Gaming and Leisure Properties Inc (GLPI) 2018 Q4 法說會逐字稿

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

I would now like to turn the conference over to your host, Joe Jaffoni, Investor Relations. Thank you. Please go ahead.

Thank you, Brenda. Good morning, everyone, and thank you for joining Gaming and Leisure Properties' Fourth Quarter 2018 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.

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 call, we are joined by Peter Carlino, Chairman and Chief Executive Officer; and Steve Snyder, Senior Vice President Development and Interim Chief Financial Officer at Gaming and Leisure Properties. Also joining today's call are Desiree Burke, Chief Accounting Officer; Brandon Moore, Senior VP, General Counsel and Secretary, Steve Ladany, VP Finance; and Matthew Demchyk, Senior Vice President of Investments. With that, it's my pleasure to turn the call over to Peter Carlino. Peter?

Well, thank you, Joe, and good morning, everyone. We're, of course, very pleased to report on the conclusion of another outstanding year at Gaming and Leisure Properties.

As highlighted in our earnings release, we completed $1.5 billion of new investment. At the same time, diversifying our tenant base with the addition of Eldorado Resorts and Boyd Gaming. In the process, we added, as indicated, 8 new properties and increased our real estate revenue by $155 million. I'll make the observation that we sometimes are questioned about our "pipeline" and note that some of our competitors rely heavily upon that thought. We've never had a pipeline and yet we've managed to do a terrific job over the last 5 years building what we think is the outstanding company in this industry. So, and as usual today, we have most of our senior management team here with you. I'm going to turn the program over to Steve in just a moment. He will introduce, Matt Demchyk, who will -- as the last person to join us, will make a few comments to introduce himself and then we'll move quickly to your questions and our team is here to answer them as best as we can. So with that, Steve?

Thank you, Peter, and good morning, everyone. Before I get into just a couple of highlights of house cleaning matter. We also filed this morning our annual report on Form 10-K with the Securities and Exchange Commission. So you have that information available to you as well as the press release. Just a few highlights on the press release, I would point out that our fourth quarter results as it relate to EBITDA and AFFO per share, we're right on the guidance that we issued in conjunction with our third quarter of 2018 earnings release.

Additionally, just a couple of highlights. You can see on a year-over-year basis, some of those highlights you're looking at adjusted EBITDA with a 17.3% increase on a year-over-year basis and AFFO per share for the quarter at an increase of 9.1% on a year-over-year basis.

So as Peter mentioned, we are very pleased with the performance of the business during the quarter. Just moving on to some things that aren't in the press release that I want to highlight, giving you a portfolio update. As you are aware, we've got no variable rent resets here in calendar 2019. The Penn lease did have its variable reset last year, and we will not see that again until 2023 and the balance of the leases in the portfolio do have biannual or every 2-year resets and amended Pinnacle lease, the Boyd lease and the Eldorado lease, which will not be affected until the next reset 2020.

Highlighting a couple of lease coverage factors for our master leases. The Penn master lease on a trailing 12-month basis at 12/31 was covering at 1.88x. The amended Pinnacle master lease on a trailing 12 basis at year-end was covering at 1.83x and the third Penn lease the Meadows lease was at 1.92 coverage for trailing 12 as of calendar year end 2018.

As to the Boyd master lease, you heard from Boyd in their third quarter earnings call and you will hear from them on their fourth quarter earnings call next week. But in their third quarter call, they indicated that for the balance of 2018, they expected lease coverage to approach 2x. And finally, Eldorado, whom you will hear from in 2 weeks, did close into the Tropicana acquisition at rent coverage that was nearly 2x.

Finally, as it relates to the lease portfolio, the real estate portfolio in the quarter, we reversed the interest that we had accrued previously on the loan to Casino Queen, and we've ceased accruing interest income on the Casino Queen loan and have restated that balance back to its original balance of $13 million on the balance sheet. The company has hired an investment banking firm. They are in the process of evaluating strategic options, which we are staying on top of and actively monitoring the process. So we do expect to see some activity there, which will hopefully bring a stronger focus to the operating performance of the asset.

Lastly, as it relates to the portfolio, the taxable REIT subsidiary. You did see in the quarter an impairment charge related to an impairment of the goodwill associated with the Baton Rouge property. The Baton Rouge market obviously has suffered from underlying deterioration, which was really accelerated last June 1 when the smoking ban went into effect in East Baton Rouge Parish and we thought it was appropriate after testing it from an accounting standpoint to take the impairment charge, which you see reflected in the press release.

Finally, I want to touch a little bit on the balance sheet. All that information is included, but the highlights on the balance sheet are that 84% of our debt is fixed rate, just under 16% of our debt is variable rate at an average interest expense of just over 5%, with no debt maturities for calendar 2019. Our next liquidity need is out in November of 2020. So we think we clearly have ample runway and great flexibility on the balance sheet to continue to manage our business proactively.

Lastly, I'll touch on the guidance, which you see included at the back of the press release. We are guiding for the first quarter to an 8% year-over-year increase in AFFO per share. And for calendar 2019, we've provided a low and a high range of guidance, which is driven by the revenue assumptions, which you will also see in the press release, on the low side no escalators, on the high side all possible escalators in 2019 kicking in and obviously those are bound by a 7% increase in AFFO per share on the low side and an 8.5% increase on the high side. So we will, of course, be refining that as the year goes on, and we hear from our tenants further as to the likelihood and the implementation of the escalators in those leases. I do want to turn it over, you saw our press release earlier a few weeks -- 2 weeks ago, excuse me, we have expanded and broadened the senior management team here at the company, and we're very excited to have Matt Demchyk join us. Before turning it over to Matt just for some brief comments, I also do want to highlight for those on the call. You heard from our new Investor Relations firm JCIR and their representative Joe Jaffoni at the beginning of the call, and I also want to welcome Joe to the team and look forward to his contributions. So with that, I would ask Matt just to touch briefly on his background and give you folks an introduction to them. So go ahead, Matt.

Thank you, Steve. I'm very excited of the opportunity to work closely with Peter and Steve and the team of motivated people here that I so highly respect and I am appreciative of their welcoming stance towards having an additional differentiated perspective at the decision-making table. My #1 goal here is to utilize the viewpoints that I have developed over my investing career to help maximize the company's risk-adjusted returns on capital and ensure that we continue to deploy capital exclusively into portfolio enhancing accretive transactions.

Given the importance of our cost of equity to our business plan, I'm also going to be personally focused on proactively engaging with investors to help ensure that they are well informed about the merits of our business and to serve as a friendly conduit for feedback. And I'm looking forward to seeing many of you and meeting those who I don't yet know over the coming months. At the end of the day, our objective is to build the most durable cash flow stream in the triple-net lease REIT sector. And with that, I'll turn the call back.

Thanks, Matt. With that, Brenda, if you wouldn't mind opening the line for questions.

(Operator Instructions) Our first question is from the line of Joe Greff with JPMorgan.

This is actually Dan Politzer on for Joe Greff. So just given the recent volatility in the financial markets, how would you characterize discussions with property sellers and their expectations here? Would you say there is any real changes from say 6 or 9 months ago?

That's an interesting question. I don't think so. I mean, look it's not a huge line of people looking to sell today. I mean, there is a lot of activity in and around the space, but I think things are pretty consistent with where they have been, Steve -- no Dan, to your question, obviously, year-end there was tremendous volatility throughout calendar quarter 4 that I'm not sure sellers' expectations adjusted based on that volatility. As we are starting here in calendar 2019, again I don't know that sellers' expectations have been reset based on the general economic environment. It certainly feels to us generally that we're in the late innings of the economic cycle, time will tell. So you will always see opportunistic investor -- opportunistic owners looking for the chance to monetize their interest in gaming assets or other real property assets, but right now I would suggest that the level of activity is certainly not what it was before Q4 of last year.

Yes, look, I think, sellers' interests are idiosyncratic. They really are. I mean, people sell for all kinds of different reasons. There are people we're talking to now that are good prospects, but you got to want to do it. And so that's an ongoing debate, sometimes takes place over time and occasionally those situations where somebody wants to do something quickly and but all reasons are different. I don't think much changed on the pricing side, as I think, Steve, pretty well indicated.

And then just one more quick one. Given your stock has rebounded pretty significantly from a close and it's actually the highest level in nearly 18 months, how should we think about your willingness to use the ATM here?

Dan, it's unlikely. I mean, it's a tool that we have available to us. We've guided folks to where we hope to take the leverage of the company and expect to take the leverage of the company during calendar 2019. We're certainly going to get back within the band of where we'd guided the rating agencies from a leverage perspective without any activity on the ATM. The way the Board thinks about it, right, is at a current yield on the equity that is still 450 basis points wide of the 10-year treasury. We think there is still dislocation in the equity value of the company.

Next question is from the line of Carlo Santarelli with Deutsche Bank.

Peter, Steve, we've spoken in the past about the equity trading multiple relative to peers as well as relative to the broader triple-net spectrum. And I know you guys have talked a lot about 2019, making an effort to be in front of investors and what not and trying to close that gap. So my question is kind of two-fold. As you think about 2019 and the multiple gap, given your advantage kind of cost of debt, do you feel as though there is an opportunity to go out and be competitive in acquisitions with the multiple where it is? And secondly, do you feel as though there are others in the triple-net industry who are looking at this space and recognizing their equity trading multiples is at such a distinct premium that it might be worth spending more time looking at this space?

It's sort of a round about way, I guess, to get to -- look, we are totally self focused. I mean, we don't waste a lot of time thinking about what others are doing. We just came off a year, where we've made some very -- done a couple of very accretive transactions, to demonstrate that whatever one thinks about our trading multiple, it hasn't stopped us from doing business. So I think that as a given. I kind of don't care. I mean, look, do we want to do a better job for shareholders, absolutely. But our focus primarily is building AFFO safely, rationally and carefully and moving our dividends ahead year in, year out. I mean that, as a large shareholder of this company, I'm manically focused on. We don't build monuments. We're building income and that's frankly, what drives us here. So I don't see any difference this year from next. We have competitors out there, god bless them. They'll do what they do. We'll do what we do and I have absolute confidence in that.

Yes, Carlo, let me just touch on both of your questions. Just from a competitive standpoint, we obviously do have a cost of capital disadvantage that we are going to work hard in 2019 to close that gap. But you should assume that given the relationships that we've developed over the decades that we've been in the gaming business that we will continue to have opportunities that will be unique to us based on those relationships. So expect us to continue to work hard and work smart. As it relates to other triple-nets and what they might see or what their view might be of the resiliency of the cash flow that our portfolio generates from a regional gaming perspective or from those regional gaming markets, that's something obviously to stay tuned for. Peter laughed at me when I go into meetings and tell people, our occupancy is 100%. It is today, and it will be 30 years from now. So as people do start to focus on the stability of our underlying tenants, the fact that in most cases, we've got guarantors on master leases that have equity market caps of $3 billion plus. I think people will look at the valuation spread between us and other triple-net single tenant net leased guys, and that gap, if smart people are alerted to it, will over time close, is my speculation for this morning's call.

Yes. And look for this business, I like the revenue we generate here. I like our earnings profile. We pay the best dividend in the business, frankly. It is the only gaming RIET that I would own as an individual, period, and we need to get more folks to understand that. And frankly that's in part why Matt is here, to beef up our team and work on that side of the things.

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

Just wanted to clarify on the guidance range. You're assuming, I guess, the variance is based on whether the rent escalator hit. That said, PENN did guide that it will be hit and you just started your leases with Boyd and Eldorado. So is there a real risk potentially that you don't hit it or are you just being conservative?

Barry, we're being conservative. We've had some experiences over the last 5 or 6 years where we assume some things were going to happen and did not. Only our operators have clear visibility into what the operating performances of their portfolios. So as it relates to the variable rent associated with the Ohio casinos, and as it relates to the escalators, we've taken an our approach that some will call overly conservative, I think, is prudent to wait until they actually hit to start banking them.

A reminder, we get no non-public information. So we know in a sense what you know -- sense at the same time with what our tenants are doing. So we don't have an advantage there.

Got it. And then just -- look, we've been asking you guys for years about going into non-gaming -- purchasing non-gaming assets. Just question, do you think we're any closer to seeing a deal outside of gaming and what could that potentially look like?

Let me take a shot at that. Look, I think, it is probably inevitable that anybody who is now a gaming REIT will someday be something else or include something else. Because I don't know whether that runway of opportunity is going to be 3 years, 5 years, but it's not forever in any large and material way. So that's quite possible. We continue to look at all kinds of adjacencies and verticals and I mean, -- but we haven't seen it yet. And in one perverse sense, we're in a business of buying revenue. And if we can be persuaded that revenue in any particular sector is as rock solid as the revenue we have here in the gaming world, sure we'd take the leap and tell the story and hopefully it would be exactly correct. But despite the fact, I think, we looked from day one in our 5-plus years as a REIT, we have not seen anything that yet has risen to the top. So we'll continue to look and we'll see, but again, it's all about -- I think, Matt said it well in his summary. It's all about rational safe growth and not -- we're not in a business of building monuments. I can't emphasize that enough. We don't feel any particular pressure to grow at a particular rate and do this or that. I just want to make sure as a shareholder that my dividend this year or next year is not $0.01 less than it is this year and hopefully somewhat more as we move forward. So that remains our total focus.

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

This is West [Maddox] coming in for Rob Farley today. Just wanted to talk about Penn's 2 new Hollywood casino properties and maybe if you can comment on how you think those would fit into GLPI's portfolio, they are scheduled to open in 2020?

On the Penn, Morgantown and York, I assume you're talking about. I don't think we really know how that's going to shape up and it's part of an ongoing discussion, I guess, with Penn tied to our lease and so forth. I don't think they need us. If that's the implication, will that roll into our master lease, I think, not. They would prefer since they have the cash and the financing available to do it, but they will. So I'm not expecting, I think, the bigger question is what impact might it have on our existing Penn National.

Yes, West, let me try and address that. Obviously, one of the facilities that they're developing is a leasehold improvement in York. So there would be no opportunity for us there. Given the fact that there is no opportunity there they seem to be, as Peter mentioned, inclined to develop the Morgantown facility themselves. You will see in our master lease with Penn National that we do have a noncompete provision in that master lease, that noncompete provision extends 60 miles from any GLPI owned facility that Penn lease is pursuant to the master lease. Inside or if they do or when they do open a competing facility inside that noncompete zone, the variable rent will no longer be reset downward. In other words, there will be a floor that will be put in place on the variable rent at that facility as a result of the competing facility for all periods into the future. So that's the remedy that Penn is aware of and has acknowledged that exists for us in lieu of owning the competing facility.

Our next question is from the line of David Katz of Jefferies.

I wanted to just go back to your appetite for acquisitions and sort of pose a question that comes up frequently, which is that while larger scale properties and say just to use Las Vegas hypothetically may not generate the stability or the returns that regional properties do. Is there an inherent or perceived value that drives higher multiples for, let's say, Las Vegas strip property or some other market that would translate into your valuation at the end of the day. And it's one of those real estate notions again that we discuss on a regular basis and so much of the discussion has been about is -- about your valuation and why it is, where it is and what may make it change. I just wanted to pose the question and get your views?

Yes. That's an interesting observation. I mean, my quick answer is, it oughtn't to and that's -- I don't mean to be flip, but who cares where it is, tell me how reliable the earnings are. I mean, it could be a shack on the beach, I jokingly say, at some of our meetings and I'm actually serious. If you could find me shack on the New Jersey shore somewhere parked in the middle of the beach that had a reliable cash flow and we knew it was rocksolid, would I want that? Absolutely, absolutely. Do I care about a monument in Las Vegas, that's producing half the cash flow on a given investment? No. Now all that having been said, we're not unaware of the fact that there is a sheen to Vegas properties that commands a bigger premium, always has been and so forth. I think in part. So we would take that -- we're cognizant of that. But I think we've also done a better job on the road with rating agencies and with investors of trying to get them to understand the stability of our regional properties and the fact that some of these places are really spectacular. I don't think there is a whole world of people out there that just don't recognize the scale of what is out in the world beyond Las Vegas. So we're conscious. Steve, you want to add to that?

Yes, David, I would even go the other way quite frankly. I mean, if you look at the stability of these cash flows through up-and-down cycles in the regional market relative to 2008, 2009 in Las Vegas, there is really no comparison. If you look at the underlying beneficiaries, the states are the partners with the operators in these regional businesses. They can't nor will they in those limited-license markets, which most of them are, allow these businesses not to be successful. And then finally when you look at the free cash flow generation of the operators in the regional markets compared to the Las Vegas operators where the maintenance capital expenditures, the CapEx expenditures that folks make in their buildings is really over-the-top, really limiting the free cash flow generation of Las Vegas assets. We really like where we are positioned as a company and we like the portfolio of operators that we have on our master leases. So we're not going to chase a Las Vegas strip asset with the expectation there are multiple who will be rerated, because we just don't believe that the market fully understands and appreciates what we have here at GLPI.

Matt, good luck.

Thank you.

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

I have 2 questions related to the goodwill impairment charge you talked in the fourth quarter. First, I'm wondering if your assessment there was entirely related to the smoking ban impact at Baton Rouge or were there other factors at play like increased competitive pressures, for example? Second -- the second one is given that, I think, you guys test for asset impairments annually on October 1. I'm just wondering why the charge wasn't called out when you reported third quarter results in November?

Daniel, it's a fair question. Let me go into the facts first. I mean, the Baton Rouge market had a wonderful year in 2016 and early 2017. Unfortunately, as a result of FEMA activity from flooding that occurred in the Baton Rouge market that dislocated many families, but brought in a lot of economic development and economic activity. So from 2016 through 2000 -- early 2017, we saw really robust activity in that marketplace. Starting at the beginning of calendar 2018, we started to see a burn-off or runoff, if you will, of that activity will decline in economic activity in Baton Rouge that was accelerated as it related to the gaming when that June 1 smoking ban went into effect Parish wide. In terms of testing any earlier for the impairment, we really did want to wait and see if the underlying economics ever recovered. And once we got to year end, it was clear to us that with the combination of the underlying fundamentals and the smoking ban there was really not an opportunity for that market to return to where it had been in 2016 and 2017. So that's really what's going on down there and the timing associated with the evaluation.

That's a perfect answer. Let me add to Steve, to that. I mean, Baton Rouge is one of the best investments that we on the Penn side ever made. It's a terrific little property. It has -- in my recollection, is we bought about $23 million in cash flow there and over the years it has been interesting sleigh ride, never bad. But Katrina for example, we were up over $60 million in cash flow, which is stunning. So if you look at the history of Baton Rouge, it's been up and down and up and down. And as Steve points out, much of it unfortunately weather-related and bad-event related. So as the last flooding kind of started to hit -- unwind and market returned to normal, you saw an impact, of course. But the smoking ban to be sure, look we warned them down there, absolutely warned them that it was going to be a disaster. And some of these states and the zealots who are antismoking, I get it, I'm not a smoker, but don't kind of get that it has a dramatic impact. And this is probably one of the biggest impacts, not just the property we own, it's those properties as well in the market. It's been a devastation for them. Maybe they wise up, maybe they won't, but I think looking at the accounting people across the table from me -- after enough time to look at it and evaluate it, made the decision let's just take that. The good news is, we'll do better later.

Yes, Daniel, the only other thing, I would add is, the goodwill came over at spin back in 2013. So this is something as we point out in our K we disclose, we test every year. And we tested it this year in light of the performance and it just felt like it was time to take this noncash charge.

(Operator Instructions) Our next question is from the line of John Massocca with Ladenburg Thalmann.

So as you kind of look at potential investment opportunities, do you think there is an opportunity to -- and this is really speaking more with regards to things that may happen in the future rather than anything recent? But [to buy] improvements your tenants may put in place at your existing properties or does that put too much pressure on coverages for you guys and just make your contingent rent hurdles too unreliable if you will?

No. John, in fact, they have an obligation to come to us to ask us if we are interested in providing financing whenever they are doing any significant leasehold improvements. And we've heard from our legacy tenants, it's a little early for the new guys that came in as tenants in Q4. But those are things that we do evaluate. There has not been anything that's actionable. What we have done is worked with our tenants to monetize for our benefit and for our tenants benefit in certain cases unutilized or underutilized land, and this has been disclosed publicly in St. Louis. We've sold off what is now just north of a 25-acre parcel that's being developed into an entertainment and an ice-skating center that will be the practice facility for the St. Louis Blues and have about 3,000 or 4,000 seat venue for live events that will be programmed by Live Aid. So that's really more of an opportunity for us than adding incremental capital to any of our existing facilities although we do look at it all the time with them.

Yes, awesome project we're examining even now.

And how big is the opportunity? It seems like it's kind of in terms of excess land parcels, just maybe some of that could be delevering at the margins, maybe improve as something with like the ice-skating rinks, like bring in extra traffic to the casino, but it's not really game changer if you will, is that a fair assessment?

No. It's not by any stretch of the imagination, do not think of it as a game changer, but think of it at the margins as things that we can continue to do to drive greater efficiency in the overall portfolio.

Yes, look, given the scale of our business today, the good news and bad news, we've done a terrific job of building this company. That's the good news. The bad news is moving the battleship forward, it is a lot more challenging to find things that may -- but look, we're always willing to hit singles. I've come around recently to say, we'll even do some bunts. As long as it's moving the ball down the field and adding pennies even to our AFFO and our dividend each and every year, that's enough to make me happy. And look, we're always looking for the home run, absolutely, we'll swing away, but you got to see it clearly and -- but we are perfectly contend to do modest transactions as well.

I understood. And so given some of the modest transactions, I mean, what kind of consent would Casino Queen need to get from you guys in order to facilitate some kind of strategic activity? I know it's little broad in general at this point, but is there any potential there that if someone came in and was interested in operating these properties that you may be able to leverage more transactions out of that kind of a situation?

That's highly possible. I mean, as the landlord in that building in East St. Louis, any substitute tenant does need our approval.

Our next question comes from the line of Cameron McKnight with Crédit Suisse.

Question for Steve. You've got about $1 billion of notes that were issued in mid '14 that are coming due later on next year. Given that you're now investment grade, what's your best guess in terms of where you could refinance that paper?

On 10-year probably plus $260 million, Cam. $250 million, $260 million, so a low $5 million handle.

Got it. And then a slightly broader question. In terms of the broader portfolio now, any assets in particular that are flashing amber or red in terms of potential supply growth?

The areas that Penn addressed on their call last week, Black Hawk is the one place because the Monarch guys are investing a lot of capital in that market. None of the newer -- the Boston facility when it opens, if there is a Southeastern mass facility that ever opens, we set Plainridge when we brought it as a $25 million annual occupancy cost with no upside or downside. So there is no reason to be cautious or concerned there. And so those are really the only areas. I'm looking around the table. That's my memory, but those are the only areas right now that have us at least monitoring any potential situation.

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

Well, thanks, operator. I thank you all for dialing in today. We're happy to close this quarter out pretty happily and see you next quarter. Thank you.

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