Greetings and welcome to Gaming and Leisure Properties' first quarter 2017 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 turn the conference over to your host, Hayes Croushore, Vice President of Finance. Thank you, sir. You may now begin.
Thank you, Manny. Good afternoon, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' first 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. 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, 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 afternoon'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 Carlino. Peter?
Thanks, Hayes, good afternoon, everyone. Always happy to announce the completion of a good quarter. Had an excellent quarter. You'll note we highlighted on page one of our release that our Bally's closing is scheduled for May 1st. A small transaction, but a nice one. I think we have, if you look at page two of our release, pretty fairly outlined the improvements to net income that explain much of what has happened this quarter. I'm looking around the table here trying to get volunteers to see who's going to shed the real insight on where we're headed and what we're doing. I know Bill Clifford is just itching to make a couple of comments, and we'll probably dragoon Steve Snyder to talk about future development. Bill, go ahead.
Sure. Relative to what we saw in the first quarter, we obviously had a good quarter. That's primarily attributable to three factors, one of which is Ohio and the rents received from Penn relative to Columbus and Toledo. Secondly is Baton Rouge had a very good quarter, certainly exceeding our expectations. That was a big part of it. The last piece is a little bit less corporate overhead than we expected. Part of that was because we were successful at Abel and got a transaction done, and therefore, were able to capitalize some of the expenses associated with the efforts that we had relative to the Tunica property. On the guidance, as we look forward, there's really two major components to what's accounting for the increase in our expected performance going forward.
One is the fact that we expect the Tunica properties to close on Monday. Obviously, that was a transaction we announced at the end of March, which we're somewhat surprised, but appreciative of the efforts that Mississippi did to approve a transaction in what, in the gaming industry, is a lightning pace, given that it's basically one month from the time the transaction was announced to when we were on the agenda and actually approved. The other component, which is favorable news that was not in our formal guidance, is that the Pinnacle, we are assuming for purposes of our guidance that they are going to pay us an escalator on the anniversary in May. Those two components are obviously helpful in terms of where we're going. We've announced the dividend for this quarter at $0.62.
We will look at adjusting the dividend or re-looking at the dividend in the quarter following that we have the first full quarter of results from Tunica and Pinnacle, which will be in the third quarter. The only other piece of news I would reiterate that we were very happy about is that Penn National on their call this morning obviously had very good results. They pre-announced some of their results previously but, again, exceeded those numbers. The rent coverages that they had alluded to three months ago has improved dramatically to the point where they expect the end of the year to be just slightly south of the 1.8.
Not that that's any of our accomplishments, so we definitely want to thank them for their effort.
We're wishing them well. We're very appreciative. Look, I think there's reason for optimism. It's hard to know where a year is going to go. Every year has its own character. They are off to a great start, but one doesn't know how they're going to finish. We have renewed hope that they're going to close out the year in a very positive way. Steve, I'm not sure there's a whole lot we can tell this group about what we're up to. You can assume, as always, that we are very active here, the entire team, everybody at this table, looking at the next possibilities. Nothing, of course, that we can ever announce, we remain optimistic, looking for steady and continued growth in this business.
I think as I look at this, I think we're quite proud about what we've been able to accomplish since we created this REIT. It's been a nice move over these last few years. It's always about what's the next magic trick, I can only say that we're working on that. With that, any other comments? I'll open it for questions. Operator?
Thank you. We will now 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'd 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 is from Robin Farley of UBS. Please go ahead.
Great. Just wanted to ask you a question that I was asking a similar company earlier today, which is-
Yeah
Do you have any thoughts on whether the potential changes in the corporate tax that out there changes to the tax code are impacting the likelihood or timing of sales as you talk to asset owners?
Robin, we were actually kind of hoping to ask you and others on this call that very question. We've poked around at Nareit. We're trying to understand better through our lobbyists and others what is likely to happen, it seems so premature right now. As anxious as we are, and maybe even concerned as we are, it's just too early to make, in my judgment, any guess of where this is going. Steve, do you want to opine?
No, Robin, to your question, just as we are trying to figure out what impact the tax reform package that the president has now given us a sort of a bullet point note on will affect our business, you can rest assured that sellers are also contemplating the same question. I think more than anything, we're anxious to see clarity, whatever form it takes, whenever it takes.
Yeah, relative to timing, I think, the tax code implications are different for large strategic corporate-type people versus maybe some of the people that we deal with, which can sometimes be privately held situations where the tax impact is a much greater consideration for whatever they might do relative to transactions. I think the answer to your question is some have expressed some concern or desire to understand the implications of potentially doing a transaction. Others are probably a little less sensitive to that. A capital gains improvement would maybe motivate some that are sitting on the sidelines. That would be a positive thing.
Yep.
One does wonder a bit about the notion of doing away with interest deductions. Could be intriguing in this business or any capital-intensive business. I think patience is going to be necessary in this case, but I am confident everybody out there who has a business, is in business, owns a business, has shares in a business, is wondering where in heck this is all going to go.
Great. Thank you for the color. Thanks.
In other words, we didn't tell you much.
Thank you. Our next question is from Steve Wieczynski of Stifel. Please go ahead.
Hey, guys. Good afternoon. First, I just want to thank you, guys, for moving the conference call time. I think it's the first time any company's ever actually felt sorry for us lonely analysts on days like this. Anyway.
We're just concerned we'd have crickets on the other side.
Never. With just, I guess, Bill, first with you with the TRS, obviously a pretty good quarter there. I think when you look at your revised guidance, it seems like all you really basically did was kind of flow through the beat from 1Q into the guidance. I assume you're probably going to give me the answer that Penn gave this morning is that, for the remainder of the year, you're still taking a pretty cautious view around the TRS component?
Listen, I think it's two properties, right? It's Perryville and Baton Rouge. To the extent that probably don't put as much time and energy and effort into it as Penn does relative to understanding trend lines. It was a surprisingly good quarter. My history with surprisingly good quarters is that somehow or another, by the end of the year, things tend to come back to normal. We have taken credit for the beat in the first quarter and pretty much left everything the same going forward, because we're not 100% sure we understand exactly why the first quarter was as good as it was. Somehow or another, these things always have a way of normalizing themselves.
We don't have properties that are really affected by weather or anything, so it's not a weather attribute, but it could just be the excitement of Trump or the desperation of Trump or whichever way you want to look at it. Some people are motivated different ways. It could be other factors that we just don't really feel like we have a great handle on why we did so well. Hard to get excited and say, well, if we knew that it was some sustainable component that we felt really good was a new trend or a new thought process or a new way of doing just a new approach or whatever you want to call it, we might've been a little bit more aggressive. We felt like, okay, great, let's take what we've got.
We're going to leave it where we were because we don't really have any information to indicate that the rest of the year is going to be any different than what we originally thought it was going to be.
Okay. Got you. Second question, I guess, bigger picture question maybe for Peter. You talked about how you continuously are out there looking for your next move or your next deal, just maybe help us understand, what does the environment look like out there at this point? Do you have potential deals coming to you on a consistent basis, or has it slowed down a little bit?
I don't know that it was ever fast. I'm not being cute about that. Everything we have done to date, well, there's a couple of examples that have kind of come to us, like a Baton Rouge, where we're asked to look at something. The largest transaction we did was Pinnacle. We went to it, if you will, to make that distinction. I mean, made it happen. I think there's not a lot of action. I can't tell you quite candidly that there's 100 people knocking at our doors. There's a handful of properties around the country that we remain focused on, a handful of businesses that we kind of keep a very close eye on, keep in contact with. Steve's constantly on the phone every day working these things. We wait for a break. We wait for the opportunity to open up.
Sadly, that's the nature of this business. I will say, in anticipation of a question we always get, are you looking at anything else? I think we stepped up the pace at which we're looking at other possibilities. Absolutely nothing that we're willing to say makes sense for us today, but I think we're bound as employees of this company to explore every possibility as we look to develop this business going forward. It's all about dividend growth. As a shareholder, that's the way I feel. We ain't going backwards, and we're anxiously looking for ways to safely go forward. This is a kind of lame answer. Of course, it's one part of this call that I hate.
I wish we were in a business where we could say, and you've heard me say it quarter after quarter, Starbucks might be able to say, we're going to roll out 50 units next, with some predictability. It's not the nature of what we do. All we need for you folks to understand is that we're not asleep here in the home office, and we're actively chasing down every possibility. To suggest that there's somehow people hanging on a clothesline just for the picking, that's not the case.
Okay. Thanks, guys. Appreciate it.
Thank you. The next question is from Shaun Kelley of Bank of America. Please go ahead.
Hi. Thank you for taking my question. Maybe sort of on the whole M&A note, since these transactions are sort of difficult to talk about in the future, could you give us a little bit more color on just how the Tunica transaction came together? Just like sort of, was that something you approached or they approached you? Just a little bit more on sort of the specifics of that deal.
Sure.
Yeah.
No, they approached us about doing a transaction. It's one of the benefits of being in a relatively small industry in that anybody who's decided that it's time to do a transaction, even if we weren't calling them on a regular basis, they know that we're certainly one of the alternatives as to who you can sell your casino to in a way that's going to maximize your potential return. We got a call, and we basically contacted Penn to fill out the transaction. They were, without a doubt, probably the only clear choice from our perspective in that they were very familiar with the Tunica market. They were prepared to put it into the master lease, which was a very important consideration for us. They also had the benefit of being able to extract some synergies because they already had a major property in the market.
Between the two of us then, we were obviously able to get a transaction completed. Without a doubt, the sellers were motivated. I've said that probably on every call, is that the only way we're really going to get transactions done is when we have individuals on the counterparties who are motivated to do a transaction, and they just want to get the best price that they can get, not motivated directly by price, right? When we approach people and say, "Well, how much does it take to get you to do something you don't want to do?" It rarely works out very well for us. We've come to a recognition that we want to be in touch with everybody to make sure that we're front and center of mind and that we're expressing our extreme interest in doing a transaction.
We also recognize that we've got to get transactions done in a way that are going to be value-enhancing. Typically, the problem obviously is when you approach somebody about a sale, the first thing they want to do is sell you their real estate at your company multiple.
Right
that doesn't work for us. Those conversations are fairly short. I'm not sure I can really add much more color than that.
No, that's helpful. Again, it's just given the lumpy nature of these, I think, just understanding how the stories come together is useful. The second question would be, and this is also a follow-up to earlier. Peter, you mentioned that you may have stepped up your looking at different types of assets. Could you give us any color or view on what types of classes of assets that you at least have under consideration? Are these going to be things that are leisure in nature and somewhat tangential to gaming, or can they go even further afield, restaurants or convenience stores, something like that?
I guess the quick answer is it could go anywhere. We tend to be focusing on some leisure possibilities. I know Steve spends a lot of time in that space. No, in the end, it's all about We're a finance business. In the end, that's what we are. Finding reliable sources of cash flow is all that really motivate us. That's kind of it. Show us a reliable source of cash flow that we can pay reasonably for, and we'll go there. It's as simple as that, if we have confidence that it's sustainable. Again, I hate these kind of vague answers, but I couldn't be clearer that we're not stuck in a rut. We're looking at anything that can move the needle and safely do so. Steve, would you?
No, I think that says it well. We're going to continue to look at things that are consumer driven, that are tangential to gaming, that are just maybe a couple of steps away from gaming, but they're really in the consumer-dominated market.
Thank you very much.
Thank you. The next question is from Carlo Santarelli of Deutsche Bank. Please go ahead.
Hey, guys. Thanks. If I could, this is just getting back to the recent acquisitions. When you go into a tougher market or a market that's been historically viewed as being one of the more competitive ones, and I think we could all agree that Mr. Clisby certainly is one of those markets. Would you guys say that your process of identifying what proper rent coverage needs to be, et cetera, is a lot different? Do you kind of rely on the historicals?
Part of the reason for my question is if you think about some other stuff where new competition could potentially be coming in, does that kind of dependence on the history of the market relative to the history of competition, et cetera, help you make a more informed decision that you'd be more willing to do something ahead of a major competitive threat?
Look, I think that is a terrific question, actually, because I think we do pride ourselves in bringing a unique underwriting ability to gaming assets. It's hard to find a corner of the U.S. that we don't understand or haven't had some dealings with so that we could look objectively and carefully at a market like Tunica. It's not anybody's first choice. Look, the price was right. We understand that market. There's some real opportunities for synergy. Yeah, that's a transaction that we're quite pleased to do. Look at what we paid for it. We should be out of it fairly quickly. Bill, go ahead.
No, listen, I think relative to Tunica, obviously that's a mature market that has obviously threats coming from potentially way long term down the road, something in Tennessee. Arkansas is clearly taking a bite out of the existing operators. Having said that, though, we do think that it's shown some signs of stabilization, the purchase price multiple was the right price, then combined with the synergies, we felt we got comfortable. I'm not going to hide behind the fact that from GLPI's perspective, the fact that we have the lease of the property embedded into Penn National with the trust collateralization and the protection of the rest of the Penn portfolio ensuring that we collect our rent, it makes it a lot easier.
Clearly, had we done this transaction with an individual on a single lease basis, the rent coverage would have had to been a lot higher.
Right.
It's somewhat not always completely underwriting that specific asset. It's underwriting that asset in the context of where it's going to end up and who our counterpart is going to be and who's going to be the tenant and what kind of collateral and protection we're getting.
Yeah. It was a credit decision in the end.
Right.
A fair one.
Thank you, guys.
Penn as well as us. Yeah, for both.
I think we got to the right answer for both.
I think Penn's going to be very happy with that asset.
Yeah.
By the way, the properties are actually pretty nice.
Great. Thank you so much, guys.
Okay.
Thank you. As a reminder, ladies and gentlemen, it is star 1 if you would like to ask a question. The next question is from David Katz of Telsey Advisory Group. Please go ahead.
Hi. Afternoon. Since it sounds like you are taking attendance, you can put down 1 yes for the mid-afternoon earnings call. Rather than stacking up early in the morning with someone else. My question is not dissimilar from Carlo's, which is thinking about these assets that you've acquired in Tunica from a much longer-term perspective and an entirely different one from Penn's, which is more about the accretion and what it sort of does to our model, let's say, over the next few years. Are you comfortable with Tunica being a stable m arket. It's certainly not a growing one. Are you comfortable that this asset will be saleable at some point in the future, should you choose to want to sell it?
We don't expect to sell it. We expect it to be a part of the Penn portfolio of assets for forever. I don't think we look at it as an asset that we're coming in to be able to carve out. Once it goes into the master lease, kind of goes into the big pile and stays there and et cetera. I'm getting a note here. As we look at it, we feel perfectly fine. As I kind of indicated earlier, relative to the Tunica piece, is that when an asset goes into the master lease and is cross-collateralized, the risk profile of that asset is dramatically different than if it's a single one-off asset with a tenant who's got the ability to then potentially hand it back.
Had we entered into a lease like that, I can assure you that both the rent coverage that we would've expected, as well as potentially even the multiple that we would've paid, may well have been different. It's a little bit of a way that we can get to a satisfactory outcome with very little risk to our shareholders. Quite candidly, end up with a transaction that works because there are enormous cost synergies potentially available in that market for them.
Okay. Yeah.
Their multiple, they will certainly generate dramatic free cash flow improvement over with that transaction. We'll have it more than paid off well before anybody would expect there to be a problem with it. Relative to the Tunica market itself, I think it's a mature market, for sure, but I think the Tunica market is a market that's going to be around for a very long time. I think the likelihood of the Tunica market disappearing is, I think, remote. With some other markets Every market will survive at some level, but there are other markets that we look at across the United States that we think have a lot more downside to them over the long term than potentially Tunica.
If you look at the rent coming from that property, obviously, if you add a new property, you've got to make a determination of what the rent additive will be at a multiple and coverage that's acceptable to us. Once it goes into the pot, it's just part of the pot, and never to be remembered again. Whether it's up, it's down. Having a portfolio of properties as Penn does, one assumes that at a given time, this X is up, Y is down, there'll be all this. The beauty is the coverage that we have spread across the board. We'll never again think about specifically what Tunica is doing versus Ohio or any other place. Well, I take Ohio back because we have escalations in there, so there are some that we do watch a little more closely. Generally, I think you get the idea.
There's one rent, and that's it.
Right.
If that helps.
It does. Your answer sort of led me right into my second question, which is, our experience with hospitality REITs is that at some point or some stage of life, they become more of a balanced buyer and seller. Obviously, at the moment, I think the list of buyers, if you were a seller, is short to non-existent. At some point and under some set of circumstances, don't you need to become a seller? Not necessarily in a large way, but a trimmer or a trader, as we've seen with other hospitality REITs, obviously, it would appear that Caesars is headed in the direction of joining the fray. How do you think about that evolution for GLPI over time?
Well, I think, to the extent that we would be a seller, and we're not, to be clear, but if we ever got to a point where we wanted to be a seller, we would be looking at the different leases that we have. Obviously, and again, I'll reiterate, we're not a seller, but we would look at it and say, "Well, how many independent leases do we have?" We obviously have Penn, but that would be a huge lease to sell. Pinnacle, that's a huge lease to sell. You have the Casino Queen, potentially is a lease that you could sell on a one-off basis to somebody. We have the Meadows that we could turn around and sell.
Those are four leases that theoretically are different in sizes that you could potentially sell, so to speak, if you ever got to the point where you wanted to do that. Now, we have some other limitations in that with the current tax law, we can't just turn around and sell anything without potentially creating a risk of an embedded gain that we'd have to pay tax on. That's the 10-year period. Or five years? Okay, I got it correct. I thought it was 10. Five-year period. It used to be 10?
Yeah.
Okay. Phew. I feel a little better. It used to be 10, it's now five, you basically can't turn around and sell an asset for five years. We'd be selling the lease. At the end of the day, we'd have whatever properties are embedded in that lease. There's no ability to carve up the lease without a negotiation with the tenant, in terms if you were to try to say, "Well, I want to take these six properties and separate them out." Just like we have a right to object to that, the tenant would have a right to object to that if we said we wanted to take-- Let's say we wanted to go to Pinnacle and say, "Hey, we've got somebody that'd really like to own XYZ properties.
We want to separate the lease agreement." That would involve a negotiation with them, and they would have a right to object. Maybe they would agree to it, maybe they wouldn't. I guess this is a very long-winded answer of saying that we could sell the individual pieces or individual leases, but that's really not in any way, shape, or form, any part of our strategic thought processes, as we sit here today.
It's not. I will say this, I think that possibilities will open over time as the investment world, the REIT world, gets to understand the stability of the cash flow that we have here. We consider ourselves grossly undervalued today, for a couple reasons, and I'm not going to try to dissect those right now. We have an extraordinarily stable cash flow that in itself would be appealing, I should think, to many, but certainly appealing to me. If that adds any color to this at all.
Nope. Perfect. Thanks very much.
Thank you. At this time, I would like to turn the conference back over to management for closing remarks.
Not much to add. I think we said most of what we can this quarter. Thank you very much for joining us today. Desiree said she hated the afternoon. We're taking votes, so Des, you might see us on an afternoon again. We'll see. We thank you all very much. See you next quarter.
Thank you.
Thank you. Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation