Greetings, welcome to the Gaming and Leisure Properties second quarter 2018 earnings conference call. At this time, all participants are in 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, Hayes Croushore. Please begin.
Thank you, Darren, good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' second 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, 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, Steve Snyder, Senior Vice President of Development and Interim Chief Financial Officer, and Desiree Burke, Chief Accounting Officer. I'd like to turn the call over to Peter.
Well, thanks, Hayes, good morning, everyone. As always, I think we have provided pretty detailed information that is there for your examination, usually, I limit my comments to just a few things that might be helpful and leave to you to ask the questions that you would like. I might underscore that we previously announced the acquisition of Tropicana Entertainment earlier in the quarter, significantly, we did complete a refinancing of our 2018 debt maturities, which is an issue that Steve Snyder will spend a few moments with you describing in just a moment. Additionally, this quarter, I think that the company continues to work towards closing the Tropicana transaction along with the Penn National, Pinnacle Entertainment transaction as well.
Penn has announced publicly that they expect that transaction to close somewhere in the fourth quarter, and we're thinking that the Tropicana transactions would close before year-end as well. That adds, and will add 8 new properties to our portfolio with an annual rent of approximately $156 million at a very attractive blended cap rate. Interestingly, for me at least, things move quickly. This fall will be almost our fifth year as a REIT, having spun from Penn. I think I'm particularly pleased with what we've been able to accomplish over these last five years, and adding these new properties is a terrific way to sort of round out the first five. With that, Steve, do you want to-
Yeah, go ahead.
Thanks, Peter. Good morning, everybody. I just want to touch on a couple of highlights. In addition to today's press release, you will also see we filed our 10-Q earlier this morning. Any questions or any specific detail that anybody wants to drill down on, it's out there in the Q, which we filed with the SEC at 7:00 this morning. Just to touch on a couple of things from the press release, just a brief portfolio update. On the Penn master lease, as Penn National indicated in their earnings release last week, in the current lease year through June 30th of this year, through the end of the quarter, the rent coverage on the Penn master lease was 1.89 times.
As they indicated in their call and we've indicated in our guidance, we are coming up on the fifth anniversary of the lease on November 1st, October 31st of this year. As of that fifth anniversary, the variable rent will be reset. The reset of that variable rent will be a one-time reduction of an annualized amount of approximately $11.5 million that will then prevail for the next five-year variable rent period. We won't see another reset on that variable component until 2023. The nice thing about that variable reset is it slightly reduces the denominator, but will actually help us modestly in realizing the escalator on the base building rent in the future.
On the escalator itself, as Penn indicated in their earnings call and as reflected by our guidance, we do expect at the commencement of the next lease year, November 1st, that we will realize the full 2% escalator, which will be an annualized impact of a positive $5.5 million approximately on the Penn master lease rental payments. Moving on to the Pinnacle master lease, which is already reflected since that anniversary back in April, the annual escalator of annualized amount of $5.8 million is reflected, and the variable reduction On the Pinnacle master lease, which occurs every two years, so it occurred this year and will occur again in 2020, was a reduction in the variable piece of $1.14 million.
Also on the Pinnacle side, but not under the Pinnacle master lease, the separate Meadows lease, we did see in the first full year, the full escalator under that Meadows lease realized, and that lease itself is actually running at coverage recently that is even slightly ahead of the Penn and Pinnacle master lease coverages. The performance at the Meadows has really exceeded our expectations going in, and I think the Pinnacle folks would acknowledge that as well. Lastly, in terms of the lease portfolio, Casino Queen, we did see the full lease escalator at the commencement of the current lease year, which was January. We do have a loan to Queen. We lent them $13 million at a 15% interest rate on a subordinated basis.
As of the end of the quarter, they elected at the direction of their senior lender to pay in kind the interest expense for the quarter. You will see on the balance sheet that the balance increasing from $13 to just under $13.5 million. We understand they're currently in negotiations with their senior lender on revising the existing covenants, that we expect that they'll get back to cash paying here in the near future. The last item in the portfolio, of course, is the taxable REIT subsidiary. I think everyone is aware of how challenging the Baton Rouge market has been. June 1st of this year, they put in place a smoking ban in East Baton Rouge Parish. Our management team on the ground down there has been very active in terms of managing expenses and even more importantly, in addressing the smoking ban.
Our property was the first, and to our knowledge, still the only property in the market that does have an outdoor gaming area, which right now has 15 games, all of which are producing at well in excess of the house average. In fact, in some instances, double the house average. Kudos to the management team at Baton Rouge for being proactive in addressing a very challenging environment. On the other side of the TRS, Perryville has been sort of trending right on plan, modestly ahead of plan. As to the balance sheet update Peter mentioned, the big activity in the quarter was completing the refinancing of all near-term maturities that we have no maturities before 2020 at this point in time. We did affirmatively elect to term out some variable interest rate exposure based on where interest rates are going.
We've now got a debt structure that has a weighted average maturity of right around five years and a weighted average coupon of just over 5% with 88% of our debt at a fixed rate of interest. The cash balance at the end of the quarter really reflects just the remaining redemption of those 2018 notes that were not tendered. Those notes will be retired pursuant to their optional early redemption at no premium here in the month of August. Finally on the balance sheet, there was no ATM activity in the quarter. You'll see that disclosed in the 10-Q that we've still got about $215 million remaining under the ATM. With that, Peter touched on the timing of the pending transactions. Just a quick comment on the financing of those pending transactions.
As we get greater clarity on the specificity of the timing, we've got a number of tools available to us. We did, as part of the refinancing, increase the company's liquidity by taking the revolver up to $1.1 billion and extending the maturity of the revolver out to 2023. With that revolver capacity, the ability to continue to access the senior unsecured note market, the ATM, and possibly even an additional term loan, given the maturity gaps that we have in our debt maturity ladder, we've got a number of tools that are available to us to complete the $1.6 billion in financing requirements that are necessary to complete the two transactions. We feel we're positioned very well to get to closing on both transactions. With that, I would turn it back to you, operator, Darren, for any questions that might be in the queue.
At this time, we will be conducting a 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. Our first question comes from Thomas Allen of Morgan Stanley. Please proceed with your question.
Hey, good morning, thanks for all the incremental color this quarter. It kind of limits our questions but can we talk about the transaction environment a little bit? Does it feel like there are more potential deals on the market? What are sellers' expectations? Is there any increased competition for deals? Thanks.
Well, you know the answer to your last question. Of course, there is increased competition. I don't think there's any huge change in the pace of a deal or two a year kind of floating around. Steve, I don't get any sense. We have things that we're working on as always. There's always something in the queue. Look, it's a competitive world.
Yeah. I think Thomas' question is twofold, right? One is, are there more sellers today than there may have been historically? I think the answer to that question, just given some of the valuations that have printed recently, I do think that we're seeing greater activity in terms of sellers exploring what a market clearing transaction might be for them. In terms of us, we are, as you would expect, myopically focused on getting the transactions that we have in the pipeline closed.
Because we look at that high single-digit accretion in cash flow and high single-digit accretion in dividends as something that is absolutely critical. Peter, as our shareholder in chief, has always said, "We're never going backward, we're just going forward." The answer to your question is, generally, there is a heightened sense of activity. There's heightened activity in the market, as you've seen by the closings, and as you would expect, other sellers seeing those closings and seeing if they can replicate them. You should expect us to continue to be completely disciplined about doing transactions that are absolutely accretive from day one for our shareholders.
Yeah, look, I have said it this way, and I mean it as firmly as ever. We're not out about building monuments, period. We're about building value for shareholders, period.
As Steve well said with sort of a mantra around here, we're going forward, we're never going backwards. Non-accretive transactions aren't part of our mix. We don't believe in the idea of strategic acquisitions. Maybe the day will come where we could find something like that, but I haven't seen it yet. I think that question's pretty well answered.
Helpful. Thanks. Just on Baton Rouge, I think we were all anticipating the smoking ban going into effect June 1st. I guess, what's going on in that market that drove the kind of expectation cut for the year?
There are a number of micro issues. I should say there's one principal micro issue unique to the Baton Rouge market. You'll recall back in 2016, there was some severe flooding in Baton Rouge, which throughout the course of the end of 2016, well into 2017, which is what we're now anniversarying, there was a lot of FEMA money and a lot of construction workers who actually temporarily, as they're prone to do, moved into that marketplace. That's no longer there. Through the June 1st smoking ban, we saw, and you see it in terms of the volume reports, we saw that market decline pretty substantially relative to the rest of Louisiana. Not that it's much of a consolation, but we actually held and modestly increased our market share.
Again, to the management team down there at the property, they were very proactive in anticipating the smoking ban that we opened on June 1st, the outdoor smoking patio with gaming equipment in place. We're doing what we can, but there are clearly activities or there are clearly phenomena in that market that we just can't overcome.
Helpful. Thank you.
Our next question comes from Carlo Santarelli of Deutsche Bank. Please proceed with your question.
Hey, guys. Thank you for taking my question. I just have one as it pertains to how the market environment has changed. Obviously, you have your debt deals done, your revolver extended and expanded. When you think about funding for the $1.6 billion, Steve, that you mentioned, you had often talked about with respect to at least the Tropicana deal, doing a predominantly debt deal. With the stock where it currently sits, has your thinking changed at all about the way you go about it?
I think that the change, Carlo, is that we're still not certain that the valuation fully reflects the accretion that will be generated as a result of the two transactions. We're encouraged, but it really hasn't changed our thinking in terms of where the equity value currently trades. Yeah. It's a good way of saying, I think we still think we're underappreciated. Let's get these transactions to closing. I'm excited about what it does for me as a shareholder, just personalizing it, and hopefully the market will recognize a little bit more our value.
Great. Thanks, guys.
Once again, ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad. Our next question comes from Robin Farley of UBS. Please proceed with your question.
Great. Thanks. I wonder if you could just give us a little color on, there's another transaction in the market recently, the Margaritaville. Is that something that you had looked at but felt the price was too high or didn't feel like it made sense strategically? Or just kind of wondering if that was something you looked at and why you ended up not doing it.
I'm going to answer this question because Peter's got two hats that he wears. Robin, it's a fair question. Shreveport Bossier is a market that we as a management team have had a lot of experience with going back to the early 2000s, when we bought the Hollywood Casino business while we were at Penn. You can rest assured that we looked at the transaction. We made a presentation, a proposal to our major tenant, that we think was on economic terms that were not too dissimilar from the transaction that was announced. We did so, as we did with our Tunica, tuck-in transaction with them a year ago, asked that that be included in the master lease, so that property would be cross-collateralized with all the other properties under the Penn master lease.
It appears they made an affirmative decision, the economics were palatable, but the notion of doing a single asset lease in Shreveport Bossier City certainly had some appeal to them in light of what the Oklahoma tribes continue to do and what may, at some point in the future, be expanded gaming in the state of Texas. I commend them. I think they tiptoed into that market in a pretty conservative way, and they maintained for themselves much greater flexibility at the end of the lease term than they would have had they come to us and bolted it onto the master lease.
Interesting. Does that change as you go forward? There are a couple of large operators out there. If you already have agreements with them, is that something that we would expect maybe future transactions not to be tucked into the master lease? Or do you think it was just a one-off because of the risks of that market?
I think it really depends on the transaction. It depends on the market. It depends on how aggressive or how conservative our competitors choose to be. I would not want to standardize. I will tell you because it exists in our master lease, when one of our tenants does go ahead and buy a property in a market that is competing, and this clearly will compete with the Boomtown facility in Bossier, that we then set a floor under that component of the master lease payments that are attributable to that facility under the master lease that our tenant has now become a direct competitor of. We do have protections. We have, I think, incentives for the tenants to come back to us. At the end of the day, they're going to make a decision that's in their best business interest.
Okay, great. Thanks very much.
Our next question comes from John Massocca, Ladenburg Thalmann. Please proceed with your question.
Morning. Just one maybe long-term question, and I know we're kind of going back a little bit to talk about it, too. With regards to the TRS properties, given the nature of the original spin, is there ever going to be a time where you can sell the operations at those assets and turn them into maybe more kind of standard owned building, leased to an operator type asset? And if so, what would be the timeline for that?
There is no timeline. I know Steve has a pretty stock answer for that. We would probably think about doing such a thing if that were to happen in conjunction with another transaction. In other words, something that's going to be tied into several additional properties. Let's say we use it as bait, but it's obviously a tool that we can use to leverage it into more business for us. In the meantime, look, we like being in this business. We're a gaming exclusive REIT. We like kind of being in touch with this business and the day-to-day. It gives us flexibility just in case we had to bring yet another asset into the TRS. We can go either way. We remain completely flexible. It's going to be whatever is in our and shareholders' best interest at the time. We could be in, we could be out.
We just haven't seen the opportunity that would justify a sale right now.
Just from a tax and kind of legal standpoint, is there a window that has to open here?
No, I think we're there. Let Desiree.
Yeah, there's no window or no safe harbor. It's a business decision. As long as we have a viable business alternative as to why we want to exit the business, from a tax perspective, we could exit the business. We're still happy operating it, and we'll make that determination when the time comes. There's no black or white answer to your question.
No, in terms of the timing, Baton Rouge was included in the spin because it was a continuing trade or business. The IRS tests a continuing trade or business by five years of ownership historically. Obviously, looking at it prospectively, we're beyond five years. We think there are no restrictions from us exploring any and all opportunities with respect to the TRS because they've served their purpose and any restrictions have come and gone.
Makes sense. That's it for me. Thank you guys very much for the color.
Great.
Ladies and gentlemen, we've reached the end of our question and answer session. I would like to turn the call back to Mr. Peter Carlino for closing comments.
Well, thank you all for tuning in today. We'll keep our eyes on now to the end of the year, hopefully get our transactions closed and frankly, wind up a really terrific year here at GLPI. Thanks again. See you next quarter.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.