Thank you, Sherry, good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' third quarter 2017 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 include those related to revenue, operating income, and financial guidance, as well as non-GAAP financial measures such as FFO, AFFO, and EBITDA. 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 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, Desiree Burke, Chief Accounting Officer, and Brandon Moore, Senior Vice President, General Counsel, and Secretary. I'd like to turn the call over to Peter. Peter?
Well, thank you, Hayes. Good morning, everyone. We're happy, once again, to report a good quarter. We received all of our escalations this quarter, we paid down some debt, which is a good thing in our business. We like to do that. I think all the comments I might make are very well encapsulated in the opening paragraphs of our press release, I call your attention to that. As our usual style, I think we're going to get very quickly to questions, unless Bill wants to add something.
I have nothing.
Okay. Operator, we're going to go straight to Q&A.
Okay, great. 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 your star keys. Our first question is from Steven Wieczynski with Stifel. Please state your question.
Hey, guys. Good morning. Hope you're both doing well. Here's a question I don't know if you'll answer or you won't answer it. Let's say, for instance, I think you probably know where I'm going to go with this, if two of your tenants were to explore some type of merger, what kind of say would you guys have in those proceedings? Then, if there was a need to find a new operator for a certain property in a certain market or any market due to ownership restrictions, who would lead that process? Hope that makes sense.
Well, that's a question we'd like to avoid, but I think we'll get right at that. Look, we've seen the same things you have seen, we know where you're going with it. We like things, frankly, at the moment, precisely the way they are. Should such a thing occur, that is, our tenants begin to talk with each other, we would have significant rights to, I hesitate to use the word, Bill, approve, or Brandon, but certainly, it would take our involvement for such a thing to occur. The bottom line for any such thing would be what it always is for us, what's good for GLPI and our shareholders, period. That's the only guiding light, frankly, here. Bill, do you want to?
Sure. Listen, I think the lease has certain terms in terms of our ability and what we have rights relative to what's in the lease. I would go on to say, obviously, we're totally in the hypothetical and totally in the because we don't have any information that says anything's been agreed to between either one of those two parties. For the benefit of everybody else who might be wondering what we're talking about, there was a newspaper article in Bloomberg speculating that there was a combination discussions between Penn and Pinnacle. Our lease, basically, where our rights would come in is because they wouldn't be able to extract any of the properties out of the leases for a sale or for a disposal if that was required by either a gaming regulator or by the FTC. That's where our rights would come into play.
I would say that we certainly would want to be supportive of any of our tenants who want to do things, because I think that's a big part of what we try to emphasize as a landlord is that we're basically partners with our tenants, and we want our tenants to be successful. If there's things that our tenants want to get done, that we would be supportive of that. However, obviously, we have to look out first and foremost for the best interests of our shareholders. That comes before that, but certainly, we believe we have certain rights within the leases to the proposed hypothetical, theoretical rumors that are floating around out there. I think I'll probably leave it at that.
No, I think that does a pretty good job. It's farther than we'd probably prefer to go, but I think the most important thing you said is that our predilection is first and foremost to work with our tenants and to be seamless in our partnership with them. In the end, it will be what is beneficial to our shareholders, period, I can't emphasize that enough. I hope that's the last question on that subject, because frankly, that's all we can say or would have to say. There's nothing in front of us.
No, that's great color. You probably said more than I thought you were, that was great.
Well, that's what we thought we were going to say, too.
No.
Frankly, that's a testament to the thoroughness of your question.
Try to dance around as much as possible. Anyway, second question. It'll be more straightforward. It's going to be kind of a generic. Every quarter you do a very good job of Peter or Bill giving us an update on kind of what you see out there in terms of potential acquisition or what the environment actually looks like, maybe both in the gaming universe and then maybe outside the gaming universe as well. Thanks.
Well, Steve, why don't you talk about what's out there and what may or may not be actionable.
Sure. Good morning, Steve. Others have commented, either in their earnings calls or in other calls that they've had, that the M&A activity seems to be pretty robust. I can't say I don't disagree with that. I think seller expectations and valuations are probably a little extreme, most of which we've driven, quite candidly, in terms of the separation of real estate assets from operating assets. I would not disagree with what we've heard from other operators as recently as yesterday, Caesars, in their sort of presentation as a new entity, that there does seem to be a longer runway right now in terms of opportunities out there. Rest assured, from our perspective at GLPI, we do try and touch everything, stay in touch with everything, and look for the right opportunities to produce accretive transactions for our shareholders.
Yeah. My line over the years has pretty much been, remains the same. If it's alive and breathing, you can count on us looking at it. We're not unaware. Finding transactions that are right for our shareholders, as I have often said, it's easy to make a bad deal, a lot tougher to make a deal that's going to be accretive for shareholders, and that remains focus one, two, and three. We'd rather be patient and do the right thing. That's pretty much our mantra. Those of you who have followed us over the years know that you've heard that line before.
Thanks, guys. Appreciate the color.
Our next question is from Robin Farley with UBS. Please state your question.
Hi. Thanks. This is actually Arpine Krikorian on behalf of Rob. Maybe asking the same question that was just asked in a slightly different way. Is there anything imminent, given that sort of year-end, we're looking at Q4, that you're kind of looking at in the transaction market that could make sense near term? And then my second question, do you guys have any updates on your leverage level targets in terms of the five times you have given us before?
Look, there's nothing imminent that we're aware of in the full meaning of imminent. There's stuff that we look at, we talk about, but there's nothing imminent. Bill, do you want to-
Listen, I think there's first of all, there are no transactions that I think could happen where we get closed by the fourth quarter, just given the whole approval timeline. Even if we did get to a definitive agreement with a number of people that are out there, nothing's going to close this year for sure. Hopefully that answers that question. The leverage, right now we're projecting the end of the year to be under 5.1 times on a leverage basis. I think we throw off roughly $130 million a year of free cash flow that we'll continue to use to pay down debt. Obviously, our target leverage level is five.
We're going to take it below that in the interim, we would view that going below five as pre-funding for potential opportunities as basically pre-funding equity, where we've stated before that any new transactions we would do with leverage at five and a half on that transaction, with the rest remaining equity. Clearly, if our leverage is below five, to the extent that we're below five, we take it back to five. We would obviously do an acquisition which might have a little bit higher leverage, but still not taking the transaction effectively over the same levels that we've kind of indicated before.
That's great. Thank you.
Thank you.
Our next question is from Thomas Allen with Morgan Stanley. Please state your question.
Hey, good morning. First question, how are you thinking about the five-year Penn rent reset that's coming up in late 2018?
Well, clearly, that's November of next year. We haven't really given official guidance. I think I'll say a couple things. We know and we understand and we acknowledge that primarily from two properties, and that would've been Lawrenceburg as well as Charles Town, and both of those were affected by competition, Lawrenceburg several years ago, Penn from both Maryland Live and then obviously National Harbor. When the revenue reset happens at the end of October of next year, we do expect that to be adverse to us. In other words, there'll be a rent reduction. However, looking forward, we believe that our rent or our dividend, with the payout ratio still at the 80%, will be flat through that period. We don't see it having an adverse effect on the dividend.
Obviously, won't be helpful to getting increases in dividends, at least as we project out, and this is without any transactions, obviously, if we're able to get any accretive transactions done, we could, in fact, see dividend increases. Certainly, through the revenue reset period, as we see it today, we think our dividend will stay flat.
Helpful. Thank you.
Our next question is from Joe Greff with JPMorgan. Please state your question.
Good morning, guys. Most of my questions have been answered. Maybe I could ask you who's going to be the next manager of the Yankees. The one question is, with respect to the last comment on the dividend, absent any acquisitions, would there be an inclination or a willingness to increase the dividend on an absolute basis?
You mean in terms of increasing the payout ratio?
Yeah.
That's basically effectively what happens, obviously, as you go down.
Yep.
Right. I think, for the foreseeable future, our expectation would be to continue to pay down debt in anticipation of getting transactions done. We're not in any way despondent on our ability to get transactions done. We think there will be opportunities, and there'll be times where we'll be able to put that capital to use on an acquisition basis. I would say, for now, at some point, I think, maybe, but obviously, we'll get to a point where we're not going to take leverage to zero. Obviously, at some point, we'd think about that. In the interim period, our intention would be to use it as pre-funding equity, not increasing the dividend.
The question is, the answer's always the same. What gives more value to our shareholders, an increased dividend or a new transaction? We'll do what is best at the time.
Well, the problem with taking the payout ratio up, obviously, also is, honestly, I think I personally, we haven't even had these discussions, but I'd personally be more in favor of buying back equity if I had excess cash floating around rather than increasing the dividend. I think the one thing that people like about our story is the stability and continual pattern of a nice, stable dividend. Taking the payout ratio up and turning around and potentially if we do a transaction, wanting to take it back to 80%, I think that would be adverse to the interest of what many of our investors are buying our shares for.
Excellent. Thank you.
Our next question is from Patrick Scholes with SunTrust Robinson Humphrey. Please state your question.
Hi, good morning. Thank you. Penn this morning put out an EBITDA margin target or put out EBITDA margin targets for the future. My question as it relates to you folks is, if part of the way they get there is by pulling back on, say, promotional spend, how does that impact potential future escalators?
It's actually good. In other words, margin improvements, which obviously should translate into increased EBITDA, would therefore translate into improved rent ratio.
Coverage
Rent coverage ratios. That would obviously be good and increase the likelihood of escalators. Certainly, Penn has, over the course of the last several years, we've continually been right on the cusp. As evidenced again this year, we're getting 75%-80% of the full escalator reset to projection. Obviously, we've got to wait and see what happens through the month of October. That's all good. The only negative, obviously, potentially negative, is if some of those marketing reductions, which might be improvements to EBITDA, if they were on a net basis, slightly less revenue, we'd have to offset that with the escalators. In terms of if they do marketing programs that cause business volumes to drop, but it's actually good for their EBITDA, that's not good for the revenue calculation.
Okay.
I don't think that's their intent. I think their intent is to figure out how to reduce marketing. Sometimes you can reduce marketing that's actually an enhancement to revenue because you're giving out less free coins. The less free coins you give out could turn around and cause people, because they simply don't have enough time on device to use up all of the free play coins, and they may not be constrained by their budget, therefore, you might actually see a net increase to your net revenues.
Interesting. Thank you.
Our next question is from Shaun Kelley with Bank of America. Please state your question.
Hi, good morning. Just wanted to touch on the dividend thing a little bit more around the possibility for the reset with Penn. Bill, it is more of a clarification than anything else, but under current assumptions, or the way you're modeling or thinking about it, would it be that you can maintain the dividend flat, payout ratio actually goes up, or can you hold the payout ratio here right around 80 with the way that the numbers would come in?
It's our expectation that we would be able to hold the payout ratio. Today, we're closer to 79 than we are 80, the ratio might increase nominally, but we don't see it going above 80.5. It's not going above 81, let's put it that way, in order to maintain the dividend. In fact, I think it'll be better than that. We're kind of talking switches here, but and it's obviously a little bit dependent on how well the economy does and how well the Ohio properties do for Penn and how well we do with the Meadows and all the rest of it. Feeling, on a conservative basis, we're not going above 81, and we'd still be able to maintain the dividend.
Understood.
1.0.
Understood. Bill, just remind us, the way this calculation actually works, it's like a trailing five-year calculation, I believe. It's not a step function down. It's sort of a slow grind down based on when the cannibalization of those properties would have occurred?
It's a calculation of the average over the last five years, it is a step down starting November 1 next year. They would then have a lower rent payment due starting November 1st. In the following year, not that I want to turn a negative into a positive, in the following year, they would obviously, when we do the rent coverage calculation, based on a lower rent level, the likelihood of getting an escalator would improve. In the following year, the certainty of getting a rent escalator just improved to the extent of the amount of the rent reduction in the previous year.
Okay.
I acknowledge that that's a spinning of a negative, it is math.
Understood. To go back to the sort of M&A landscape, which it's always difficult for us to ask about, I'll try anyways. Just basic big picture here is that, is it your sense that seller expectations are that people are, let's just say, testing the market based on what could be perceived as really good values? Do you think there are some serious sellers out there, given the discussion of what's going on, and things will actually transact over the next six to 12 months, whether that's with or away from GLPI?
Steve, why don't you? Yeah.
Yeah. Shaun, this is Steve again. I think to some degree, you're right. I think sellers are testing the market and seeing if some of the public market values can translate into private transactions. I do expect that you'll see some prints over the next couple of quarters in terms of transactions because there are some circumstances where sellers are motivated by things that might not be simply value-driven. There's really no way to sort of standardize across the universe of what we're seeing.
Thank you very much.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Dan Dolan with Ladenburg Thalmann. Please state your question.
Thank you, and good morning. Was just curious what the unused property that you sold at the Hollywood Plainridge was.
There was a piece of land that formerly housed the HR.
It was remote. It was a warehouse.
Several blocks down the road.
Yeah, it was several miles down the road. It was nothing that was integral to the operation of the facility. It was used, quite frankly, back after Katrina, because the business volumes down there were so extreme. It had no longer served any useful purpose.
Well, it was actually land purchased in the original acquisition by Penn. You might be reacting to the fact that we took a loss. That's because in the original purchase, I'm not sure that they, way back, and we're talking about 15 years ago, that they did a proper job of allocating the land value. In terms of between other land that they had. I don't believe at the end of the day that the land that we sold for had depreciated to the level that we recognized the loss. Accounting is what it is, and that's what it was sitting on the books for, and we sold it, and obviously, the amount we sold it for was less than what was on the books.
Sure. I was just more or less curious if it was something that you could have developed or what. It sounds like it was down the road. It wasn't contiguous.
Well, it wasn't contiguous. It also had a dilapidated structure on it, a building with the roof caving in and all kinds of other fine attributes.
Nice way of saying we're glad to get rid of it.
Okay. Then just curious if you could update us on how many properties Penn and Pinnacle have outside the master leases, and if any of those, your master leases with them, and if any of those properties would be of interest to you down the line or maybe could be something that you could get if negotiations change or how their structured may change.
That's right. For Penn, the two biggest properties that they have, well, there's three, I suppose, that would be of main interest. One would be their Massachusetts property in Plainridge, potentially the Tropicana. They have a joint venture in Kansas that could be of interest. They also have a couple. They have a dog track, but I don't think that has particular value for us. Relative to Pinnacle, Penn also has a joint venture with a track in Houston. Pinnacle has the racetrack in Ohio that we left behind as part of the spin transaction. They also, I think, have a partial interest in a track in San Antonio. Those are all potential opportunities. Obviously, the Texas stuff would involve, there'd have to be some kind of legislation passed to authorize any gaming. I think that's quite far in the future.
Okay.
Would we be interested in such things? The answer is, of course.
Okay, perfect. Just lastly, just because no one's asked it yet, just curious the appetite or interest level for non-gaming properties. I think that you said in the past the runway still looks good for gaming, just curious your thoughts there, if you've gotten maybe closer than maybe you have in the past. Just curious your thought process there.
I think the quick answer is we're no closer to that. We remain open to it. We look through the REIT publications on a monthly basis to see what's going on out in REIT world generally. Look, we're still focused on this business at home. Nothing has crossed our desks that would be remotely attractive. That's really the straight answer.
Okay. Thank you.
If you would like to ask a question, please press star one on your telephone keypad. One moment while we poll for questions. Okay, we have reached the end of our question and answer session. I would like to hand the conference back over to management for closing remarks.
Okay, operator, thank you very much. Thanks to all of you who have dialed in this morning. We will look forward to talking with you next quarter. Thanks again.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.