Greetings. Welcome to the Gaming and Leisure Properties, Inc. third quarter 2019 earnings conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Joseph Jaffoni of the JCIR. Thank you, Mr. Jaffoni. You may begin.
Thank you, Tim. Good morning, everyone, and thank you for joining Gaming and Leisure Properties' third quarter 2019 earnings call and webcast. The press release distributed yesterday afternoon is available on the investor relations section of 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 Steven Schneider, Chief Financial Officer at Gaming and Leisure Properties. Also joining today's call are Desiree Burke, Senior Vice President and Chief Accounting Officer, Brandon Moore, Senior Vice President, General Counsel, and Secretary, and Steven Ladany, Senior Vice President of 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 to all. I will begin with my usual few comments. Obviously, we have our entire team here today to answer any and all questions that you may have. Steven Schneider will obviously provide a lot of detail. Look, we're very pleased to present another solid quarter with very good performance from each of our major tenants. I'll add that those of you who have followed us for years know that we are very aggressive people. That hasn't changed. We continue to look at a number of opportunities. I want to highlight what we generally do each quarter. We're in no hurry to rush into any transaction that is less than optimal for our company. That's an inevitable question. What are you guys looking at? We're looking at a number of things.
Again, patience is, I think, one of our strong suits. We're looking ahead to a strong year in 2020. In the meantime, we continue to perfect our balance sheet with this summer's debt refinance. At the same time, using our free cash flow to pay down debt and position ourselves for whatever will come next. We're very pleased with where we find ourselves this quarter. With that, I'm going to turn it over to Steven Schneider, and then we'll handle your questions. Steve?
Thanks, Peter. Good morning, everybody. As Peter said, it was a very productive quarter. During the quarter, we certainly strengthened the financial foundation of the company by executing on our refinancing. In addition to the refinancing, we did hit our revenue guidance, and we were able to exceed our adjusted EBITDA guidance by 1% and exceeded our adjusted FFO guidance by over 2%. Real quickly, I'll just go through one housecleaning matter. We did file our quarterly report on Form 10-Q this morning with the SEC, so that any detail you want to find or want to learn about, you can find in it. Highlighting the portfolio, as you know, we are and remain 100% leased.
In terms of the individual leases in the portfolio, the Penn master lease, as was disclosed on their earnings call yesterday, they achieved sequential improvement in their coverage factors as a result of their continued margin initiatives. One highlight on the Penn master lease I would make is that in February of next year, the Resorts Tunica property will be removed from that master lease, you will see a reduction in the count of facilities under that master lease. It has been contemplated. We just provided the notice of termination of the ground lease effective next February. Moving on to the amended Pinnacle master lease, also a Penn lease.
We have completed our review, as the Penn folks stated on their earnings call yesterday, of the lease year rent coverage as of the end of the lease year, April 30th, and we mutually agreed with our tenant that the actual coverage was 1.81 times pursuant to the provisions of the lease, resulting in a realization of nearly $1 million, actually $979,000, in annual run rate escalators on the amended Pinnacle master lease. We will realize the rent and a true-up payment of approximately $650,000 in quarter four of this year, the quarter that we are currently in. Those will be realized between now and year-end, reflecting the period from May 1st, the lease anniversary date, through year-end.
We want to thank our tenant for providing their full cooperation in realizing this outcome and believe it highlights the transparency afforded both parties under the master lease. In terms of the Eldorado master lease, the coverage of that lease was 1.98, as disclosed by our tenant, reflecting a sequential improvement of five basis points
On a quarter-over-quarter basis and demonstrates the success of Eldorado's business model. As of October 1st, we did realize the full escalator under this master lease, and we've also now, as of October 1st, seen an increase in the interest rate on the Lumiere loan from 9.09% to 9.27%. As of the anniversary date of the lease on October 1st, we, as required by the Missouri regulators, released the deed of trust securing the Lumiere loan and our discussions with Eldorado on the substitution for this property into the master lease remain ongoing. As it relates to the Boyd master lease, they certainly commented on their earnings call last week. They're very satisfied with the performance of the Midwest assets under that master lease, and they are covered at 1.9 times on a trailing 12-month basis as of September 30th. Moving on to the Casino Queen property.
As you know, their coverage is still below the minimum required coverage under the lease, although it has improved sequentially to 1.33 times on the trailing 12-month basis as of September 30th. We believe that that modest improvement is indicative of the performance improvements that have been put in place now starting to take hold. Additionally, as it relates to Casino Queen, an institutional investor, Standard General, has been approved by the regulators in both states as the new secured lender to the Queen. They've deployed some of their operational talent into the business at this point in time. Lastly, The Meadows lease. We were positively surprised to receive the full 5% escalator on the anniversary date of that lease at 9/30 as a result of the coverage being 2.06 at the 9/30 trailing 12-month year end.
Moving to the TRS, the taxable REIT subsidiary did significantly outperform in the quarter, achieving EBITDA of almost $7.5 million, which is an over 11% improvement or 11% better than our previous guidance. Really reflects the discipline our management team has employed down in both Perryville and Baton Rouge in achieving stabilized revenues on a year-over-year basis in the quarter in light of the market conditions in Baton Rouge. As far as the balance sheet update, I think everything is pretty much in front of you in the press release. I will acknowledge that we did achieve better than anticipated results in the tender offer for our 4 7/8 notes due in November of 2020. We did achieve 78.5% participation in that tender offer, which resulted in a significant savings compared to the make-whole call premium that was embedded in the notes.
As a result of the new financing, we were able to extend our debt maturity profile by over a year while reducing the company's average borrowing cost by over 18 basis points and reducing the company's exposure to variable rate indebtedness from 15% previously to under 9% as a result of the refinancing. The outcome of the refinancing and the balance sheet statistics as of 930 resulted in gross leverage of 5.54x and net leverage at 930 of 5.52x. In terms of liquidity, you can see we're drawn at quarter end on $60 million on the revolver, leaving over $1.1 billion of available capacity under the revolver. Lastly, on the balance sheet, there was no ATM activity during the quarter.
Finally, as it relates to guidance, you will see in our press release, we have increased our guidance for the balance of the year above the high end of the previous range that was provided with our last quarterly earnings release as a result of those rent escalations, the interest rate savings from the refinancing, and the TRS performance. With that, Tim, I would turn it over to you to make it available for questions.
Thank you. At this time, we will be conducting the question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from the line of Carlo Santarelli of Deutsche Bank. Please proceed with your question.
Hey, good morning, guys. Peter, Steve, when you think about in a limited kind of acquisition environment, not saying that's what you were saying, but in the absence of doing deals, how are you guys kind of governing your thoughts on the dividend at present? It looks like you're kind of in that 78%-80% dividend payout range as it pertains to AFFO. Moving ahead, if we looked at 2020 in the absence of transactions, how do you kind of foresee the dividend growth?
That's a fair question. Look, we have targeted 80%, I'm just speaking from my point of view as a shareholder, I'm for pushing dividends as far and as aggressively as possible. As a manager, frankly, managing our balance sheet, paying down debt, focusing on the health of the company is goal 1, 2, and 3. That having been said, I think we have room. Obviously, that's an issue to be discussed with our board. Steve, do you want to-
Yeah, Carlo, Peter said it well. We've focused on an 80% payout ratio, 80% of AFFO.
We have increased leverage in the company as a result of the transactions that we completed a year ago. We've used that free cash flow after those dividend payments to de-lever. We're well on pace to get to our goal of being below 5.5 and be somewhere between 5 and 5.5 times. It really does provide us the flexibility to look at the dividend payout ratio, to look at de-leveraging, to look at stock repurchases if we get to a point in time where we've achieved our leverage target. All of those three variables are kind of in the mix, but you should feel comfortable being guided by our historical practices of a payout ratio close to 80%.
Great. That's helpful. Steve, if I could just, with kind of the limited variable rate debt that you have right now and somewhat limited kind of revolver outstanding debt right now, does that 5-5.5 range feel more comfortable towards the high end when you think about 2020?
In the absence of any transaction in this market environment, yes.
Okay.
By this market environment, I mean the macro market with interest rates trending where they are.
Understood. Thank you, guys.
Thanks, bro.
Thanks, Carlo.
Our next question comes from the line of Nick Yulico of Scotiabank. Please proceed with your question.
This is Greg on with Nick. I just have one quick question. Trying to understand, on the Resorts Tunica ground lease cancellation, I'm not sure the competitive environment necessarily support it, but could a new operator come in and reopen that casino?
Good morning, Greg. Look, it's a fair question. There has been capacity taken out of that market in the past. In fact, the largest facility, the old Grand facility, which became Harrah's, is still sitting there with three hotels on it and an overgrown golf course. We have issued notice of termination of the ground lease. The facility will be turned back to the ground lessor without any gaming equipment, with all of the gaming pieces removed, and you should assume every piece of movable equipment removed by our tenant, Penn. I would suggest that given the market dynamics down there, it's highly unlikely, and it's not something that we are going to keep in our portfolio as an independent lease.
Right. Okay. I guess that makes sense. Actually just one more quick one, Steve. For the retroactive lease audit with Pinnacle, how does the rent work from an accounting perspective? Is there any differences there?
No, there are no differences. There will be, as I mentioned, payments that will have commenced or will be commencing here in the quarter. It's a $979,000 per year, divide by 12, that's the monthly amount. There'll be a catch-up payment to reflect the payments that were due, starting with the April anniversary of the lease, through the quarter, and then just monthly on a go-forward basis.
Yeah, let me add that the issue was simply a difference in treatment of certain expenses between Pinnacle and Penn. What Penn did was logically conform the two when they brought the thing together, but it had the unintended effect of impacting our lease payments. We had a discussion about that and obviously came to a very amicable settlement. Done and over.
Great. Thank you.
Thanks, Greg.
Our next question comes from the line of Thomas Allen of Morgan Stanley. Please proceed with your question.
Hey, good morning. Obviously in the quarter, there was a big transaction with Blackstone buying the Bellagio. In general, is there a lot of more private equity interest in this space and kind of what are you seeing out there? Thank you.
Thomas, good morning. Look, private equity has exhaustive pools of capital that they are looking to deploy. The numbers that I have heard out of the Blackstone private REIT are staggering in terms of the monthly cash that they are generating in that business. I think private equity will continue to look at any opportunities where they see potential dislocation to put capital to work in an accretive way. I don't think that this is the last, I don't think it's the only experience that we'll see with private equity being involved in gaming or in fact, in gaming real estate.
Helpful, thanks. Just on the Pinnacle deal and the escalator that you guys figured out this quarter, was the accounting agreed upon on a go-forward basis, or do you just kind of reconcile the past or this escalator, and then how is this structure different going forward? Thanks.
Thomas, the way to think about it and why I tried to comment on it in my notes in the introduction, there are remedies that are available to the tenant. There are remedies that are available to the landlord whenever there's anything at issue. In the past, we had never faced an escalator where we were going to get a zero. This was the first time that we were ever looking at an escalator of zero other than the situation with Casino Queen. I'll catch myself. As a result of that, we thought it prudent on behalf of our stakeholders to try and understand what went on, because a lot happened with the merger of Pinnacle into Penn in October of 2018. We worked with them. They were very cooperative.
It was a very friendly effort to understand and to appreciate why the accounting for the lease and accounting for the rent coverages under the lease, as had been done and conducted by Pinnacle previously, was where our expectations remained. That really gets to exactly what the difference was. We wanted to make sure and did, that there were no changes in how things were accounted for as a result of that merger.
Helpful. Thank you.
Thanks.
Our next question comes from the line of Jordan Bender of Macquarie Group. Please proceed with your question.
Morning. Thanks for taking my question. Over the last three or six months, have you seen conversations from operators that still own all their land, pick up, say, from the last year or two?
Jordan, first of all, good morning and thank you to you and Chad for the work, particularly you, the work that you've put in terms of understanding our asset class, educating yourself around GLPI, and your initiation of coverage. We welcome you joining our call.
Thank you.
In terms of your question, they're both. If you listen to the Boyd earnings call or read the Boyd transcript, there are a number of operators, and I don't mean to single them out, but those comments are there. There are a number of operators that feel we are relatively late cycle in terms of the U.S. macroeconomy, and therefore, feel retaining the real estate provides them a cushion if or when their instincts are correct and we go from economic growth to economic contraction. On the other hand, there are investors, there are entrepreneurs who are always looking to take capital off the table. There are still folks out there that are looking to monetize as much of their real estate as possible. There is no single template that I would be comfortable with. You feel differently, Peter?
No, I feel pretty much the same.
I don't think the environment's changed for better or for worse. It kind of is what it is. We overturn a lot of rocks looking for something of value, and we remain totally focused. Look, it gets to be I kind of buy the late cycle idea. That seems to be a sense that people are being very cautious in what they choose to do. I wish we could give a better, clearer answer, except to say there are a few things that we're looking at. I presume others are doing the same. If we see the stars align and get the kind of accretion that we think merits action, then we'll head down that path. I'll speak for myself. It's my usual vague answer because it's really not a whole lot more we can say about that.
We're very focused on growing, but again, I think I said in my opening comments, it's never growth at any cost. We'll just assume manage our balance sheet, keep ready for whatever's next and stay tuned.
Perfect. Thanks, guys.
Thanks, Jordan.
Our next question comes from the line of David Katz of Jefferies. Please proceed with your question.
Hi, good morning.
Morning, David. Morning.
Thanks for the sort of detail and color. I wanted to just go back to the Las Vegas Strip for a moment. This does seem as though it's a moment for the Las Vegas Strip that has some rarity where things become available. I certainly hear your commentary and appreciate the commentary around growth not being at all cost. How do you feel about the notion that Las Vegas real estate could have some positive effect on the inherent value of what you own and on the portfolio and ultimately in your stock?
Well, look, the quick answer is we hope that's the case. We're kind of looking every day at my little handheld here to see what prices are doing to make some judgment about whether the market has quickly embraced that idea. It isn't bad that Blackstone has come into the space, validated. Again, Bellagio is a very, very special, irreplaceable property. Look, it doesn't hurt. We think it is positive. Time will tell just what effect it has on pricing. Yeah, David, if I may. With those pools of capital looking for homes, I think it obviously will, over time, have an impact. I don't want to leave anybody on the call with the impression that Las Vegas and the portfolio that we have in terms of regional gaming assets are directly comparable.
In fact, we think the regional gaming assets are more secure and provide greater stability because where else do you find state governments that are actually revenue participants? I mean, there's so many real estate investors that look for opportunities to put capital to work where the governments are paying lease payments. We're even above that. Our facilities are generating substantial funding for these state governments. We're not funded by state governments. We are funding state governments in terms of the underlying operations of our business. We think over time, institutional capital will come to appreciate that.
Right. I suppose the essence of my question is, does it pay to overpay just a little bit to get something that may be constructive or helpful over the long term? That's not intended to be a preconceived or leading question.
Fair. It's a fair question. Go ahead.
Well, look, in terms of overpaying, I laugh, right? When people come to me and say, "Take that cell on that Excel spreadsheet and expand the decimal places out to four, and then you'll find the accretion on a per share basis." That's really not something that we've made a practice of. Likewise, doing something that is credit dilutive, where all of a sudden, the portfolio after the transaction is weaker than the portfolio before the transaction, and oh, by the way, you had to go to that fourth decimal spot to find possible accretion. Those just aren't the kinds of transactions that we would ever be comfortable with. Now here, as we said earlier, maybe being a little late cycle, taking on incremental risk without appropriate compensation just doesn't feel this is the time to do it.
Yeah, I view my, and our requirement as managers is to protect the values that we've built in this company. That's got to be goal number one. There's no transaction we have to do. I say on the road all the time, we are not in the monument building business. We're in the cash flow generating business, and I want to keep that number moving ahead as it has every year since we've been public in this business. Year after year after year and get there by any means possible, but not at any cost.
Yeah. This is Matt. I'd also add, to the extent we do any transactions and we match fund them, I mean, we're effectively selling a piece of our portfolio at what we think is a really attractive multiple. To overpay really would go against getting that positive spread for our shareholders. There's a value to diversification, and there's a place for everything in the portfolio at a price. Given the current prices in the environment and the low risk premium, it doesn't line up right now to make sense.
We're already the most diversified company in the gaming space.
Appreciate it. Thanks very much.
Thanks, David.
Our next question comes from the line of Barry Jonas. Jonas, pardon me, of SunTrust. Please proceed with your question.
Yeah, thanks. Just to close the loop on this Bellagio transaction, have you seen any change in seller expectations in sort of the non-high-end Strip or just the regional markets around the multiple? Is there an understanding that this is very unique and maybe not applicable to the rest of the market?
I think you've answered it, but I'm watching Steven Ladany shaking his head. Why don't you step up, Steve? Get some more people involved here.
Yeah, I mean, I can't speak for what may be going on with other Strip assets that are currently rumored to be in play directly. I can tell you in the regional markets, the conversations that are being had, I don't believe that sellers' expectations are currently taking the 17 times comp and applying it to their marketplace. I do think people view Blackstone as a unique buyer. I think people view the Bellagio as a unique asset, and because of that, there has not been a direct correlation to seller expectation.
Okay, great. Just curious about the international pipeline, maybe you're looking at stuff out there and also curious where international stacks up relative to non-gaming domestic deals. Thanks.
Yeah. Barry, this is Steve. We've talked in the past. There is a very robust commercial casino industry north of the U.S. and Canada in the different provinces. There is activity all the time out there. For us, as a REIT, it's really a matter of making sure that we can bring back the income without any kind of tax friction, any kind of excise taxes or anything like that, since REITs are a phenomena of the U.S. tax code. Canada and most of the EU countries are places where there are methodologies to be able to do that. We do continue afoot in terms of looking at those opportunities.
Yeah, and just from where that stacks relative to non-gaming?
Well, in Canada, the mechanics are very similar. It's high tax, high barriers to entry, limited numbers of competitors. That is probably a much higher priority because we just have not found non-gaming opportunities that exhibit the same resilience of the cash flows that our current portfolio generates.
Great. Thanks, Steve. Thanks, guys.
Thank you.
Thank you.
Our next question comes from the line of John Massocca of Ladenburg Thalmann. Please proceed with your question.
Good morning.
Hey, John.
Good morning.
I know it doesn't really change from an accounting perspective, but given Standard has kind of entered in to take a role at Casino Queen, does that change your thinking on the potential of getting some kind of value back from the loan you made there?
Time will tell. We obviously are an unsecured lender there, and we will continue to pursue any and all remedies available to us as an unsecured lender. While we do continue to collect on a timely basis the rent pursuant to the lease. Standard General, as you may know, they've been very active in gaming, Aliante, Twin River, Greektown. They do have a track record and they have a bench. They are the secured lender. They will certainly be taking the lead on this. As we said on our last call, if there is any recovery under the unsecured note, which we have written off, it will only be realized when the check clears.
Okay, understood. I guess, are you seeing any more, as the expansions in kind of Pennsylvania, the mini casinos kind of start to take root, are you seeing any opportunities there potentially, as things get a little more tangible, maybe people start thinking about what their long-term plans are for those properties?
Yeah, that's a fair question. I think what is becoming clear is that five is probably the number, not 10, because these last auctions have not resulted in anything. I don't know if they're up to two or three at this point in time of failed auctions.
Right. Yeah.
It's five facilities. The five facilities are well dispersed as they were required to be, since they had to be outside of the 25-mile radii restrictions around existing facilities. We have looked at the five. We've had some conversations, but at this point in time, there clearly is nothing for us to announce.
Okay. That's it for me. Thank you very much.
Thank you.
Thanks, John.
Our next question comes from the line of Joe Greff of J.P. Morgan. Please proceed with your question.
Good morning, everybody. My questions were asked and answered. Thank you.
Thanks, Joe.
Thanks, Joe.
Our next question comes from the line of Robin Farley of UBS. Please proceed with your question.
Hi, thank you. It's Albina for Robin. Regarding recent transactions involving JACK Entertainment by one of your competitors, I was wondering if you could talk about competition there and your interest level in those assets and whys and why nots, and while we are at it, maybe sort of your recent thoughts on transaction market in general at this point at your end. Thanks.
Sure. Yeah. In addition to the comments that we made earlier on the call in terms of the transaction volume, the transaction that you're referencing, the specific circumstances were obviously an entrepreneur who is looking to take his capital off the table, and did it in the form of pretty much 100% of the financing coming from a sale-leaseback or from a loan from the counterparty under the sale-leaseback. Quite candidly, the risk profile of a transaction like that with an owner that takes all of his capital off the table really feels like a free option on whether or not the economic cycle continues or doesn't. We at GLPI are really not in the business of granting free options to counterparties. That's really the commentary I would have. Peter, is there anything else you would say about it?
No, I think that says it very well. It's just not a place we wanted to be.
That's right. Thank you. You mentioned last quarter that you saw some early signs of pickup in Louisiana as you anniversaried the smoking ban there. Any recent thoughts of the trends? Thanks.
Yeah. You saw in the quarter the revenue at the TRS stabilized on a year-over-year basis, roughly. You obviously see what the Louisiana reports are as they come out every month. Part of it has certainly been margin control, margin improvement. Now that we've anniversaried as of June, we are still seeing some green shoots of actual year-over-year growth. If you look at that Baton Rouge market, it's been the most impacted, the most depressed in the state in terms of year-over-year growth. We are finally starting to see some signs of stabilization. There's nothing that leads us to conclude differently than our last call.
Thank you. That's it for us.
Thank you.
Thank you.
Our next question comes from the line of Daniel Adam of Nomura. Please proceed with your question.
Hey, good morning, guys. Thanks for taking my question. Just one for me. I'm wondering to what extent, if at all, do you think MGM's increasingly vocal strategic focus on becoming more asset light will lead to other owner operators who maybe previously were not considering sale-leaseback to maybe reconsider their strategies? Thanks.
Daniel, that's a great question. That's obviously what is top of mind for the folks that are on the real estate committee at the board level at MGM. I think it is going to take some time to play out, and I think over time, hopefully your instincts are correct that others will see the merit to deploying their balance sheets in ways other than real estate as a way to facilitate growth and value creation. Obviously there are now two comps on the board, and the two comps are Penn and now MGM, although MGM still has a number of owned assets, international assets, other things. It's probably not as pure play an operating company as Penn is. We'll just wait and see, and believe me, all the operators are certainly paying attention to it.
All the operators are weighing how far they're comfortable going in terms of monetizing real estate without having any adverse impact on their overall enterprise valuation.
Okay, great. Thanks so much, guys.
Thank you.
Thanks, Daniel.
At this time, there are no further questions over the audio portion of the conference. I would like to turn the conference back over to management for closing remarks.
Well, I guess we get to thank you all for dialing in this morning. This is the kind of quarter we like to report, and looks like we're going to wind up a very strong year here at GLPI. We're quite pleased with that.