Greetings, and welcome to the Gaming and Leisure Properties third quarter 2016 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. It is now my pleasure to introduce your host, Ms. Kara Smith, Investor Relations. Thank you. You may begin.
Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties third quarter 2016 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 morning's conference call, we are 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. Now I'd like to turn the call over to Peter Carlino. Peter?
Thank you, Kara, and good morning, everyone. As is our normal practice, my comments will be very brief, and we'll quickly turn this over to you folks and find out what interests you today. I think our quarter is well summarized in our press release. I would, of course, highlight quite happily that in this quarter, we closed on the Meadows transaction. We're pleased with that sign, an operating arrangement with Pinnacle Entertainment, which is terrific. I'm really pleased about that. We also raised some $46 million in equity under our ATM program with an appetite for more at the right prices and as opportunity presents itself. Finally, and as always, we are scouring the earth for other appropriate transactions, which is about as precise as we can be about the things we're looking at and working on.
We remain very active and busy as we work to grow this business. With that and those few comments, let's open it up for questions.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. 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. Once again, that is star one to register your question at this time. Our first question is coming from Steve Wieczynski of Stifel. Please proceed with your question.
Hey, good morning, guys.
Morning.
Peter, I guess one of the things in the release, you had a comment in there I thought that was pretty interesting, where you said regional gaming transactional activity remains pretty lumpy. Could you just expand on that a little bit and then maybe what you're seeing in terms of interest from smaller operators out there willing to sit down and have discussions with you guys?
Well, Steve, lumpy just characterizes the nature of our business. We're not buying shopping centers, which of course dot the highways and byways of every city and town in America, there are limitless possibilities. Gaming is much more limited. We need to be more focused as we look state to state. It's the nature of things. You saw the Pinnacle transaction, admittedly a very unusual one, but a very large one. We'll do some small ones, and the key is finding transactions that are accretive and that fit well with our stated goals. To that end, we remain focused. I'll anticipate a question by saying that we have looked outside of gaming on occasion at other possibilities. Haven't yet seen something that makes sense for us.
Look, we're not bound in a box, we continue to remain focused on gaming properties around the United States and have planted seeds or even sometimes gone beyond that in trying to solicit interest. We have looked outside the gaming business as well. This is always the frustrating part for us. Wish we could tell you a lot more on this call. The only thing we can say is that we remain pretty focused on growth. Bill, do you want to add anything to that?
No, I think we're out talking to people. I think we have a couple of diligence meetings scheduled, candidly, that's a long ways from getting a deal signed. I think the reality is we're active, getting to a resolution is always tough. Sometimes it happens, sometimes it doesn't, right? You like to say that every time you did a diligence call or a meeting that it's going to turn into a deal, the reality is that I think you've got to be practical about it and recognize that they'll happen. They'll probably happen either in surges or there'll be periods where there's nothing happening. Quite candidly, we're always rooting for us to have six deals a month. That's not realistic. I think, looking forward, I think, as we've said before, right, there's transactions that'll happen.
Going way back to the spin, we had the $500 million a year worth of transactions. We said at the time that those transactions would be infrequent and large in different sizes. If we look back since we did the spin, we've done well north of $500 million a year.
Bill says, "I think we're good for another six years.
Yeah. We got like four or five years to go.
Obviously, we don't look at it that way, but I do think that if I were to reset the clock and say over the next three to five years am I going to average $500 million a year in transactions, I feel very comfortable with that statement that yes, we will. I still think that our prospects are bright, and I think we've got a real good opportunity to get some transactions done. They could be small, medium, or large. As we look forward, we're as optimistic as ever that we're going to be able to continue to grow and to find transactions that'll make sense for us.
That's our usual non-answer. If I can paraphrase the Bible, many are called, but few are chosen. We remain as discerning as ever. You should be sorry you asked that question, Steve.
Not really. You did somewhat answer the second part of it was, you touched on it a little bit. I assume you're probably not going to answer this question, as you say you're starting to look or you have looked outside of gaming, would you even comment in terms of what kind of areas you're looking at?
I'm going to say no. Obviously, we're going to start with leisure activities because it's in our name. We'll go beyond that. Again, it's just a question of where we can make a difference, pay a price that is still significantly accretive. You know the answer to that. Look, it's our challenge to be alert to any possibility. We get that question all the time, would you go outside? The answer, of course. Show us the right deal. In fact, call us tomorrow and share what you got because we'd be thrilled to look at it. I wish I could give you a better answer. Obviously, it's frustrating for us on these kind of calls, but it's the nature of our business.
Sure. Last question, just real quick on the TRS. You guys always have pretty good color in terms of just the general gaming consumer. Maybe give us your high-level comments there in terms of what you're seeing. I guess maybe with Baton Rouge as well. I'm surprised that the TRS EBITDA, in terms of your guidance, has held up so well given some of the issues that they've seen down there. I guess last part of that would be, I assume you guys are expecting no impact whatsoever at Perryville given the distance once National Harbor opens up.
That's a quick no for that.
Yeah. I think, taking your last question first. Relative to Perryville, we do expect that we'll lose a trip. Over the course of a year, obviously everybody who's anywhere around the Baltimore-Washington area is going to make a trip to go look at the property. I think given the distance that we're away, that we wouldn't expect to lose any repeat customers or certainly not saying you can't lose somebody who becomes so infatuated with it. At the end of the day, I think the impact will be very small. In Baton Rouge, obviously, as you said, we had some issues in Baton Rouge, none of which were our doing. Primarily the thing that impacted us the most was the flood in August. That was a really bad month.
We also, as a company, decided to provide some support for our employees, which amounted to roughly $300,000 of incremental expense that we spent in the third quarter helping our employees that were affected by the flood. Many of those people who lost their homes, lost all of their belongings, et cetera. Obviously a very devastating event for them. As we look, so that's included in the results. As September rolled around, it's bounced back quite nicely. October is also very encouraging. Looks very good. Well, they're October. It was a very good month in October. I think that's somewhat the offset and the impact of, even though the event's a horrible event for the town and the city, there's been an awful lot of people from outside the town who've come in to help. Insurance claims come in, repair work's gotten done.
We see it because we're losing some employees or have lost some employees who've found opportunities to make more money in the cleanup process around the floods. Clearly, there's an economic stimulus that happens in town. I don't know how long that'll last. I don't think it'll be that long. I think when it's all said and done, we'll look back and I don't think that'll be one of the things when we look back on the year that we're going to say, "Wow, Baton Rouge was adversely affected by the flooding.
In the U.S.
Right. Now, generally across the United States, I think it's kind of bumpy, right? I think there's ups and downs. I know everybody's always looking for the last fluctuation to determine if it's a trend. Quite candidly, I don't see trends that are very concerning. I think we feel pretty comfortable and good. There have been some good months and some bad months. That's generally the history of regional gaming. As we see it, we think that, quite candidly, things are fine. Not spectacularly great, but steady.
Yeah. That's fair.
Okay, great. Always good color, guys. Appreciate it.
Thanks.
Thank you. Our next question is coming from Shaun Kelley of Bank of America Merrill Lynch. Please proceed with your question.
Hey, this is Barry Jonas. Just a couple of questions. Is $168 million still the right number of where you're going to hit on the ATM, and when do you think you could get there?
Yeah. Well, that's for the total amount that we said. Listen, I don't know that we look at that number as an absolute number we need to get to. Yes, it's in the 160, 170 range. That's certainly our goal. So far as part of the downside of ATMs is you're only allowed to be in the market during your open windows. We're going to be looking at somewhere from November through early December. The most we've got is a month. I'm not sure that we're going to be hyper-aggressive in the next month given where our stock price is right now. We believe that it'll come back. I'm not saying we won't sell some shares, but I think we'll be pretty disciplined about how many shares we put out. We will get there.
Listen, I don't in any way want anybody to walk away thinking that we're not going to issue all of the shares, but I would expect that probably happen sometime first, second quarter, maybe third quarter next year. The pace of that may well be affected if we sign up a deal and we know a deal's coming, we may accelerate the pace a bit. We're very focused that our activity in the market should not have any impact other than psychological, but it's not going to have any actual impact on the trading price of our stock. That is our number one criteria that we give to our underwriter. That's the last thing we want to do is have them pushing out stock that would have an adverse impact on where our trading volumes are.
To the extent that we ever see any trades that happen that look like it's impeding the market on that day, we'll pull back. That's been our approach all along, and it will continue to be our approach.
Great. Just to follow up on the strategic question. With another readout there and increased strategic competition, where are M&A multiples trending right now? Maybe just on top of that, any general thoughts on the Eldorado acquisition of Isle of Capri?
It's kind of hard to say where trends are. There's not.
Haven't been a lot of transactions
Haven't been a lot of transactions to develop a trend. Certainly, if you look at what we paid for the Meadows, that was obviously under duress and bad circumstances. We ended up paying a little higher multiple than we would normally pay. I think it's all deal specific, right? At the end of the day, when we look at transactions and what multiple we're going to pay, is it a conglomerate of assets? Is it a one-off asset? What markets it's in, what's its challenges, what's its opportunities to grow the rent? All of those factors come into play. I wouldn't necessarily walk away and say there's an exact defined multiple for transactions that are going to happen in the future.
I think the prospect of the higher interest rates has actually, if anything, maybe caused some people to be a little more thoughtful about making sure they get a transaction, or if they're going to do a transaction, that there seems to be a little bit more openness to a transaction given the prospect of rising interest rates. Because obviously, rising interest rates will cause multiples to come down. There's no if, ands, or buts about that in the triple net space. I think smarter people are acknowledging that, and that's probably why you're starting to see transactions happen, not necessarily particularly in our space, but certainly in other spaces inside the REIT community.
Great. Just the Eldorado acquisition of Isle. Is that something you kicked the tires on, and any general thoughts there?
Well, we were certainly involved. We've spent a good amount of time and energy and effort and diligence on Isle. I will say that I think they paid a very full price. Not that we couldn't theoretically paid a fuller price. The challenge we had is that the friction costs around the Isle transaction for us as a REIT were outrageously high. That involved the tax basis of the assets and the separation of the assets and other implications around tax that quite candidly caused, based on the price they paid, plus those other incremental costs, to be a transaction that didn't work for us. We'd been there earlier.
I'm not going to say we were an active part at the very last minute, we'd certainly looked at Isle and had come to our views on what was a fair price, they got a price that, at least a headline number that was higher than the price that we were willing to offer.
Great. Thanks so much, guys.
Thank you.
Thank you. Our next question is coming from Cameron McKnight of Wells Fargo. Please proceed with your question.
Good morning. Thanks very much.
Morning.
Just turning to fourth quarter guidance that assumes the escalator is in operation in the fourth quarter. Can you talk to rental coverage for the third quarter and the last 12 months?
Sure. Rent coverage through the third quarter, which I won't actually talk about in the third quarter, but through the third quarter for Penn was basically what you're seeing in their press release, is that their expectation is that there'll be a partial escalator, which tells you that after the rent's done, we'll be at exactly 1.80 through the end of the year. The Pinnacle rent coverage is also just slightly north of the 1.8. Certainly rounds down to 1.80. I don't really want to give exact numbers there. First of all, we're early into the process. It's only been since the close of the transaction, which really effectively for a full month was May. We're talking about 4 months.
I think we'll have numbers again at the end of the fourth quarter, which I think will be much more relevant to whether we'll get an escalator out of Pinnacle or not on their renewal. I think we're in good shape there. The Meadows obviously doesn't matter, or it's only a partial month anyway. I don't know if that's helped or not.
Okay, got it. Thanks, Bill. Back to the question of acquisitions. The bid-ask spread has remained persistently wide in gaming. Do you think it could take another recession to really crack open some opportunities for you guys?
Well, I would hope we don't have to have a recession to make that happen. Just from a general perspective. I think it's hard to say. I've said this before, and I'll probably get hit over the head for saying it again, but at the end of the day, it takes a willing seller and a motivated seller who's not looking for just the biggest, highest price. At the end of the day, it's because it's at the end of a fund's life, it's at the end of the management team's life or the ownership's willingness and desire to run the business. There's family discord. There's any number of things that cause people to want to monetize a transaction, potentially being over-leveraged. When that time comes, they recognize that it's time to sell.
Yes, they're going to go look to get the very best price that they can get, but they're going to do a transaction. Right now, what we're confronted with is we're confronted with sellers who are saying, "Well, if you hit the right price, I'm willing to sell." That price is generally stupid. If you're willing to pay a stupid price, I'm willing to sell. That generally doesn't yield transactions that make a lot of sense. If, on the other hand, the guy says, "I'm selling, and it's either going to go to you, party A or party B," I think we have an excellent chance of being the winning party. Now, it didn't happen in Isle. Another party took a different view that I think was pretty optimistic.
Potentially, I'm not saying they won't get there, but there's basically, I would argue, on their part, some assumptions that are pretty much best-case scenario.
Also the tax issues.
Right. We have tax issues, obviously, on the Isle. You combine the two of them, we didn't win that one. Listen, if we start losing transactions on a regular basis, then we'll have to do some introspective looks at ourselves and say what's happening. I don't think that's going to be the case, to be quite honest.
Yeah, you have to. Bill says it well. Every deal that we ever did, we've purchased a lot of gaming assets over the years, there's a reason somebody was selling. Maybe it's Bill highlights a change in circumstances, or they want to get out of the business, or they're going to retire, or there's a thousand reasons, or a family dispute. I could highlight a couple of those that we have benefited from. Sometimes you work at it, and then you hang in there long enough to get lucky, waiting for the right timing. That's really the nature of this stuff. There's not a lot of these assets out there.
It's a messaging process and being prepared, keeping your capital in the best possible shape so you can be competitive and ready, which is something we're working very hard at. Just being on top of everything that sort of breeze that could be an opportunity. We're doing that. It's the same kind of non-answer that we give, I think, most of the time until we have another one.
Right. Well, I'll just throw one more topic on for Isle, right? The Isle transaction was a transaction that happened where it's still assets that are still in play. Not to say that they're going to do a transaction with us in the near future, but it basically went to a company who now owns a lot more assets in real estate, and at some point in time down the future, there's the potential that they may do a transaction involving monetizing their land and building. Had we done the transaction at the price we'd done it at, we would've done it at a price that we wouldn't have been very happy with, and we would have never had an opportunity to ever get the assets again at a more reasonable price.
Not to say that in the future, we couldn't end up paying more than what we paid last time. It'll be a better price that we'll be happier with when we pay it, so.
Got it. Understood. Thanks, guys. Just on leverage. Is 5.5 a hard target, or could you see yourselves going below that next year to give yourselves a little bit of dry powder?
It's our expectation that we're going to go below that. We've indicated where we're going to be at the end of this year. That's without any future ATM proceeds. We do expect that the ATM proceeds, we'll have some more of those, and that will accelerate the de-leveraging as well as the free cash flow that we're going to Basically generate over the course of the next coming years will be used to de-lever, certainly get us down below 5.5. Again, it's a little bit of that you have to measure it in terms of the environment. Our current thoughts, I don't think we would be looking to take it much below five. Who knows? We'll see when and if we get to that point, which this will take a while, a few years. We'll revisit the topic at the time.
Somewhere in that period between the 5.5 and down, I think having some cushion so that we can do a transaction on an all-cash basis and not have to worry about our leverage going above 5.5 is actually a very prudent position to take.
Perfect. Thanks very much.
You're welcome.
Thank you. Our next question is coming from Carlo Santarelli of Deutsche Bank. Please proceed with your question.
Hey, guys. Good morning.
Good morning.
Bill, you made the statement earlier, you talked a little bit about conversion of diligence to actual deals. Could you talk maybe, or maybe even just give us kind of an idea of how many deals you guys have gotten to the diligence stage on since going public?
There's different levels of diligence. There's diligence where you have conversations and you look at some, what I'll call public information. There's getting into the more, you might sign an NDA and get some access to some non-public information, and then you get into the diligence level where you're hiring outside resources to help you, whether that's on the financial, tax, or legal side. There's been a number of each category. I'm not really sure I want to go out and do a dissection of every opportunity we've ever looked at and why it failed or didn't fail, or why we were successful. Clearly, we try to not spend a lot of money on outside resources unless we think we've got a deal that's likely. To be fair, we did spend quite a bit of money on Isle over the course of time.
That was one that didn't work. I don't think it's really that productive to get through. Some of these deals, even if they fail, doesn't mean they're over.
Understood. If I could, obviously, Casino Queen was involved in a transaction. You guys clearly have a relationship with them. My question is, you mentioned obviously the friction cost involved with Isle. Does any of that change, with Isle having been acquired now with a new entity, does that change kind of the setup from your perspective on a go-forward basis?
A lot of it'll depend, quite candidly, there's going to be a whole new tax characterization created on the transaction with the new acquirer. I don't know. We haven't done any work in terms of what they're doing, in terms of how they're accomplishing the merger between the two companies. There'd be a lot of steps in how they monetize and how they push down, whether they push down debt or whether they do step-up basis in the assets. A lot of stuff will happen in that merger that, quite candidly, until it's completed, and I doubt they even have that completely nailed down as we sit here today. It's hard to say. It's hard to characterize.
I would hope that if they're forward-looking, that they would be taking advantage of the opportunity to fix some of the tax bases in some of the real estate that they're purchasing, so that if and when they ever decide they want to monetize their assets, that they would have done it in a way that'll be more tax efficient. Having said that, I have no idea whether they're doing that at all. This might be a helpful hint.
Understood. Thank you very much.
Thank you. Our next question is coming from Daniel Politzer of JPMorgan. Please proceed with your question.
Hey, guys. To what extent do you think there's been any pause in sellers willing to transact because of the election? Kind of on a related note, have you noticed any change in tone lately, given the somewhat choppy regional GGR numbers that have come out?
I can't say we're seeing any of that, to all of you or Steve Snyder around the table. Again, I'm not sure that it's the economy or anything in that vein or the election that really affects somebody's desire to sell. There's usually a reason they want to sell.
Right.
Bill has highlighted this many times on the road. We're knocking on a couple doors. Steve, I know you have, and I have a couple things in mind where there's a perfectly good property, single asset in state X that we'd love to get. The seller's got a lot of money. He's making a lot of money. Life is good. This is typical, so I'm talking apocryphally about any number of people in that category. Eh, it's a lot of cash, but I'm having a good time. Why should I sell? It's a process. You sow seeds, then you kind of keep at it and massage it and hopefully get something out the other end because, over time, attitudes change. In the absence of a desire to sell, they don't kind of have to do it.
This is going to be, what's the word we use in our release, a lumpy process. That's just the nature of things. There aren't 20 guys out there looking to sell their properties today. Probably aren't even 10. There might not be five at this given instant. Our job is to be on top of everything that might be pried loose.
Understood.
Steve, do you have any comment about that? You're frontline with these guys.
In answering the question specifically, there's nothing about the election that has motivated people either to sell or not to sell.
Right.
If there's tax policy that comes out in 2017 that looks like capital gains tax rates might go up, those are the kinds of things that could precipitate a little bit greater motivation on the parts of sellers. If people think that interest rates are going to go up dramatically, therefore cost of capital will rise and multiples will compress. Those are the kinds of events that could lead people to rethink their strategy. To Peter's point, the first question any seller always asks, if they're not really a seller, "What am I going to do with the cash?" That's the way you should think about it. If people have better uses for the cash, they're going to come to the table as a willing and participating.
Okay. I'm not sure if you guys will answer this one, but figured I'd throw it out there. Has there been any additional ATM activity here in the fourth quarter?
Well, even if we wanted to, we couldn't. We're in a closed window until the earnings release. The answer is no.
Got it. All right. Thanks a lot, guys.
Yep.
Thank you.
Thank you. At this time, I'd like to turn the floor back over to management for any additional or closing comments.
Thanks, operator. Well, look, we thank you all for tuning in this quarter. We'll look forward to seeing you again after the end of the year. Thanks very much.
Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.