the early years kind of drum up interest and we'd have 6, 3 or 4 or 5
Greetings and welcome to the Gaming and Leisure Properties First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Hayes Crawshaw.
Please go ahead, sir.
Thank you, Stacy, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' Q1 2018 earnings call and webcast. The press release distributed earlier this morning is available in the Investor Relations section of our website at www.gl 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. Examples of forward looking statements 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, questions. 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 these forward looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non GAAP financial measures contained in the company's earnings release. On this morning's conference call, we're joined by Peter Carlino, Chairman and Chief Executive Officer and Bill Clifford, Chief Financial Officer of Gaming and Leisure Properties Inc. Also joining are Steve Snyder, Senior Vice President of Development guests Desiree Burke, Chief Accounting Officer and Brandon Moore, Senior Vice President, General Counsel and Secretary.
Now I'd like to turn the call over to Peter Carlino. Peter?
Well, thanks, Hays, and good morning, everyone. We are again happy to report a very good quarter with some strong announcements. Obviously, revenues and earnings are in line with our expectations. I'll acknowledge that our TRS properties were a little soft, largely due to horrendous weather in January February, although I'll comment that things appear to be better and stronger and we expect that those properties will be more in line as we look ahead. To have identified a new operator with Eldorado Resorts.
That's just a terrific addition to our portfolio of great operators. Of course, we're tracking along well with the Pinnacle transaction, which welcomes employees, gaming into our operator ranks, which is just terrific. Couldn't be more excited about that. We expect both of those transactions to close, say, let's say, Q3 of this year. And that suggests that 2018 should be a very, very strong year for this company.
And I think predictably 'nineteen should be even better. So we're feeling very, very good about that. Another comment I'll make years that you've seen the release that Bill Clifford will be retiring. Bill has been a significant part of everything that we have done in this company, all the major movements over the years. Only Steve Snyder, guests sitting to my left has been here longer.
And that includes Penn National as well. So and in that time, we built terrific company at Penn that was very much a part of that and then led this effort to form Gaming and Leisure Properties from Penn. In those years and that time and that decision has produced enormous value for
shareholders who have been with
us over a members who have been with us over a long period of time. So I just I want to acknowledge that with Bill present. And he's going to stick with us for guests provide some oversight and thought over the next months while we transition through this period. And so Bill, officially. Thanks very much.
It's been terrific. Goes fast though. It goes very fast, the years as I look back. So I think this is a strong report. And with that, I'm going to unless there's any other comment from guests.
The table here, I think we'll go straight to your questions as we usually do. So operator, please open the floor.
Thank you. We will now be conducting a question and answer Our first question comes from Thomas Allen with Morgan Stanley. Please go ahead.
So can we just talk
a little bit about the Tropicana deal? Can you just elaborate a little bit about how it came together, How the process worked and kind of your expectations going forward?
It's Steve, why don't you? Thomas, it's Steve. Completed their aisle transaction without a sale leaseback or an OpCo PropCo approach. Most recently, the discussions focused on what other opportunities existed because they I expect to continue to be a consolidator in the regional groups approached their large shareholder and entered into an exclusivity period with them and and conducted due diligence. So we spent quite a bit of time with the Eldorado folks both around this property and around their management approach and the opportunities that they see in the Tropicana portfolio based on the results and the performance they've been able to drive out of the aisle transaction.
Announcements in the performance of the Tropicana portfolio. And I do think as they said, as Tom and Gary Carano said on their phone call. They look at the OpCoPropCo opportunities as ways to continue to facilitate their growth. So the announcement that you saw on April 16th, you should look at is really the outcome of several quarters of closing because New Jersey and Indiana are 2 new states for Tropicana or for Eldorado and they've already gone forward with the submission of their applications and we're doing exactly the same. So we're pretty optimistic that this is that will close or should close before year end.
Helpful. And then, I mean you mentioned you have been talking to them around the IL deal too. What held back a transaction happening with you and around the IL transaction too? Thanks.
No, we didn't speak with them Specifically about the Isle transaction, they obviously made a decision that they were comfortable with the equity solution that they took on behalf of existing Heil shareholders at that time. So that was not a transaction we were engaged in an extensive in any dialogue with Eldorado. It really was just, again, something that they decided We go it alone.
Okay, helpful. Thank you.
Thank you.
Our next question comes from Carlo Santarelli with Deutsche Bank.
And Bill, congratulations. Peter, could you talk a little bit about as you think about a new CFO, kind of what are some of the criteria you're looking guys for that candidate. And would you be looking more from an M and A background or more kind of a REIT experience, gaming experience, etcetera?
Well, that's
a tough question to start with. That's awful. Probably both. That's something we're looking at. That's why we have not announced precisely what we're going to do and who's going as we look at the world.
There's like 3 legs to that stool. 1, we are still focused on the gaming world. At least that's the way I think of ourselves. So dealing with the capital markets is kind of what we do. I think and we're probably going to look at the REIT world more broadly.
So I'm sad about that. That's you fairly asked that question, so that having some knowledge and experience in REIT world since we are clearly a REIT, I think would be helpful. So in a perverse sense, I guess the answer is all the above. And I think the general view is we'll know it when We see it.
Understood. Thank you. That's helpful. And then just in terms of the Tropicana transaction, the decision to go with a 1.8 times, 8, 5 times minimum rent coverage, a little bit lower than some of your other deals with the guaranteed escalator. How much of that decision was fueled by The assets given there's obviously some new competition coming to Atlantic City, etcetera.
Yes. I'll let Steve speak to that. But fundamentally, we have a great deal of confidence of these folks. And that did very much influence our judgment. Steve?
Yes, Carlo, They are very optimistic around the opportunities for margin improvement in that portfolio. They were comfortable with guaranteeing the 2% base rent escalators through the 5th anniversary, Greetings and welcome. Subject of course to not putting the lease in default at 1.2 times coverage. So that spoke volumes in terms of our getting comfortable with the impact that the openings in Atlantic City will have on that large property Tropicana on the boardwalk because it speaks volumes when your tenant steps up and says, we hear you, but we are comfortable with a construct that guarantees you 5 years of escalators. So I'm not going tell you that we completely agreed with our tenant in terms of what the impact might be of the Hard Rock questions in the leads.
Yes, let me add. Look, these are highly experienced people. They've been around this business in very competitive markets for a very long time. So I think that informs part of our judgment, Steve, as well. No, I think that hits it spot on, Peter.
I mean, these are markets that they were familiar with. These markets that they are comfortable competing in and having competed for the last couple of decades in Reno, they know how to handle
This question comes from Joe Greff with JPMorgan. Please go ahead.
Good morning everybody and I'd like to say congratulations to Bill as well. You've had a great career and I'm just working with you. I look forward to seeing your index continue to migrate down on gin.com. Obviously, you've been busy on the acquisitions front. Are you kind of in pause mode right now until these things until the 2 sets of acquisitions close and
So what kind of question
is that? We are never in pause mode. Never. You got to be kidding. Look, you've heard me make the comment many, many, many times over the years that look, if it's out there alive and breathing, You can count on the fact that we're looking at it.
But finding transactions that we want to make that we feel good about is always the challenge. As I like to say, many are called, but few are chosen. And that goes on all the time. So My general view, particularly as they say we're in the finance business, is to keep our powder dry and to be prepared and then
And then obviously you have the share count referenced in the press release. Did you issue any equity under the ATM this month
at all?
No, we did not.
Thank you very much.
Our next question comes from Shaun Kelley with Bank of America. Please go ahead.
This is Barry Jonas. 1st off, Bill, congratulations. It's been a pleasure working with you. I guess, Peter, it begs the question, curious how you're thinking about your own timeline for continuing at least operating role. Any general thoughts on succession planning?
That's a tough question. Don't kind of see me go anywhere for a very long time. Listen, if you ask the question, I'll do this as long as we can be effective. And since We are in my judgment highly effective and you look at the way this business has grown over the years. Maybe the day will come when I'll feel that isn't case, but right now, I'm having too much fun.
Fair enough. And then just one question on the Eldorado MasterLease. I guess, can you just maybe give a few more details in terms of how much of the total rent will be subject to the escalator and The variable rent reset, what sort of time line that will be, whether it's 2 years or 5 years? Thanks.
Yes. It's going to it will be reset every 2 years consistent with the existing Pinnacle master lease. And in terms of base versus the 2 variable components, you should think 70 ish in 70% plus range in terms of base rent that would be subject to the 2% escalator.
Great. Thank you very much.
Just a clarification, the escalator is only on the base, the land base rent, which is Usually, probably about half of that, but we haven't set those numbers yet. So we do the best the escalator is only on a portion of our fixed rent, not on our on the second portion of our fixed rent.
Right. So it would be approximately on 70% of the 110 or
No, it's less than that. But what would be subject to the escalator is less than that.
Understood. Thank you.
Our next question comes from Patrick Scholes with SunTrust Robinson Humphrey. Please go ahead.
Hi, good morning. Question for you on Atlantic City. As I recall in the past you've been somewhat cautious on entering that market. Can you talk just a little bit why your mind is changing now and your thoughts on that market going forward?
Well, we're doing it with a partner, as I think we well explained, who likes the property, it would appear that years in improving that place. Steve, do you want to comment more broadly on that? It's in terrific condition.
Yes. No, as the sellers indicated, they've reinvested all of the free cash flow they've gotten out of Tropican over the years that they've owned it in the properties, quite a bit of that being in Atlantic City. I mean, just the way we've looked at it, if you look at the aggregate portfolio and the rent that we'll be deriving from our new tenant, El Dorado, approximately 40 ish percent of it is going to be coming out of that Atlantic City market. So we really do look at it as a sort of diversified portfolio with some penetration in Atlantic City. Would we do Tropicana Atlantic City on its own as a standalone lease?
I think You know the answer to that, absolutely not. But given the nature of this tenant, the opportunities that they see to improve the operating performance across the portfolio and their experience in other comparable markets, we were able to get comfortable proceeding with this transaction.
Yes, I think it says
a lot more about Eldorado when you start thinking about it. That clearly informed our judgment. It's who we're dealing with here and we feel good about that.
And then shifting gears somewhat here. There was an article over the weekend in the St. Louis post dispatch suggesting there might be some regulatory risk of gate being approved for that market. I don't know if you have any thoughts in that regard?
We do and Brandon is going to tell you.
Yes. We obviously saw the article. And I think as we look at that market and other markets in We went through a pretty in-depth review of our lease with on the federal level, and the anti competitive effects or the lack thereof in the Pinnacle transactions. And we're very confident that our lease, if that deal and our lease in this deal don't present any opportunity for us to impact competition in any of those markets or in any market at all. And we're confident in that level that we're going to be fine.
I wouldn't say we're confident on state regulatory level, but we're certainly very optimistic for the same reasons. Those leases just don't permit us to impact competition. If you look at the St. Louis market in particular, currently on a pro form a basis, we'd have 4 publicly traded operators in that markets. And even if the Pennant Pinnacle deal finishes, we'll still have 3 publicly traded operators in markets.
So we're pretty confident as we get through the process and we have those conversations that they too will come to the same conclusion that these leases don't Any opportunity to impact competition in the states.
Okay. Thank you very much. That's
Our next question comes from Robin Farley with UBS. Please go ahead.
Thanks. Yes, I just wanted to ask you about the transactions markets generally. It seems like there's been a significant increase in activity just this year aside are a little more established and sellers have a better understanding of the values or in other words, Do you expect the activity level to stay at maybe more elevated pace now? Thanks.
Rob, I wish I knew. I'm not sure we have any real answer for that. Yes, we have always talked about transactions lumpy and unpredictable and so forth. Quite happily, as I look at our spin and look at where what we've been able to do in growing AFFO and dividends near and dear to my personal heart. It's been terrific.
I mean, we've done an incredible job. We could never have predicted where it was going to come from much as we kind of told you and the market. But nonetheless, people managed to kind of eke it out. And I expect we're going to be able to do the same. I don't think anything materially has changed in sellers or owners' willingness to transact, it kind of falls out when it falls out.
You may have something correct though right around pricing and the sense that people are more sensitized to the possibility of doing a transaction with I think that has occurred. And I don't expect that to change. In fact, back to the St. Louis question, I think pretty soon, I Most of the United States is going to be owned by a handful, at least the real estate owned by that small handful of companies that you're well aware of. So it's a trend that is not going to go backwards.
But some pattern or predictability,
Just sort of coincidental of the timing of a couple of things this year.
Steve, how would you want to characterize
production of a new competitor in terms of the gaming REITs. Interest rates are trending upward and and people may be fearful of that. I would suggest, yes, if you look at a year ago, there are more frequent dialogues that are taking place. And I think you're seeing it in terms of other transactions that had been announced. But you should expect that consistent with the way we've approached our business in the past, we are going to Just leave it
at that. Our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.
First off, Bill, congratulations on retirement. Thank you. And then kind of looking at the balance sheet, given the various acquisitions you have lined up and the debt you have maturing later this year, How are you viewing the debt capital markets? And kind of maybe generally speaking, what kind of relative pricing do you think you can get versus the existing debt you have
John, you should think about us looking at the maturities that we've got senior sub debt to fund the acquisitions as they come online, as they get closer to closing Q3 and Q4. Obviously, the market has ticked up. You've got the LIBOR yield curve that's ticked up that we've reflected in our guidance. But we don't see the capital markets in any way, shape or form impacting trading in the secondary market other than toward new issue premia. So I don't envision any obstacles.
And they've made no indication. There's no indication that they'll make any movement in our underlying credit rating at this point in time.
And we're going to remain pretty conservative as has That goal has never changed.
Understood. I was really more interested in kind of where relative pricing you expect kind of relative pricing to be Your existing debt. I mean is there any thought process on maybe lengthening out the term on your debt Greetings and welcome. Given how potentially accretive these acquisitions could be and maybe sacrificing a little bit of increasing interest expense, But getting longer term on your debt?
No, I think that will be sort of conditioned on what the market looks like when we're in the market. But yes, looking at a longer duration for our debt stack is something that our Board has asked us to take a look at and keeping sort of the ladders in our debt stack consistent so that we don't have risk.
Yes, I'm not being cute. It's not rocket science. I think you could recognize what our goals would be and that is to smooth this out over as long a period of time as pricing allows. So, yes, I think we have a pretty clear sense of where we want to be
Understood. And then, maybe kind of shifting gears a little bit. Looking at the Tropicana deal, was Montblu not included in the master lease with Eldorado just because of the ground lease underneath it or were there other factors driving that decision.
No, it's as simple as that. I mean the Mount Blue lease is really more of a facility lease rather than a ground lease. And we've had enough trouble getting assignments of underlying ground leases in other transactions questions that we did that we did not want to try and get involved in the landowner consents here. And given the scope and scale of Mount rooms relative to the overall Tropicana transaction. It was just something we were comfortable leaving behind.
Understood. That's it for me. Thank you very much.
Is from Andrew Berg with Post Advisory. Please go ahead.
Yes. First of all, I can echo everyone else's comments with respect to Bill. Congratulations and best Welcome retirement. You'll definitely be missed. With respect to the comment made regarding refinancing potentially refinancing the debt, You said senior sub debt.
Did you actually mean senior sub or did you mean senior unsecured?
Senior unsecured.
Okay. Just wanted to clarify that's my thought. And then with respect to competition for assets, now that VICI has been out for a little while longer, Has that changed at all the tone of the conversations you're seeing? Has that bumped up the bid levels a little bit here? Just wondering with respect to them being in the market now with a little bit more time whether that's changed the dynamics or made it even more competitive than it had been.
Well, look, we liked it better when We were here by ourselves. I mean that was a much happier circumstance. But look, they're going to do what they're going to do. And we'll just have to wait and see how it plays out. My life experience has been, we're not looking over our shoulders at them or even thinking what they may or may not do.
They'll win their share of transactions. We expect we'll win ours. Deals happen for different reasons, even beyond price sometimes. So, yes, I mean, I think it's too early to know how this is going to go. Let's see how it plays out over the next year.
Okay, great. Thanks again and look forward to seeing you for a long time, Peter.
There are no further questions. I would like to turn the call over to Peter
Well, listen, thanks everybody for dialing in today. We're smiling, wishing a good farewell to Bill and appreciate his help over the next couple of months as we make this transition. Look, this lines up to be a great year, a very, very good year. It looks like 2019 is going to be a good year. So we're pretty excited about what's going on here.
Company is in great shape. I feel good that the goals that we set out at the beginning when we did this spin have and are being met. And look, as a shareholder who collects a dividend every quarter. I'm a very happy guy and I hope many of you are as well. So thanks a lot.
See you next quarter.