently achieved investment grade rating. On October 1, we announced the completion of a transaction related to the acquisition of Pinnacle Entertainment by Penn National. Together, these transactions increased our annual real estate income by $155 million, while expanding and diversifying our geographic footprint and our list of tenants. These transactions are immediately accretive as evidenced by our October 15 announcement that our fourth quarter dividend would be increased to $0.68 per share, which is an 8% improvement over our prior quarter.

Interestingly, at least to us sitting here at the table today, this day is the 5-year anniversary of our spin from PENN. And I've got to tell you as I read a couple of numbers here, that even I'm surprised at just what we've been able to accomplish over these last 5 years. Not sure I had ever put it all together in a piece of paper at one time. We've completed transactions in that 5-year period worth approximately $6.8 billion, growing our real estate revenue by over $580 million annually and our dividend has increased 31% since our first quarter as a REIT.

In the process, our portfolio has grown from 20 assets in 12 states to 46 assets in 16 states. We've expanded our tenant base from 1 to 4. And to fund these acquisitions, we've successfully issued approximately 90 million shares of common stock and completed $3.5 billion in note offerings. And notably, which is critical to all of us here around this table, we've done this with a commitment to accretion, immediate accretion and safety, which has been, I think, a hallmark of what we've shared with our shareholders from the very, very beginning. So we're extraordinarily proud of what we have accomplished, this enormous success. And we want to celebrate that on this day, our fifth year anniversary.

I would ask Steve Snyder to highlight a few other interesting points about our success.

Thanks, Peter. Good morning, everybody. Just real quickly, a house cleaning matter, we also this morning filed our 10-Q with the SEC. So it's available at your leisure to review. To follow up on Peter's comments in terms of this being the actual date of our fifth year anniversary from the spin out of Penn National Gaming, there are just a couple other data points I want to highlight. Just looking at where we were in our first year to where we are as a result of the transactions that have been announced, you're looking at nearly 150% increase in both our EBITDA and our AFFO. And looking at that 145%, 150% increase, those data points have grown by compound annual growth rates of about 20% over the course of our existence as a separately traded real estate investment trust. It's certainly far better than I think any of us expected when we spun back out in 2013.

And as Peter mentioned, it is an outcome that we're quite proud of but also a great foundation for that continued success into the future. So with that, I'm just going to touch on a couple other points from the quarter. It's an odd quarter, right? All of our efforts during the quarter led to outcomes that occurred after the quarter's end. Our team did a tremendous job. Our legal team, our accounting team, everyone in working through some regulatory challenges that we faced in modifying the previously announced agreements so that we were able to efficiently and effectively get to the closings of the 2 transactions, the Tropicana Eldorado transaction on October 1 and the Penn Pinnacle merger with the new tenant Boyd Gaming on October 15.

We also, during the quarter, as Peter touched upon, were successful in getting an investment-grade rating from Fitch. So as a result of that, we saw some very effective pricing on our $1.1 billion in notes. It was also the first time we were ever a high-grade issuer since we now have an AB rating from 3 of the rating agencies, 3 BBB- and of course the BA1 from the other rating agency. What we learned being a first-time, high-grade investment-grade issuer was that unlike the high-yield markets, the forward deliveries, the settlement dates on high-grade issues are a little bit shorter. So as a result of it, we made an affirmative decision during the quarter to go ahead and close on the debt financings from our unsecured note offerings, prior to quarter end. And that is one of the drivers that you will see in the press release in terms of expenses that were unanticipated since we closed on the notes on September 26 and didn't put that capital to work until October 1.

Moving on, just to give a real quick update on the portfolio. PENN, in their earnings call this morning, mentioned that on their assets through September 30, their lease coverage was 1.87x. They also highlighted the fact that their variable rent will be reset for the first time during the primary lease term. It will -- that reset will be a one-time adjustment of about $11.8 million annualized and will remain then in effect, it won't be reset again until 5 years from November 1, so until 2023. Also they acknowledged that there is -- we are going to be the recipients of the full escalator, the 2% escalator on the base building rent. That 2% escalator annualizes to an increase of about $5.4 million in rent. So that we're looking at a net reduction of just over $6 million as a result of those 2 offsetting items.

Moving down the portfolio. Pinnacle, the lease coverage on the Pinnacle portfolio was modestly better than PENN's. We did, as was reported earlier, receive the full escalator back on the lease anniversary date at the end of April, and they did reset the variable rent on the Pinnacle lease for the 2-year variable period. That reset also was done back in April and resulted in a $1.14 million reduction, which was offset by the escalator of $5.8 million. Additionally, on the Pinnacle side, which will in the future, of course, be part of the Pinnacle lease that PENN will be assuming, it's a separate lease, it's an individual lease, the Meadows property. Meadows will be realizing the full 5% escalator that we're entitled to on its lease anniversary date, September 26, call it, October 1, but they also will see a variable rent reduction of about $270,000 for their first 2-year variable reset.

Lastly, our fourth tenant, the Casino Queen folks, their lease is current at the subsidiary level, the parent company CQ Holdings is still negotiating with its senior lenders and us as a subordinated lender on amendments to their existing credit documents. Finally, before I move on to the balance sheet, both of our new tenants Boyd and Eldorado, in particular, Boyd who has had their earnings call, they indicated on their call that their assets were looking at coverage for their future first year of about 2x coverage. And they were expecting to realize the full 2% escalator on the base building rent in the Boyd master lease asset.

On the Eldorado side, Tropicana closed into a coverage of just under 2x at the closing on October 1. The last item on the portfolio, of course, is the taxable REIT subsidiary. Perryville continues to show modest year-over-year improvements in performance. Not enough, unfortunately, to offset the headwinds that the Baton Rouge team has faced in terms of the performance in that market. The management team down there still is very proactive in managing expenses in light of a market that in some months has been down as much as 20% to 22% on a year-over-year basis. Yes, additionally, as Peter points out, the smoking ban did go into effect in Baton Rouge on June 1.

I'm going to wrap up then and turn it over to Q&A. On the balance sheet, you can read the press release in terms of the ATM activity, the cash position. We did complete the note financings, as a result of those note financings at September 30, our fixed-rate versus variable-rate debt was 90% fixed versus 10% variable. Our weighted average maturity was approximately 6 years, and our weighted average coupon is just under 5%.

Finally, subsequent to quarter-end, we did increase our revolver by $75 million by adding a new lender to the team, the bank syndicate, and we also, subsequent to quarter-end, to fund the balance of the transaction expenses draw on the revolver for $386 million, which keeps our fixed interest rate debt still at 85% pro forma for that draw.

So with that, operator, I would turn it over to Q&A and let the callers go wherever they'd like.

(Operator Instructions) Our first question comes from the line of Cameron McKnight with Crédit Suisse.

So to kickoff, in terms of the equity, the dividend yield is currently little over 8%. You just issued 2029 paper at 5.3%, so 330 basis point difference. I'm assuming that you don't want to issue any equity here through the ATM or otherwise?

I think you can pretty safely assume that. Look, for what's in hand, we're well covered. We will be able to pay off enough debt this year to get where we need to be. Obviously, if we were to do something else, we'd have to take a look at the equity market. But right now, I believe, we don't need it. And yes, it's -- clearly, we have to do something to get people appreciate just what we have here at GLPI.

Got it. And then a question for you, Peter, also for Steve. In terms of accretion on deals, Trop will be about 8% accretive to AFFO on our numbers, which is higher than you might see elsewhere in real estate. What do you think is the right or target level of accretion for future deals?

Well look, a lot depends on the scale. I mean, would we do an extraordinarily large transaction to get a penny that could be at risk? The answer is, no. It's all about transaction to transaction, what's the market? What are the properties? What's the risk profile? And what are we willing to accept? And it will vary in virtually every transaction.

Cameron, there are strategic reasons for doing transactions and there are obviously financial reasons for doing transactions. And we've always used the positive accretion out-of-the-box as the governing factor either way, whether it's financial or strategic. If we have opportunities to broaden the tenant roster, if we have opportunities to broaden the asset pool, we may consider things that are more modestly accretive then certainly the benchmark that you pointed to in terms of the Tropicana transaction. So I would just leave it as, and Peter does a very good job of explaining this given the dividend income that he receives, if that dividend isn't at least equal to the dividend before the transaction, you can assume it wouldn't happen.

Yes. We've worked too hard to get where we are and to get the credit rating that we have today and still working to make it across-the-board by the way, as we talk to the folks at Moody's. And we think over time, we'll get where we need to be there. So we've worked very hard to get where we are. We intend to stay there. There is really no transaction that we have to do. I have said publicly, we're not about building monuments. We're about building value, and I think we've done that rather remarkably over the last 5 years. Nothing is going to change. And I will say this, getting big numbers is tougher at the base we have today. The company has grown to the point where having 8% dividend increases is a challenge. But needless, more is better. So -- but our focus hasn't changed.

Our next question comes from the line of Carlo Santarelli with Deutsche Bank.

As you guys look out at the landscape right now, clearly rates have risen, I know you guys have said before in prior meetings that this rate environment and this transaction and cap rate environment can't last forever. Have you seen of late, especially as kind of the markets have gotten volatile with some of the -- your peers coming under a little bit of pressure. Have you seen the tone of any type of discussions around real estate, center transactions change at all?

[It's kind of] early. Go ahead, Steve.

Yes, Carlo, I think it's a little too early to tell. Obviously, you saw in the gaming space, a transaction announced yesterday or earlier this week of CDI buying an interest in the Rivers Des Plaines at a valuation that was probably right there with all of the other recent prints. I think we have, as you point out, said that declining cap rates and rising interest rates cannot continue into the future. I don't know if the music has stopped yet. I think obviously it takes time for sellers' expectations to be tempered by other outcomes. So it's just a little too early to tell, in response to your question specifically.

And look, we're going to have to wait and see how some of these other transactions, that is those we're not involved in, get financed, and we'll see where that leaves others with what kind of an equity overhang. So a lot of things have to happen over the next months, maybe the next year for us to get a better sense of where things are going. But look, there's always something out there that for various reasons, sellers choose to do possibly with us, not with somebody else. So again, it gets back to a deal-by-deal basis. To your broad question, I think we just have to give it a little more time.

Understood. And guys, if I may, in acknowledging we're talking about trends at -- in 2 properties and 2 states, one of which obviously is going through some structural change with the smoking ban in Baton Rouge. But when you think about what you are seeing from a core kind of patron level, both in Baton Rouge and in Perryville, have you noticed any kind of discernible shift in customer behavior over the last couple months?

No, Carlo. We really haven't. I mean, the phenomena in Baton Rouge started in the first quarter and then accelerated with the smoking ban. Perryville has been going along very constantly throughout the year even on a month-to-month basis looking into October as well. So we've seen no change in consumer patterns in the Perryville market but it's simply one data point.

Yes, look, I wish we could get states to recognize. We understand the health motivation in enacting smoking bans. Some states have chosen to deny it has an impact. But the evidence through many states is clear, 15% to 20% loss of revenue is the norm, and it doesn't come back. So we'll have to wait and see. Now you can build smoking areas and they're getting a little smarter and a little bit better and we'll look at things like that to improve the opportunity for smokers -- look, gamblers are smokers, and to a larger degree than maybe the general population. I have got absolutely no statistics to support that but I think we know empirically that, that is the case. So it has an impact.

Our next question comes from the line of Thomas Allen with Morgan Stanley.

I know this is a simple question but your stock is down 1.5% today, I think, on concerns around PENN's earnings. Can you just kind of stress like the rent coverage? And how comfortable you are with it?

Yes, Thomas, I mentioned in my comments that the rent coverage was 1.87x at quarter-end, 9/30. The rent coverage on the Pinnacle master lease was modestly better at 9/30. I don't know what else to tell folks in terms of our security relative to the rest of the capital stack of our tenant -- all of our tenants. It sort of defies logic to see where some of our securities trade relative to, quite frankly, where some of our tenants' subordinated notes trade. But from a security standpoint, we're very comfortable being where we are at the top of the waterfall with respect to the occupancy cost that our tenants face. And we think that at 1.87x, we're in pretty good shape. Now what all of our tenants are doing and PENN sort of addressed this in their earnings release, people in the regional gaming markets are managing more to profitability. So marginal revenues, which might not be profit generating, you are seeing sacrificed. As a result of that, you're seeing some of our variable resets decline because they are allowing revenue to burn off because they are focused on profitability. And the long-term focus on profitability for us and PENN with its cost initiatives will inure to our benefit. As their EBITDA margins improve, some at the corporate level but also some at the property level, we will continue to see coverage improve if they hit their profit plan. So I'm not sure what else to suggest to you in terms of why the disparity but those are the observations from a pretty high level.

Yes. Let me say a little bit more crassly if I can. It would take a - look, we root for the success of our tenant. Obviously, we want them to be successful. But it would take an atomic attack or something near to that, quite frankly, to threaten our revenue from our tenants. I mean, because the gap is so wide and if you would look at what would have to happen to their businesses, it's beyond any precedent that we've ever seen in history. So it would take a flat-out disaster to have any impact on us, could impact them but that has no impact on GLPI. And that's a point we try to make, again, again and again. They're up. They're down. We might on the margin lose some escalator but remember then the base gets reset again, almost over, well, we're going to get that all back, just it's going to be the next round. So it's not lost forever. I just can't emphasize enough just how stable this revenue is. And so I can't say more than that. Nothing that you or I could imagine will threaten our income flow.

And then -- and you brought up Rivers, can you just -- was that a process that you got invited to? Is that something that could be an opportunity in the future?

I'll point out that the Rivers transaction was the sale of an equity interest in an existing partnership. So there was no real estate component to it. So CDI stepped into Clairvest's position and stepped up by buying some of the other partner's interest to get to their just over 50% ownership. So it is not something that was contemplated in terms of any real estate component as far as we can tell.

Our next question comes from the line of Robin Farley with UBS.

I think most of the big issues have been tackled. Maybe just circling back to there was a lot of talk about potential M&A in the sector. I guess, what is your appetite after digesting a bunch of transactions just in the last few weeks? How should we think about your target for growth, I know, in the past you've talked about your growth will be lumpy but you had this sort of long-term CAGR that you thought about. How should we think about it now looking ahead?

Well -- hi, Robin, you might remember that when we started this process, we set, as a company an arbitrary goal of $500 million of assets a year. After looking at what other REITs do, how we might define success, we've blown so far through that, that it's a joke. I'll sort of stick with the same kind of target. We're as hungry as ever to do transactions, without a doubt there. Absolutely, nobody is more voracious than we. However, finding the right transactions is unpredictable. I don't mind saying that, several of us are going to get on a plane this afternoon and fly off to another city to talk to an owner about a transaction. We do that all the time but taking -- paraphrasing the Bible, many are called but few are chosen. So that's a process that we get paid to pursue day in and day out and our enthusiasm for that has not waned one bit. So we'll just have to wait and see what sort of comes loose. I wish I could tell you that we had 9 things on the docket and -- but it's just not the way things work. Couldn't have told you that the transactions that we just closed were on the horizon a year prior. Steve?

Yes, Robin, just to follow up on Peter's comments real briefly. I mean, we manage what we can, which is the balance sheet. We manage the credit side of the balance sheet and you see it with the investment-grade rating that we've achieved in the crossover financing that we did that we closed on September 26. And we position ourselves from a liquidity standpoint and from a balance sheet standpoint to be able to be reactive. Everything else, to Peter's point, is just sort of stay tuned and wait and see how things happen.

I'll tell you, I wish we could be more clear and less vague but that's just the nature of our business.

Our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch.

Peter, just to kind of return to something you mentioned around the anniversary and how much growth has actually occurred here, I think you mentioned, specifically, I think it was more of an off-hand comment, maybe something needs to be done to get people to appreciate what's actually occurred at GLPI, but I go back and look and I think from where you guys started 5 years ago, the dividend has grown like 30 , almost like probably over 30%. So I'm kind of curious, do you have any ideas of what some of those things could be, whether it's on the investor-facing front, get some of the rededicated money to look at this more closely? Or anything else, just any brainstorming you might have about what it could do to tell that story to people?

Look, to some degree, I think we're surprised at the market reaction to our extraordinary performance. It has been terrific. It has been -- well, the numbers speak for themselves. I think Steve and I and our entire team here have agreed that part of our responsibility over the next 12 months is to step up the pace of our outreach. To get people to recognize, forget growth for the moment, that just the stability, the absolute rock-solid predictable stability of our cash flow is something you ought to have in your portfolio, particularly at these levels. I mean, it's a joke, say I. And it's -- so we scratch our head here, keep putting one foot in front of the other as we work at developing and building this company. But, yes, we do scratch our head and say, what else can we do? And this year is going to be a lot more outreach. Steve?

Yes, Shaun, I think Peter sums it up well. I mean, we -- again we're proactive with the credit rating agencies. We've been able to drive down our cost of debt capital. Now we've got to be as outward facing and as interactive with the equity investor base, whether it's dedicated REIT investors, whether it's income investors, whomever it may be. We've been doing a lot of communications with folks and we recognize that people don't really fully appreciate the difference between our regional assets compared to strip assets in some of our peer sets' portfolios. People don't appreciate the maintenance CapEx requirements in the regional gaming space relative to a 3,000-room hotel on the strip. You look at PENN's earnings announcement this morning. I mean, their maintenance CapEx expenses for this year has been 2.25% of their revenue. It's just much more modest, it's a very different business than the folks that look at Las Vegas strip assets and we just have to continue to educate them as to those differences and you can take Peter's word for it, we are and we will.

And sort of great segue into second or follow-up question should be around Las Vegas. There is -- continues to be a lot of activity out there in the spaces. Clearly, accretion is going to be the name of the game in terms of your first overarching goal. But how does Las Vegas kind of fit into the portfolio for you guys, I mean, to the extent you can meet other criteria out there? And is there anything you'd take a shot on in terms of trying to change or tweak the kind of the portfolio as it relates to getting access to bigger scale strip assets?

That's an easy answer to provide. We have no special interest in it -- I'll speak for myself. Maybe Steve would answer or others at the table differently. I have no special interest in Las Vegas. It's just another place, where we might find properties that could be accretive for our shareholders. Now I have said at many of our meetings and I mean it, not flippantly but look, I'd buy a shack on the beach and I mean a shack with no windows and doors, if we could be persuaded that the cash flow is solid as a rock and certain. And that's all it's about. How predictable, how certain is the cash flow and then you take all other factors into account, how stable the market, the kind of risks that one might have with capital expenditures and so forth. So, I mean, it's -- we have no particular interest in going anywhere. I would go to the moon if there was something up there that we could REIT. So, name of the game is, to find asset opportunities that we can purchase at the right price with the confidence it's going to produce income for us year-in and year-out over the term of our lease. I mean, the obvious answer but I'm trying to underscore it.

Yes, Shaun, the question came up earlier, and the bottom line is, accretion is not just one of our acquisition criteria. It is the critical acquisition criteria. So we don't feel any need to grow just for the sake of growing. We don't feel any need to get any larger for the sake of getting kind of multiple expansion because we hit some critical mass. We think we're there, in terms of the size of the portfolio, the diversity of the holdings across The United States, the diversity of the tenant roster that we've developed. Look, we've got 3 of the 4 largest regional gaming operators in The United States as tenants now. So we're very comfortable with where we are but we'll, as was said, continue to look at opportunities across-the-board with no particular focus on the Las Vegas strip.

Our next question comes from the line of John Massocca with Ladenburg Thalmann.

Just kind of touching on that last point about accretion, is it maybe difficult for you guys to find accretive transactions out there, given your cost of equity capital and then you're pretty much at or maybe slightly above where you want to be from a leverage level? And the potential competitor -- competition out there from some of your REIT peers for assets?

Look, there are other tools in the toolbox. We have an operating partnership that we can activate to issue OP units. So you should not think of the balance sheet as constraining and obviously, given the liquidity that we've got on the balance sheet with no near-term maturities, our next maturity isn't until 2020, it's really not a balance sheet question, it really comes back to being disciplined in terms of driving shareholder value through growth in AFFO. It's as simple as that.

Okay. And then a little more of a technical one. I know you have kind of raised agreements that sets floors on the kind of rent resets with existing tenants. If they build a new property within a certain in-mile radius, what happens to those floors, theoretically speaking, if you buy the new asset they're developing?

If we do buy the new asset that they're developing, it would be because we've modified the master lease and incorporated it into the master lease, so that would not be subject to that limitation. I think the easier one to look at, and I think what you're referencing is PENN's announcement of their York and their Morgantown, Pennsylvania facilities as a result of the opening of those facilities, when they open, the portion of the master lease rent that is attributed to or generated from Grantville -- from Hollywood Casino in Grantville will be set as a floor for all future annual obligations from that facility. So at that point in time, no more variable piece. It will all be a floor based on the 12 months prior to the opening of that competing facility inside that 60-mile radius restriction. I'm looking at the accounting team and the legal team here to make sure I haven't misstated anything and I'm getting thumbs up, the point being, that it can only go up, it can never go down.

Our next question comes from the line of Barry Jonas with SunTrust.

Most of my questions have been answered but maybe just 2 quick ones. In terms of the variable rent structure in Ohio for the PENN master lease, is there any interest by you or the tenant to maybe change that now that the property is a bit more mature to a more fixed sort of standard structure?

Barry, first of all, it's a fair question. We think there is still room for those facilities to ramp. We do think that when Ohio does adopt sports betting and some other Internet wagering and other alternatives that those revenues will flow through the building and therefore flow through our variable -- our 20% variable land-based rent. So we're not in a rush for any reason to go ahead and modify those -- that lease, as it relates to Toledo and Columbus.

Great. And then, I guess, Steve, you really haven't missed a beat in the new interim CFO role. Just curious what the latest status is for a permanent search?

I guess, I can answer that. Look, we've, I think publicly said, we've engaged Spencer Stuart. They, of course, if you know the process will scour the planet and suggest a very broad list of names, which they have only now begun. And I have to say, we don't need anything right now at all. Do we need a new person at this instant? We don't. The company is no -- with our entire finance team, all of who, frankly, are present in this room, we're fine. I think what we look at, however, we would reallocate people, is just maybe getting one more person to put a little more muscle on the front line, so we can spend more time on business development and so forth. Steve has historically spent most of his time in business development. I mean, that's the way it's been. And now with -- he is focused in both areas. So as we look ahead and we think about the direction of the company going forward, we think and I suspect the board thinks that we should see what's out there but we're under no desperate interest to do anything in a rush. We'll find the right person or we won't. We're fine if we don't. If we find somebody who really can put a very positive light on this company and help us get, frankly, the recognition in the REIT world that we think we deserve, that's the kind of person we might want. So -- and I'll put it pretty plainly, my challenge to Spencer Stuart is pretty much we need somebody luminary enough who would cause the market to say, wow, they got Harry or Sally or somebody who had an immediate impact. Less than that, frankly we don't need a thing.

(Operator Instructions)

Our next question comes from the line of Daniel Adam with Nomura.

Can we talk about the amended Eldorado and Boyd leases in Missouri and Ohio, and specifically to what extent do you think your current concentrations of gaming real estate might limit your ability to transact in certain jurisdictions?

Well, Daniel, it's Steve. Obviously, the amendments generated the identical economics for us that we had originally contemplated in both the Ohio and the Missouri situations, they were done in a fashion of facilitating the regulatory approval in both jurisdictions so as not to delay the transaction. They were done outside of the master leases with Boyd on the 3 properties that were transferred over from Pinnacle and outside the master lease with Eldorado on the 6 properties, the 5 that actually ended up in the master lease that were transferred over from Tropicana. In terms of the limitations or the impact in the future, we really think that we've got to continue to educate folks to help them to understand what role we as a passive landlord have in terms of the day-to-day operations of the operator, the licensee in those facilities. But I don't want to leave anyone with the impression that it's smooth sailing. I mentioned in my introductory comments that our team here spent countless hours at the end of Q3 modifying those transactions to satisfy the regulators, that was first and foremost in our priorities, was making sure that everyone was comfortable and ready to go. I think it really is a question of how individual regulators in each state will interpret their laws relative to our transaction structure. Brandon, is there anything else you would add?

No, I mean I think both of the situations in Ohio and Missouri were somewhat fact-specific and anomalies compared to other states. I mean, obviously the FTC and others have taken a view in these transactions previously on our Pinnacle transaction and this one with regard to what effects we can have on competition in those markets. And those are the only 2 states, we've had a problem in Ohio, was very specific to a racing statute that was not directly tied to competition or anything they saw with the concentration level of our portfolio. So I think they are both somewhat unique but we're obviously concerned about educating the market, as Steve has mentioned. And we believe that our leases and our position in these properties is such that we're very much a passive landowner. We don't have any intention, expectation or ability to control competition in those markets and we don't see that changing in the way we do business, it's just a matter of making sure that everyone understands the limitations we have as a passive owner.

And Daniel, different people will interpret things differently, unfortunately. And you see it in Louisiana, where we own 2 properties -- we own 3 properties in Baton Rouge, and we operate one of them. So the FTC has looked at that market, that transaction -- those transactions, the Louisiana Gaming Control Board and its staff have looked at that market and those transactions. And obviously we're comfortable approving the Eldorado acquisition of Tropicana. So each state is going to be its own set of circumstances, and we understand that.

Yes, to be clear, we have no operating responsibilities, no operating opportunities and no interest, frankly, in any operating question. We get no nonpublic information, nothing, 0, zip. We find out when you all find out how these properties are doing. So I think the FTC, of course, has done extensive work, they have not been shy in squashing transactions, by the way, that they thought to be anticompetitive. They clearly understand that there is no ability on our part to, or desire for that matter. I think the one thing we do get to approve are architectural changes but even those are very broad in the sense that our only interest is that they don't paint the facility pink, for example. That might be something we might opine on but that would be true of any landlord in what they might allow a tenant to do with the space. But that's the rarest of exceptions, there is not another thing that we would -- and frankly, anything that they would do and spend to improve the quality of the property, only improves our cash flow. So we're completely aligned with the tenant in that regard. We want to maximize performance.

And there have been a number of capital improvements across our portfolio over the past 5 years. I think we have not stood in the way of any tenant capital improvement, as Peter said. We're happy to have them improve our buildings. And if they wanted to paint it pink even, they might be able to do that in the short term as long as it didn't impact the structural integrity of what was there and they painted it back before they left. But that's really our goal, the passive landowners protect the structural integrity of our assets.

That's it. Yes.

Got it. And with respect to the tax treatment of the mortgage interest payments, is that -- will that be the same as rental income or...

Desiree, why don't you take it.

Both of those loans, at least for the onset, are secured loans, and therefore it is good REIT income and will not be taxed.

Our next question is a follow-up question from Cameron McKnight with Crédit Suisse.

Just wanted to circle back on PENN and the 5-year rental reset. Specifically, just wanted to confirm the one -- the reset that will occur 5 years from today is dependent on where revenues stand at PENN's legacy properties relative to revenues today. And secondly that the reset that's occurring today, reflects really the view that you and PENN had on revenues back in 2013?

It does reset 5 years from the anniversary date based on the average of the 5 years between now and 2023. In terms of does it -- where did we land relative to where we thought we would land? Quite frankly, Cameron, this was meant to give PENN relief for events like National Harbor opening and having a much bigger impact on Charles Town than it did. So if you're asking the question, is this reset less than we expected 5 years ago? Quite candidly, I think it is. A little bit less of a reset. We all thought that the impact on Charles Town and other competitive environments around The United States was probably going to be a little bit greater. So it's hard to go back and look 5 years ago what the crystal ball looked like but that's my initial sense in terms of responding to your question.

Well, and I think, Brandon was just pointing out -- a sidebar here to me that we really, really were interested in the long-term stability of our tenant. So it was kind of an interesting process, I was just -- looking back those years and a couple of years it took to make this spin, we had people sitting around a table arguing for one side for the other. So it was actually a very iterative negotiation from them, as we were going to stay with PENN and those -- and some who didn't know which side they were going to end up on, like Desiree across the table here shaking her head. Fought pretty hard for what PENN would get and what we got. But look, the goal was always to get a balanced transaction that treated both companies fairly, and anticipated what could happen in the marketplace up and down and to make sure that we never put our tenants under any untoward strain, how was that?

Yes, and I think just to amplify Peter's point a little bit, our peer set is sure to follow, right, so it sort of amplifies the fact that giving the tenant a little bit of cushion in how they react to competitive situations that are beyond their control, they have some relief, however, modest it may be.

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Well, I'll make it simple, that was a pretty robust Q&A period, which we appreciate. And thank you all for your interest. Looks like we'll be talking again after next quarter. So thank you very much. Have a great day.

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