Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q4 2023 Earnings Call Transcript

Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q4 2023 Earnings Call Transcript February 28, 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: Greeting and welcome to Gaming and Leisure Properties’ Fourth quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jim Leahy. Thank you. You may begin.

James Leahy: Thank you, Rob. Good morning, everyone and thank you for joining Gaming and Leisure Properties fourth quarter 2023 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-K 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 joined 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, chief Development Officer and Matthew Demchyk, senior Vice President, chief Investment Officer.

With that, it’s my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Peter Carlino: Well, thank you, Jim and good morning, everyone. We’re especially pleased to be here with you this morning talking about the windup of a very good year, last year and off to a good start in the first quarter of this year. I think the critical issues are well outlined in the first four paragraphs of my written comments in our press release. I would encourage you to read them there rather than having me repeat them as is our normal approach. I’m going to ask Desiree Burke and Matthew Demchyk to make some — or to highlight some things that we thought you might want to hear, and then we go straight to your questions and answer the things that really interest you. So with that, Desiree?

Desiree Burke: Sure. Good morning. For the fourth quarter of 2023, our total income from real estate exceeded the fourth quarter of 2022 by over $32 million. This growth was driven by the addition of Bally’s Biloxi and Tiverton, which drove an increase of cash rental income of $12.1 million. The Rockford acquisition increased cash rental income by $3 million. The Casino Queen Marquette acquisition and the Baton Rouge landside development increased cash rental income by $2.3 million. The recognition of escalators and percentage rent adjustments on our leases added approximately $3.6 million of cash rent and the combination of higher non-cash revenue gross-ups, investment and lease adjustments, and straight line rent adjustments drove a collective year-over-year increase of approximately $11.6 million.

Our operating expenses increased by $12.8 million, primarily related to increases in non-cash expenses such as depreciation and the provision for credit losses. The annualized rent reduction in the amended PENN percentage lease was $4.4 million, which began in November of 2023. However, we did achieve full escalation on that lease of $4.2 million annualized and $3.5 million escalation on the PENN 2023 master lease annualized. In addition, our PENN amended and Pinnacle-Boyd master leases have rent resets occurring on May 1st of 2024. We expect these resets will increase percentage rent adjustments between $4 million and $5 million annually. From a balance sheet perspective, during the fourth quarter, we sold 3.9 million shares of common stock under our ATM program raising approximately $179 million.

Subsequent to year end, we sold an additional 182,000 shares. Our net leverage remains under five times EBITDA. Included in today’s release is GLPI’s full-year 2024 AFFO guidance, ranging from $3.70 to $3.74 per diluted share and OP unit. Please note that this guidance does not include the impact of future transactions. for modeling purposes, our non-cash straight line rent adjustments for 2024 will be approximately $62 million, which will be needed to be included in revenue and then deducted for AFFO purposes. I would also like to note that our first quarter dividend was declared of $0.76 per share and our rent coverage ratios remain strong, ranging from 1.95 to 2.75 on our master leases as of the end of the prior quarter. With that, I will turn it over to Matthew for his comments.

Matthew Demchyk: Thanks, Desiree and thanks to everyone for joining today. Over this past quarter, we’ve watched as market participants vacillated between diverse views on interest rates, inflation in the economy, headlines around looming commercial real estate loan issues and the potential for more abound. It’s a very interesting backdrop to further highlight the relevance of GLPI’s enduring cash flows. Our thoughtfully constructed portfolio of safe and durable cash flows combined with our liquidity and capital markets discipline have set the stage for opportunity. And to that end, this past quarter, we again demonstrated our team’s ability to uniquely source and structure a transaction to the benefit of our shareholders. Our team created a bespoke solution for a new tenant partner, American Racing with our recently-announced Tioga Downs acquisition, in which we issued OP units and achieved an 8.3 initial cap rate on $175 million investment.

The transaction took a long time to finalize and underscores the sweat equity that our team invests into deals as we compete on capability and not just cost of capital. Our capital market actions reemphasize our commitment to balance sheet strength and our respect for the role it plays in our long-term success. With an appreciation for our pipeline of opportunities, including Tioga, we also opted to lock in equity through our ATM program. Our very healthy net leverage positions us to be highly opportunistic in our use of debt and equity for new deals. We’ve underscored our dual commitment for GLPI to be both safe in a Voldo [ph] environment, and also very well positioned to take advantage of opportunity if and when it arises. Our core message to potential counterparties is that despite the macro backdrop in volatility, we are very much open for business.

Our overarching objective remains the same, increasing long-term intrinsic value per share. Thank you to our shareholders for the confidence you’ve placed in our efforts to make prudent long-term decisions for you. And with those comments, I’ll turn the call back to Peter.

Peter Carlino: Well, thanks, Matthew. I think that well summarizes kind of our philosophy of operating with this company. And the growth, which I’d love to look at. The 19 properties we left when we spun from PENN, we did so with 19 properties. Today, we have…

Desiree Burke: 62 including Tioga.

Peter Carlino: Yes. we just added that. The script I have here says 61, but things get old here quickly. so, we’re pleased to say 62 properties in the time, we’ve been in this business. We’re proud of that. Okay. with that, time to open the floor to your questions. Operator, would you please do so?

Operator: Thank you. [Operator Instructions] Our first question comes from Jay Kornreich with Wedbush Securities. Please proceed with your question.

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Q&A Session

Jay Kornreich: Hey, good morning out there. You previously mentioned having a number of opportunities to hit singles and doubles this year with new acquisitions. So, I’m wondering how you currently see the opportunity set and based on your conversation, what the appetite of regional casino owners currently looks like?

Peter Carlino: Just for fun, I’m going to give that to, to Brandon Moore, who’s looking — well, how about it, Steve?

Steven Ladany: I’m sorry, could you repeat the second part of the question?

Jay Kornreich: Yes. My second part was just based on your conversation with current regional hotel owners, kind of what their appetite currently looks like for sale-leaseback?

Steven Ladany: Sure, sure. Look, I think from a pipeline perspective, it remains very healthy and active. Our dialogues are plentiful. I think, from a regional owner perspective, we’re currently having more dialogues with folks, who have either generational ownership type of complexities that they’re working through or tax matters that they’re working through. I think things right now are not necessarily down the middle of the fairway as far as people just out there looking to transact for the largest number and regular way transaction, because of where the capital markets sit in the macroeconomic environment. So, I think what we’re really seeing is interest is remained high for people that have needs and those needs are various. But we continue to have dialogues and I think we feel very, very good about the upcoming quarters.

Brandon Moore: And Jay, I’ll add if you, I mean, look out in the environment, we’re building on this reputation of being a unique problem solver. You look at Tioga to Steve’s point, the fact that we used OP units, we’re able to help tax structuring, did the same exact thing in a different way with Cordish. that tends to help. And it also tends to help us get a back to the sweat equity theme, a better than market return when we close these deals for our shareholders. Because we have a true partnership with our counterparty.

Peter Carlino: I’m smiling here, you can’t see it obviously. but my suggestion that we direct that question to Brandon as our General Counsel was, he is always caution that we don’t get too far ahead of what’s out there. Look, we’re very active in chasing down opportunities. These things are often complex, take a long time to get done. So, with those cautions, we continue to work away. Early on, we used to get the question, where’s your pipeline? Well, we’ve never had a pipeline yet. I highlight we’ve gone from 19 to 62 properties and it’s not an accident. So, we’re encouraged. We’ll see where it goes.

Jay Kornreich: Okay. Well, I appreciate all that color. And then just as a follow-up on the capital raising front, as you commented, you’ve recently been tapping the ATM, you have a robust $684 million of cash and balance sheet looks like. So, just wondering how you think about funding upcoming acquisitions, if that will largely be done, nothing but balance sheet or if you think about or how you think about match funding, kind of new equity and debt capital with new acquisitions.

Peter Carlino: Yes. Jay, I mean, one thing we’ve been certainly focused on is making sure that we’re not exposed to the winds of the capital markets. So, towards the end of last year, we derisked our bond, refi that we’ll see later this year with the bond raise that we did. And you’re right, we’ve used the ATM to cover effectively all the cash needed for Tioga and then a little bit. from a position, where we already had really strong debt to EBITDA. And the goal is really to be in a position to play offense. And when you think about the relative cost of debt and equity, there’s a period, where they converged decently and they’re beginning to diverge a bit. And if you look at our bonds that we did towards the end of last year, the trading in the low-sixes, and that’s really late earnings potential to your point on incremental deals.

I mean, we have the opportunity to use debt as a tool maybe, more so than we have over the past few years, because our leverage is so low and expect us to continue to pre-fund and match fund acquisitions with ATM equity at the same time as maybe balancing things a bit more from an earnings perspective. But it’s going to be a function of how big the opportunities we close are and the timing around those. And don’t forget, we’ve also got Lincoln still outstanding. We’ve got the spend with 10 on the back burner to ultimately get spent. So, we want our balance sheet to be able to handle, walk and chew gum at the same time, handle multiple things at once.

Jay Kornreich: Okay. All makes sense. Thank you very much for the time.

Operator: Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question.

Greg McGinnis: Hey. good morning. Maybe, just to follow up on that funding question. So, VICIs [ph] used the forward feature on its ATM pretty effectively in terms of building up dry powder with a limited dilution impact. Is this a tool that you’ve considered using or what are you looking for before utilizing it?

Desiree Burke: Yes. I mean, we have used the ATM in the past. We closed on an acquisition in February of this year. So, the fourth quarter use of the ATM, we knew we had that transaction Tioga coming at us. So, there was no need to enter into a forward for that equity raise. But we absolutely know that that is a tool that we have to use when it makes sense for us to use it.

Greg McGinnis: Okay. And then I’m just trying to understand on the guidance range how you might hit the bottom end. Because if we annualize Q4 we’re kind of in the middle of the range and embedded escalators appear to offset any additional share issuance that is guidance included, share issuances beyond what we’ve already seen or is there something else to consider there?

Desiree Burke: Yes. So, we — as you know, the forward curve, it moves pretty quickly on us. And so it just as of last week when the fed came out with their announcement, the curve actually shifted up as they didn’t expect some of the rate declines to occur. So, we do have some room in our guidance around what that curve might do in the future based on future announcements and whether or not the 75 basis points or so of rate reductions will occur at the end of the year. So, there is some noise in interest expense, as well as the fact that we’ve told you about our pipeline of Rockford funding. We don’t know exactly the timing of the funding of some of the transactions that we have out there. We have a commitment to fund that loan, but we don’t know exactly the timing of it. So, there is some room around the timing of those transactions and the fundings of those loans.

Greg McGinnis: Okay. So, if those are delayed, then that’s potentially how we get to the bottom end.

Desiree Burke: All right.

Greg McGinnis: I guess, it’s just the term loan, right. That would be the…

Desiree Burke: yes.

Greg McGinnis: …on the variable side.

Desiree Burke: that’s $600 million term loan. That’s right.

Greg McGinnis: Okay. All right. Thank you.

Operator: Our next question is from Todd Thomas with KeyBanc Capital Markets. Please proceed with your question.

Todd Thomas: Yes. Hi. Thanks. Good morning. I guess, I just wanted to follow up first on the comments around that capital costs. Matt, you said they’ve come in a little bit, what’s in the guidance for the September, the $400 million with a maturity at 3.35%. And then if you do look to utilize debt capital more in ’24, with pricing a little bit more favorable today, can you just remind us how comfortable you are taking leverage up from current levels?

Desiree Burke: Right. So, in the guidance clearly, we’ve already pre-funded the $400 million, 3.35% that we’re taking out, right, with the $400 million that we issued at the end of 2023. So that is a known item and not a variable item. And we — as Matthew mentioned, we will use our balance sheet when we think it’s optimal to use our balance sheet, but our — we can always increase our leverage. We don’t intend to keep it below five forever. We just want to have it as a tool to use when the timing is correct to use it.

Matthew Demchyk: Todd, I mean, over cycles we’ve talked about our target range being 5 to 5.5. We said, hey, in this environment, our sweet spot’s definitely towards the lower end of that. but to Desiree’s point, we’re well within it right now. So that gives us some flexibility on incremental deals to navigate and think about what’s best given those relative costs.

Todd Thomas: Okay. And then just in terms of the investment pipeline and pricing, how should we think about pricing for any future investments just vis-à-vis the Tioga Downs deal at 8.3%. Can you just provide some insight on pricing for future deals that, that you’re seeing in the pipeline today and how we should think about that?

Steven Ladany: I’d say, it’s Steve, yes, sort of not really. So, not to be a joke, but I think, look, every transaction is very different. There are aspects of each transaction, which either garner additional risk-adjusted return and therefore higher cap rates or potentially lower cap rate depending on the transaction. So, I think directionally speaking, I feel like you can look at where the market has been on gaming — regional gaming transactions, even in the last 12 plus months. And most transactions have come in that 8% area plus or minus. And I don’t see cap rates moving materially in a very expedited way. So, I don’t anticipate seeing a 9.5% cap rate anytime soon, nor do I expect see 6.5% cap rate in a regional market anytime soon. Vegas obviously has its own differentiating factors. but I think right now, it’s hard to say, you should definitely model X% into your forecast, because each transaction is very different and it stands on its own two feet.

Todd Thomas: Okay. and is there any update at all on Lincoln, whether you have any insight or can discuss how you feel about that potential opportunity prior to the end of the year?

Steven Ladany: Yes. we don’t have really visibility or color into that. Obviously, it’s an asset that is a premier regional asset that we would love to own in an accretive way. And so all those factors remain true. The win is very unknown. Obviously, as we did with the Tropicana transaction, we pushed out the option to the end of 2026 to give ourselves additional time to pursue and ultimately acquire Lincoln. So, we do have additional time. It’s not required that we would close that by the end of this year. So, we’re kind of standing by and waiting to hear updates.

Todd Thomas: Okay. Thank you.

Operator: Our next question is from Brad Heffern with RBC Capital markets. Please proceed with your question.

Brad Heffern: Yes. thanks. Hey, Matt. I think you briefly mentioned about PENN development funding. but can you give a broader update on that and when you would expect those funds to start being drawn obviously, Aurora’s had the groundbreaking?

Matthew Demchyk: I mean, we really point you to the comments they made around their expectations. I mean, all that we’ve heard is pointed to them likely given the mechanics, the agreements and Aurora likely using their balance sheet and using us probably closer to the end of the development period versus early as more of a takeout. But it’s really up to them. No, I think…

Peter Carlino: That’s the update we have.

Matthew Demchyk: that is the best update. I mean, I believe they’re, well, they are committed and moving forward on these projects. We’d love to put up money sooner, but that’s — that gets down to their balance sheet management and what they choose to do. So, we stand ready willing and able, and anxious to put money to work with PENN if we can, or as soon as we can.

Brad Heffern: Okay. Got it. And then the coverage ratios continue to work down fractionally each quarter. Are we at the point now where you think kind of the COVID tailwinds that we’re elevating those numbers are out of the numbers and these coverage ratios are sort of representative of the true fundamentals? Or is there still more to go?

Desiree Burke: Yes. that’s a good question. Probably more so for the operators than it is for us. but look, we — they barely inch down as you’ve noticed, a couple, we’re still 1.95 to 2.75. It’s still extremely strong. So, we are confident that it’s not related to COVID any longer. It’s related to operational adjustments that they’ve made and strengthening their margins. But that is probably a better question for how the operators feel about their coverage.

Peter Carlino: Yes. We’ve said for a long time. we expect some of the benefit to ultimately be kept. but I mean, there are a lot of forces that were one time in there. So, we started from a strong position, it got incredibly strong and we expect it to fall out somewhere in the strong plus category.

Brad Heffern: Okay. thank you.

Operator: Our next question comes from Haendel St. Juste with Mizhuo Securities.

Haendel St. Juste: Yes. Hey, sorry about that. So, first question’s on the dividend. The new annualized dividend of $3.04 implies like an 81% payout ratio at the top end of the guide. So, I guess I’m curious are you changing your target payout ratio here to something maybe above 80%, or is this basically just a reflection of your — you and the board’s confidence and your ability to outperform expectations this year? Thanks.

Desiree Burke: We are not changing, around 80%, we’ve always been around 80% of the payout ratio. Obviously, it does change based on what our taxable income is at any point in time. And we are reflecting a payout ratio to meet our taxable income distribution requirements.

Haendel St. Juste: Fair enough. And then a follow-up on the acquisition of Tioga Downs in the quarter the Racino [ph] asset, I’m curious, kind of what drew you to that asset type. Are we going to see you do more here in the near term? And any color on how that low 8% cap rate there may compare to where you think or have — or seeing regional, more traditional regional gaming cap rates in the market today? Thanks.

Peter Carlino: Steve?

Steven Ladany: Yes. look, the proprietor of that asset, Jeff Gural, we’ve known Jeff for some time. and Jeff had some tax things he was working through with respect to the transaction and minimizing the leakage and the like. So, we were a natural fit to have the dialogue with him and try to find a complex bespoke solution. And so we endeavored down that path. Look, we were not in the state of New York. We obviously have an interest in geographic diversification at the same time. It’s a wonderful asset and I think we feel very comfortable that whether it’s Jeff or someone, someone will want to run that property long into the future beyond when I’m here even. So, we felt very good about the longevity of the asset and the counterparty we were dealing with and the ability to solve some of the problems that he was working through from a tax perspective.

So, those are all the reasons that kind of got us to the table as far as the transaction goes. with respect to whether you should take the A3 and just roll it forward for other transactions. I think, I would go back to what I just said. I think each transaction’s different. I think for smaller transactions with individual proprietors, where we are providing additional benefits, I don’t know, maybe for the time being that’s an okay area to think about cap rates in the low-eights. But I think as the markets kind of stabilize and the larger players come back and start to look at divestitures or larger scale M&A, things of that nature, I don’t think, we’ll forever see low-eights as kind of the normal go-forward cap rate for transactions.

Haendel St. Juste: Got it. Appreciate the color. And just more broadly, are you interested in adding more of these assets to your portfolio? And is there anything specifically with this operator that you can do any rolling horizon agreements to purchase any more? Thanks.

Steven Ladany: Which assets? I mean…

Brandon Moore: well, I think if I understand the question, are we interested in adding more regional assets to this nature? I think if that’s the question, our answer will be sure.

Haendel St. Juste: absolutely.

Brandon Moore: We can underwrite them and get the right cash flow.

Haendel St. Juste: With the racing component, right? This one’s a little different. So, just curious on?

Brandon Moore: Well, we have plenty of assets that have a racing component to them. I think sometimes the racing component provides the entry point for these transactions and other times, it’s a necessary amenity to the transaction we’re doing. excuse me, I don’t think we focus primarily on racing per se. but certainly, the racetracks are an important part of many of these gaming properties, and we are — we don’t shy away from them. And we certainly look for opportunities to get engaged in those transactions.

Peter Carlino: I don’t know that it’s true, but I would wager just sitting here that we own more racetracks than anybody in the United States physical facilities. So, no, I mean, look, we’re in the gambling and gaming business, and everything that that entails, and I think Brandon said it well, it has been in many, many places, the entree to broader gaming. So no, we — some of the last things that I did at PENN were build two racetracks in Ohio, and those are great facilities, great gaming facilities as well. So now, we’re thrilled on racetracks.