Greetings, welcome to the Gaming and Leisure Properties second quarter 2016 earnings 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 call is being recorded. I would now like to turn the conference over to your host, Ms. Danielle Guterding with ICR. Thank you. You may begin.
Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties' second 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. 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. 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 very much, Danielle, good morning, everyone. I guess my summary comment about this quarter is that things went as well as planned. We happily and successfully closed, of course, our Pinnacle transaction. We are poised to close on our Meadows transaction in September if all the regulatory things come together as we hope and expect that they will. We launched a $400 million ATM program with the caveat, I think, well written and summarized in our release, that would expect to draw up to $168 million in equity for that Meadows transaction. Even that, subject to circumstances at the time. We'll be most cautious with that. We continue to look for, and aggressively look for, other opportunities, none of which we can tell you about. I can promise that you will be the first to know as things evolve.
Pretty straightforward this quarter and I'm going to go straight to questions. If you would, operator, please open the floor.
Thank you. At this time, we'll conduct 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. One moment please while we poll for questions. Thank you. Our first question comes from the line of Joseph Greff with J.P. Morgan. Please proceed with your question.
Good morning, everybody.
Hi, Joe. Morning.
In the press release, obviously when you reference the ATM, you talk about further reductions in leverage and then combining that with undistributed earnings that will allow you to finance smaller deals without accessing the equity markets and any kind of volatility associated with accessing the equity market. Do you have a fertile pipeline of smaller-ish kind of deals, or can you talk about that a little bit?
I thought we said we weren't going to talk about that. The only answer I can give, Joe, is that we look at stuff big and we look at stuff small and we'll do big and we'll do small. These things are complicated transactions as you know. There are always regulatory issues of one sort or another almost any state that we look at. I can only tell you that we're pretty active now. It's not done until it's done and wouldn't even hazard a guess as what we'll be able to accomplish over the next year. We remain hopeful and positive and, I think out of the box from the time we began our spin, we've done some pretty remarkable things. We may be able to do that again, maybe not, but I'm satisfied that we're moving forward pretty aggressively.
How's that for a non-specific answer?
That's right in line with what I thought you'd answer with. That's all. Thanks.
Thank you. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.
Hi. A couple of modeling questions. In the second quarter, TRS EBITDA came in line with your expectations, but you're lowering the outlook for the year. I guess two questions on that. Can you talk about the second quarter in general, regional trends have been weaker. Did you offset that with some cost savings? Why the more tempered outlook? Thanks.
Well, the TRS actually came in under about $1 million for the second quarter versus our expectations. We offset that with some savings at the corporate level on the corporate overhead line item. That's why you're seeing the favorable there. I think generally speaking, Perryville is holding its own on the revenue side, and so we've done some more good things relative to expense control, and so Perryville's pretty much operating in line with our expectations. Baton Rouge has had some up and down months. I think in the second quarter, April and May were both rough months, but June was much better. Now there are some incidents going on in Baton Rouge that are creating a little bit of noise. I don't know that necessarily it's a fair quarter to look at in terms of expected long run rate.
Everybody recalls all of the unfortunate situations that happened in Baton Rouge a couple months ago. At any rate, so our outlook going forward is expecting that Baton Rouge has, without a doubt, been a more troubled market than Perryville, and so we've reflected that in our outlook going forward. I wouldn't read a lot into our two little properties in terms of what's going on with the regional gaming markets. I think you can look to the results for Penn and Pinnacle in terms of what their operating results are as a much better indicator of what's going on in the regional markets than what you'll see out of either Perryville or Baton Rouge, to be honest.
Helpful. Ohio came in slightly below your expectations for the quarter, but for the rest of the year it's the same, or?
Well, basically what we do is we follow the expectations of our tenants. They give us what they believe how the property's going to perform, we reflect that in our guidance, absent us having some contrary view. Obviously, they have a tremendous amount of better visibility into what's happening at their properties than we do. I think it was a rough month, right? Just as a reminder, our revenues in Ohio are 20% adjusted monthly. That's where we have the most variability to our rent flow stream is, quite candidly, in the Ohio racetrack. That has generally been good. I do know that the Columbus property, there's been some pretty decent amount of road construction that's been happening in and around that property on the main beltway, which at times has been less than wonderful.
I can't give you a whole lot of specifics on that, just know that we're actually fairly encouraged with where we think Ohio's going to be going forward. In short story, our guidance reflects what our expectations are of our tenant.
Helpful. Thank you.
Thank you. Our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch. Please proceed with your question.
Hey, good morning, guys. Peter, to maybe follow up on the first question that was asked maybe in a slightly different light. Thinking about the smaller properties that might be out there. I think as we compare what you guys might be willing to acquire with some of the M&A approach of others out there in the market, is there a minimal size property that sort of makes sense relative to how you need to split the cash flows for these types of sale-leaseback transactions? What kind of scale, in a theoretical acquisition, do you need to have before you think a property owner can really evaluate GLPI as a partner?
Boy, it's hard to say how small is small.
We'll go pretty tiny.
I was just going to say, we'll do almost anything reasonable. It's got to be a solid property in a solid location, and believe that it has a future and all that. Yeah, we'll do little ones, keep going, because again, little ones can lead to big ones. They give us more outreach with new operators. There's a lot of strategic reasons for us to be poking around in some of these smaller properties right now. We'll do them. Look, a penny here, a penny there. Look, we knew perfectly well when we did the Pinnacle transaction that moving the needle's going to be more challenging. In the meantime, what we have said is that our job is to get our balance sheet down to fighting weight, to be as fit as we possibly can.
Look, and if we have to keep hitting singles, we're willing to do that until we finally hit one out of the park, which I fully expect in God's time we will, so
That's helpful. Thank you. Bigger picture, when we think about the ATM program from here, is this sort of a preferred mechanism, you think, moving forward to help alleviate some of the equity overhang that was created in the Pinnacle transaction? Or is this the right avenue for Meadows and maybe for a single asset, but not correct for a portfolio? Just how you think about how this fits into your toolkit.
Go ahead.
The way I'm thinking about it is we look at the ATM as a very cost-efficient mechanism for raising equity. When you compare that against a fully underwritten deal with the commissions you pay to the banks as well as the undoubtedly, usually anyway, we were very fortunate last time to get a slight premium on the filed offer. Normally there's some sort of form of discount there. Being able to move stock out at the market prices on a very, I'll call it measured and disciplined approach. In other words, being able to obviously turn it on and turn it off as we see fit, is a compelling opportunity. I think one of the things that we're looking at is, we'll have leverage under 5.3 times by the end of the year on a pro forma basis.
That gives us a little bit of cushion there, as well as having the ATM program. It does increase the size of transactions we can get done without having to worry about market volatility on the equity. Listen, I think I talked about it last time, right? Is that what we experienced through the Pinnacle transaction was gut-wrenching, is probably the best description of watching your stock move by 30% from peak to valley and kind of retracing most of it, fortunately, in the nick of time. That is not something that we are particularly anxious to go down that path again on. The ATM program adds more flexibility in terms of adding $100 million, $200 million, $300 million of equity. It also gives us the ability to take advantage of where we think our stock is fairly priced.
Relative to larger transactions, I think what we've indicated before is that really large transactions are going to require, from our perspective, equity take back from the seller, to avoid what we experienced in Pinnacle transactions. I'm talking about really large transactions. There's really small transactions, which would be easy. Those actually wouldn't require any equity, because we're going to be generating somewhere in the neighborhood of $120 million a year of free cash flow on undistributed earnings. You add in an ATM program to supplement that, so you can do fairly decent sized, almost Meadows sized transactions, normally, going forward, just by nature of the fact that you've got the undistributed earnings and a little ATM supplement and wouldn't have to worry about it at all.
When you go larger than that you might have to accelerate the ATM program, or obviously, since it's only $400 million and we plan to do $168 million relative to the Meadows, we'd probably have to re-up the program at some point in the future. We think this is a program that will get people very comfortable with our ability to finance transactions of a reasonable size, and I think can quit worrying about equity overhangs. Andrew?
I think it's a great mechanic. Last question, if I could, would be, sort of targeting ending it at 5.3 times is probably actually a little less than I was thinking previously. Is the five to five and a half kind of the right ballpark? Would you ever dip below that opportunistically, given if the stock price works? Where do you really want to be independent of movements for a specific transaction, or when something's right in your sight?
My thoughts, obviously this is somewhat subject to change in market conditions and what's going on in the world, is that we'd be comfortable. What we've recognized is, the reason we thought that we could have six times leverage, then bring it down and take it back to six. Clearly that hasn't been accepted very well by the rating agency. It is our goal to get to investment grade. The new thought process is, five and a half and bring it down below five and a half, which will be at 5.3 by the end of this year. Take leverage back to five and a half or do transactions at five and a half. Really put ourselves in what I'll call a bulletproof balance sheet perspective.
The way I would characterize the thought process is, if we find that we're under-leveraged and some way we make that determination, that's a problem that's very easily solved. Takes about 30 days. You can fix your under-leverage problem really quickly. If you're over-leveraged, obviously you could spend a decade trying to get that fixed. We look at the fact that out in the outer years, starting in 2018, we have roughly $1 billion a year of maturities coming along. The last thing we want to be doing in that situation is to have ourselves in a situation where our balance sheet or that the market, for whatever reason, and obviously today, we're way under-leveraged, but who knows where that'll be in 2018, is we want to be in a position where the refinance ability of our maturities is without question.
You can end up in a very bad cycle, and we're highly focused on making sure that when we get ready to refinance our current debt maturities, which start in 2018, that we're in good shape to do that, and hopefully at lower interest rates than where we are at the time we issued the debt.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.
Hey, everyone. Good morning.
Good morning.
Bill, Peter, whoever wants to opine. When you guys think about the discussions you've had in transactions that may or may not be serious, today, relative to kind of the tenor of those discussions, maybe prior to a new competitor emerging, are you noticing any different dynamic in kind of the potential seller or potential other side of the table, what they're asking for?
Why don't we give that to Steve just for fun? He's looking like he wants to take that.
Well, obviously, Carlo, there hasn't been any noticeable change on the seller side because our principal competitor in our space has basically set a threshold that obviously is materially higher than what you've heard from us. When you look at portfolio transactions, that competitor as a subsidiary of a larger parent, obviously is not going to be conducive to a sale-leaseback transaction because the nature of their parent. In terms of the tone or tenor of the negotiations or the dialogue with third-party sellers, it really hasn't entered into the mix in terms of the environment that we're sort of circling around.
Yeah, that makes sense.
Yeah, I would add on. I think, listen, the reality is right now is interest rates are at all-time lows. Credit availability seems to be at all-time highs. People are looking at those and they're still looking at valuations and expecting pretty rich valuations. Our view is that, we have to be disciplined because anybody can do a very rich transaction. We could announce 4 or 5 transactions a year, probably, if we had zero discipline on price. If the transaction's non-accretive, it simply doesn't work. Even marginally accretive transactions can be troublesome because, quite candidly, all you're doing is increasing your share count, which means at some point in time in the future, when you do get a transaction that makes sense, all you've done effectively is negated the value of that transaction.
We're going to be disciplined, and we're going to continue to pursue opportunities, and I think there will be some opportunities. As we've said since day one of launching this spin, they're going to be lumpy, irregular, and they're going to happen when they happen. Quite candidly, sometimes it'll take some patience. Our view is to make sure that we have a great balance sheet, that we're ready to go, that we're obviously aggressively looking for transactions when they're ready to go at the right time and the right price. Most of that motivation's on the seller, not because we're knocking on the door offering too much money. When we have a motivated seller, I think there's a very high likelihood that we will be involved in the transaction.
Yeah. I think Bill said it very gracefully. I have said on previous calls, a lot less gracefully, that any moron can make a bad deal. That's just not what we're about. Discipline is everything. I think that, I feel that we have a fiduciary responsibility to preserve our dividend structure. First and foremost, I'd rather do nothing than jeopardize that. We're willing to sort of inch along and less than until we can find something that's going to move it in a bigger way. If we're putting out $0.60 a quarter, let's say currently, it ain't going to be $0.59, not if we have anything about it. That's the first goal, to make sure that our dividends are perceived by the market as solid as a rock.
Great. Thanks, everyone.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of David Katz with Telsey Advisory Group. Please proceed with your question.
Hi. Good morning, all.
Good morning.
I think any moron can make a bad deal is perfectly graceful. What I wanted your update on is that we've gone down the road, and you've obviously completed some monumental tasks the past couple of years or few years. When you look out ahead or even where you are today, what does the posture feel like in terms of assuming deals are a function of recent comps, interest rates, forward-looking sentiment, where do you think the posture is and how do you think that progresses, let's say, in the next 6-12 months in general?
David, there's really no way to know. I think we've answered that in a couple different ways, that this is completely unpredictable. Bill uses the word lumpy. It is utterly unpredictable. We are looking at things large. We are looking at things small, but there's so many factors. It takes a willing seller, somebody who really wants to get it done or somebody that perhaps can be approached. We're not adverse to more hostile approaches if it seems business sensible to do that. We've always proven to be pretty smart about that. Bill, take a whack at that, but I haven't a clue.
Listen, I think the biggest motivator has to be a seller who's motivated. Obviously, they want a good price. Anybody who's selling anything wants a good price, but their motivation can't just be that it's a price that's so compelling that they can't say no to it. It should be a function of whatever, it's family discord or it's a desire to retire or estate planning or just general retirement and getting out of the business or whatever it is that's causing somebody to make the decision, or it's a private equity fund that's at the end of their expected life of the fund.
Whatever it is that's causing the motivation for the liquidation or the monetization of the cash. That needs to be the driving force behind the transaction, not because we're coming in and offering some price that somebody says, "Well, that's such a stupid price, I have to take it." That's where we're at. I think we look at incredibly large transactions, and we've looked at what I would call infinitesimally small transactions. I don't think we are, in any way, looking at a transaction saying it doesn't work for us because it's of a size nature. There have been transactions that we've passed on that we thought were too risky, and that we thought that the future cash flow streams over the course of 20, 30 years were incredibly insecure or unsecure. We've passed on those types of transactions.
Other than that, I don't think there's a gaming property in the U.S. that we wouldn't be interested in looking at if we thought it was in a good, stable for the foreseeable future, and it was at a valuation that made sense.
The market forces within a normal band are really not the driver of this necessarily. It's really a function of a property owner wanting to pursue this type of model at which point terms will dictate themselves.
They want to exit the business, right? It's either looking at this as a thought process maybe they could be solving some internal political issues.
Take cash off the table.
Take cash off the table.
Still stay in the business.
Many possibilities.
Right.
I think certainly, up to and including, they just want to get out of the business entirely, and our model is the way that gets them the best price.
Right.
They may want to deleverage. That's certainly been a motivator in one of our transactions, was a company that was over-leveraged. Actually, that was the motivator for two of the transactions. Both the Casino Queen and The Meadows were all about the parties having a little bit too much leverage. Right now, given where the debt markets are, that's not quite applying the level of pressure that we might find desirable for our own selfish purposes. Those ebb and flow. That changes over time. Just a matter of time, matter of being patient.
Understood. Appreciate it. Thanks very much.
Sure.
Thank you. Our next question comes from the line of James Taylor with Bank of America. Please proceed with your question.
Hey, guys. How you doing?
Good.
Good.
Speaking of cheap debt. I just had one quick question follow-up, Bill. Obviously, it's hard to predict exactly what the agencies will do, I get that, and I know we've talked about that. Just sort of big picture with the sort of balance sheet strategy you laid out, sort of taking leverage to the low fives, levering up to the mid fives, and doing transactions in the mid fives. Do you think that that is at the goal post that the agencies have set for an eventual upgrade to IG?
I don't know. Obviously, in my mind, it is, but I'm somewhat irrelevant to that.
Let me chime in, Bill, before you get started. The irony is there's plenty of companies at a 6 level that are investment grade. You tell me by what alchemy they get to what they get to.
Obviously, it's a challenge. I think there was some concern from the rating agencies with the Pinnacle transaction and how that went down in terms of, we kind of moved leverage around. Although quite candidly, from my perspective, when I looked at all of the comps in the REIT space, six times leverage is well within the sweet spot of investment grade. The concept that we would take it up into the sweet spot alarms them, I guess, is the best way of describing, because we'd indicated somewhat that our target was five and a half. During that whole transaction, we bounced between five and a half and six times. We ended up at significantly less than that. With the confluence of events that have happened this year as well as the equity offering and upsizing the equity.
Obviously, some option proceeds from employees, some deleveraging, et cetera. We're going to be well under the five and a half and down to the 5.3 times. I would say we absolutely are worthy of getting an upgrade. However, my opinion is of little value. We'll be anxiously awaiting to hear what the rating agencies have to say after they've had a chance to digest this earnings call, as well as the fact that we're putting in place an ATM, and I would hope that they find that to be a commitment that's not just words. In other words, that it's real. Obviously, by the next quarter, we'll make some progress. I'm not going to guarantee that we're going to get the entire $168 million done by the end of the quarter. That might be way too aggressive.
We'll certainly make some progress towards that, I would expect. We'll see what happens when they give us their next update.
All right. Very good. Thank you.
Thank you.
Thank you. Mr. Carlino, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.
Really none to make except thank you very much for joining us. Let's hope we accomplish everything we wish through the next quarter and have a happy call then. Thanks again. Have a great day.
Thank you.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.