Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q1 2024 Earnings Call Transcript

Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q1 2024 Earnings Call Transcript April 26, 2024

Gaming and Leisure Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning and welcome to the Gaming and Leisure Properties, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joseph Jaffoni: Thank you, Ryan, and good morning, everyone, and thank you for joining Gaming and Leisure Properties’ first quarter 2024 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section in 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 the risk factors and forward-looking statements contained in the company’s filings with the SEC, including the Form 10-K and 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 Brandon Moore, 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, it’s my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Peter Carlino: Well, thanks, Joe, and good morning to everyone. As usual, let me call your attention to my written comments in our release, which highlights that this has been a steady quarter for us during which we strengthened our balance sheet in anticipation for what we would hope to deliver through the balance of this year. And in the last paragraph of my comments from which, I’ll briefly quote, in 2023, we completed over $1.1 billion of transactions, including over $760 million of traditional real estate acquisitions and $337 million of loan funding commitments. The overall 2023 transaction value, despite a challenged market environment reflects our creativity and creating comprehensive financing solutions for our tenant partners.

Our 2023 addition set the stage for financial growth in 2024 and beyond. So that — I can say that look we’re — we’re now working on a number of transactions, both small and larger. And I think you — most of you recognize that what we do is highly complex and it requires a great deal of careful structuring and often regulatory approval. Nonetheless, we expect that our performance will level out acceptably well as it always has over the next — over the balance of this year and beyond. So we feel pretty good about that. And one final gratuitous comment I’ll throw in, that as a large shareholder, I couldn’t be more delighted with the growth in our dividends over these last years and our announcement this quarter as well. So with that, I’m going to turn it over to Desiree Burke to make some comments?

Desiree?

Desiree Burke: Thanks, Peter, and good morning, everybody. I’m just going to highlight for the group, what’s happening in our income statement for the quarter. For the first quarter, our total income from real estate exceeded the first quarter of ’23 by over $20 million. This growth was driven by the Tioga acquisition, which increased cash rental income by $2.2 million, the Rockford acquisition, which increased cash rental income by $3.1 million, the Casino Queen Marquette acquisition and the Baton Rouge Landside development, which increased cash rental income by $2.3 million, the recognition of escalators and percentage rent adjustments on our leases, which added approximately $3.5 million of cash rent, the combination of non-cash investment lease adjustments and straight line rent adjustments, which drove a collective year-over-year increase of $9.4 million.

As far as operating expenses go, they increased by $30 million, but that was primarily due to a non-cash increase in the provision for credit losses. Our PENN Amended Pinnacle and Boyd Master Leases have rent resets that are occurring on May 1st of 2024. We continue to expect that these resets will result in increased percentage rent adjustments of between $4 million and $5 million annually. In addition, we expect to receive full escalation on these contingent escalation leases, which will result in $6.5 million of additional rent annually. Finally, the Amended PENN Master Lease is subject to contingent escalation as well on November 1st of ’24 and if obtained in full would result in $4.2 million of annual rent. Included in today’s release is our AFFO guidance ranging from $3.71 to $3.74 per diluted share in OP units.

Please note that this guidance does not include the impact of future transactions. We have invested in a zero coupon six-month treasury bill that matures in August of 2024 at an implied yield of 5.32%. So in addition to the cash that you see on our balance sheet, we also have this treasury bill. Our rent coverage remains strong ranging from 1.98 to 2.71 in our Master Leases as of the end of the prior quarter. With that, I’ll turn it over to Matt for comments.

Matthew Demchyk: Thanks, Desiree, and thanks everyone for joining us this morning. Our focus on stability and dependability continues to show in the consistency of GLPI’s cash flows and the solid four-wall coverage across our leases. Our business model is built to navigate business cycles, including economic and interest rate volatility. History suggests that heightened volatility, often leads to opportunity for those who are prepared. At GLPI, we have worked hard to prepare. Our leverage and liquidity are at levels that strengthen and support our business model. We’ve got normalized debt-to-EBITDA in the mid-4s, a staggered maturity profile, our next unsecured maturity not due until mid-next year and significant available liquidity between a revolver and quarter-end cash position.

We have positioned the company to have optionality on incremental capital sourcing for transactions as they arise. Our track record of creativity, makes us an ideal choice for counterparties, who would benefit from bespoke financing solutions. Our partners want not only to solve their current needs, but also to have a partner, who can predictably continue to meet them well into the future. We’ve always been a dependable capital partner and in the current backdrop, the value of that dependability has gone up. As potential counterparties need to do things, we are here ready for them, willing and able. We are focused on closing opportunities to prudently deploy our shareholders capital. I’ll now turn the call back to Peter.

Peter Carlino: Thanks, Matthew, and thanks, Desiree. I think you all have a pretty clear picture of who we are and where we’re headed. So with that, operator, would you please open the floor to questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of Greg McGinnis with Scotiabank. Please go ahead.

Oliver Chang: Hi. Good morning. This is Oliver Chang on with Greg. If you look across the regional markets as the property still owned by gaming operators and those that want to expand still, what is the realistic investable market size, that would still meet your desirable investment spread criteria? And maybe the real estate is desirable, but initial accretion is limited. So how much are you willing to give up on initial cash yields for potentially better growth from rent escalators?

Peter Carlino: I don’t think there’s any shortage of opportunity, if I understand the question correct. We see a horizon of some pretty, I hesitate to say juicy, but good opportunities with partners and others that we have on the drawing board on a constant basis. But let me ask Matt to opine on that answer.

Matthew Demchyk: Sure. I mean, when you think about the opportunity set, I’d really think of our job as figuring out structures and ways and approaches to make most every asset work for us. Remember, we’ve got master leases and we’ve got a lot of other structuring tools in our tool chest, that have consistently made us really high-quality cash flow. Every one of these deals tends to be at least the ones we do directly originated and with a lot of accommodations for solves on the other side. So I think of — most all the assets out there over a long period of time as part of our opportunity set. The big question is, what the catalyst is on the other side for someone to do something? And right now, I mean, there’s different buckets.

If you have someone who’s rolling up assets, developing assets, maybe redeveloping at large scale, there’s a more natural opening for someone like us and the reality that these assets generate a lot of cash flow means that, that sense of urgency isn’t necessarily there for everyone and it’s our job to be ready if and when it arises. The other reality is this year we’ve got a presidential election and the amount of volatility that could come up, as we get closer and concerns around tax changes, maybe that’s another bucket to think about. I mean that’s where the Cordish deal ultimately came from.

Oliver Chang: Got it. Okay. It makes sense. And I guess speaking — speaking of catalyst for an operator to do something, I was given recent Bally’s news of the credit rating being downgraded with a negative outlook, how have conversations changed maybe around the potential investment opportunities, both new and those embedded within the pipeline due to the tighter financing environment?

Steven Ladany: This is Steve. I’ll try to take a shot at that. So I think separate removed from Bally’s though I would include them in this comment, I think all of our counterparties, whether they’re current tenants or potential tenants in the future, I think all of our counterparties have seen the increased debt costs last longer than I think they maybe had hoped for or at least anticipated. And I think as time has more on and the hopeful desire for rates to be back to a much lower level has somewhat dissipated, I think people have started to come to more of a realization that higher rates might be around longer and therefore, it has started to kind of somewhat reset the way potential sellers have thought about cap rates. Now don’t run with that in that and I’m not saying that people have immediately — have immediately pushed themselves from an expectation of 7.5% to 8.75 %.

But I think we have seen people become a little more realistic with respect to pricing expectation and it has meant that cap rate expectation has started to move higher, excuse me.

Oliver Chang: Got it. Okay. Thank you.

Steven Ladany: Thank you.

Operator: Thank you. Our next question is from the line of Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem: Hey, just two quick ones. Starting on the pipeline, a commentary about doing $1.1 billion last year, which is roughly 70%, 75% traditional versus sort of funding commitments. Maybe as you’re thinking about the pipeline going forward, is that sort of the right mix of opportunities? How is that sort of evolving and so forth?

Peter Carlino: I guess the smart answer is, we’ll let you know when we get there. But look, this is so completely unpredictable as I made in my introductory comments. We’re looking at some modest deals. I call them inflation fighters, and then we’re looking at some larger transaction as well. And I think that’s kind of the way it’s always been. We managed to scrount something out of the woodwork, year-in and year-out, and we expect it’s going to be more of the same. So the fact that this has been quiet to the early part of ’24, I shouldn’t suggest for a moment there isn’t a ton of stuff going on here. It — somebody here around the table and I don’t remember which of you all had noted the analogy. It’s sort of like a duck going — little duck going across a pond. It looks smooth and effortless, but down below the water, he’s frantically paddling. We’re always frantically paddling here. So I’ll stick with that — with that answer.

Ronald Kamdem: That’s great. And then my second one, if I may, on the guidance, maybe just high level, can you talk about any moving pieces between NOI, interest cost, looks like the treasury investment, how does that impact the guidance? And also if you could talk about the Lincoln asset and an update there? Thanks.

Peter Carlino: Okay. Des?

Desiree Burke: So from a guidance perspective, we use the SOFR curve forward-looking to estimate our high and low-end of our guidance and that is our largest moving part as well as the fact that we have the pre-announced transactions for Rockford and the timing of the funding of that transaction also impacts the high and low-end of the guidance. And then as far as Bally’s Lincoln, I don’t think we have any new information to provide at this time. We still have our option out there, but if we don’t have any information, to know, when they might actually be able to sell us that asset.

Ronald Kamdem: Great. Thanks so much.

Peter Carlino: Thank you. We haven’t exhausted everybody yet. Have we? Operator? Are we still connected?

Matthew Demchyk: Peter, I can hear you.

Peter Carlino: Where is Ryan?

Desiree Burke: Ryan?

Peter Carlino: So Joe I think we understand that everybody that’s dialed into the line, can probably still hear us, but we don’t have an operator to filter the questions through to us. So we apologize for the delay.

Joseph Jaffoni: Hang on a second. We’re trying to contact the operator. I don’t know why he’s not responding.

Operator: Ladies and gentlemen I apologize for the technical difficulties. Stand by one moment please. Once again, ladies and gentlemen, we do apologize for the technical difficulties. We do have a question coming from the line of Todd Thomas from KeyBanc. Todd, could you please confirm if you’ve asked your question?

Todd Thomas: Yeah. Hi, good morning. Can you hear me okay?

Peter Carlino: Yes, we do.

Todd Thomas: All right. First question, just, Brandon, Matt, I just wanted to go back, if we could real quick to some of the commentary around asset pricing. And I’m just curious as you look ahead and look at kind of what you’re seeing out there, underwriting in the pipeline of whether you would expect to be deploying capital at higher yields than say the 8.3% for Tioga, as you sort of look ahead assuming the environment does not change from here?

Matthew Demchyk: I’d say more broadly, that’s — each one of these deals, is so unique and it’s really hard to come up with a homogenous answer. I don’t know that rates have changed in the last few months based on some of the volatility, but I also think that level represents what’s possible in an environment like this. And unfortunately, you’ll have to see some headlines, to see where we kind of land things with folks. We always try to get the most possible, but obviously, there’s a negotiation in two sides of it that get us to the finish line.

Steven Ladany: Yeah, this is Steve. And I think last quarter, I didn’t pull the notes to see what I said, but I think I said something along the lines of, I don’t expect to see deals north of 9% cap rates and I don’t expect to see deals south of 7%. And I think that range is true at this point and I think everything else Matt said is spot on.

Todd Thomas: Okay. Does the more recent backup in rates, does that impact plans at all regarding either sort of redevelopments or expansions that you and your operator partners have maybe been contemplating in any way, either sort of activity levels altogether or timeline?

Steven Ladany: I think the backup in rates actually increases the amount of dialogue we have with some of our partners. Obviously, as you would assume, when they are contemplating a capital improvement at an asset that we own with them and leased to them, they have — they have a couple of pockets to take cash from or seek cash from for those projects and one of which is borrowing costs. And so if we go turn back the clock a few years, the borrowing cost was always significantly inside of whatever cap rate we could offer from a financing perspective, that’s no longer the slam dunk that it used to be. And so I think we’ve seen an increase in dialog and I think that will continue as we move forward here.

Matthew Demchyk: Yeah, Todd, one of the interesting dynamics we’ve seen playing out or are seeing in real-time with the Fed not cutting as people might have expected is, we’ve got an inverted yield curve. So people that are borrowing short based on SOFR, are permanent capital on sticker price is a lot closer to, what they might be thinking about or better than that versus an environment where we’re quote-unquote a little more normal.

Todd Thomas: Okay. That’s helpful. And just lastly, Desiree, what do you do with the funds from the zero coupon T-bill at maturity? And what’s the rate that you’re earning on cash relative to the 5.32%? I’m assuming it’s relatively close, but what’s assumed in guidance with those funds at maturity?

Desiree Burke: So at maturity, we’re going to use the funds, to repay the $400 million bond, that comes due on September 1st and the 5.32% is very close to what we get for our normal cash deposit. Right now, we’re at like 5.24%, I think. That number changes by the day though, but.

Todd Thomas: Right. Okay. All right. Got it. Thank you.

Peter Carlino: Thank you.

Operator: Thank you. Our next question is coming from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Barry Jonas: Hey guys, good morning. Let’s talk about the competitive environment you’re seeing out there right now for deals. Is it kind of the same faces or any new players out there? Thanks.

Peter Carlino: You know, I never think that we compete, with anybody, frankly. The reality is, yes, sometimes there are other players around a particular transaction, but Matt coined a phrase a couple of years back, that most of our transactions are bespoke, where we discuss or find a way to provide something special, different, more effective in the aggregate to a particular partner. And I think we’ve done that. We’re not always the cheapest, it’s certainly not our goal. I used to say I never wanted to be the winner at an auction, because the winner often loses. It’s just not our goal. What we seek to do is find transactions that give us a spread that’s not real complicated to our cost of capital. And so far, we’ve been able to do that in any environment.

So each transaction is unique, each of our partners has a special desire. And plus, I’ll add one other suggestion too, in a recent discussion we had with a tenant, they do business with us because they like us and they have confidence in us and we have a good reputation of being a good partner. All that figures into it, and it’s more than just dollars and cents.

Barry Jonas: Got it. Got it. And then maybe one for Desiree. I get its non-cash, but can you provide more color on the change in the allowance for credit losses? Just trying to understand if there are any wider ramifications down the road here or it’s all just accounting. Thanks.

Desiree Burke: Yeah. So that number is very volatile and this quarter in particular, it was more of the macro-economic environment and assumptions around the commercial real estate index and where that is heading that caused the charge. I would say it’s more accounting than anything. It has nothing to do with performance of our properties that are in our investment and financing lease line, which requires the reserve.

Barry Jonas: Great. Thanks so much, guys.

Peter Carlino: Thank you.

Operator: Thank you. Our next question is coming from the line of Daniel Guglielmo with Capital One Securities. Please proceed with your questions.

Daniel Guglielmo: Hello, everyone. Thank you for taking my questions. The first one, you all have a well-diversified portfolio with around eight public and private operator tenants, and I’m sure you guys are talking with them on a regular basis. I’m just curious, in those conversations, are there broader themes that they’re all thinking through or is it kind of a mixed bag?

Peter Carlino: Steve, why don’t you take that?

Steven Ladany: Sure. Look, I think — I think that each company is in a different — different state. So I think they are similar themes as far as operating efficiency, focus and expansion of their properties to drive additional revenues, those are — those themes are consistent. Where they start to deviate is some of the tenants are a little more focused on growth by way of maybe, new jurisdictions, that are opening up, some are focused more on online platforms and things of that nature. So each one has a specific focus that’s kind of taking some of the time share from them. But overall and overarching, they’re all focused on the brick-and-mortar business of generating additional cash flow and ultimately paying our rent, which is — which is what we’re most focused on as well so.