Gaming & Leisure Properties, Inc. Q1 FY2020 Earnings Call

Welcome to Gaming and Leisure Properties First Quarter 2020 Earnings Conference Call. Please note that this conference is being recorded. I would now like to turn the conference over to Joe Jaffoni with JCIR. Thank you. You may begin.

Thank you, Sherry, and good morning, everyone, and thank you for joining Gaming and Leisure Properties' first quarter 2020 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section of 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 materially from those discussed today. Forward-looking statements may 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 risk factors and forward-looking statements contained in the company's filings with the SEC including its first quarter 10-Q and earnings release, as well as the definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release. On this morning's call, we are joined by Peter Carlino, Chairman and Chief Executive Officer; and Steve Snyder, Chief Financial Officer at Gaming and Leisure Properties. Also joining today's call are Desiree Burke, Senior Vice President and Chief Accounting Officer; Brandon Moore, Senior Vice President, General Counsel and Secretary; Steve Ladany, Senior Vice President; and Matt Demchyk, Senior VP of Investments. With that, it's my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Thank you, Joe, and good morning everyone, and thank you for joining us today. With us, as Joe indicated, is most of our senior management team who are equally available to fill in the blanks where Steve and I may miss something or some detail. So at the outset, I want to say that this is not the first quarter call that I expected to make at the start of this year. We and our tenants were off to a terrific start until the unexpected impact of the COVID-19 virus changed everything. We've just concluded a tremendously successful 2019, as you would know, but what a difference a week or two can make. We saw our entire portfolio of assets completely closed, which happened virtually overnight. So we moved quickly to try to understand what this shutdown could mean to our tenants and ultimately to us, and figure out how to decisively mitigate any risk to our business. We recognize that Penn National, our largest tenant, was critical to our success going forward. Not knowing how long this crisis might last, we made a judgment that we needed a plan we believe would carry us safely into 2021. We've met several times with the Penn National team to fully understand their situation and work to craft a plan that would give us both companies the ability to outlast any plausible closure period. To that end, again, as you would know, we purchased the Tropicana Las Vegas on what I believe were very favorable terms in a transaction where Penn received credit for approximately five months of prepaid rent. This consideration for that property was beyond an outright sale, which would perhaps be a priority one, but there may be a number of attractive options that we might consider. At the same time, we negotiated a new ground lease at Morgantown, and by the way, that property is under construction, stalled now of course, but it's at a terrific location, one of the new properties at a 10 cap rate. We obtained lease modification, a number of things we were anxious to change with Penn. We secured master lease renewals with Penn and we struck an option for Penn to buy Perryville along with a number of favorable terms that came out of this whole package. This outcome accomplished our original goal of giving us and our lenders and shareholders visibility and predictability around Penn's rent payments through the end of this year. It also will ensure our shareholders remain economically whole, which is a huge focus of ours from the beginning. We weren't giving away something; we got true value and I think we acquired great value for that period of time. We received almost 99% of our overall cash rent in April with payments in full from Penn, Eldorado, and Boyd. Casino Queen is yet to be settled, but we have had constructive dialogues with their ownership group today and we believe that this should or could lead to a favorable outcome. One of the most difficult parts of addressing the impact of the COVID outbreak was the decision to furlough the majority of our casino employees in Baton Rouge and Perryville, which was a very painful but sadly necessary choice. We have maintained employee benefits at least through the end of this month. And we have retained certain personnel to help us plan for reopening as soon as safely possible. Getting our employees back to work is a huge priority for us. And we believe as many of you may have seen, there will be news soon that all of our tenants' facilities may open as early as in the next couple of weeks, albeit with initial restrictions. It could be tough; we don't know yet. And I think we expect to have a lot more clarity on where this is going by the end of this month as states feel increasing pressure to make decisions. For additional insurance, we drew down our revolver this quarter, and we received approval from our directors to change the composition of our second quarter dividend to 80% stock and 20% cash, which is an obvious choice to preserve cash to enhance our liquidity and flexibility given the uncertainty of knowing precisely when these facilities will open, or how quickly they will ramp back up. The change was made in conjunction with a reset to our quarterly dividend run rate as well. The decision to reduce the quarterly dividend was made really in an abundance of caution. There's no magic to that number. It is a reasoned carefully thought out number, but it's not the final word. We could well adjust positively later, but we think that prudence suggests that we take a cautious view. These actions along with others, as Steve Snyder will outline in his following comments, should see us through. Our properties are extremely critical to the states where our tenants operate. The tax revenue they generate is extremely important to most of them, especially now. So we expect great pressure for states to open their properties as quickly as they think is safely possible. And then finally, you know, thinking about this, as I talk to you all this morning, I want to say I've been in this business and its predecessors for a very long time. I was Penn National's President when it opened in 1972, and I led our public offering in 1994. And through those years, I have weathered many, many challenges, though this one, I must say, is like no other. But we have a highly talented team here at Gaming and Leisure Properties who are more than capable of successfully navigating through this crisis. So we will do all that we must to ensure that when this all ends, we're on our way to being bigger, better, and stronger than ever. We believe that there will likely be much greater opportunity for favorable asset purchases as we begin to return to normalcy, and that the journey to regain our previous success will be both gradual but certain. And through this all, you can expect us to maintain the same focus and discipline for which we have long been admired. With the same company, we will always work very carefully. With that, Steve?

Thank you, Peter, and good morning, everybody. Recognizing these are very unique circumstances that we find ourselves in, let me just get one housekeeping thing out of the way. First, we did file our Quarterly Report on SEC Form 10-Q last evening with the Securities and Exchange Commission. So there's an exhaustive detail in that document to the degree I will file questions after this call. Obviously, this is a very unique earnings call, and the quarter we are reporting, even though it was reasonably strong, and we achieved all of our objectives in spite of our businesses being closed for two weeks during the quarter. This quarter really isn't the focus; the focus is on the steps we've taken to preserve value in light of the unprecedented velocity and depth of the disruption to the economy that has significantly affected our and our tenants' businesses. COVID-19 has affected everyone, and as a company, we must look at the current circumstances through the lens of its impact on our employees, our tenants, their employees, the communities in which our facilities operate, our creditors, and all of our stakeholders as we rapidly adapt to a world that's evolving more quickly than we could have ever imagined. Historically, the cadence of our earnings calls has been to follow our public tenants after they've provided us with four wall coverages for the completed quarter to incorporate that critical measure of four wall coverage into our release. In an effort to provide more timely transparency, we felt it was better to not wait given the impact that zero-revenue months have in the near term on the coverage of our tenants' lease obligations. We will continue to work with all of our tenants to forbear covenant defaults resulting from these closures as long as a collaborative dialogue continues with our tenants. To highlight some of the steps that we've taken, and Peter mentioned some of these, we've done extensive scenario analysis and held frequent discussions with all of our tenants, as well as with all of our credit groups. As you saw from the Penn transactions, the series of transactions that were announced, we had prior to announcing that transaction, obtained the cooperation of our banks in amending our credit facility agreement to allow us to recognize non-cash receipts as cash revenue for purposes of all covenant calculations. We also withdrew our guidance given the lack of predictability relating to our monthly variable rents and our Columbus, Ohio asset, the upcoming variable rent resets that we will be seeing under our master leases, the lack of escalator realizations here in light of the COVID-19 pandemic, and the TRS performance due to the duration of closings and the reopening trajectory of our facilities. We drew down the amounts available under our revolving credit facility to provide enhanced liquidity, providing a quarter-end cash position of nearly $560 million, which has been enhanced by the receipt of cash rents in April. Finally, as Peter mentioned, we made the very difficult decision to furlough nearly 550 of our TRS employees, which was a very difficult decision to make, but we've committed to paying their benefits through the end of May and will evaluate this as May progresses, as we gain greater visibility regarding the timing of the reopenings. We've maintained minimum staffing levels for security purposes but also to prepare for the reopening of these facilities and to provide for the appropriate sanitary and hygiene protocols to ensure a safe opening for both our employees and our customers. Lastly, we outlined in detail the financial impact to the company of zero facility revenue months and the impact on the contractual rent adjustments from the standpoint of our expense structure. Obviously, you all know our average monthly interest expense is about $23.5 million. We've reduced the G&A in the company below $2 million per month. And as disclosed in the press release, we've reduced the expenses in our taxable REIT subsidiary to under $1 million per month. So our total monthly cash burn on average is just over $26 million. A quick portfolio update: Peter mentioned that Casino Queen did not pay its April rent. As you recall, they had an item pending in front of the Illinois Gaming Control Board in January for a change in ownership of that business. Given the impact of COVID-19, the change in ownership of that business has been slowed down. We are in very productive conversations with the sponsor of that reorganization of the business, who is also the secured lender of that business, and we do contemplate a deferred rent agreement as part of the recapitalization of that business as it proceeds forward once that facility reopens. In Ohio, we were fortunate to get the Ohio Racing Commission to give approval for our ownership of the Belle Terre Park real estate, and we are working with Boyd to complete the transaction to include that real estate as owned real estate in our portfolio rather than tackling it as a mortgage. For the current quarter, as Peter mentioned, our Board approved a dividend policy that reflects the impact of the current closures on the business. We're also changing, as Peter mentioned, the composition of our second quarter dividend to be paid 80% in stock to provide a matching of our non-cash distributions to the non-cash rent receipts. This temporary step also provides a reasonable cushion to maintain our leverage targets and offers future balance sheet flexibility. Obviously, the goal of taking these steps is to both strengthen our current position while also providing value-enhancing opportunities in the future, among them evaluating alternatives for our own acreage as a result of the Penn transaction. We consider the current environment to be a temporary interruption in an asset class that, as Peter mentioned, is essential to the state and local governments in which these facilities operate, given the significant tax generation and employment provided by these facilities. We're very confident that the regional markets and our tenants will lead the way in the recovery of these assets when they do reopen. Social distancing in the form of virtual weddings or virtual happy hours or a virtual NFL Draft will not become the new norm. It's simply the current norm, and our tenants are planning for activities that will return to these casino floors. Lastly, before I turn it over to you operator for questions and answers, I want to highlight our team members. The folks at GLPI and our taxable REIT subsidiary have really stood up and shown their dedication and talent through these very trying circumstances. Our property management is implementing the furloughs, our property management team is working with our effective team members and seeking the support that's available, including making donations of food and beverages to the local food bank in Baton Rouge. We've taken significant steps to help all of us try and get through these uncertain times because there will be another side to this. So with that operator, I will turn it over to you for questions and answers.

Our first question is from Carlo Santarelli with Deutsche Bank. Please proceed.

Hi, Peter and Steve. Thank you very much for all the color. If I could just start with as you guys think about the transaction that you've already made with Penn, and you think about the go-forward from here, there is a range of outcomes that are very difficult to handicap from just about any perspective. But acknowledging properties will start to reopen here in the coming weeks, how are you guys thinking about the ramp and potentially what levers they are left with some of your primary tenants or larger tenants in the event that we experience a potentially slower ramp that doesn't necessarily translate to positive cash flows or cash flows that exceed the ability to make rent payments down the road? Are other levers left to pull or other types of creative transactions that you guys are contemplating?

Well, you had a multi-part question. Let's start first with the Tropicana transaction itself and what we got for it. I mean, it's a 35-acre site and probably Penn remains, if you will, in Las Vegas, which is a terrific location. MGM is doing a lot of development around it that we think lends value. The tenants had previously indicated that they were looking to sell that property, so that's not a new idea. They were in active discussions with a number of people about that before all this happened and significantly higher prices than what we're discussing today. Now, that doesn't necessarily mean anything for the future, but we believe we received fair value at the number we’ve identified, and we'll have to play it out. There may be some other things that I won't get into today that we could do with that property. The point is, we own it, we control it, and a simple sale would be fine. In the end, we believe we got paid. We now have to monetize that in the form of cash rent. So that's about all I can say at the moment other than Steve, what would you add?

Yes, Carlo, obviously, your question is what's left on the shelf if there's something necessary, and no one has visibility on when and how these facilities will ramp back up. We are in constant dialogue with all of our major tenants, and we recognize none of our tenants plan their balance sheets for zero revenue months. None of our tenants came into 2020 with a business plan for a series of zero revenue months. So we will continue the dialogue with all of our tenants and evaluate any and all alternatives that they would like us to consider, but clearly the discussion is going to be if there is any kind of short-term compromise, it will come with long-term gains. Because at the end of the day, we own these facilities. We own these bricks and mortar, and we do feel we have a portfolio of the best operators in the business realizing the maximum opportunity that exists in this asset class. So I'm not trying to avoid your question — it doesn't have a clear answer. All we can do is share with you the thought process.

Yes, let me add to that. You inquired about the ramp-up question, which is indeed the hardest to answer because the reality is that none of us really know. There are announcements like the one from the Governor of Illinois regarding casinos, stating that discussions will happen at an unspecified time in the future. So, it remains uncertain. Some places are looking to reopen much sooner, but the specifics around restrictions—like whether it will be 10% or 50% capacity—are all unknown and will vary by state. However, we know that West Virginia is eager to open, and our industry is significantly important there; this could put pressure on our governor in Pennsylvania to expedite the reopening process more than it currently appears. Ultimately, we are navigating into the unknown. I am confident that all these locations will be operational sooner rather than later; the only uncertainty lies in how gradually they will return. We just don’t have that answer yet. Gamblers tend to be a very active and eager group, and with the current situation of people being stuck at home, I believe they will return in numbers that might exceed our initial expectations. That’s my best and only response to that.

And Carlo, this is Matt. I'd also add on the topic. I mean, our operators are obviously in much better solvency positions across the board than they were just a few weeks ago, largely due to this transaction but they've also taken meaningful steps to reduce their cash burn to a comfortable level. I'd also point out to Steve’s comments. I mean, you can look at a few signposts that were really relevant in the Penn deal, and continue to be relevant for us to appreciate how we're thinking. It was really about getting to a point of economic wholeness for our shareholders with an opportunity for upside that we're obligated to secure for our shareholders wherever possible despite any deviations from the norm. And the bottom line question in all these decisions for us is, is the company's long-term value more or less after the decision is made versus before? And with Penn, we were very confident that that answer is, yes. I hope that gives a little extra color on how we think about things.

That does. Thank you, guys. Thanks for all the color. And could I just ask one follow-up, which I think will be a much simpler question? The monthly resets in Columbus and Toledo with the Greektown deal there is a floor under Toledo little less than 50% of the monthly rent I believe that you get from those two assets. How much lower is that floor, slower than kind of where you were trending say in 2019 with respect to the monthly rent on the Toledo pieces? Can you disclose somewhere or is that something you guys could provide?

It is in the queue; it's $22.9 million is the floor.

On an annualized?

For Toledo, I'm sorry.

Our next question is from Nick Yulico with Scotiabank. Please proceed.

I just want to touch on the dividend. Peter, you did mention that you could maybe adjust the dividend positively later. You didn't mention negatively, so can you give us a feel for how the board thought about adjusting the dividends in light of obviously you had already the Penn transaction, but if there is any other rent relief you might have to give to your other operators? How should we think about your comfort level there?

Of course, we don’t have the answers to any of those questions. I'll let Steve walk through the logic that got us to the number we selected. We just took a conservative view; I used to say when our rent ends, but we are not in the gambling business; our customers maybe are not. And that certainly applies on the Gaming and Leisure side of things. We're trying to be open; we try to be extra transparent. All that you've seen over the years you've followed us. So we just looked at the logic and said, well, things aren't going up too quickly. Let's look at a number that feels sustainable under almost all measures. To your other points, could it be worse? Well, sure. I mean, if nobody opens, and this goes on forever, I mean, who knows what will happen? But we remain optimistic. Take a look at Pennsylvania. Our two properties in Pennsylvania provide over $250 million annually to the state. That’s before income taxes and corporate tax, before everything. Those two properties in the balance generate almost $2 billion for the state of Pennsylvania. You can bet somewhere up there in the governor’s office, they’re thinking about how to bring this back. So that's what we rely on ultimately, but just how it's going to play out, who knows.

And, Nick, just a follow-up on your question a little bit. In dealing with our board, in presenting this to our board, we basically looked at what the contractual impact is going to be on our business as a result of these months of negative EBITDA. We considered what that means in terms of coverage, what it means in terms of the resets of our leases, and what it means for the operating performances in our taxable REIT subsidiary. So we think we arrived at a point for our dividend that is reasonable in light of the current circumstances. And that will allow us to get back on a growth trajectory in terms of returning capital to shareholders in light of where the balance sheet is. Because at the end of the quarter, you see we got well below 5.5 times net leverage, which has been our target. So we're inside of our target ranges; we've got a very solid relationship with our bank credit group. We think this messaging to all of our constituents signifies our willingness to make difficult decisions and really an approach that allows us a nice runway going forward to get back to the trajectory, but we all need to wait and see exactly when these things open and how they open before we can arrive at a conclusion and tell you with certainty that this is it. No more.

Okay, appreciate that. And just my second question has to do with your other operators Boyd, Eldorado. Have you had any conversations with them about rent deferrals? And do you expect to receive full May rent from them?

At this point in time, we certainly do hope to receive full May rent since we are now at May 1. Everyone is certainly focused on maintaining the flexibility to get reopened and to reopen as quickly as possible, and therefore they don't want to trip any covenants. As you saw, Penn got covenant relief when they announced our transaction. As you can imagine, if someone fails to pay rent, and there's a default under a lease, that is likely to trigger a cross-default under existing credit documents. So everyone is very focused on not allowing for a default that would cause an acceleration of a lease obligation or cause acceleration of any credit facilities that they currently have. So at this point in time, we are in constant dialogue with all of our tenants, but really as it relates to May, they are all focused on opening. And obviously with the opening, you have to pay occupancy costs.

Our next question is from Thomas Allen with Morgan Stanley. You may proceed.

So Peter, you know this industry better than anyone else probably. What do you think the outcome will be from a state-by-state perspective on the weaker state budget and potential more state legislation?

By new state legislation that you think in taxes?

I mean, taxes, expansion, shift to online—how are you thinking about it?

Again, you know as much as I do about what's out there and possible, and frankly, anything is possible. I hate giving vague answers, but this is one time in my life where I have no clear picture of where this is all going to go. I think it's going to be very different state to state. I'll make one observation: those states led by Republican Governors seem to be a little bit more ambitious. But you make your own conclusion about that to get these places up and running, than others. And in fairness, some of the Northeast states have been harder hit than some of the Western and Southern states. So it's going to be all over the map. Some states are in big trouble. Illinois, for example, just said they don't know where they're going and offered no guidance, yet their state is in one of the worst conditions in the U.S. This is just an unknown.

But, Thomas, to your question I do think internet wagering, I do think sports wagering, I think things that were being contemplated before COVID-19 are going to be accelerated. I don't think that anybody expects that tax rates will jump, because operators have been significantly impacted by this event. Raising taxes on an industry that's already been impacted feels like an attempt to get blood from a stone. We know that all of our operators in the entire industry are certainly lobbying heavily to make sure that the industry comes back and gets back to where it was in 2019. So I see opportunities for enhancements. I don't see a real risk immediately of a wide expansion of additional facilities in states or anything like that. Only because I believe that these state legislators will first try and protect their legacy industries and then, of course, try to get them back as quickly as possible.

No, that’s helpful, thank you. And this is a follow-up—hasn’t your experience changed your thinking about your long-term leverage targets at all?

Look, that's a great question, given how benign the interest rate environment has been. I do think the interest rate environment is going to be pretty favorable going forward. I mean with a 10-year Treasury at 60 basis points. Obviously, people have made the argument that should you have leverage, and clearly financial leverage is something that we as a REIT are going to employ. What is the right leverage level? We felt quite comfortable. The rating agencies felt quite comfortable, and our creditors felt quite comfortable with where we were. I look at this again as a temporary interruption in a very sound underlying business. So we have had discussions with the Board as part of the dividend policy, and the dividend policy does preserve the flexibility to migrate further down the leverage scale as you can imagine.

Our next question is from Barry Jonas with SunTrust. Please proceed.

Just wanted to go deeper into the Tropicana. Maybe it's too soon, but can you talk about the level of interest you're seeing from potential buyers? And I guess with that, how are you thinking about timing if you're going to sell it given you'll keep more proceeds the longer it takes?

The first order of business is to get paid; convert what we have to cash. So there was an ongoing arrangement as I said, Penn was actively working out—not mentioned the broker who's involved—but had an agreement to represent this property for sale. There was significant interest at a much higher price than where we are today. And we, of course, have full control of what that disposition will be. We insisted that Penn keep it operational; it's hard to sell a house that has no furniture in it. They've agreed to do that. And they cover all expenses, so the carry costs that we have to deal with are covered by them. It’s hard to know; I don't think there's someone ready to buy tomorrow, though there may be for all or part of that property. Remember, there is a lot of interest in the frontage there. We're just exploring that; it’s too early to say. We have bigger concerns—getting to work with our Penn partners to get these properties open in Perryville and Baton Rouge. As soon as we see forward momentum and as Las Vegas comes back, we will make the appropriate press release. If we can sell it early and receive an attractive offer, I think that’s what we will do.

Yes, Barry, let me just add to that. By any metric in a normal market environment, looking at comps in Las Vegas, whether it's off-strip properties like the REO or the Hard Rock that have traded in recent years, given our basis in this asset at under $9 million an acre for 35 acres of land at the corner of Las Vegas Boulevard and Tropicana Boulevard, along with the hotel rooms and amenities on that property, we feel that we have a significant cushion to realize incremental value when the timing is appropriate. It’s just that right now, as you can imagine, everybody is waiting to see where things are going to go. So to Peter's point, it’s not like you should expect anything to materialize tomorrow, but you should expect us to look for value-maximizing opportunities with respect to those holdings.

We would take a good offer tomorrow if someone was willing to pay the right amount.

Got it. And then just a second for me. How does this crisis influence your thoughts about additional M&A within gaming? And I guess does it influence your thoughts on eventually doing something outside of gaming as well, but from a geography within gaming?

Well how to know what’s going to happen? I don’t think it changes our ambitions one bit.

And Barry, look, I'm anxious, as we all are, to get to the other side of this. But I think people will come to appreciate the stability that exists in the cash flows from these regional gaming assets once they do reopen and return to a more normalized operating environment. As we've spoken about in the past, there's a pretty high hurdle in terms of finding other assets that have the same characteristics and the same cash flow quality as the portfolio we've built. So it's a high standard, but we will continue to be focused on increasing shareholder value as we continue to grow our business.

Our next question is from Joe Greff with JPMorgan. Please proceed.

Peter, does it make sense to use some of your liquidity to invest new equity in your tenant? You can think of it as an insurance policy that has depreciation potential. Are there any restrictions for GLPI to do that?

Joe, there are related party tenant issues that would limit us to owning up to 10% of a tenant. It's an interesting thought, one that we've had discussions about in the past. But suffice it to say it is a component of any discussion we’ve had with Penn, as an example, when discussing any transactions that you saw as part of this deal. Looking at those kinds of opportunities, taking advantage of the liquidity we have, are certainly things we would consider subject to the REIT constraints that exist.

All things considered, you can assume that we're contemplating everything. It’s a point I’ve made for many years: if it's alive and breathing, we're looking at it. If it makes sense for our company, sure we’re looking at it.

Got it. And then, Steve, looking back at last year for Columbus and Toledo, the math I have for Columbus rent last year was about $25 million, and Toledo was something like in the low 20s. Is that sort of correct?

Yes, the floor was set based on 2018. The floor is $22.9 million as disclosed in the Q. It’s correct.

Our next question is from Jay Kornreich with SMBC. Please proceed.

Just a follow-up on the sports betting. As Penn made sizable investments into sports betting with Barstool Sports and other similar players, are you viewing these types of no-touch gaming going forward in terms of the recovery? Do people continue to worry about social distancing?

So the question is what we see as potential or where do you think we think it's headed.

Yes, if I understand your question correctly, it's basically did these remote solutions have an impact? I think your question was not unique to sports betting but was more about internet wagering as well?

Yes, both of them.

Yes. Clearly, all of our tenants are looking at internet platforms for both their sports wagering and in Pennsylvania and New Jersey, full-blown casino gaming. Each of them has identified that as a real source of customer ID, customer acquisition, and retention. So it would feed; the real estate would feed the internet business, which would in turn feed our bricks and mortar business as they continue to develop that internet presence, helping them identify people at a relatively low cost they might not otherwise have identified and drive them into the facility. So if the question is will sports wagering grow? Yes. Will internet wagering grow? Yes. What impact will it have on our real estate? We expect it to eventually become a value driver for our tenants in terms of driving incremental traffic into our buildings and therefore improving performance under our leases.

Got it, that's helpful. And then just one follow-up with Penn's option to buy the Perryville operations and then lease the real estate for $7.77 million. I'm curious if you guys know or have announced the cap rate that got you to that $7.77 million?

No, we haven’t. What we’ve done in the discussions we had with Penn were really around what the performance of Perryville would look like, impacted by the category for licensed facilities here in Pennsylvania when they open. So it’s really a question of its two elements: what is the multiple on the operating company and what is the cap rate on the underlying lease? Those will be determined as we get closer to closing based on the actual performance of the facility.

Yes, remember, both Morgantown and New York are within the range of a large industrial base, so something we have to account for as well.

Our next question is from David Katz with Jefferies. Please proceed.

I do want to go back to a couple of the prior questions. I find it to be one of the more philosophical management teams about this. We consider this to be a temporary set of conditions. But like many events, whether it's personal or corporate, we would have to adapt on the other side in some way. How do we answer the question of how the company prepares or positions itself for the next pandemic or for a potential resurgence that may or may not occur? Specifically, how you look at tenant coverage, and more broadly, how you think about leverage? I know you've touched on it with various questions, but is four to five the new five to six? That’s ultimately what I’d love to hear your perspectives on.

I'll take the first part. I think Steve can follow me. Look, I have often said to those of you who have seen me and come to visit us here through many years of this in the racing business and so forth, I've been through many ups and downs. You have to consider that Maslow's hierarchy matters; it’s food, shelter, and gaming. It’s almost that simple. In every recession we have had over the years, except 2008 and 2009, we actually went up during that period of time. People found relief and entertainment, and so forth. I have absolute confidence we will get back to full capacity socialization in time. What I can’t guess is how long it will take for people to have the confidence to do so. My bet is that it’s going to be shorter than many think, but it is going to take a while. There’s going to be a lot of fear out there. A lot may depend on which state, which place, what the risk level is. People intuitively know that. So I’m going to be very optimistic about ultimate performance. What I just can’t speculate on is how long it will take to get there.

Look, David, you're asking the right questions. Does this affect our decision-making in the future? It has to. The bottom line of living through an experience like this is going to affect everyone's decision-making in the future. Are we going to materially modify the way we approach this business? We own the buildings; at the end of the day, these buildings are key revenue drivers for the states in which they operate. We are comfortable that there's an alignment of interest between the states, the regulators, our operators, and ourselves in bringing these businesses back as soon as possible on an accelerated performance level. All that being said, are we going to be better prepared for the next shutdown? I don't know if this is going to cause us to plan for future shutdowns, but time will tell.

Our next question is from Shaun Kelley with Bank of America. Please proceed.

I just had a couple of more specific ones. So the first one is just on the stock versus cash dividend, Steve. I think there was a sense in there that said something about you only planning to pay the stock dividend in the periods when you're realizing non-cash rent payments. Can you just elaborate a little bit on what that means?

Yes, as I stated in my comments, Shaun, I mean distributing cash in distributions when we're not receiving cash rent, obviously, is a leveraging transaction, and that's something we did not want to pursue. You know from the disclosures that the Penn agreement provides for cash and non-cash rent credits in the months that are outlined—May, June, July, August, October, and November. There are impacts in each of the next three quarters based on those non-cash rent receipts. That was the point with that statement. We're aligning the distribution of equity with the receipt of non-cash rents. For us, that creates tremendous flexibility for the company when we realize the value in Tropicana. We will take that onto the balance sheet as a non-income producing asset at this point in time and will amortize its value in those non-cash rent receipts or non-cash rent credits over the coming months.

So Steve, would that allow you to tee up the possibility of a one-time special dividend to return some of those proceeds to catch back up if Tropicana was actually monetized? I appreciate we've already talked about the circumstances and that could take a while. But is that the sort of underlying implication?

Look, that’s an alternative. If it's a liquidity event, we’ve got substantial liquidity from our sale. We’ll evaluate at that point in time based on market conditions the best deployment of that capital, whether it’s for value-enhancing transactions, deleveraging, or returning it to shareholders. Yes, just to clarify, the $1.175 billion revolver is not due until 2023. There is a $449 million term loan A1 maturing in April of next year. Given the continued contractual payments of rents, there is no liquidity issue. Yes, there is a liquidity issue. We have only unsecured debt, so we have the ability to incur secured debt. We do have an accordion feature under our existing unsecured credit facility with the bank group allowing for up to $2.5 billion under that accordion feature. As you saw from the amendments agreed to by the banks in anticipation of the Penn transactions, we’ve stayed in constant dialogue with our bank group. They are well aware of our situation and quite supportive of us as a company. We believe there are no liquidity issues on the horizon even with that $449 million maturity in April of next year.

Let me add one small part to that, just a simple thought. And that is as you measure the use of cash and capital, in the six years that we have spun from Penn, I've been particularly pleased with the dividend growth that we've managed each year. Last quarter, we were at $0.70 a quarter. As one of the largest shareholders in this company, that enthuses me, and I'm wildly enthusiastic about that. I want to return to that level as quickly as possible. So cash dividends mean a lot to me. That being said, stability and safety of this company matters more. It’s also important to ensure we maintain the spending engine. I might even say that maintaining proper leverage is probably the larger driving force. If we take care of that, dividends will be fine. That’s a philosophical point of view I wanted to share.

Our next question is from Jordan Bender with Macquarie. Please proceed.

In terms of the dividend, I think you guys typically target paying out roughly 80% of your AFFO or somewhere in that range. Over the next couple of quarters, do you plan on staying within that range?

Jordan, given the uncertainty that exists in the world today, we've set the $0.60 at a lower payout ratio than historical norms based on our internal modeling. We just think it's the prudent approach to take at this point in time. We need to get through these next couple of quarters, but this has been set at a more conservative approach than the historical 80% of the AFFO payout ratio.

Our next question is from Robin Farley with UBS. Please proceed.

A lot of my questions have been asked already. I guess thinking about how the pandemic may somewhat limit for a while the opportunity for others to sell real estate to GLPI because EBITDA and therefore rent levels would be so low. I guess in the past, others have suggested that maybe a combination with other gaming REITs would make sense. I'm wondering in this environment, with possible changes, if you have thoughts on that?

Weasel out of that question by simply saying that it's kind of too early to know. Maybe by two quarters from now, I'll have a good answer or a better answer for that. We're just focused right now on getting this company back on firm ground again. That’s our driving force.

Robin, you’re asking the appropriate question given the current circumstances. Goal number one is to preserve and protect the assets of the company. Goal number two is to look for accretive ways to enhance shareholder value. You can rest assured, as I've said in the past, we will always look at any opportunity that is shareholder value enhancing.

Our next question is from John DeCree with Union Gaming. Please proceed.

I think you touched on that just about all. But I wanted to ask about some other dialogues that you may have had with casino operators. Whether it be your tenants or partners you haven’t yet reached an agreement with and REITs being new to the space relatively speaking as a financing partner. We’ve seen loan markets with pretty wide spreads, particularly for smaller operators? Has anyone approached you? Have you had discussions about providing some liquidity, whether it’s through loans or buying call options or anything a little bit more creative than outright asset sales? Is the short question, are casino operators looking to you as more of a financing partner than they have in the past, and is something like that interesting to you?

No, John, that's a great question. The disruptions we're facing create opportunity for us, and we will look and engage in dialogues with folks that are looking to extend their liquidity runways. Right now, everybody is focused on working with their existing creditors and stakeholders, even the small private operators, rather than looking at outright asset sales. But I think that's just a matter of time before those discussions accelerate and increase in frequency.

Our next question is from John Massocca with Ladenburg Thalmann. Please proceed.

As we think about the withdrawal of guidance, what would you potentially need to see in the kind of market on a macroeconomic basis or within your portfolio to be comfortable reinstituting new guidance?

It's a great question. I'd like to think we're more transparent than almost anyone else in the triple net space given that we've got almost all public company tenants that you can read through, and we are pretty elaborate in terms of spelling out all of the terms of our leases. I think everyone can model our business pretty effectively given the moving parts in our business. In terms of returning to issuing guidance, we need to get back to a much more normalized operation. I wouldn’t want you to take away from this phone call that as soon as these facilities reopen, we will reinstitute guidance. first we need to see where things first open, then stabilize, and ultimately normalize before we’ll probably feel comfortable making such statements.

Yes, let me say this as well: these rollouts are going to be very different state-to-state. That’s the problem. We just have to see how it evolves. I guarantee you that not all states will be alike; not all states will move with equal speed; and not all states will welcome customers back as quickly as others. So we scratch our heads here. What do we say? We don't want to give misleading information, so we'd rather be silent for a moment until we actually have something we think we can firmly tell you.

Understood. And then maybe kind of longer term philosophically, as you come out of the current economic situation, and understanding that the Perryville option granted to Penn was part of a larger transaction, has your view on having TRS properties changed at all because of the last couple of months? I mean, does the agreement with Penn indicate some willingness there to divest of those assets?

We've always had that willingness if it made sense. Look, we’re not operators, that has never been our number one goal. That having been said, if it makes sense, I’ve said publicly before to facilitate a transaction, to transport another OpCo back into GLPI—let's say Perryville goes to Penn—we would do that, so we have no concerns on that front. We kind of like having our fingers in the gaming side, keeping our memory sharp about the gaming landscape right now, which underlies our entire business. I don't want to necessarily lose touch. We just think it's the right move to get back to a pure REIT status today, but we won't hesitate to do something else in the future.

And John, that goes both ways. Maybe people haven't focused on it, but we're actually bringing the Tropicana into our TRS because it is non-income producing, and we're bringing it in not necessarily with an expectation of owning it for a long period of time. Thus, moving assets out of and into our TRS are tools we will employ.

Just a clarification on that last comment, that you're not liable for any of the obligations. Penn is going to take all the risks associated with the actual EBITDA of that property?

Absolutely; everything, electric, you name it, all taxes. God bless him, it's all there.

Just wanted to make sure. And then one last clarification, you kind of alluded to it a little bit with some of the earlier questions and in the press release, but the rent credits are not going to flow through AFFO, I'm thinking about correct?

No, no they are.

They are?

Yes, because they're flowing through the income statement. They’ll be flowing through the income statement. As I've mentioned and as disclosed in the press release, we did get agreement from our credit facility providers to treat those as an equivalent of cash, which GAAP requires us to do.

No, the cash impacts of not having that cash rent are not going to be reflected in AFFO, or will it be reflected in AFFO?

It will be reflected in AFFO as a cash equivalent.

Okay, that answer my question. Thank you very much. That's it from me.

Thank you, John. Take care.

Our final question is from Spencer Allaway with Green Street Advisors. Please proceed.

One of your peers reported a notable impact from the current expected credit losses accounting standard. Do you guys anticipate looking at a similar allowance for potential credit losses or a subsequent write-down in the value of any of your real estate this year?

We did evaluate our loans. Unlike the party that you're referencing, we treat our leases as operating leases. Given the short duration of the loan portfolio, we didn't see an impact that was material enough where that rose to a level of materiality.

And that concludes our question-and-answer session. I would like to turn the call back over to Peter Carlino for closing remarks.

We will make them short. I again want to thank you all for dialing in today. These are very interesting times, but we here at GLPI are very optimistic about the future. Thank you very much.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.