Earnings Call Transcript - GLPI Q1 2021

Operator, Operator

Greetings and welcome to Gaming and Leisure Properties Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Joe Jaffoni, Investor Relations. Thank you. You may begin.

Joe Jaffoni, Investor Relations

Thank you, Doug and good morning everyone and thank you for joining Gaming and Leisure Properties' first quarter 2021 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section of the company’s 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. The 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 its risk factors and forward-looking statements contained in the company's filings with the SEC, including its first quarter 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 of Gaming and Leisure Properties. Also joining today’s call are Desiree Burke, Senior Vice President and Chief Accounting Officer and Treasurer; Brandon Moore, Executive Vice President, General Counsel and Secretary; Steve Ladany, Senior Vice President and Chief Development Officer; and Matthew Demchyk, Senior Vice President and Chief Investment Officer. With that, it's my pleasure to turn the call over to Peter, Peter Carlino. Peter, please go ahead.

Peter Carlino, CEO

Well, thank you, Joe and good morning everyone. Thank you for joining us this morning. We are of course pleased to announce another strong and I think eventful quarter. Notably we have continued to diversify our tenant roster with the significant addition of multiple transactions with Bally's. Part of which includes a 50-year ground lease on the Tropicana property and just want to note that that kind of brings full circle our pretty, I think bold and decisive choice to provide liquidity to Penn National back in a very, very dark hour. The results for them and clearly for us, as well have been evident.

Desiree Burke, CFO

Thanks Peter. Good morning, all. Our first quarter results were strong and we are ahead of the first quarter of 2020 on several metrics, primarily the variable items in our business. To summarize our first quarter REIT segment, our rental income increased by $7.1 million compared to the quarter a year ago. That's primarily related to non-cash rent adjustments of $9.5 million, higher percentage rent from our Penn Master Lease of $3.2 million relating to the Ohio monthly results. Morgantown rent of $750,000 relating to the lease that we had with Penn that became effective in the fourth quarter of 2020. Those items were partially offset by lower percentage rent of $2.1 million on our amended Pinnacle lease or Boyd lease or Meadows lease. Lower past rental income from Caesars of $700,000 as you might recall, we entered into an amendment with them in July of last year, which provides for fixed escalation in the future. Lower rental income from Casino Queen, which is related to our deferred rent agreement with them and their temporary closure during the quarter. We do expect this amount to be collected upon closing of our Hollywood Casino Baton Rouge transaction with Casino Queen, which is expected in the latter half of this year. The REIT segment also benefited from lower interest expense this quarter due to the refinancing activities we conducted in 2020. And then lastly, our TRS had strong performance with net revenues and adjusted EBITDA exceeding the prior year by $10.9 million in revenue and $6.8 million in EBITDA, consistent with the theme that we're seeing across all regional gaming. Spend per visitation continues to be strong, and we began to experience an increase in visitation throughout the quarter as well. So, we have spent up, as well as the visitation, which is a very positive sign for our TRS operations. With that brief summary, I’ll turn it back to Peter.

Peter Carlino, CEO

Thanks Des very much. Matt, you wanted to highlight some broad issues, just to put the company and our efforts in perspective of this quarter.

Matthew Demchyk, CIO

Sure. Yeah, a few thoughts. The first being, if you look at the $150 million of acquisitions we just did, and the transaction we did last year with Bally's, and you really consider their master lease construct, credit worthy operator, and a very solid four-wall coverage based on our underwriting. They arguably represent some of the best risk adjusted cash flows in all of commercial real estate.

Peter Carlino, CEO

Thanks, Matt. You know that's very helpful. And with that, I expect to hear from others, but let's open the floor operator for questions.

Operator, Operator

Thank you. Our first question comes from the line of Barry Jonas with Truist. Please proceed with your question.

Barry Jonas, Analyst

Hi, thanks for that. Maybe I’d like to start with Tropicana. Can you give any more color on the process? How deep was interest in the end? Do you think you maximized proceeds? Or was the relationship with Bally's equally an important factor? Thanks.

Peter Carlino, CEO

Well, let me take a shot at that. The relationship with Bally's is very important. That probably was a driving part of this. There was a lot of interest in the range of, without saying too much, in a range of what we had invested. Maybe you could have made a couple of dollars. But I think we took the long view here to create an earning asset, after all, that's the business we're in. We got a significant cash check. We'll get a significant cash payment upfront and a long-term deal with a decent yield. And also, solidify our connection to Bally’s in this and other things that we're looking at and doing. Anybody else at the table want to add? Steve?

Steve Ladany, SVP & Chief Development Officer

No, I think everything you said, Peter is correct. Look, I think the ability for us to convert an asset that was non-income producing into income producing, and the ability to use the $150 million as an offset to the additional acquisitions we're doing in Black Hawk and Rock Island I think were very beneficial for us in our story going forward.

Peter Carlino, CEO

Thanks.

Barry Jonas, Analyst

That's great. And then just as a follow-up question, I'm curious to get your thoughts on the recent Realty Income acquisition, and see if there are any takeaways for you, especially as you think about consolidation at some point in the gaming REIT space, potentially?

Peter Carlino, CEO

Matt, why don’t you take a look at that?

Matthew Demchyk, CIO

Yeah, I mean, I’d just say big picture, Barry. I think there's certain key factors in all triple net M&A, and it's really initial accretion, future growth impact, diversification of the portfolio, and I think – and the impact of a larger denominator on the company. And in the Realty Income deal, and all the feedback I've heard the overarching positive was the 10% AFFO accretion that they shared, and the countervailing point was just a question around how the denominator that large is going to impact their growth going forward. And without any specifics to our sector, I mean, I think those themes are applicable. I think the accretion piece and the impact on future growth piece are what they are. Diversification is a little different, because Realty Income was a lot more diversified when it started. So, I don't know if they gained a lot there. Our companies are much less diversified. So, you could take that for what it is. And then the impact of the denominator also is as relevant, maybe more, because there's a limited finite number of properties in the space. So, I think that's how I’d read the tea leaves there, and leave the conclusions to you.

Barry Jonas, Analyst

Great. Thank you so much, guys. Appreciate it.

Peter Carlino, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas, Analyst

Hi, thanks. Good morning. First question I guess following up on asset pricing, Matt you touched on cap rate compression in your opening comments, are you seeing price pressures or competition beginning to drive down cap rates from a competitive standpoint? Are you seeing new capital go up on the real estate side?

Matthew Demchyk, CIO

Yeah, I think it's a little early to call exactly where spot is, because there's not that many moving pieces in real time. We haven't seen three or four transactions close. I'd say what we did was certainly an off-market deal in every aspect. So, I wouldn't take our cap rate as market. I mean, I'd suggest to you that was favorable to where the market might be. We'll have to see where price discovery is. And I'd also say every one of these deals has a lot of nuances.

Todd Thomas, Analyst

Okay. And then I was wondering if there was an update on the timing of the sales of the TRS operations and the closing of the initial Bally's transactions?

Peter Carlino, CEO

Brandon why don’t you take that?

Brandon Moore, EVP, General Counsel & Secretary

I mean, simply there's really no update on that. And what we've said publicly is still where I think we are in the second half of this year, and I don't see anything to change that at the present time, whether it's early in the second half or later in the second half will depend on the regulatory process. Both of those are in full swing, and I think we'll know much more next quarter than what we know this quarter.

Peter Carlino, CEO

Yeah, I mean, candidly, we can't get ahead of that process. And we owe it to the folks that we work with, our regulators to be patient, get it done, and they kind of set the time. So – but I think, as Brandon indicates we stand by our previous suggestion of when they will probably occur.

Todd Thomas, Analyst

Okay, got it. Are those the two primary factors, you know, around, you know, not providing guidance at this point, and should we expect to see some additional guidance and visibility once those transactions close?

Peter Carlino, CEO

Go ahead Steve. You want to take that?

Steve Ladany, SVP & Chief Development Officer

Yeah, Todd, I think the answer is yes. With seven assets, currently, either being divested or acquired, it is very difficult for us to provide guidance because the timing aspect of all these transactions is so critical to what will ultimately be the annual performance here. So, I think you're right. That's the main overarching issue for us to provide anything that would be accurate to the marketplace.

Peter Carlino, CEO

Let me say this. It’s all good. I mean we’re going to get there with these transactions, but we can only be wrong in trying to estimate when and how they're going to occur. So, we just feel that whatever we said would be misleading one way or the other. So, that'll smooth out at the end of this year as we get into next year, and we may well then get back to guidance.

Todd Thomas, Analyst

Okay, thank you.

Operator, Operator

Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, this is , asking on behalf of David. Just to the Bally’s transaction for a second and just give us a bit more on the rationale there, is there a ground lease instead of the usual triple net lease on properties that we see? Can you just give me more details there?

Peter Carlino, CEO

Who wants to take that?

Steve Ladany, SVP & Chief Development Officer

Yeah, I can jump in. With respect to the Tropicana side of the transaction, yes, it's a ground lease in effect that we are going to only own the land pro forma for the transaction. Part of the long-term thought, as Bally’s has indicated, in their press release was they will look at redevelopment opportunities in the future. And I think it was important that for them that they have the ability to make changes to the overall capital improvements that sit on top of the land today. So, I think that was part of the thought process there. It will be triple net in that we have no carry costs associated with the property. We'll just collect our rent on the land.

Unidentified Analyst, Analyst

Got it. That's helpful. And with respect to the right of first refusal in several markets that they laid out, can you talk about the rationale behind balancing using equity or debt to finance such acquisitions or financing provided to them?

Matthew Demchyk, CIO

Yeah. I mean, as the year plays out, I'll go back to that commitment to having a balance sheet in the optimal place. We've historically said, the guideposts for that are 5 times to 5.5 times debt-to-EBITDA, and as the year plays out, I think we're going to get some more visibility on the likelihood of some of the transactions coming to pass. And I'll just remind you, we have in our tool chest the same tools we've had historically. We've got an ATM program. We've also got retained cash flow that at our size is actually a decent number that can help fund things too as we move forward. You know, our intention on anything we're going to do incrementally is to at least appropriately balance the debt and the equity and that means to have – that's not going to with a company.

Peter Carlino, CEO

Yeah, I think that's the best answer. We're committed to that as Matt well outlined. So, you can always assume we're going to stay in that range, period.

Unidentified Analyst, Analyst

Right, thank you very much.

Peter Carlino, CEO

Thank you.

Operator, Operator

Our next question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.

Nick Yulico, Analyst

Thanks. Good morning, everyone. In terms of – couple questions on Bally’s, can you tell us what is the outstanding obligation to Bally’s on the $500 million commitment for the Gamesys transaction? You know, it's not clear also whether the Black Hawk and Rock Island sale leaseback transaction would satisfy part of that obligation.

Steve Ladany, SVP & Chief Development Officer

Sure. As you would imagine, we would love to fund the commitment in exchange for $500 million worth of sale leaseback acquisitions with Bally’s. However, historically Bally’s has demonstrated an ability to efficiently fund transactions using various forms of capital. I’d point out that and remind you that the outstanding commitment is reduced by any incremental equity they raise above $850 million between the time of our agreement and closing of the Gamesys transaction, and they've already raised $745 million. So, we're cautiously optimistic that some portion of the sale leaseback financing may occur.

Nick Yulico, Analyst

Okay. And are you able to select which assets satisfy the sale leaseback obligation or is that at Bally’s discretion?

Steve Ladany, SVP & Chief Development Officer

That's a mutual agreement between us and Bally’s.

Nick Yulico, Analyst

Okay, thanks. I guess just one other question is on rent coverage, which is, you know, 1.3, which is below the typical 1.8 Escalator Coverage Governor. You know, given the recent occupancy cap restrictions that are lifted in certain jurisdictions, could you provide some insight into the potential trajectory of improving rent coverage?

Desiree Burke, CFO

So, are you referring to the table where we report the prior quarter rent coverage on Page 14 of our release?

Nick Yulico, Analyst

Yeah.

Desiree Burke, CFO

Okay. So, you know, obviously, each of our tenants have been impacted by COVID in prior quarters and that is a trailing 12-month number. So, you know, we expect those numbers to continue to improve as we've said, the properties have continued to open up and have had fairly strong performance, that's what we've seen other operators report to date. So, those numbers are important points in time in trailing 12 months and do include closed periods.

Steve Ladany, SVP & Chief Development Officer

Yes, I'd like to say and certainly it's hard to count to zero. Zero revenue and limited revenue is just that. So, no, we're not at all concerned about coverage. And we expect it's going to move very swiftly back to a place that we're more comfortable and in line for increases.

Peter Carlino, CEO

And Nick, you can take a look at some of the results we've seen at least Bally’s reported. I mean, there were certainly some robustness in the time period since the numbers in here. We're just – we're not giving any guidance on the timeline of when we expect that to eclipse our threshold, but we're hopeful to see it in the not so distant future.

Nick Yulico, Analyst

Okay, thanks, everyone.

Peter Carlino, CEO

Thank you. Thanks, Nick.

Operator, Operator

Our next question comes from the line of Jay Kornreich with SMBC. Please proceed with your question.

Jay Kornreich, Analyst

Thank you. Good morning. As Bally’s has been quite acquisitive late, how do you think about the value for opportunities in the market? I know Bally’s previously had a bid for a Virginia casino development or that they might be interested in the downstate New York full-scale casino that gets legalized. So, just curious to know overall big picture view on the potential here?

Steve Ladany, SVP & Chief Development Officer

Sure. I'll give it a shot, but, you know, obviously, we can't speak for Bally’s intentions of any project. But yes, it's probably reported obviously that they were knocked out of the Virginia acquisition. Look, I think the way we landed at the row for in those four jurisdictions, was predominantly based on the fact that we believed and they believed those were four jurisdictions where ultimately online sports betting and iGaming will be very important to a company that's trying to put together an omni-channel strategy. And therefore whether or not they achieved the acquisition of a property in the next 12 months or in year six of the process, I think we want to be able to have a seat at the table to work with them because, as you did point out, they have been acquisitive, they are aggressive, and we would like to be their partners in any transaction, whether that's a development project or an existing casino property. So that was the thought behind that process.

Jay Kornreich, Analyst

Okay, that makes sense, and then just one follow up. As the tenant conversation has largely shifted away from your largest tenant and national gaming, do you foresee any further desire for them to grow and access new states with you as a partner or is the right way to think about external growth with your operators like Bally's or the ROFR on the Casino Queen?

Peter Carlino, CEO

Yeah. I mean, I think the answer is we want to do business with everyone of our tenants. And we stay as close as possible to each of them to be a good and positive partner for the things that they may wish to do. How it would shake out on a particularly deal of state or an opportunity, I can't predict, but obviously, we spend a lot of time thinking about how we can be a good partner to our existing tenants. It happens at the moment, Bally's is highly acquisitive. They’ve proven to be really good people to work with. Honest, easy, it's been kind of fun. So, we're going to go with the rivers flowing. So, and that could be with any one of our existing tenants.

Jay Kornreich, Analyst

Okay, appreciate it. Thanks very much.

Operator, Operator

Our next question comes from the line of with Citi. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, thanks. I just wanted to ask you, there's been a lot of media stories about Native Americans moving into commercial gaming, particularly with a couple of assets in Las Vegas now, and do you see that as a potential avenue to develop new tenants or is that of less interest to you?

Peter Carlino, CEO

No, it’s commercial. That's a terrific opportunity and we want to be part of that anywhere in any place we can with any responsible well-capitalized group, absolutely.

Matthew Demchyk, CIO

I mean, if you look back historically, we've talked about on the travel reservations, it's a little hard to structure appropriately for our structure, but anything they do off campus effectively with projects that are on traditional sale leasebacks with us, I mean it’s – we’d love to do it with the right balance sheet, the right credit, and some of them have a lot of cash flow, they'd like to grow it. So, it's certainly a part of the conversation here. It has been frankly.

Unidentified Analyst, Analyst

Yeah. I mean, do you feel like this is an avenue that more Native American tribes will, you know, pursue going forward, you know, for whatever reasons, it just seems like there's been a little bit of adjustment – I mean some of them have been in it for a while? Could be like a big, you know, a big new thing over the next few years.

Peter Carlino, CEO

I mean the question to me is, if they have a lot of cash sitting around what do you do with it, right? And then people with good situations have their problems around the world and they know that business, and they know the upsides in that business. This is very unique compared to other things you could put your cash into. So, I'd expect there to be more of it.

Steve Ladany, SVP & Chief Development Officer

And I'd echo that and include the fact that there's a number of jurisdictions, which historically have not had gaming, you know, Nebraska, Alabama, which are now starting to move towards it. So, as you have cash flow, and you're sitting on a wonderful asset that's performing, but you have sudden competition possibly coming in around you, you're going to look to diversify. And I think that's something we're going to continue to see. And I think you're right. I think we'll continue to see things happen in Vegas, maybe not on the strip, maybe all strip but I think we'll continue to see activity there.

Unidentified Analyst, Analyst

Okay, thanks. And then, you know, just maybe a comment. I mean, I don't know if you're taking a vote on this, but there's only three gaming reits. And I think to have your call concurrent with one of the others is, you know, you should probably like reach out to your peers in this space and figure out a way to have calls at separate times. Just a comment for consideration.

Peter Carlino, CEO

. They came in after we did and I think somebody came into my office and said, shall we move out? I said, let them move. I'm not worried. But yes, it's unfortunate we agree. So, we're the same page. No malice there. It's just the way it kind of worked out.

Operator, Operator

Our next question comes from the line of with Bank of America. Please proceed with your question.

Unidentified Analyst, Analyst

Hey, thanks for taking the question. I wanted a little bit more broadly, just as we've seen some new states legalize online sports betting and the license system is kind of untethered from land-based casinos to a certain extent, just be great – or hear your thoughts on how that's going to affect the transaction market going forward, and maybe your own growth plans?

Steve Ladany, SVP & Chief Development Officer

Well, look, I mean, part of the answer is, we don't really know. But you know, most of these states are tethered to bricks and mortar. There are some that aren't, and there are some ongoing debates in various states. I know talking to our major tenants, they're very focused on bricks and mortar, they are completely focused on that and are building out facilities at some, you know, considerable cost to capitalize on that opportunity. So, I don't think the script has been written yet. There are some stages, you're right, it could open it to the world, it's possible. But I think on balance, look, people are social animals, I'll take the point that – or make the point that you might place the occasional bet from home or from your car from a parking lot someplace, but by and large, on a Saturday afternoon football is gone. And Sunday, football, activity, people are going to want to be with other people and enjoying a drink and get the whole social experience. So, I think what's going to happen is, you're going to see a huge lift in gaming in the United States generally. I'm not sure that's good from a public policy point of view, but I think that's what's going to happen. You're going to see numbers rise everywhere.

Matthew Demchyk, CIO

Yes. And I'll point something out, I mean, you use the word tethered. And one piece of this practically for us is how did the state structure it? But the reality is, if you look at Penn's public comments, the value of a customer that uses multiple pieces of their omni-channel platform, whether it's iGaming, sports betting, and the bricks and mortar is inherently multiple times more profitable. So, there's a business incentive for our operators to have both pieces in their delivery platform. And at the end of the day, I mean, our assets are essential in getting customers that are reliable, and predictable, and get them more profitability. So, I think when we look back, we're going to get many positives that come from COVID, getting this case study that we're getting. And on the growth fund, I don't know that it's going to be very different, because those economic incentives are going to be there, regardless of how the state structured things.

Steve Ladany, SVP & Chief Development Officer

You know, I think with – I had one differing comment just around your M&A question. I do think that it could be a little different in that if you can now go and be one of 60 online license holders in Maryland, you don't maybe then feel the need to go acquire an asset there. I think that that's the surface understanding of it. But I think what the reality is, is there are owners of assets in states, which have had massive price appreciation tied to the assumption that those states will tie their license back to a property. And if those things don't happen, those valuations move aggressively. So, if you take New York for example, and look at an asset there, the assumption that all that was going to be tied to a property in a suddenly – appears that it might not be will massively swing what the perception is of value for a particular asset. So, I actually think we're going to see M&A come out of this. And it's going to be the opposite direction than what everyone's thinking. It’s going to be people that were holding out with hopes that they were going to get this massive pot of gold, and now all of a sudden, people can access the market a different way. And now they realize that maybe they should be a seller anyway.

Unidentified Analyst, Analyst

Great. That's super helpful color. I really appreciate that. And then I guess, one other question for me just on the M&A market, I understand the transactions you guys have done in the last few months have been generally a bit more off-market, but it'd be great to hear kind of your sense about what the buyer pool for assets looks like? I, you know kind of pre-COVID, there was a big talk about the increasing institutionalization with private equity, which has been quite active on the operational side so far, post-COVID, but just be great to see kind of who else you guys are seeing out there in terms of deals.

Peter Carlino, CEO

Matt why don’t you take a look at that?

Matthew Demchyk, CIO

Yeah. I think that it's the usual suspects. We certainly see them, and I think on the margin, there's a little sniffing around from some folks on the private equity side, but remember, it's not that easy. I mean, a lot of these states need to be licensed. There's a lot of regulatory dynamics involved. And it's not for the faint of heart. And that has given us historically an economic moat to an extent that our risk-adjusted returns. So, we'll see how that plays out. But you're right on the path towards institutionalization, it's inevitable that other folks get involved. And on the other side, you could look at it as a nation deal. I mean, they are not in the real estate, but as an operator. So, there's also a case that some of that capital finds its way on the operating side and uses someone like us, which might actually be helpful to us. We'll have to wait and see.

Unidentified Analyst, Analyst

Great, thank you guys. Congrats on another great quarter. That's it for me.

Peter Carlino, CEO

Thank you.

Operator, Operator

Our next question comes from the line of with Deutsche Bank. Please proceed with your question.

Unidentified Analyst, Analyst

Hey, good morning, guys. Thanks for taking our question. Given costs have reduced as heavily as they have been for operators, and as much acquisition-related synergies are probably harder to justify, do you guys expect the M&A environment to remain as active as it has been?

Peter Carlino, CEO

Go ahead, Steve.

Steve Ladany, SVP & Chief Development Officer

Yeah, I do. I think that, you know, the synergy aspect was certainly important a few years ago when Eldorado acquired Isle and Eldorado acquired Tropicana, you know, I think that at this point, I think those large scale M&A deals where one operator is buying, you know, 10, 12, 15 assets from another operator, and is able to garner a massive corporate expense synergy. I think those deals are few and far between going forward, just because the landscape in the gaming, you know, operator world is pretty set. There are just not a lot of those, you know, Isle, Trop type size companies that are still left. So, I do think that synergy piece will be less important. The asset quality asset type filling out your omni-channel, I think those are the things that people are looking at. In talking with operators, they're focused on that type of asset there. I think they are being a little more selective at this point, as far as what asset they're buying, in what market, but I don't think synergies are going to slow down the M&A environment.

Unidentified Analyst, Analyst

Okay, great. Thank you.

Operator, Operator

There are no further questions in queue. I'd like to hand the call back over to Mr. Carlino for closing remarks.

Peter Carlino, CEO

Well, thank you very much, and thanks to all who dialed in this morning. It's been fun to talk with you and we'll look forward to hopefully another strong quarter next time around. So, see you then. Thank you.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.