Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q3 2023 Earnings Call Transcript

Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Greetings, and welcome to Gaming and Leisure Properties Inc Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Jaffoni, Investor Relations. Thank you, Mr. Jaffoni, you may begin.

Joe Jaffoni: Thank you, Andrew, and good morning, everyone, and thank you for joining Gaming and Leisure Properties third quarter 2023 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section on the company’s 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 materially 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 the risk factors and forward-looking statements contained in the company’s filings with the SEC, including its Form 10-Q and in the earnings release, 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 of Gaming and Leisure Properties. And joining Peter will be Brandon Moore, Chief Operating Officer, General Counsel and Secretary; Desiree Burke, Chief Financial Officer and Treasurer; Steve Ladany, Senior Vice President and Chief Development Officer; and Matthew Demchyk, Senior Vice President and Chief Investment Officer.

With that, it’s now my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Peter Carlino: Well, thank you, Joe, and good morning, everyone. As always, you will hear from most of our team this morning, though almost everything relevant has been highlighted in our earnings release. However, let me underline these — a couple of accomplishments this quarter. We expanded our footprint with the addition of the Hard Rock Casino in Rockford, Illinois, by signing a 99-year ground lease generating an initial $8 million in rent. Plus, we’ve agreed to fund up to $150 million of construction costs at 10%. This construction, you should know, is well underway, and the temporary facility there is doing exceedingly well, with great management looking at the Hard Rock Group going forward. And as you recall, we sold our Hollywood facility in Baton Rouge to Casino Queen.

And as part of that sale, we retained the right to design, build and construct the landside facility, eliminating our old boat. Our $78 million spend will produce a yield of 8.5%. The new casino is doing spectacularly well. And I must say, for the money invested there, to say this is an issue of personal pride, it’s a terrific facility, and it’s kicking butt. So — but I’ll leave to the Queen folks to release the numbers when they’re ready to do so. But performance numbers are terrific. As part of managing our design build capability, we hired Jim Baum, who was our Head of Construction at PENN National in my time there. Our team here with Jim built many round-up casinos and major projects over the years. Now Jim gives us the ability to assess and monitor the flow of money into new projects or expansion of existing properties, and we have a number of those on the horizon.

With that capability in mind, we acquired the land and certain improvements of Casino Queen Marquette, with an annual rent increase to our Queen master lease of $2.7 million with a commitment of at least $12.5 million for new construction, perhaps more at the property. I should highlight, it’s not our goal to become a construction company, but Jim expands our capability to keep an eye on money as it’s put out in these construction situations brings a great deal of experience, plus we are doing more thorough examination of our properties, oversight, understanding utility costs, some of the things that we need to know these days. And making sure that the major systems are inspected on a periodic basis. Jim runs that process as well. So I had suggested over the last couple of quarters that 2023 would be a good year for us, and I think it’s going to pan out to be a very good year for us.

And looking at our probable pipeline, 2024 should be strong as well. So with that, I’m going to turn it over to Desiree.

Desiree Burke: Thank you, Peter. Good morning. For the third quarter of 2023, our total income from real estate exceeded the third quarter of 2022, once again by over $25 million. The addition of the Bally’s, Biloxi and Tiverton properties drove an increase in cash flow income of about $12 million. The Tropicana Las Vegas land lease increased our cash rental income by $2.5 million. The Rockford acquisition increased cash rental income by $700,000. The Casino Queen Marquette acquisition and the Baton Rouge landside development increased cash rental income by $900,000. The recognition of our escalators and percentage rent adjustments on our leases added $2.9 million of cash rent. And the combination of higher noncash revenue gross-ups, investment in leases and straight-line rent adjustments drove a collective year-over-year increase of approximately $6.6 million.

Our operating expenses were impacted by the prior year recognition of a onetime gain due to the sale of the Tropicana building and other noncash increases such as depreciation. We still anticipate an annualized rent reduction in the amended PENN lease percentage rent between $5 million and $6 million beginning in November of this year, which was negatively impacted by casino closures from COVID during the 5-year reset period. We also expect full escalation of $4.2 million annualized on this lease. In addition, $3.5 million of escalation on the PENN 2023 master lease. Also, around 10 amended Pinnacle and Boyd master leases have rent resets occurring on May 1, 2024. While it is too early to predict with confidence, we expect these resets will increase percentage rent adjustments because the resets that occurred on May 1, ’22 included months where the casinos were closed due to COVID.

From a balance sheet perspective, our pro forma net leverage is at 4.74x EBITDA. We raised approximately $211 million at a net price of $48.24 under our $1 billion at-the-market program this quarter, which we used primarily to fund the Rockford transaction and repay some short-term borrowings. Our current rent coverage ratios remained strong, ranging from 1.96 to 2.78 on our master leases as of the end of June 30. We have refined full year 2023 guidance for AFFO per diluted share in OP units to a range of $3.68 to $3.69 per diluted share, which now includes the impact of Rockford and the Marquette transactions. Please note that this guidance does not include the impact of future transactions. With that, I’ll turn it back to Peter.

Peter Carlino: Okay. Thanks, Desiree. Matt, do you want to add some comments up front?

Matthew Demchyk: Sure. Thanks, Peter, and good morning, everyone. Our decision to use our ATM program during the quarter was driven by the health and composition of our investment pipeline. The quarter also prevented a unique event with our addition to the S&P 400 MidCap Index. The $200 million that we issued bolsters our offensive capability. Done $100 million in proceeds utilized already for Rockford, the remainder allows capacity for new opportunities. On the topic of new opportunities to grow the portfolio, we remain disciplined thoughtful and measured. In this environment, traditional sources of capital are not as abundant and are also proving to be less predictable. At the same time, the value and the kind of bespoke solutions that we offer is as relevant as ever.

Our recently announced Rockford ground lease is a prime example of what is possible in this environment. A relatively bite-sized $100 million 99-year ground lease at an 8 cap or about 30% of overall development cost with 2% fixed escalation would have been unthinkable just 12 months ago, when banks and other providers of capital were much more aggressive. We’ve in effect, waited for the world to come our way, and it’s beginning to. Over the past year, we have been comfortable waiting to be throwing strikes. Rockford was a strike. And the current environment holds the promise of throwing a few more. We will see. Dialogue with potential counterparties has been healthy around a number of generally smaller potential opportunities and we remain highly focused on risk-adjusted returns in this environment.

As Peter likes to say, many are called and few are chosen. No mention of opportunities would be complete in this environment without a discussion around funding. Our funding philosophy remains the same: do it right and sleep at night. When we approach transaction funding and our overall business model, you can expect to see the same continued discipline around match and prefunding that results in GLPI locking in transaction accretion for the benefit of our shareholders, and avoiding equity overhang and avoiding what I’d like to call, getting off sites. Our leverage and liquidity are at levels that strengthen and support our business model, with net debt in the high-4s, a staggered maturity profile, our next maturity not due until next September, and over $1.8 billion of available liquidity between our revolver and quarter end cash position.

Our balance sheet continues to be a solid foundation for all that we do, and you should expect that to continue. Overall, we remain focused on all aspects of our business with a goal of maximizing long-term intrinsic value per share. We also appreciate the partnership we have with all of our shareholders. Thank you for joining us this morning. I’ll turn things back to Peter.

Peter Carlino: Well, thank you, Matthew. I appreciate that. And with that, operator, let’s open the floor to questions.

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Q&A Session

Operator: [Operator Instructions] First question comes from the line of Greg McGinniss with Scotiabank. Please go ahead.

Greg McGinniss: Given the broader economic backdrop and elevated interest rates. How is that impacting your underwriting, your targeted cap rates or investment spreads, types of transactions you’d like to do and the availability of those deals? And then if you could also just touch on expected investment spread on the Rockford deal as well. So our math is putting it at like a 30 basis point investment spread, but just thinking about — how are you guys thinking about it?

Peter Carlino: Matt, why don’t you take that?

Matthew Demchyk: Well, taking a step back and looking at the macro environment, I mean, clearly, rates are up, volatility is up. We see economic and geopolitical forces that make certainty a lot more challenging, and we’ve got still a lot of money in the system from the printing that the Fed did effectively. And our goal is really to be agile and adaptable the environment. So we’re playing against the new defense and we need different places to play. And we still stay resolute in our goal also maximizing long-term intrinsic value per share. So you’ve seen a lot of this in the actions we’ve taken in the previous quarters to position ourselves for an environment like this, getting our balance sheet at the leverage level we talked about.

And also focusing on really the simplicity of match funding, prefunding and finding accretion. So I mean, people seem to detach in conversations where cap rates, where funding costs. And for us, it’s all about a risk-adjusted spread. And Peter’s point on the Rockford transaction. I mean, they have a ground lease to be at that part of the cap stack with an 8 yield out of the gate and a decent spread. So look at the capital we raised during the quarter at 48 handle you can calculate the spread, it’s very healthy there, very healthy for our business and value accretive. One thing that seems to be missed in the environment by maybe some is, the need to check 2 boxes with acquisitions. Not just the box of initial earnings accretion but also the box of — just actually add value to the business over the long run.

And when you look at the deals we do, there’s a lot of subjectivity qualitative and quantitative factors that go into the latter and we strongly believe that Rockford checks both boxes. And the things that are in our pipeline are generally smaller, so they enable us to be really balanced with our funding. But we ask the same questions, and we have the same goals. Does that answer what you’re looking for?

Greg McGinniss: Yes, I think we can get what we want out of that. Thanks, Matt. Looking at Queen Baton Rouge, I can appreciate you guys not wanting to disclose ahead of them. It does look like looking at the gross gaming revenue, it was up like 85% year-over-year. So pretty significant job there. However, they also have the Belle Baton Rouge, which saw a bit of a decline year-over-year. And I know Caesars was looking at doing an investment there before selling the property. Just curious what might be happening there? You also bought a couple of buildings nearby. So curious what that was for, and then how it even works in terms of making additional investments there as the assets kind of still under the casino — sorry, the Caesars master lease, while being owned and operated by Casino Queen, just — any details you can provide would be helpful.

Peter Carlino: I’m going to ask Brandon Moore to speak to that. Brandon is very close to that issue.

Brandon Moore: Yes. I guess I’ll start with the last part of the question is whether or not that will be moved to the Casino Queen lease from the Caesars lease. And the short answer is yes. We anticipate moving that property formally over from the Caesars lease to the Queen lease. The thing that was holding that back was a small piece of litigation involving two of the leased properties that’s now been resolved. And so we’re working to move that property over. The bigger question on what’s happening with the Belle, I think, is probably a better question for Bally’s than it is — or for Queen than it is for us. But clearly, they’ve made some — they have put in an application to do a landside move off the boat into the atrium there at the bell.

I think that’s still being evaluated, and we’re currently evaluating what our role in that will be. But I think if we can play a role in moving that land side in a way that’s accretive to the shareholders, we’ll certainly be a part of that. So I think there’s more to come on that. We’ve been focused more on solving the legal issues there and being able to move that property into the Queen master lease, and I think we’ll be able to do that shortly.

Peter Carlino: Yes. Look, it’s right in the sweet spot of what we do and coming off the heels of a terrific job patting ourselves and our team on the show for what we did down the road, if you will, with the old Hollywood property. It really is quite exciting. So I invite anybody to get out and take a look at — that $78 million spent in gaming. So anyway, you’ve got a good answer. We’d love to participate if it fits and fits their desire.

Greg McGinniss: Last question for me. I’m thinking about your kind of commentary on leverage, how are you thinking about addressing the $400 million term loan coming due next year? Are there any plans to take that out early or address it early or potentially just paid off using cash, cash flow or ATM?

Desiree Burke: It’s actually a $400 million bond that isn’t due until September. Yes, and due in September 1 of ’24, and all of those are options. I mean, we look at our cost of borrowing or cost of raising equity on a daily basis. And obviously, we have free cash flow each year. So we haven’t concluded at this point that you can stay tuned for that, but know that it’s definitely on our radar.

Greg McGinniss: Alright. So is the overall plan to be reducing leverage from here?

Matthew Demchyk: So we mentioned last call, we’re at a steady state place we like, and any incremental delevering really prefunding opportunities and based on the health of our pipeline that we’re effectively at our sweet spot in this at this level in this environment. So there’s no need to proactively delever for its own sake. It’s really to do things offensively.

Peter Carlino: Yes. Desiree pretty well answered it, that this is an everyday event for us. Look, we’re in the finance business. We’re looking at bank, we’re looking at bonds. We’re looking at equity. And we’ll take advantage of any one of the 3, if they line up in our gun site. So we’re going to be opportunistic where we can but realistic at the same time.