Greetings, welcome to the Gaming and Leisure Properties First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Kara Smith of ICR. Thank you. You may begin.
Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties First 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.glproperties.com. On today's call, management 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. 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. With that, I'd like to turn the call over to Peter Carlino. Peter?
Thank you, Kara, good morning, everyone. As usual, I'll start with a few brief comments then open the floor right away to question and answers. We have as usual and as you heard, our entire group. I'm happy to report both a good and an eventful quarter. Operating results are in line, of course, with what we projected, we also have concluded a very successful equity raise, as you know, along with an equally successful debt raise. In the process, we attracted a new group of long-term investors. I think now with the final closing on with Pinnacle, we position the company as the major player in the gaming REIT space, as well as the third largest triple net player in the United States. We're excited about that closing, of course, is scheduled for Thursday.
Additionally, we favorably settled our litigation involving the Meadows, and have announced that we partnered with Pinnacle as the operator of that facility, which if for those who haven't seen it, is a terrific facility just south of Pittsburgh. I also want to note as we come up and finally approach the closing of Pinnacle, that we have developed a tremendous working relationship with them. I would expect, as a result, that you'll see us partnered on many future transactions, and we're looking forward to that. With that, look, I'm going to open the floor to questions. Operator, would you please do that?
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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your headset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of Felicia Hendrix with Barclays. Please proceed with your question.
Hi, good morning, and congratulations on all the positive events that you've had lately.
Thank you for your input.
You're welcome. I just wanted to start out, there's been some acquisition activity lately in the sector. As you know, Boyd has been active with some acquisitions. Just wondering, were you involved in the process for any of those assets? And then on Aliante specifically, just wondering what your thoughts was on the purchase multiple because I'm wondering if this comp now raises the bar for other acquisitions you may be looking at in Las Vegas.
Speaking to my end, we've got others who may want to comment. I don't think there's much we want to say about what we've looked at and what we haven't. I'm very reluctant, frankly, to opine on what somebody else has chosen to pay for those assets, because each company has a different metric, different cost saving opportunities and so forth and, I don't know, Bill, do you want to venture an opinion on that?
Listen, obviously, it's really difficult. Certainly, we were aware of the transactions, to your point. I think, as we look at it, when you've got properties where there's enormous expected synergies and opportunities for growth Related to a specific plan or operating plan that a company has in place. It's really difficult for us to get involved at the multiples that they're quoting. Obviously, the multiples that they're paying on current EBITDA would be difficult and doesn't, quite candidly, work for our business model. A nine or 10 cap rate doesn't fit into the thought processes of what they paid for those assets. Relative to what that does for future expectations, I would be pretty excited if I owned a small property in the Las Vegas locals market right now, if I thought that that was going to continue.
To what Peter said, I think there's some strategic thought processes going on relative to what Boyd is doing there in terms of their geographic footprint within the locals market and how they're trying to balance out their properties. I, quite candidly, don't have any insight into their thought processes, and I'm sure they have a plan and a strategy that's going to work for them. This was just one of those types of transactions, quite candidly, that doesn't fit within our business model. That doesn't mean that it wouldn't fit into our business model in the future once they realize the opportunities that they see when they made the purchase, and that as a result, as they achieve those synergies, that at that point in time, that there's every reason that we could get involved.
As far as its implications on the future, I suppose it does raise the bar somewhat for locals properties in Las Vegas. I think we'll have to wait and see how that turns out in the future.
Yeah. Look, which prompts me to conclude by saying that it's probably a very good transaction for them.
Okay. That's clear. Bill, while we have you, in the release, it said that the company was going to be under 5.5 times leverage by the end of 2016. I'm just wondering, does that include the impact of the Meadows? Also, what's the longer-term target, and how long does it take to get there?
I think that our target, as we've pretty much always said, is 5.5. The 5.5 with the Meadows does anticipate us making the acquisition on the 5.5 target. We're going to be opportunistic about how we make that happen. Obviously, we have a very nice size, and we raised significantly more equity than what we had said we would when our stock was in the mid to low 20s. We're very happy with that outcome. I think we're very focused on making sure that we keep our balance sheet in a great position to be able to go forward to do future transactions and future deals. More than likely, you'll see us do it in a very non-market disruptive way. There's a number of ways to get that done.
We'll undoubtedly raise equity in the future because that's what REITs do. I would expect that we're going to be very focused on getting to 5.5 or below 5.5. As we sit here today, the plan would be to make sure we're there by the end of the year. That's about all. I'm not going to really give any more specifics than that.
No, that's helpful. That answered my question. Thank you.
You're welcome.
Our next question comes from the line of Steve Wieczynski with Stifel. Please proceed with your question.
Hey, good morning, guys. Bill, first question, I'm not sure you were going to be able to answer this, or you will answer it. When you look at the guidance for the full year, the $2.93 in AFFO, is there any way you could give us what that would look like if you owned Pinnacle for the full year?
No, I'm not going to give you that. If I was going to give it to you, I would've given it to you in the press release. I think there's some timing issues there in terms of when all that's going to happen. Obviously, it's a function of what month do we close, and then where do we end up? What's the timing relative to the financing for that, and what form does that take? As been our prior practice, we've never really given forward-looking guidance short of having a better disclosed plan on how we plan to finance it, I guess, is the best way of putting it.
Is the Meadows not in the guidance for the full year just because the closing date is still basically five months out at this point?
Exactly.
Okay. Last question, I guess, for Peter. Can, I guess, you give us a little bit more color on how you view the overall acquisition market today, and then maybe your view with now having another competitor out there with the MGP deal getting done? That might be helpful.
On the first part of that question, it's so unknowable. It's probably the question I hate most of all. In fact, I joked about that with the group last evening as we talked about this call today. The question always is what's next? Which I appreciate, and of course, we kiss a lot of frogs in this world of where doing new transactions is what we're about. We're looking at things large and small, it's so absolutely unpredictable. I think it gets back to the points Bill was making before, that all we can do is ready ourselves for whatever the hell comes up next. Getting our capital structure perfectly in line, having the absolute best cost of capital
Going forward. To that end, we are completely and manically focused. You can count on that. As it relates to what MGM has done, I think it's terrific, actually. I think we struggled for the first year and a half with just kind of a ho-hum that now there's a gaming REIT. We're the only one, isn't that kind of cute? People just weren't mustering the interest that I thought they should have had. MGM coming to the space adds some additional luster to the process and some more muscle and scale and name recognition and so forth. I think we've already turned a corner with their presence in the space. We view that, I think, actually as a very good thing.
Okay, great. Thanks, guys.
Our next question comes from the line of Joseph Greff with J.P. Morgan. Please proceed with your question.
Good morning, guys. Question on the Meadows financing and maybe asked a different way, Bill, is if you were to finance the Meadows transaction with all debt financing, would you still be at around 5.5 times pro forma 2016 EBITDA?
No, we'd be a little higher. Obviously, you bring on the $25.5 million of rent, and roughly just north of $300 million, the implications would clearly be that would be an X. It only takes you to roughly five, probably rounds of five, six when you're done. That's why we don't feel an enormous pressure to necessarily have to go out and raise an equity in a particular timeframe. We can do it once we feel like the markets are stable and that there's a fair price, and then it'd be a small offering if it was an offering, or it could be there's different programs. You can do an ATM program, you can do a forward, you could do an overnight, you can do a DRIP. We could implement a DRIP program to raise some equity that way.
There's a number of ways mechanisms will be available to us, or we could simply be a little bit more patient and say, "Well, the reality is it's going to take us a little more time, and our leverage will naturally get to below 5.5 anyway." I think the last one is probably less likely. As long as the markets are reasonably cooperative as they have been, I think that's clearly our intention to get down into that range below the 5.5 and get ready so that we can do another acquisition and not have to worry about having the pressures of the equity markets.
I said this saying when I was on the equity roadshow, It was kind of a way of helping people reflect on what we've been through, which is, and for those of you that heard this, I apologize because it's going to be hearing it again. In my world, there's reprimands, spankings, and beatings. A reprimand, you nod your head and acknowledge that maybe that wasn't a great idea. A spanking, it hurts for maybe a few hours or a day, and in a beating, you're in the recovery room. We've just kind of come out of the recovery room for a six-month period with what happened with our stock around the Pinnacle overhang, and I think, quite candidly, we're pretty happy to be out of the recovery room, and I don't picture us going back into the recovery room anytime soon.
I would say that we will do the right thing and make sure that we do not put ourselves in a position again to have a major overhang. This isn't a major overhang under any circumstances. I look at it as being very focused on the future and saying, "We need to make sure that we never get ourselves into that position again of having a mandatory sizable slug of equity required." That means we will be doing stuff to manage our balance sheet in the way that accomplishes that.
Great. Then I have 2 more follow-ups. One is with regard how you look at increasing, modifying the dividend. Do you look at the dividend change based on the anticipation of incremental AFFO growth per share or based on what you reported and looking backwards and then raising the dividend based on what you reported in the prior quarter? You know what I mean?
In this quarter, right, we've got, if you look at it, we could not raise the dividend in anticipation of Pinnacle transaction. We're going to have 2 months worth of rent. In all honesty, we're going to have coming in, we're really going to be making a dividend payment before the end of the quarter. In some ways, we'll only collected a month's worth of rent, and we'll have a full allotment of shares related to the Pinnacle transaction. It didn't really make any sense to try to adjust it based on the historical level. What we've done is adjusted it reflective on our expectations for the year. That's why we gave some guidance relative to once we normalize, which will be in the 3rd quarter. By that point in time, we can go to our more appropriate run rate.
Our focus is on 80% of AFFO as being our dividend policy. Basically, 80% of free cash flow. I think we would continue to do that. Going forward, once we close the Meadows transaction, I would expect we'll do the same thing, depending on the timing of that. We may very well leave the quarter of the close as flat and then reflect whatever the impact is in the Meadows going forward into the next full quarter where we've got the results. Not sure if that 100% answers your question or not,
Right. The dividend calculation adjustment, the $5.4 million that you deduct from AFFO for the full year and the $1.2 million for the second quarter, does that go away next year?
It does. That goes away in the third quarter. Well, for the outstanding shares, to the extent that we have employees who have options who are not receiving dividends, who elect not to exercise their shares for whatever reason, we will still make that calculation in anticipation that those shares will eventually get converted into fully outstanding shares. We have a combination of shares that are held by GLPI employees, and we have share options that are held by Penn employees still. To the extent that those options are unexercised, they're vested but unexercised, we will still account for the fact that those dividends will eventually get paid when they are exercised. There will always be that adjustment, but I would expect that that will come down significantly, certainly with the GLPI executives, once the dividend is no longer getting paid on those options.
Okay. My final question for both you, Bill, and Peter, now that you have two potential buyers of gaming real estate, and I get it's super early, but are you seeing more activity with sellers recognizing that having two potential buyers of real estate is better than one, therefore pricing might be better, and seeing that manifest itself in a bigger pipeline?
I think you answered it already. It's much too early to reach that kind of conclusion. It remains to be seen what MGM is going to be interested in. Clearly, their early focus is going to be on the two properties they're developing in Massachusetts and in Maryland. Those are big things that they're going to have to, after they stabilize, roll in. Yeah, I think it's way too early to conclude that.
Great. Thank you.
Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.
Hi. I thought it was interesting in your prepared remarks in the press release, you noted how you're getting more interest from traditional REIT investors. Thinking about this the other way, are you seeing any increased interest from other Triple Net REITs into the gaming space now that maybe it's become more high profile? Thanks.
I don't think we've seen that. I'm speaking for myself. Bill, you and anyone in the group can comment. Steve might have some thoughts, but I don't think so. I think many have dabbled around the edges, but not many, but several have. We know that. I think most are daunted by the licensing processes. Obviously, the bigger you are and the more states you're dealing with, the more complex the problems. I got to tell you that if you try to bring on a new director, even a single director, who has not come up through time and has to go through all the states where we do business, it's a very ugly and intrusive process. That has, and I think will remain for maybe forever, kind of a high bar of entry. Any other comments? Steve?
Peter, you're right, Peter. In fact, the two Triple Net Lease REITs that have dabbled in gaming have noticeably sort of stepped back. The non-gaming REITs that have tried just seem to be impacted by, as you say, the regulatory regime in an adverse way. I do think now with MGM Growth Properties and ourselves, there's obviously a robust marketplace, but I don't see the triple-net guys that are out there coming into our space for the reasons you've stated.
Great. Helpful. Thanks. Just my follow-up. Can you just help us, Bill, think about G&A on a go-forward basis once you're done with the Pinnacle and The Meadows transaction? Thanks.
Sure. Well, there's no increase in headcount related to the transaction. There'll be some nominal increases in what I'll call the overhead numbers of whether it's your outside auditors, your D&O insurance, your SEC fees, or bond rating fees, those types of things. Those numbers should be a very small number. Our G&A costs should stay very fixed. The one item that'll be coming out is what I talked about a little bit earlier, is the dividends on options ends in the third quarter. That's not really a Pinnacle-related option item, but it's an item that does go away in terms of our payments on those. Also some historical awards around, call them phantom stock, or basically phantom stock, goes away as well by the first quarter of 2017.
We will have hit the three-year anniversary and when the maturing of those has happened and the vesting of those. I would say, overall, our overhead's actually going to come down and then hit basically a new stable platform going forward. There'll be a small increase for the ancillary costs, some reductions on the equity programs and how that impacts the income statement. From that point forward, I think we're relatively stable. Candidly, on any future acquisitions, regardless of size, I don't expect to see any significant or any increases, really, in headcount. Maybe an entry-level staff
individual for the legal department or maybe an individual staff person for the accounting department. Other than that, I don't see any need for any kind of increases. Peter may want to touch on that as well.
I agree completely, Bill. It's pretty straightforward. As long as we don't increase our operating capability or appetite, that is, properties like Prairieville or Baton Rouge, you won't see any significant change in our headcount at the home office.
Helpful. 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. I was just wondering, to follow up on the comment around the participation from some of the REIT dedicated investors in the Pinnacle transaction. Bill, could you give us a sense of what some of the feedback might have been from some of those investors and, any things that sort of change a little bit in your underwriting as you look at future deals? You talked about the overhangs. You certainly don't need to repeat that one. Anything else that may have been, your kind of lessons learned or discussion topics on the mind of some of those investors as you guys went through the equity raise, that'd be helpful.
Sure. I think there was a few things that came across. I think was obviously, and Peter touched on this earlier, the very visibility of the fact that MGM was converting to a REIT increased the level of interest in just the concept this might well become a whole new segment and sector versus a one-off, and I think that was helpful. I think, as people dug into the work, they started to realize that the visibility into us and understanding us was actually much easier to understand than, and I think the analogy I heard was, like medical property or healthcare REITs, which a lot of these guys were interested in, were taking a look at that sector and doing a compare and contrast with us and them, and figuring out quite candidly, that it was much easier to get their hands around our economic prospects versus theirs.
There's some of the old issues that have always been out there, I think, whether it was tenant concentration, and helping guys digging in and working through the tenant diversification issue and how these cross-collateralized master leases work and then some work we did around explaining how resilient gaming operators are during difficult financial times. The analysis we gave on the road show was around what happened on a theoretical basis to rent coverage through the financial crisis and how that impacted our two tenants was being Pinnacle and Penn. That gave people, all of a sudden, a lot more comfort around the security of the cash flow stream and the AFFO and the stability.
I think, just generally speaking, I think it's also one of the things that we knew upfront, when we did the spin, which was that, it was going to take time for people to just kind of watch what happened. I think, watching eight consecutive quarters of earnings coming in within, less than a penny's variance to the guidance gave us credibility relative to our statement that we were a stable platform. Listen, I think we're very happy with the mix of the investors. I think we've got some great long-term REIT investors who've invested and I think have at least based on conversations, seem pretty happy with their investment to date. I think they like the prospects going forward, we'll see.
I'm not sure if I addressed everything you asked there, so if I missed something, if you could ask it again, I won't be offended.
No, it's okay. I think you hit on a lot of it. The follow-up would be, leverage, obviously at one point you were contemplating being a decent amount higher, just given the cost of equity. It kind of reached that self-fulfilling prophecy as the stock price went up, that you could raise more or afford to raise more. I guess the question on that ratio is, does five and a half times put you back in the area of investment grade? Is that still a target that you guys are trying to reach?
What we are, and I think Peter touched on this earlier, is that we are maniacally focused on having the very lowest cost of capital because at the end of the day, our entire business is based on a spread between what our cost of capital is and what we have to pay, to acquire cash flow streams. Investment grade is very much a part of that strategy. I wish it was in my control. I think I can make some incredibly persuasive and logical arguments as to why we should be investment grade, but unfortunately, my opinion counts for almost nothing. We'll have to work with, obviously, the agencies in terms of working through those things.
I think, listen, we've certainly had a tough period there with our equity, and when our equity was trading at obscenely low levels. We were still committed to raising equity at almost any price. Well, really at any price, and keeping leverage at six times. We think six times, quite candidly, is investment grade. There's a number, I could give you a whole slug of REITs that are at six times or north that are investment grade. We felt like it wasn't like we were going into an irresponsible zone. We felt like we were just going into a zone that was somewhat at the higher end of it's still investment grade. Obviously, the markets cooperated. The enthusiasm was there.
We were able to upsize without having to pay a penalty price in terms of raising more equity, we elected to do that, which I think was the smart move. I think, candidly, talking to the larger REIT investors, they were highly supportive of increasing the equity size of the offering and getting the leverage lower. Not only did that fit within our own internal thought processes, but it was nice to have shareholders supporting and encouraging that decision.
Thank you very much.
Our next question comes from the line of David Katz with Telsey. Please proceed with your question.
Hi, good morning. I think you've probably addressed, with your metaphor for the recovery room, your thoughts around your acquisition strategy going forward. I wanted to ask about raising equity. You listed the menu of different ways that you could go about doing that. I think we've seen in the past where entities would accumulate or raise equity ahead of a deal, or secondarily in response to the announcement or the targeting of something that they intend to buy. How do you feel about those one strategy versus the other?
Well, it seems like, after having come out of the recovery room, do it earlier rather than later. However, I do think that you just have to do it in a way where you don't disrupt the markets, and you don't end up with an overhang. I think there's a mechanism, certainly, quite candidly, I think we're almost spending too much time on this issue, but I'm happy to. Our policy is obviously to deal with this as many times in different ways that people want to talk about it as possible. I think at the end of the day, you can do a transaction of this size. Well, let me put it up. We do generate $120 million, approximately, pro forma free cash flow per year. To accomplish the Meadows transaction at five and a half times means about $160 million.
The amount of equity that we're talking about here is relatively de minimis. We also have embedded in our assumption, and I'm getting way more granular than you guys probably care about, but embedded in our assumptions is we are not assuming that everybody has exercised all of their options, all of the GLPI employees and the Penn employees, so we've been relatively conservative on that side. The reason that's an equity raise of another form is that when those employees exercise those options, the strike price times the number of shares is actually an equity proceed for us. That's another element that's going to come into play, and we'll measure that out.
Doing it, I don't think it's ever bad to pre-fund a transaction, and obviously, having coming out of the recovery room, would probably be okay with, in other words, doing an equity offering, and if by some chance the deal fell apart, it's not the end of the world. Certainly, you're not going to go pre-fund something in the multi-billion-dollar category and sit on it. If you were to go out and raise, even if you did raise $100 million or $200 million of equity in anticipation, the reality is it's 1% of our outstanding share count. 1% is just not enough to get excited. It's just not enough to worry about in terms of saying, "Well, gee, I've got a little bit too much equity." Whether I'm at 200 million shares or I'm at whatever, the extra few million shares was now hardly a big problem.
That's kind of how I'm looking at it.
Is it fair to say that you could potentially, on the list of potential strategies would be an ATM program that really just serves to reduce your leverage incrementally as you progress forward, which then presumably would leave you the latitude to do more things when they came up?
Yeah, no. Listen, ATM program, it's basically dribbling small amounts of shares out into the market on a fairly regular basis. Doesn't affect the stock price.
Right.
You can't raise massive amounts of capital in a short term with that kind of a program.
Right
It's definitely a way to get it done. You can also look into forwards or other elements. Not that those are necessarily great, or we can just do a follow-on offering. I think, the one nice thing that came out of this roadshow was that we clearly got the feedback that the big REIT players are very excited I don't want to say excited, that's probably too strong a word, but they're very supportive of raising equity in anticipation of getting deals done in the future. Sitting there, and the feedback we got was, "You won't have to worry about us not being supportive because you've raised some extra equity in anticipation of getting a deal done.
If that means that your dividend doesn't go up by a penny. It's going to be, instead of being $2.40, if you had to leave it at $2.40, instead of taking it to $2.41, don't worry about it, because that's not really how we look at you. I think, as we transition from investor types who are really way more focused on AFFO per share, and not that we're not focused on growing AFFO per share in the long term, don't ever take this to mean anything different than that.
Recognizing that a quarter or two or three of a delayed gratification for a penny or two on your dividend is not going to translate into people having an adverse reaction is incredibly helpful and supportive of doing the right thing and getting our balance sheet where we want it to be, which is we want to get to the lowest long-term cost of capital humanly possible.
Okay. Thank you very much. Very helpful.
Our next question comes from the line of John DeCree with Union Gaming. Please proceed with your question.
Good morning. Thank you for taking my question. I think most of them have been answered so far. Just wanted to shift gears a little bit and get an update on the TRS strategy now that the TRS is a much smaller component of the business post the Pinnacle acquisition. Is it something that you would keep for flexibility, perhaps consider divesting those assets or maybe even adding to if the capacity allows?
I think you kind of answered it with your question, that keeping it for flexibility makes a lot of sense. For these years that we are solely a gaming, or principally a gaming-focused REIT, having operating capabilities, some very strong operating staff in place, I think is a huge plus. Don't know how and if and when we'll use it, but it's a capability that I think sets us apart from some others. I think it makes sense for us to. Now, that having been said, I can't tell you that we have no plan to go out and pick up operating assets to build that segment. I think my general view is that it's a fail-safe for us in case we might need or desire on an interim basis to take in a property to be able to handle it. It's not our business.
We are a Triple Net REIT, and that's kind of what we plan to remain. Bill, anybody, Steve, any comment?
Sure. No, listen, I think, it's a nice strategy so that if we were to ever get into a situation where we wanted to acquire a portfolio of assets, and for whatever reason, we ended up with an operating entity, let's say a small piece that couldn't fit within it. As we've talked about before, we're not going to do transactions where we don't have an operator invited. Let's say you ran across a portfolio of, I don't want anybody to get excited about any number, this is just a total random number, is let's say 10. I don't think anybody has 10 properties, so that'll be okay to throw that out as an example.
If you had 10 properties, and 9 of them you had an operator or a partner identified, and there was one small property that that operator couldn't take for whatever reason, whether it's license limitations, FTC issues, or whatever, we would think about maybe leaving that operating and moving that into the TRS. Not necessarily on a permanent basis, but certainly as a mechanism to facilitate getting a transaction done, especially in a scenario where you weren't able to run a public process. Let's say there was a portfolio of assets that were available. It was on a confidential basis, so you couldn't just go out to the general market, and we had 9 of the 10 covered. Would we think about putting the one into the TRS? The answer is yes. Other than that, I think our expectation would be that's not the desired outcome.
That's simply a fallback position.
Great. Thank you.
Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.
Hey, guys. Thank you. More of a theoretical question from me. When you guys think about acquisition opportunities, especially as it relates to greenfields, not referring to anything specific, but how do you think about stabilization of the asset and when, or a period of time it would take you to get comfortable with proposed rent structure? Maybe if you could answer it two ways for a greenfield development in a new market versus a greenfield development in an already established market.
Well, that's an interesting question. Look, greenfield transactions can make a lot of sense. As we've said for years and through our Penn years, we excel in monopoly situations, kind of like those a lot. Look, we were involved with several possible transactions in Massachusetts, where had we been the winner, there's a high assurance of success. You kind of know it when you see it in an established market. What's the market? You underwrite these on a deal-by-deal basis. I think we all know that. Maybe I'll try it this way. You won't see us doing a greenfield property on the Strip in Las Vegas. We are always now and forever risk-averse, and generally very cautious. If that's any guidance at all, I get back to saying, you know it when you see it.
We have two years of experience in the gaming world, kind of know what's a safe deal and what is not. Bill?
I would agree with that. Obviously, greenfield projects that are, as Peter said, on the Strip, incredibly difficult to think about on a nine cap basis when the total project returns have generally been mid-single digits. Obviously, paying rent at a nine cap or a 10 cap doesn't work. I think there are opportunities, especially in new jurisdictions where there's limited competition or the market demographics are enormous, that you can get excited about doing a greenfield project. We certainly did, as we announced. It was short-lived, but we were associated with a couple of situations where we were prepared to do a greenfield financing. We just didn't happen to have the partners that we selected, obviously, that didn't go anywhere.
I think in the future, if there were opportunities in future states, but I think, quite candidly, this is a very esoteric question in some ways, because I don't know of any states where there's any upcoming opportunities to even do a greenfield. Obviously Texas someday, who knows? Georgia someday, who knows? Northern Florida someday, who knows? They all fit into that category of, quite candidly, being years away from anything that's actionable. I would leave it at that that's probably one of the areas that we're not really going to have to spend a whole lot of time worrying about, because it's nothing that's going to be on our horizon of an opportunity or a choice to make for probably a good long period of time.
Understood. Thanks, guys.
Our next question comes from the line of George Smith with Davenport. Please proceed with your question.
Hi, thanks for taking the question. Bill, you've spent a lot of time talking about lessons learned during the process as a buyer of assets. I'm wondering if maybe we can think about lessons learned from a seller vantage point or maybe would-be sellers. Specifically, do you think people have woken up at all to the benefit or potential win-win nature of striking a more accretive deal and then taking equity as currency?
I think clearly there's an argument or a discussion point that if you're selling an asset for cash, clearly you want to get the highest price humanly possible. If you're going to be taking a significant amount of equity back, making sure that the transaction is an accretive and positive transaction can actually end up in a result where you end up with a better transaction as a seller than actually eking out the last tiny bit of consideration. Obviously that's a rational thought process, but at the same token, you're sharing some of that upside, right? People, the sellers, generally have an emotional reaction to trying to get the last dime. I think it takes a very pragmatic seller to be able to get to that point.
Obviously, I'm sure this is a nice clandestine way to talk about the situation happening in a certain bankruptcy court or process in the U.S. Who knows? I would think that there is absolutely, in a situation where it's a major transaction, where there was equity take back, that the seller should be thinking about what does the implications mean for the acquirer, and is that in fact going to be a transaction that's going to be well received or not, and that there's upside to be shared on that they're actually benefiting both parties. We'll see. I would say it takes an enlightened seller to understand that concept. We'll see if there's any of those out there in the market. Listen, I think opportunities are going to be there. There's going to be potential for us to do transactions of a variety of sizes.
Some, there may well be small transactions that we might affect. I can tell you that obviously, we're very interested in being a good partner with people that we've entered into transactions, whether that's with Penn or Pinnacle or the Casino Queen. We were quite excited, quite candidly, about the prospect of the Meadows transaction ending up with Pinnacle, because I think it also sends a message to people that doing transactions with us is the beginning of a relationship that can be mutually beneficial for growth for both parties. We would do other transactions with our existing tenants and be excited about doing that. In fact, we might do things that, quite candidly, for an existing tenant that we might not do for an outside party, as an example.
Especially on something of a certain size or scale, or whether we might have to provide some incremental financing like we did for the Queen original transaction. Those are the types of things that we look at as part of our tools to be helpful with other people who are somewhat hesitant about entering into a transaction with us. I know I've kind of gone off on a bit of a tangent here, I apologize for that. I think, yes. What you're really talking about is acknowledging the partnership relationship, right? If you're taking back equity in an entity that you own a significant percentage of, you should as well be jointly interested in how well that partner is going to do, that partner obviously being us in a situation where we're giving back a significant amount of equity. Long-winded answer.
Hopefully, one of those comments It was on point. The other ones you can take for editorial comment.
Real quick, just to make sure I'm clear on the dividend. Our new run rate becomes $0.60. That does capture the full benefit of Pinnacle, presumably, I don't know if you guys have put much more numbers on it, but once we get Meadows, we'll have something slightly incremental to that?
Yeah. Obviously, it's the expected run rate, where we're at with, at least in the third quarter for the Pinnacle transaction. Obviously, there are escalators and whatnot that come into play in the future that'll have an impact going forward, which should be positive. It does not have the Meadows. I think the Meadows is a transaction that was structured recognizing a fairly rich price, but we have built-in escalators that are stronger as the time goes on, assuming that the property performs in accordance with both ours and Pinnacle's expectations. I think they're going to be very excited to pay us the increased escalators because obviously that means they're making an outsized return or an increased return on their investments as well. Directly is, yes, the third quarter is Pinnacle only.
Yes, when the Meadows comes in, depending on the timing of when that gets approved, based on the size and scale of that transaction, I don't think it's going to have a huge impact by any stretch on our AFFO per share. Yes, there is hopefully some potential incremental benefit to that. If not immediately, down the road as the escalators kick in.
Okay. Thanks for the time.
You're welcome. Thanks.
Our next question comes from the line of Daniel Rubin with Gates Capital. Please proceed with your question.
Hi, this is actually Jeff. I have a couple of questions if I can. Assuming the Pinnacle deal closes Thursday, would you adjust the dividend that you'll pay in September for the new run rate?
We're going to adjust it in the third quarter. We're expecting to pay a $0.56 dividend in the second quarter, which is consistent with what we did in the first quarter. Starting in the third quarter, we're expecting to pay $0.60.
That would be the 9/17 dividend that you pay or whatever, would be the first one at the higher rate.
Yeah, that'll be paid sometime in September. Right.
Okay. That's the first question. The second question is, what's the total amount of option proceeds that you expect in 2016?
I think we're going to decline to give that level of specificity. That's really dependent on it's a projection, and it's my estimation of when individuals are going to exercise their options. I don't necessarily want to put too much pressure on those individuals.
Okay. Let me ask it another way then. At the end of 2015, you had about 7.9 million, I think at just under $20 a share. That would be like Do all of those 7.9 expire?
They don't expire. There's a mix of roughly half and half, it's not exact, of options held by GLPI employees and Penn employees. The Penn employees have not been receiving dividends on their options. The GLPI employees have. Those dividends paid on options end with the third quarter dividend. It's our expectation that most of the, well, certainly a big chunk of the employees will exercise their options in that window of time either before or after they're no longer receiving a dividend.
Okay.
As I said on the roadshow, if I was coming up with a stock that was non-dividend participating in our story, how many of you would be interested in buying it? Obviously the answer was almost zero. Well, pretty close to zero. For the same reason, obviously, with 80% of the free cash flow going out in dividends, it's not that prudent for the employees to be hanging on to their options when they're not participating in the dividend.
Just lastly, based on the opportunities that you see out there today in the acquisition landscape, how long would you guess it might be before you would consider an acquisition outside of gaming?
Well, let me take that, Bill. We try to answer it this way. We've looked at some non-gaming opportunities. In one sense, look, it's all about buying reliable cash flow. That's the whole deal. So it could, pick any sphere that you like, if we had confidence in the stability of that cash flow and thought that we could make a long-term transaction around it, we would do it tomorrow at 9 o'clock. We really would. We're not looking in those areas, but we have been approached with some broader leisure-related or entertainment-related kinds of things. Yeah, we'll look at it. It's a function of stability. Again, we're not seeking those things out right now. Don't think we're in a hurry to go there. Don't think we've kind of run the table in gaming, and I think we're a long way from that.
I think it's inevitable
As a public company, we have a responsibility for responsible growth, and we'll be focused on that. We have no prejudice against it even now. It just isn't where we're looking today.
Lastly, can you just briefly talk about your shareholder base? I know there's about 52 million shares that are going to Pinnacle holders this week. It looks like the short interest is up about nine or 10 million shares from where this started. I'm just wondering, in your conversations with the larger Pinnacle holders, how much of that you expect to turn over? Then the other consideration is the composition of your shareholder base pro forma for the equity raise, and how that might change when the states become a separate category at the end of August, and how you're sort of thinking about this whole thing.
Bill?
Yeah. I'll take that. Listen, obviously this is a transaction that the Pinnacle shareholders are going to receive GLPI shares has been long known. Our short interest is up. I would assume that there's a component of those people who did not want to own GLPI shares who have, at various points in time, probably shorted the GLPI portion of that side of the transaction. I'll be very interested in the next person to see who has short interest in the period after the transaction closes this Thursday. There are a number of people who own both GLPI as well as Pinnacle shares, who put an order in the book to own more shares of GLPI in our public equity offering. I would assume that those people were aware that they'll be receiving GLPI shares as part of the Pinnacle transaction.
In fact, I'm 100% sure they were. A certain number of those individuals, I will assume, will be perfectly happy taking ownership of their GLPI shares and retaining those shares. There will be certainly others that will probably look to rotate out. I don't think there's going to be a rush to the door. I don't think this is a situation where Thursday morning's going to hit and they're all going to hit sell no matter what the price is. I think they're going to look at it as an opportunity to potentially rotate out over time. Certainly, anybody who had a position where they wanted to be there has already set themselves up for that to happen.
I doubt they would take the market, that they would just all of a sudden on Thursday wake up and decide, "Oh, my God, I own GLPI shares." I think it'll be a gradual process. I'm not overly concerned with how that's going to take place. I think it'll happen over the natural course. I'm sure that those people that are looking to rotate out will do so in an orderly fashion. It'll take some period of time for that to happen, but I'd be surprised if it takes more than a few weeks for people to feel that they're in a good position. As some guys have actually said to me, "I'm not looking to even guys who acknowledge that they're not a natural holder.
It's not the end of the world to collect north of 7.5% dividend while they're waiting for their time to rotate out. It's hardly the worst outcome in the world. We'll see. Obviously, I can never predict what the market's going to do, and what the individual investors are going to do. They surprise me all the time. We'll see what happens. I'm not losing a lot of sleep over this, the fact that there's going to be those shareholders and that they're going to rotate out. I think it'll happen on a fairly organized basis.
Operator, let me say this. If there is one more question, we'll take one more, and I think we're going to have to wind this up.
We have no further questions at this time.
Well, this is perfectly well-timed as we get to the end of the hour. Take the opportunity to thank everyone for calling in today. As always, we look forward to seeing you again at the end of next quarter, hopefully with equally good news. Thanks again.
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.