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Gaming and Leisure Properties Inc
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Greetings, and welcome to the Gaming and Leisure Properties' First Quarter 2018 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, Hayes Croushore. Please go ahead sir.
Thank you, Stacy, and good morning, everyone. We'd like to thank you for joining us today for Gaming and Leisure Properties' first quarter 2018 earnings call and webcast. The press release distributed earlier this morning is available in the Investor Relations section of our website at www.glpropinc.com.
On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. Examples of forward-looking statements 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 these forward-looking statements contained in the company's filings with the SEC and the definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release.
On this morning's conference call, we are joined by Peter Carlino, Chairman and Chief Executive Officer; and Bill Clifford, Chief Financial Officer of Gaming and Leisure Properties, Inc. Also joining are Steve Snyder, Senior Vice President of Development; Desiree Burke, Chief Accounting Officer; and Brandon Moore, Senior Vice President, General Counsel and Secretary.
And now I'd like to turn the call over to Peter Carlino. Peter?
Well, thanks Hayes, and good morning, everyone. We are again happy to report a very good quarter, there was some strong announcements obviously revenues and earnings are in line with our expectations. I’ll acknowledge that our TRS properties were a little soft largely due to horrendous weather in January and February although I’ll comment that things appear to be better and stronger and we expect that those properties will be more inline as we look ahead.
We had – we are thrilled to have been able to report the signing of a transaction with Tropicana and too had identified a new operator with ElDorado resort that’s just a terrific addition to our portfolio of great operators and of course we are tracking along well with the Penn Pinnacle transaction which welcomes Boyd Gaming into our operator ranks which is just terrific, couldn’t be more excited about that. We expect both of those transactions to close say, would say third quarter of this year and that suggests that 2018 should be a very very strong year for the company and I think predictably 2019 to be even better. So we’re feeling very very good about that.
Another comment I’ll make is that you’ve seen the release that Bill Clifford will be retiring. Bill has been a significant part of everything that we have done in this company, all the major movements over the years. Only Steve Snyder, who is sitting to my left has been here longer, and that includes Penn National as well. So, and in that time we built a terrific company at Penn, that was very much a part of that and then led this effort to form Gaming individual properties from Penn and those years and that time and that decision has produced enormous value for shareholders who have been with us over a long period of time. So I just – I want to acknowledge that with Bill present and he’s going to stick with us for and provide some oversight thought over the next months, while we transition through this period and so Bill you know officially thanks very much. It’s been terrific.
It goes fast though, and it comes very fast the years as I look back. So, I think this is a strong report and with that, I’m going to unless there’s any other comment from the table here, I think we’ll go straight to your questions as we usually do.
So operator, please open the floor.
Thank you. [Operator Instructions] Our first question comes from Thomas Allen with Morgan Stanley. Please go ahead.
Hi, good morning and Bill thanks for all the help over the years and good luck on retirement.
Thank you.
So can we just talk a little bit about the Tropicana deal? Can you just elaborate a little bit about how it came together; you know how the process worked and kind of your expectations going forward?
[Indiscernible] Thomas, its Steve. Yes, we had been working with the ElDorado folks for really years I was going to say several quarters, but it’s really years in terms of trying to develop and cultivate a relationship. They obviously completed their Isle transaction without a sale-leaseback or an OpCo/PropCo approach.
Most recently the discussions focused on what other opportunities existed because they -- I expect to continue to be a consolidator in the regional gaming space. I -- and we collectively identified an opportunity with Tropicana entertainment being publicly traded, but controlled by a single shareholder, so we jointly approached Tropicana, we jointly approach their large shareholder and entered into an exclusivity period with them and conducted due diligence, so we spent quite a bit of time with the Eldorado folks, both around this property and around their management approach and the opportunities that they see in the Tropicana portfolio based on the results and the performance they’ve been able to drive out of the oil transaction.
So they are very optimistic in terms of margin improvements and the opportunities for enhancements in the performance of Tropicana portfolio, and I do think is as they said as Tom and Gary Carano said on their phone call, they look at the OpCo/PropCo opportunities as ways to continue to facilitate their growth.
So the announcement that you saw on April 16 you should look at is really the outcome of several quarters of developing a relationship with an intense 60-day period since the beginning of the year that led to that announcement.
As to the timing, Peter mentioned we think this will close later this year. I think reasonably it’s probably a year-end closing, because New Jersey and Indiana are two new states for Tropicana -- for ElDorado and they’ve already gone forward with the submission of their applications and we’re doing exactly the same. So we are pretty optimistic that this is a transaction that will close, or should close before year-end.
Helpful. And then I mean you mentioned you have been talking to them around the Isle deal too, what held back a transaction happening, with you and around the Isle transaction too. Thanks.
No, we didn’t speak with them specifically about the Isle transaction. They obviously made a decision that they were comfortable with the equity dilution that they took on behalf of existing Isle shareholders at that time, so that was not a transaction that we were engaged in and extensive in any dialogue with Eldorado. It really was just again something that they decided to go it alone.
Okay, helpful. Thank you.
Thank you.
Thank you. Our next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Thank you very much, and Bill congratulations. Peter, could you talk a little bit about you as you think about a new CFO kind of what are some of the criteria you’re looking for, for that candidate and would you be looking more from, from an M&A background or, or more kind of a REIT experience, gaming experience etcetera?
Well that’s a tough question to start with, that’s all – probably both. You know that’s something we are looking at, that’s why we have not announced precisely what we are going to do and who’s going to do it as we look at the world. It is like three legs to that stool. One, we are still focused on the gaming world, and now into the gaming business is helpful, but clearly in the end we are really a finance company atleast that’s the way I think of ourselves, so dealing with the capital market is kind of what we do. We’d operate a couple of properties happily, but fundamentally we’re in the finance business.
So I think, and we are probably going to look at the REIT world more broadly, no doubt about that, that’s you fairly ask that question, so that having some knowledge and experience in REIT world since we are clearly a REIT, I think would be helpful. So in a perverse, I guess the answer is all the above. All the above and you know I think the general view is we’ll know it when we see it.
Understood, thank you. That’s helpful. And then just in terms of the Tropicana transaction, you know the decision to go with a 1.8 times 85 times minimum rent coverage a little bit lower than some of your other deals with the guaranteed escalator, how much of that decision was fueled by the success that ERI has had with respect to generating synergies and stuff from some of the assets given there’s obviously some new competition coming to Atlantic City etcetera?
Yes, let Steve speak to that, but fundamentally we have a great deal of confidence in these folks. And that did very much influence our gut with it Steve.
Yes, Carl, they are very optimistic around the opportunities for margin improvements in that portfolio. They were comfortable with guaranteeing the 2% base rent escalators and through the fifth anniversary, subject of course to not putting the lease in default, that 1,2 times, cut 1.2 times coverage, so that spoke volumes in terms of our getting comfortable with the impact that the openings in Atlantic City will have on that large property Tropicana on the Boardwalk, because it speaks volumes when your tenants steps up and says we hear you, but we are comfortable with the construct that guarantees you five years of escalator.
So, I’m not going to tell you that we completely agreed with our tenant in terms of what the impact might be of the hard rock and the revelry openings, but the proof is in what they were willing to put on the table in terms of those stipulations or those conditions in the lease.
Yes, let me add. These are highly experienced people. They have been around this business in very competitive markets for a very long time. So, I think that it forms part of our judgment Steve as well.
No, I think that, that’s hits it spot on, Peter. I mean these are markets that they were familiar with. These were markets that they are comfortable competing in and having competed for the last couple of decades and we know, they know how to handle competition.
Great. Thanks, so much guys.
Thank you. Our next question comes from Joe Greff with JPMorgan. Please go ahead.
Good morning everybody and I would like to say congratulations to Bill as well. You’ve had a great career and I’m just working with and look forward to seeing your index continue to migrate there on [Indiscernible]. com. They – obviously you’ve been busy on the acquisitions front. Are you kind of in pause mode right now until these things -- until the two sets of acquisitions close and….
Joe, what kind of question is that. We are never in pause mode. Never, you’ve got to be kidding. Look, you’ve heard me make the comment, many many many times over the years. And look if it’s out there alive and breathing, you can count on the fact that we are looking at it. But, you know finally transactions that we want to make, that we feel good about it is, it’s always the challenge. I like to say many are called but few are chosen. And, and that goes on all the time, so you -- my general view particularly as I say we are in the finance business is to keep our powder dry and to be prepared and then the looking very aggressively as we always do. I mean this is kind of a stock answer, but nothing changes.
Got it. And then obviously you have share count referenced in the press release, did you issue any equity under the ATM this month at all?
No, we did not.
Thank you very much.
Well thank you.
Our next question comes from Sean Kelly with Bank of America. Please go ahead.
Hi, this is Barry Jonas. First off, Bill congratulations, it’s been a pleasure working with you. I guess, Peter begs the question, curious how you’ll think about your own timeline for continuing atleast in an operating role, any general thoughts on succession planning?
That’s a tough question. I don’t kind of see me go anywhere for a very long time. Listen, you asked a question, I’ll do this as long as we can be effective and since we are in my judgement highly effective and you look the way this business has grown over the years, you know maybe the day will come when I’ll feel that isn’t the case, but right now we are having too much fun.
Fair enough. And then just one question on the ElDorado master release. I guess can you just maybe give a few more details in terms of how much of the total rent will be subject to the escalator and the variable rent reset, what sort of timeline that will be, whether it’s two years or five years? Thanks.
Yes, it’s going to be set at closing based on the revenues of the portfolio, the 12 months prior to closing. It will be reset every two years consistent with the existing Pinnacle Master Lease and in terms of phase versus of the two variable components you should think 70-ish -- in the 70% plus range in terms of base rent that would be subject to 2% escalator.
Great. Thank you very much.
Just the clarification, the escalators only the base -- the land base round which is usually probably about half of that, but we haven't set those numbers yet, so we do the best-- the escalators only on the portion of our fixed rent not on the second portion of their fixed rate.
So it would be approximately 70% of the 110 or less than that?
No. it’s less than that, but would be some of the escalators less than that.
Understood. Thank you.
Our next question comes from Patrick Scholes with SunTrust Robinson Humphrey. Please go ahead.
Hi. Good morning. Question for you on Atlantic City, as I recall in the past you've been somewhat cautious on entering that market. Talk just little bit why your mind is changing now and your thoughts on that market going forward?
Well, we're dealing with the partners. I think we will explain who likes the property. It would appear that those folks invested a great deal. The owners invested a great deal of their cash flow over the years and improving that. Steve, do you comment more broadly on that. It's in terrific condition.
Yes. No. As the sellers indicated they've reinvested all of the free cash flow they've gotten out of Tropicana over the years that they've owned in the properties quite a bit of that being in Atlantic City. I mean, just the way we've looked at it, if you look at that aggregate portfolio and the rent that we'll be driving from our new tenant Eldorado approximately 40-ish percent of it is going to be coming out of that Atlantic City market.
So we really do look at it as a sort of diversified portfolio with some concentration in Atlantic City. Would we do Tropicana Atlantic City on its own as a standalone lease? I think you know the answer of that, absolutely not. But given the nature of this tenant the opportunities that they see to improve the operating performance across the portfolio and their experience in other comparable markets we were able to get comfortable proceeding with this transaction.
Yes. I think it says a lot more about Eldorado when you start thinking about it, that clearly informed our judgment, it's who are dealing with here and we feel good about that.
Okay. Thank you for the color on that. And then shifting gears somewhat here; there was an article over the weekend in the St. Louis Post-Dispatch suggesting there might be some regulatory risk of getting approved for that markets, I don't know if you have any thoughts in that regard?
We do and Brandon is going to tell you.
Okay.
Yes. We obviously saw the article and I think as we look at that market and other markets and as we went through a pretty in-depth review of our lease on the federal level and the anti-competitive effects or lack thereof in the Pinnacle transaction and we're very confident that our lease in that deal and our lease in this deal don't present any opportunity for us to impact competition in any of those market or in any market at all.
And we're confident in that level that we're going to be fine.
I wouldn't say we're confident on the state regulatory level, but we're certainly very optimistic for the same reason. Those leases just don't permit us to impact competition, and if you look at the St. Louis market in particular currently on a pro forma basis we have four publicly traded operators in that market and even if the Pinnacle deal finishes we'll still have three publicly traded operators in that market. So we're pretty confident as we get through the process when we have those conversations that that they too will come to the same conclusion that these leases don't present us any opportunity to impact competition in the state.
Okay. Thank you very much. That's all.
Our next question comes from Robin Farley with UBS. Please go ahead.
Thanks. I just want to ask you about the transaction market generally. It seems like there's been significant increase in activity just this year aside from just yourself, is that something that you – I know previously you've talked about expecting transactions to be lumpy and time and between. Do you think there's something that's different about the transaction market now, maybe if there have been enough transactions and multiples are little more established and sellers have a better understanding of values? Or in another words do you expect the activity level to stay at maybe more elevated pace now? Thanks.
Robin, I wish I knew. I'm not sure we have any real answer for that. Yes, we have always talked about transactions being lumpy and unpredictable and so forth. But happily as I look at our spin and look at where -- what we've been able to do in growing AFFO and dividends near and dear to my personal heart it's been terrific. I mean, we've done an incredible job. We could never have predicted where its going come from much as we have kind of told you and the market. But nonetheless we've managed to eke it out and I expect we're going to be able to do the same. I don't think anything materially has changed in sellers or owners willingness to transact.
You know, it kind of falls out when it falls out. You may have something correct though rate around pricing and the sense that people are more sensitized to the possibility of doing a transaction with the Read, I think that as occurred. And I don't expect that change. That back to the St. Louis question and pretty soon I think mostly United States is going to be owned by a handful, at least the real estate owned by that small handful of companies that you're well aware of. So it’s a trend that is not going to backward. But as we do some pattern and predictability, I can't say that.
So it sounds like you're not having an elevated level of discussions now versus six months ago, just sort of coincidentally the timing, is it couple of things this year?
Steve, how would you want to characterize that?
No, Robin, to your point I think evaluation have risen. Our sector has seen the introduction of a new competitor in terms of the gaming reads. Interest rates are trending upward and people may be fearful of that. I would suggest, yes, you look at a year ago there are of more frequent dialogues that are taking place and I think you're seeing it in terms of other transactions that had been announced, but you should expect that consistent with the way we've approached our business in the past we are going to stick with transactions that are accretive for our stakeholders rather than taking any kind of inordinate risk. So, I would just leave it at that.
Okay, great. Thank you.
Our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead.
First off, Bill congratulations on retirement.
Thank you.
And then kind of looking at the balance sheet, given various acquisitions you have lined up and debt you are maturing later this year, how are you viewing the debt capital markets? And kind of maybe generally speaking what kind of relative pricing do you think you can get versus the existing debt you have given the movement in underlying rates?
No. John, you should think about us looking at the maturities that we got to do here near term and positioning the company's balance sheet to take on incremental senior sub debt to fund the acquisitions as they come online, as they get closer to closing Q3 and Q4. Obviously the market has ticked up. You got the LIBOR yield curve that's ticked up that we've reflected in our guidance, but we don't see the capital markets in any way shape or form impacting our ability to access the capital markets at a fairly consistent level with where our bonds are trading in the secondary market other than toward new issue premium.
So I don't envision any obstacles. You've seen the reports from the rating agencies in terms of their outlook on the company as a result of the Tropicana/Eldorado transaction and they've made no indication, there's no indication that they'll make any movement in our underlying credit rating at this point in time. And we're going to remain pretty conservative as had always been the case and that goal have never changed.
Understood. I was little more interested in kind of where relative pricing – you expect kind of relative pricing to be versus your existing debt. Is there any thought process on maybe lengthening out the term on your debt given how potentially accretive these acquisitions could be and maybe sacrificing a little bit of increasing interest expense but getting longer term on your debt?
No. I think that would be sort of conditioned on what the market looks like when we're in the market. But yes, looking at a longer duration for our debt stack is something that our board has asked us to take a look at, and keeping sort of the ladders in our debts stack consistent so that we don't have any huge spikes in any of the out years that were faced with capital market expose [ph] -- any undue capital market risk.
Yes, I'm not being cubed. Its not rocket science. I think you could recognize what our goals would be and that is to smooth this out over a longer period of time as pricing allows. So yes, I think we have a pretty clear of sense of where we want to be and I think we're going to get there.
And we reflected those impacts in the guidance that we gave on the anticipated accretion from the transactions in the April 16 announcement.
Understood. And then kind of shifted gears a little bit. Looking at Tropicana deal, with MontBleu not included in the Master Lease with Eldorado just because of the ground lease underneath it or were there other factors kind of driving that decision?
No, it just simple as that. I mean, the MontBleu lease is really more of a facility lease rather than a ground lease, and we've had enough trouble getting assignments of underlying ground leases and other transactions that we did that we did not want to try and get involved in land owner consents here. And given the scope and scale of MontBleu relative to the overall Tropicana transaction it was just something we were comfortable leaving behind.
Understand. That's it from me. Thank you very much.
Thank you.
[Operator Instructions] Our next question comes from Andrew Berg with Post Advisory. Please go ahead.
Yes. First of all, I can echo they are one off comments with respect to Bill congratulations and best of luck on your retirement. You’ll definitely be missed. With respect to the comment made regarding refinancing – potential refinancing debt you said senior sub-debt, did you actually mean senior sub, did you mean senior unsecured?
Senior unsecured.
Okay. Just want to clarify that. And then with respect to competition for assets now that VICI's been out for a little while longer. Has that changed at all the tone of the conversation you're seeing. Is that bumped up the bid levels a little bit here? Just wondering with respect to that being in the market now with little bit more time whether that changed the dynamics that maybe even more competitive than it had been?
Well, look we like the better one, we were here by ourselves, so we never got much happier circumstance, but look they're going to do what they're going and we'll just have to wait and see how it plays out. In my life experience has been, we're not looking over our shoulders at them or even thinking what they may or may not do. They'll win their share of transactions. We expect we'll win ours. Deals happen for different reasons even beyond price sometimes. So yes, I mean I think it's too early to know how this is going to go. Let's see how it plays out over the next year.
Okay, great. Thanks again and look forward. I have seen you for long time, Peter.
Well, thank you.
There are no further questions. I would like to turn the call over to Peter for closing comments.
Well, thanks -- listen, thanks everybody for dialing in today. We're smiling, wishing a good farewell to Bill and kind of appreciate his help over the next couple of months as we make this transition.
Look, this lines up to be a great year, a very very good year, looks like 2019 is going to be a good year. So we're pretty excited about what's going on here. Company is in great shape. I feel good that the goals that we set out at the beginning when we did this spin and are being met and look at the shareholder who collects the dividend every quarter. I'm a very happy guy and I hope many of you are as well. So thanks a lot. See you next quarter.
This concludes today's teleconference. Thank you for your participation. You may disconnect your line at this time.