Gaming & Leisure Properties, Inc. Q3 FY2022 Earnings Call

Greetings. Welcome to Gaming and Leisure Properties Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Joe Jaffoni, Investor Relations. Thank you. You may begin.

Thank you, Sherry, and good morning, everyone, and thank you for joining Gaming and Leisure Properties third quarter 2021 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section on our website at www.glpropinc.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ 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 10-Q and in the 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 at Gaming and Leisure Properties. Also joining today's call are Brandon Moore, our Chief Operating Officer, General Counsel and Secretary; Desiree Burke, Chief Financial Officer and Treasurer; Steve Ladany, Senior Vice President and Chief Development Officer; and Matthew Demchyk, Senior Vice President and Chief Investment Officer. With that, and as always, it's my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Thank you, Joe, and good morning, everyone. I'm here with our team, ready to answer your questions. We're pleased to report another eventful quarter, with all the details available in our press release. We have successfully closed on the Tropicana property in Las Vegas with Bally's and initiated our 50-year ground lease, which we are excited about. Additionally, we're working on closing what is likely to be a combination of Tiverton and Biloxi, also with Bally's, subject to final approval in Rhode Island, which we hope will come soon. Most importantly, we have established what I will call a pipeline, a term I usually dislike as we've never had one before. However, in this instance, we have made progress with Penn National—excuse me, Penn Entertainment. Looking out my window, it’s now Penn Entertainment, which is quite exciting. We have worked with them to allow them to take a couple of properties out of our existing master lease, Aurora and Joliet, and moved to much more advantageous locations in a pretty exciting transaction. Also, we will fund a long overdue hotel in Columbus, which you would recognize was much more difficult, if not impossible, for them with the lease arrangement that we previously had. So all of this transaction was done to make some of these things possible. Also, we are talking about another tower at the M in Las Vegas, which is having great success in that market. So these are some pretty exciting opportunities for us to put money to use with one of our major tenants and then consolidate all these new properties and a couple of stragglers we had out there independently under a new master lease with terms that are more fixed, which is something that we've wanted to achieve for a long period of time. So all in all, there's a lot of good stuff that happened this quarter, and we're looking forward to the balance of this year into what ought to be a strong year next year as well. With that, let me ask Desiree Burke to highlight some financial items.

Thanks, Peter. Good morning. Our total revenue from income from real estate outperformed our third quarter of '21 by over $50 million. As you all know, we closed on the quarter's Live! transactions this year, which increased cash rental income by approximately $31 million. We also closed on the Bally's Quad Cities and Black Hawk properties in April of this year, which also increased our cash rental income for the quarter by $3 million. We achieved our escalators on our Pinnacle, our Boyd, our Belterra and Penn leases, which added another $3 million of cash rent for the quarter over prior quarter, and we had non-cash revenue growth from investment in leases and straight-line rent adjustments of $10 million. Our operating expenses decreased by $57 million, and that's really due to the gain on sale of our Trop Las Vegas building of $67.4 million, which is offset by the gain on Perryville last year of $14.8 million. We also had a decline in our G&A expense, also related to the sale of the TRS operations in 2021. Offsetting those declines in expenses, we did incur non-cash charges related to our land lease gross-ups and land rights amortization of about $2 million. We have included in our lease full year 2022 guidance of $3.52 per diluted share in OP units between $3.52 and $3.54; that is, which does not include any impact of pending transactions. Lastly, during the quarter, we completed an ATM equity raise, a forward equity transaction and continue to strengthen our balance sheet. Our leverage position is right on time. So we feel very confident in our balance sheet at this point in time. With that, I'm going to turn it back to Peter.

Well, thanks, Desiree. We have Matthew Demchyk on the line from a remote location. Not too far away, though. Matt, would you add your comments, please?

Sure. Thanks, Peter. Good morning, everyone, and thanks for joining us in these interesting times. Our core gaming triple-net lease business model is relevant now as it's ever been. And that relevance spans 2 fronts. First, with potential transaction partners. As the financial markets and broader economy have rapidly changed with higher debt costs and unpredictability, the interest from operators in dialogue with GLPI is robust. The same folks who saw our sale-leaseback proposition as expensive debt last year, now better appreciate its permanent nature, as well as the fact that our sticker price is much more competitive with prevailing debt costs. This results in a strong value proposition for our tenants. The second area of relevance is related to institutionalization. As the world focuses on risk and risk-adjusted returns, our business model shines brightly. And rightfully so. Pound for pound, regional gaming real estate continues to stand out as incredibly attractive compared with other investments across the real estate spectrum. Since we've last discussed the topic, we've watched economic and structural headwinds significantly impact a number of property types that were long considered blue chip holdings. While our business model has remained as solid as ever. We continue to build on a track record of cash flow resilience amidst the uncertainty and stand to benefit from far greater institutionalization over time. When it comes to institutionalization, we're in middle innings at best, with a lot of game to go. I'd be remiss if I didn't say go Philly's given the baseball analogy. The backdrop of volatility and heightened uncertainty also underscores the fundamental truth. You cannot predict the future. But we believe you can prepare for it, and we've done just that. At a time when uncertainty persists, you can be certain that our do-it-right, sleep-at-night balance sheet philosophy will help guide prudent decisions. To derisk the execution around the debt for our Bally's transaction, our team successfully worked to put in place a delayed draw term loan with a 5-year term for $600 million, which is all incremental to our revolver, and economic terms consistent with the revolver. It's structured to be drawn at the transaction's closing. During the quarter, we also bolstered our offensive capability. In addition to our overnight issuance of the $350 million of equity related to the Bally's transaction, we also issued another $169 million of equity through the ATM program, $104 million normal way and the additional $65 million to the newly implemented forward that Desiree mentioned. Shares were sold at an average net price of $50.97. This drove leverage well within our target range and bolsters our acquisition capacity as it gives us firepower and optionality to play offense, depending on how the acquisition opportunity set evolves. We will continue to stay disciplined in our decision-making and our doors remain open for business. Our efforts are focused on unearthing and creating opportunities to grow our cash flow per share, to protect and perfect the quality of those cash flows and to increase long-term intrinsic value per share for our shareholders' benefit.

Matt, that's very helpful and appreciated. So I think with that, you've got our team here. Sherry, would you open the floor to questions.

Our first question is from Neil Malkin with Capital One Securities. Please proceed.

Nice quarter. First one from me, I guess, Peter and then maybe Desiree tying in is, obviously, the recently announced promotions. First off, congrats. But you gave some commentary maybe a couple of quarters ago, Peter, about the sort of ambiguity of the C-suite in terms of titles and roles. And you really kind of hammered the point home that you were really happy with how things were going. balance sheet was in a great place, which it continues to be. And so I'm just wondering what caused the change to name the roles officially just from that short time ago?

Over time, it's become clear how things actually function here. I want to stress that although we will eventually share an organizational chart, we don't operate that way. We have not in the past, we don't now, and I hope we won't in the future. We collaborate as partners with equal contributions from all involved, and that’s incredibly important. Everyone on this call plays a role in every decision we make. My internal philosophy is that I may not need to be right, but I must do the right thing, and our group effort determines how we achieve that. Internally, nothing has changed; we continue to operate as we always have. However, I felt it was necessary to officially close out certain positions to clarify how our current dynamics work. This decision is also about long-term skills and the experience of our team members. So, I wouldn't read too deeply into this — it's business as usual. We have an excellent team, arguably the best, and I want to reiterate that.

Okay. Great. Peter, I think my other question is about development, which relates to your favorite term, the pipeline. Could you possibly, Desiree, assist us in understanding the recent growth in amounts and economics regarding both current and prospective development? Specifically, regarding the Casino Queen's relocation in Baton Rouge and the costs associated with relocations in Illinois, it would be very helpful to know how you foresee those costs and the overall economics playing out.

Sure. So we continue to work on our relocation in Baton Rouge. It shouldn't be a significant spend. We have about $40 million remaining to spend on that project throughout sometime in '23 is when we expect it to open. As far as Illinois, we have committed to $225 million for the relocation of the Riverboat in Aurora. And then we've also committed to the $350 million for the other projects that Peter mentioned earlier. The cap rate on those other projects is to be determined in the future once we know current rates and timing of those projects. Does that answer your question or is there any other...

Yes, of course. What do you anticipate the total cost for Baton Rouge will be given that there is still about $40 million left to spend?

$60 million in total; we've already funded a little over $20 million, and we have $40 million left to spend.

Yes. Now I should add, there are soft costs beyond that, which we are not involved with. So to be clear, that's not the total project. That's our piece.

Correct.

Sure. Helpful. And then, I guess, just to get clear it up. If the projects in Illinois, I'm sure they're going to be great based on the commentary you gave. But if you guys don't get the returns that you are underwriting, are you still confident in the coverage you'll have on those 2 properties?

Yes. I mean we definitely expect to get a return. I mean we do have an implied cap rate there for the Aurora project for sure. And all accounts show that the project should be very successful for Penn and therefore, the coverage great for GLPI. It is also going into a master lease that has other properties that are performing well within it.

Our next question is from Barry Jonas with Truist Securities. Please proceed.

Great. And congrats to Brandon and Desiree. I wanted to start, given the current capital markets environment, has the deal pipeline shifted at all? Do you think there's been a reset in seller valuation expectations or not just yet?

I'm going to give that to Steve for a minute. I think everything is still fluid, but we see plenty of activity out there. Steve, why don't you take that one?

Sure. From a pipeline perspective, we remain very active, potentially more active than it's been in the prior quarters. I would caution that, though, to your second question, which is that, yes, I do believe sellers have not necessarily stayed connected to where the capital markets currently reside. So I do think there is a disconnect on certain instances, with certain transactions between what the seller's expectation may be and where buyers' borrowing costs have moved to. So I do think we could see a little lull, even though it's very active, before everyone kind of resets new expectations and new levels. I would say the only other area that kind of falls under the pipeline is from a development perspective. New greenfield development projects where, obviously, as you would guess, starting to see more and more of those come across our desks, mainly because the financing market for project finance is either unachievable or just too expensive. So we're starting to see a bunch of those things. However, again, I would caution that we need to be disciplined. We need to get a return for our risk and compensated for our risk. So as our borrowing costs come up, the spread we would need to get above and beyond our cost of capital would remain substantial. And then the individual risk associated with each of those projects would obviously layer on another economic attribute. So long-winded way of saying we're very active. There's a lot of stuff going on right now. But I'm not sure that the marketplace on the buyer and seller side are seeing on high.

Got it. And then just as a follow-up, Peter, you've talked over the years about your preference for regional markets over the Strip, given sort of the inherent risks around destination markets. You've obviously dipped your toes in the water with Tropicana. But as GLPI gets bigger and bigger, is there more of an argument to increase your diversification into more sort of Strip assets?

We've never held any negative feelings towards Strip assets; it simply comes down to cost, as we've found more value in regional markets. However, I've been reconsidering this after the recent downturn, especially post-COVID, when the Strip demonstrated greater resilience than I expected. We were aware of the regional market behavior, where people rushed to our properties as soon as they could, but I was more uncertain about Vegas, and I admit I was mistaken. The results speak for themselves. Ultimately, it's all about money. We're open to any opportunity. We'd be interested in Strip properties; I've often mentioned that I'd acquire a modest beachfront property without windows and doors if the cash flow was solid. Our focus is on cash flow, regardless of size. What matters to us is whether we can achieve an appropriate return that exceeds our cost of capital while effectively managing our balance sheet. There is no bias against Vegas assets; we constantly evaluate them.

Our next question is from Greg McGinniss with Scotiabank. Please proceed.

Once again, I like to pile on off my congratulations to Desiree and Brandon on the new titles. I've also been getting some incoming calls about the impact of these new titles as it relates to Steve and Matt. Maybe this goes back to your entire partnership, is there any change to their roles or reporting structure or ability to make decisions and influence the direction of the company?

You're reading much too much into this. All we've kind of done is solidify what has transpired over many, many years. This doesn't change Steve's position, doesn't change Matt's. Matt made some significant commentary earlier. Steve is pointed at the spear and much of our new stuff. So again, we operate as a partnership. I cannot emphasize it. We sit around a table. Each of the people you've mentioned at every transaction, every financing, everything that affects this company involves every single person. Nothing passes that the group doesn't sign off on. That's just the way it is. it's the way we choose to operate. I've got a great team here, and it's really all I'm going to say about it. I mean it just is what it is. No diminution of responsibilities for anybody.

Got it. And then just a couple of balance sheet funding questions. One, what's the team's views on the interest rate environment and how it impacts your business? And two, on the capital raise side, the ATM usage was maybe a bit out of your historical norm and raising equity with no immediate acquisition. Just what are your thoughts on the execution of ATM and holding cash in the balance sheet as well.

Des, do you want to take that?

Sure. So our equity raises were in line with funding of our Penn transaction at some point in the future as well as our $500 million bond that's due next year. Depending on what rates look like at that time, we'll make a decision on how to deploy the capital that. We were happy with the $51 price raise in order to fund those transactions and lock in some accretion.

Okay. And how are you thinking about interest rate environment impact in the business?

Capital markets are affecting all of us quite a bit. The interest rate environment is something that we need to be cautious about and understand and be prudent and disciplined. In financing our transactions, we look at it. Every day, it changes. So trying to pick a cap rate to finance a transaction at this time is definitely a challenge. But we are working through it and we are continuing to look at all deals that we think we can get done in an active manner.

Yes, we have held two formal meetings in recent days to involve our team in discussions about this topic. We don’t have a clear forecast, just like none of you do. We spend considerable time evaluating our options and how to safeguard our position. We're focused on the long-term, and short-term borrowing isn’t the solution for the stability we seek. We can't provide definite answers until we face our next transaction and see what the market looks like then. This situation requires us to adapt on an hour-by-hour and day-by-day basis. However, I'm encouraged that the market is up today and our stock is performing positively. I wish we could offer a clearer response, but as Des mentioned, we’ll know more as we move forward.

Our next question is from Haendel St. Juste with Mizuho. Please proceed.

So I guess stepping back for a second, perhaps what can you tell us about why you don't expect Lincoln to close now because of the Biloxi. And I assume you still retain an interest in acquiring Biloxi if it were to become available. How much notice would at least be required to give you? And how does that impact your thinking on balance sheet strategy?

Let me ask if Steve or Brandon would like to address that.

Yes, I'll address your question. The reason we are buying Biloxi and Tiverton is that Bally's has not obtained lender consent. Without this consent, they cannot sell us the real estate in Lincoln right now. This means we have the option to acquire Lincoln under the same terms originally negotiated for the acquisition, and this option will be available until December 31, 2024, giving us just over two years with a fixed price secured. Did that answer your questions?

I was curious also as well as how much notice would they be requiring to give you if at some point they did get levered and how that kind of impacts your thinking of balancing strategy here over the next period?

I don't remember. You have to go back and look at the agreement; I don't have it off the top of my head. I think it was 60 or 90 days, but I think the reality is that we're in constant communication with the Bally's team. We understand the complexity of this lender consent process. And the reason I think you're seeing a 30-month option in there is we didn't want to get in the way of Bally's business decisions and their relationship with their lenders as they navigate those waters. So from our perspective, the Biloxi and Tiverton acquisition is a good acquisition. Those are good properties. And we feel as though the Lincoln property will eventually be in our portfolio, but the Bally's team needs time to get through their other issues. And we felt 2.5 years was a lot of time to do that.

Yes. Look, they may have to reset their financing along the way to make moot the lender consent. They've got a lot of stuff on their plate, and I suspect they'll be back to their bank group often over the next year or so. So we're quite happy to take the assets we can take today and looking forward to achieving Lincoln later.

Got it. Got it. Okay. A question on the $500 million maturity next year, I see the rate 5.38%, which, I guess, looks pricey in the rearview, but offers less refinancing headwind than many REITs are facing today as lower cost that come due. I guess can you talk a bit more about what options today you're considering for the refinancing, where you could issue 10-year unsecured today? And would you consider perhaps shorter term?

We haven't made a decision on how to proceed with that. There is a possibility of using our free cash flow and the forward equity that is set to mature in August next year, coinciding with the no par call date on the $500 million bond. We expect that the rates we would consider for a 10-year bond would be around 7.5%, but there is no guarantee that we would actually issue a bond at that yield.

Okay. And then last one, if I could sneak it in. Peter, for you. Last week's chatter about new casinos here in New York City. I guess I'm curious how do you rate the prospects of that occurring? Any possibility that you can be involved in any way? And then how do you think that would impact the broader freight area and maybe a ripple effect in the Northeast, your assets included?

Yes, it's going to have an impact. There's little doubt about that. That's why I've been saying for years that Northern Jersey will need to adapt and find a way to keep some of that business nearby. I don't want to share too much, but we have had some discussions with potential developers. Steve leads that process, and I've joined him on occasion. So Steve, what are you ready to propose on that? I prefer not to say much more.

Yes, we have met with several involved parties. We are not exclusively committed to anyone, and we are closely monitoring the situation. Regarding my earlier comments about financing for greenfield development projects, I believe some of these projects could face challenges securing financing if the amount reaches $3 billion. We are staying informed and are in discussions with various stakeholders, eagerly awaiting the outcome.

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

I guess going back to the going back to the pipeline, can you provide any update in terms of further potential opportunities with Bally's and the Cordish company? And in addition, any further interest into non-game investments they might be looking at?

What was the last question? Oh...

Any further interest into non-gaming opportunities.

Yes. I'll discuss Bally's and Cordish from a gaming perspective, and then I'll let Matt talk about Cordish and their non-gaming aspects. From Bally's side, we maintain regular communication with the company and their stakeholders. We strive to support all of our tenants, not just Bally's, as demonstrated by our discussions with Boyd following the transaction with Penn. We will keep the dialogue going. At this point, we don't see a need for us to engage with their current assets beyond those we have already partnered with. Our current focus is on successfully completing those agreements. Regarding Cordish, we've collaborated with them on several potential acquisitions over the past few quarters, but we haven't finalized any. Nevertheless, we remain in continuous discussions with them and aim to assist in their growth and expansion in gaming. Now, I'll hand it over to Matt.

Sure. Yes. So on nongaming, we continue a very robust dialogue across opportunities with all the right folks. But you have to remember, our base case is bottom-up decision-making. And the question is, is whatever we're going to do going to increase long-term intrinsic value per share? You know or cost of capital, pricing of opportunities in gaming, outside of gaming. When that algorithm flashes a green light, we're more than happy to move and do it at scale. That said, we're also not pressured to keep up some pace of activity or do things for the sake of doing them. Our goal is not activity; its progress. So I'd say more broadly, the fact that the Fed has effectively lifted their thumb off the scale and the subsidy for debt across the capital markets is now somewhat, in volatile way, being removed from the market, they very well could be opportunities. Where our mentality around making bespoke structures for folks that are a win-win helpful to them, but also achieve our economic goals, maybe more and more relevant, the reason we're at the table for the conversations. And that, by the way, is the same in and outside of gaming. But at the end of the day, if we're selling a piece of our portfolio in the form of equity to do something new, its merits have to be more attractive than our starting point. And we haven't found anything to date that's checked those boxes. But we'll see. This next 6 or 12 months could be really interesting depending on just how dislocated aspects of the capital market get, and how big the advantage we have because of our solid and dependable balance sheet and access to capital compared to some of the folks that may not be in that position. It might make great partners for us for the long term.

Matt, I want to add that while we are interested in exploring other opportunities, it makes more sense to invest in a hotel in Columbus, Ohio, where we see potential for enhanced performance, rather than diverting our efforts elsewhere. We still have plenty of gaming opportunities available to us, and while there may come a time when that changes, it's not the case right now. We have several years of projects lined up that look promising, so we are comfortable staying the course in the gaming sector for now.

Our next question is from Brad Heffern with RBC Capital Markets. Please proceed.

I know in the prepared comments, you said you're hopeful that the Rhode Island assets will close soon. I'm just curious if you can give a more detailed update on where exactly we are in the regulatory process there.

Brandon is best equipped for that?

At GLPI, we have completed all the necessary applications and documentation that Rhode Island has requested. It's important to note that Rhode Island currently has only two assets and does not have a REIT established. As the first REIT to enter Rhode Island, we are collaborating closely with the regulators. We remain optimistic based on our successful licensing in other jurisdictions that this process should not pose significant challenges for us. However, each new jurisdiction requires its own process, similar to what we experienced in Delaware. While it's difficult to predict the exact timeline, we are hopeful that we will see progress by the end of the year, allowing us to potentially finalize those assets in early January. That said, we want to respect the regulatory process, which involves a considerable amount of work to reach completion. At this point, we see no reason to doubt our ability to navigate this in a timely manner.

Okay. I appreciate that. And then the forward equity raise was a little bit different during the quarter. I'm curious if you see that as a preferred way to raise capital going forward in order to manage the dilution when you typically have deals that don't close for a number of months.

I can take that, Matt, if you want to.

I'll start.

Sure. The straightforward answer is yes. Our business model requires a lengthy period between raising equity and the actual need for the cash, which is a strategy that many have successfully implemented. In our case, after utilizing the necessary resources for the Bally's transactions to keep us within our limits, we decided to use the surplus as a strategic tool. Moving forward, this approach will enable us to pre-fund opportunities when used judiciously, providing flexibility with our balance sheet in light of rising debt costs. It also adds another option for us to fund future growth more effectively and efficiently.

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

Can we just talk about one of the avenues of extending capital on a credit basis, effectively issuing loans or notes as an avenue? Can you just talk through sort of the puts and takes of using that as a vehicle for growing the business, growing revenues?

Look, I'll give you a quick comment that loaning to own can make some sense. But we're not a bank; we're not in the straight loan business. Matt said something important earlier, of course, that our cost of capital now is a lot more appealing than it was a little while back, so that we can be more competitive now. And yes, we would consider and have talked with folks about that very possibility. But we're real clear, we have to own the real estate at the end of the game.

Yes. And I think you've seen in our history, historically, we have got loan-to-own basis. I mean, that is how we got the Lumiere asset, the Belterra Park asset; and they were both loans that got transferred into our REIT and our lease restructure.

Yes. I mean I think we use loans strategically. So we use loans as part of a way to solve problems or as part of a bigger transaction. And sometimes, you'll probably see us use them as an element of safety. So if we're not sure when the asset will start generating revenue or something like that, a loan permits us to put capital to work at an interest rate during that period. So I think loans can effectively be used in our business to as a means to an end, but not as an end themselves.

I think that's a reasonable viewpoint. It seems like the situation is becoming more favorable in the current environment. Would you agree with that perspective?

Yes. We're all looking around the table who wants that one. I mean the answer is yes.

Our next question is from Smedes Rose with Citigroup. Please proceed.

I'm curious about your views on capital and the comments you've made during this call. When considering gaming operators, especially the smaller ones outside your current tenant base, do you think they will need to adjust their expectations more rapidly due to upcoming refinancing challenges? We're hearing that credit is tightening in that sector. I'm wondering if you are observing this as well. It seems possible that there could be a quicker realignment of expectations compared to other asset classes, and I'm interested to know if there might be more opportunities over the next year than we anticipate.

Well, Smedes, we're hopeful that's the case. I mean it comes down to what do people want versus what do they need. And you're right; to the extent there's any looming maturities, the cost right now is certainly not what people pro forma back when they entered their investments. And that's where the dialogue that we talked about previously on the call really comes into play. And to be able to structure a solution that gives us the back-end look at the real estate, but in real time gets them a bridge from here to there, it's really important. It was even, frankly, a piece of the dialogue with Penn, right? I mean they're in the market, where incremental development costs, to Steve's earlier point, is a little more expensive than they like, and it made a lot of sense for us to figure out a way to help them permanently finance those properties. And that's the flavor of the conversations in real time. The question, though, is, yes, price discovery. And it's our job to stay disciplined on how we price our capital, and we've got to wait for the game to come our way in some cases because there's some bid-ask gap. It's like the house sale looking backwards, and knowing what his house was worth 6 months ago and the fact that mortgage rates have doubled and are probably not worth that anymore. But that doesn't matter until the person to sell the house; someone has to buy a house. We're in that phase, but at the same time, it feels like fertile ground for things to happen.

Our next question is from Ronald Kamdem with Morgan Stanley. Please proceed.

Two quick ones from me. Just going back to the pipeline. You talked about sort of loan-to-own opportunities and stuff. Can you just contextualize just how much is that taking up versus just straight sort of real estate buy?

Every one of these could vary widely. People have specific problems they're trying to address, and we offer solutions that will ultimately impact real estate in the future. I can't specify exactly what that looks like. The only exception might be with developments, where there is some immediate dislocation, and individuals may initially seek a loan solution before considering a sale-leaseback or two-step process. Overall, the discussions generally revolve around how to establish a permanent solution for our debt situation.

Yes. And I think from a broader context, our goal is always to own the real estate, right? So first and foremost, in any transaction we're looking at, our goal is to add a real estate asset to our portfolio. And if the loan is an avenue to do that based on the facts and circumstances with whatever tenant it is, a current or a new tenant, that's something we'd certainly consider. But it doesn't change our goal of owning the real estate.

Great. My last question is about the new Penn Mass relief, which has reduced some of the variable rent exposure. Going forward, do you believe you are at a comfortable level, and that this will naturally decline as you engage in more deals? Or are you considering the possibility of lowering it even further?

Yes. So basically, we reduced our variable rent component from around 12% to around 6%, right? So this transaction significantly reduced our exposure to the revenue reset, the percentage rent reset. It also shored up our escalation as we have guaranteed escalation on the entire balance of that new lease rent rather than just a component of it, and it is fixed escalation as we move forward. Both of those were a lot of our goals. We don't have an extreme amount of variable rents in the future that we would be concerned about. So I think that we're happy with the position that we're currently in.

We appreciate the increase in variable rent when it was rising, which brought us great satisfaction. However, it's important to acknowledge that what rises can also fall. In the REIT sector, certainty often outweighs the potential for opportunity. Achieving this stability has been a long-term objective, largely due to requests from our shareholders. We have successfully reached this goal at a favorable time, considering the performance of our properties. We are pleased with this achievement and optimistic about its positive implications for Penn. Having developed most, if not all, of the new Penn properties over the years, I'm thrilled about the upcoming hotel in Columbus and the improved facilities in Aurora and Joliet. The M desperately needs more capacity, and that property is performing exceptionally well. We are excited about the developments that will unfold in the coming years.

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

So in terms of the smaller Bally's transaction, what are the debt needs associated with that investment, especially in the context of the kind of tax indemnification negotiations with the tenant? Is that kind of covered by a smaller debt amount that was kind of originally contemplated in some of the documents released around the original deal?

Yes. That smaller transaction requires $600 million of debt financed proceeds, and that $600 million is coming from the new term loan credit agreement that we entered into in September and announced that allows Bally's to guarantee GLPI's debt for that transaction.

Is the rate on that term loan fixed at this point, or will you need to go to the market to secure a fixed rate as we approach closing?

No. Our term loan is the same basic floating rate that is exactly what is in our unsecured credit facility today.

Okay. And then in terms of the $350 million of potential kind of development funding beyond Aurora that's in the Penn deal, how is the cap rate for that going to be determined? It's in kind of market cap rate, but is that something that's a de novo negotiation? Or is there some kind of economic parameters put in place to determine that?

John, I'll just say it's a nonpublic dynamic pricing structure that's pretty discrete. There's not any qualitative factors in it, but we haven't given specificity. I will say it's based on spread to our permanent capital cost to make sure that we'll have an appropriate spread for our shareholders. What we didn't want to do upfront was lock in the cap rate on the entirety of projects that would go well into the future because the backdrop, like we talked about, is pretty volatile. So we broke things up to the 2 25 at the prescribed 7 75 cap rate, and then structured this other piece so they could be sure that they have capital, if they ask for it, at the current price, and we're not obligated, but we give a price outside of what we've put in place.

Okay. And then in terms of some of that funding. I mean how contingent are some of those projects on you providing the funding? I'm just thinking, Columbus, for instance, do they have to come to you to fund that hotel expansion? Or if whatever reason they can find a better pricing out there in the market in the future, is that something they could do without tapping that $350 million?

Yes. The answer is yes and yes. I mean it's completely at Penn's discretion whether or not to take our funding and whether or not to do the project.

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

Actually, my question has been answered.

And our final question is from Todd Thomas with KeyBanc Capital Markets. Please proceed.

Regarding the new Penn lease, it seems that the annual dollar amount might be slightly higher under the current structure. You mentioned that a significant portion of the variable rent has been converted to fixed rent, resulting in a larger base for the escalator, which has decreased by about 50 basis points. Peter, you also noted that while variable rent is beneficial when revenue increases, it can have its drawbacks as well. How do you view the variable rate segment today, especially considering it stands at just over 6%? Do you have any insights on what might happen with that? Also, could you remind us of when the next reset is scheduled?

Yes. So obviously, the remainder of the PENN lease, the percentage rent resets happen and they happen in 2023 in November. And that is a five-year period that you will be looking back on that transaction. And in that 5-year period, we had COVID. So we certainly expect a percentage rent reset down next year. We haven't quantified the amount, and so we have a full trailing 5-year history.

Yes. But you're right, five years later, it can go back up as well. So it does go both ways.

I would expect it to. We won't have 0 in the next 5-year period.

Exactly. Exactly. Although I think, on balance, this is a good transaction for us and for shareholders.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mr. Carlino for closing comments.

Well, thank you, Sherry, and thanks to all of you who have dialed in this morning. We're happy with this quarter, looking forward to next, and we'll catch you in a couple of months. Thanks, and have a great weekend. Bye-bye.

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