Gaming and Leisure Properties (NASDAQ:GLPI)
Q2 2016 Earnings Conference Call
August 9, 2016 10:00 AM ET
Danielle Guterding - ICR
Peter Carlino - Chairman and CEO
Bill Clifford - SVP and CFO
Steve Synder - SVP, Corporate Development
Joseph Greff - JPMorgan
Thomas Allen - Morgan Stanley
Shaun Kelley - Bank of America/Merrill Lynch
Carlo Santarelli - Deutsche Bank
David Katz - Telsey Advisory Group
James Kayler - Bank of America/Merrill Lynch
Greetings and welcome to the Gaming and Leisure Properties Second Quarter 2016 Earnings 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 call is being recorded.
I'd now like to turn the conference over to your host, Ms. Danielle Guterding with ICR. Thank you. You may begin.
Good morning. We would like to thank you for joining us today for Gaming and Leisure Properties' second quarter 2016 earnings call and webcast. The press release distributed earlier this morning is available in the Investor Relations section on our website at www.glpropinc.com.
On today’s call, managements' 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 relating 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. Also joining are Steve Synder, Senior Vice President of Development; Desiree Burke, Chief Accounting Officer; and Brandon Moore, Senior Vice President, General Counsel and Secretary.
Now I'd like to turn the call over to Peter Carlino. Peter?
Thanks very much, Danielle. And good morning, everyone. I guess my summary comment about this quarter is that things went as well as planned. We happily and successfully closed of course our Pinnacle transaction. We are poised to close on our Meadows transaction in September if all the regulatory things come together as we hope and expected they will. We launched $400 million ATM program with the caveat I think well written and summarized in our release that would expect to draw up to $168 million in equity for that Meadows transaction. But even that subject to circumstances at that time. So we would be most cautious with that. And we continue to look for -- and aggressive look for other opportunity, none of which we can tell you about. But I can promise that you will be the first to know as things evolve. So pretty straightforward this quarter and I am going to go straight to questions. So if you would operator please open the floor.
Thank you. Our first question comes from the line of Joseph Greff with JPMorgan. Please proceed with your question.
Good morning, everybody. In the press release, obviously when you reference the ATM you talk about further reductions in leverage and then combining that with undistributed earnings that will allow you to finance smaller deals with that accessing the equity markets and any kind of volatility associated with accessing in the equity market. Do you have a fertile pipeline of smaller-ish kind of deals or can you talk about that a little bit?
I thought we said we weren’t going to talk about that. Look, the only answer I can give Joe is that we look at the top big and we look at the top small and we will do big and we will do small. If these things are complicated transactions as you know, there are always regulatory issues of one sort or another almost any state that we look at. And I can only tell you that that we are pretty active now. But look it's not done until it is done. And we wouldn't even have it a guess as what would we able to accomplish over the next year. But we remain hopeful and positive and look I think out of the box on the time we began our spin. We've done some pretty remarkable things. We maybe able to do that again maybe not but I am satisfied that we are moving forward pretty aggressively. And that's for non specific answer.
That's right in line with what I thought you would answer with. That's all for me. Thanks.
Thank you. Our next question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.
Hi. A couple of mulling questions. In the second quarter TRS EBITDA came in line with your expectations with your lowering outlook for the year. I guess two questions on that. Can you talk about the second quarter in general, regional trends have been weaker. Did you offset that with the cost savings? Then why the more tempered outlook? Thanks.
Well, the TRS actually came in under about a $1 million for the second quarter versus our expectations. We offset that with some savings at corporate level. I mean the corporate overhead line item so that kind of why are you seeing the favorable there. I think generally speaking Perryville is holding its own on the revenue side and we've done some more good things relative to expense control and so Perryville pretty much operating in line with our expectations. Baton Rouge had some up down month I think in the second quarter April and May were both rough month and but June was much better. Now there are some instances going on in Baton Rouge that are kind of creating a little bit of noise. So I don't know that we are necessarily it's a fair quarter to look at it in terms of expected long run rate. Everybody recalls all of the unfortunate situation that happens in Baton Rouge couple of months ago. Anyway so our outlook going forward is expecting that Baton Rouge has without a doubt been more a troubled market than Perryville and so we are expecting, we reflected that in our outlook going forward. I don't -- I wouldn't read a lot into our total properties in terms of what's going on in the recent gaming market, I think you can looked to the results for Penn and Pinnacle in terms of what their operating results are as a much better indicator of what's going on the regional market and what you see out either Perryville or Baton Rouge to be honest.
Helpful. Then Ohio came in slightly below your expectations for the quarter but for the rest year it's the same or --?
Well, basically what we do as we follow the expectations of our tenant. They give us submit what they believe we are going or how the properties going to perform and we reflect that in our guidance absent us having some contrary view. And obviously they have a tremendous amount of better visibility into what's happening at their properties than we do. I think they had -- it was rough month right, just as a reminder our revenues in Ohio are 20% adjusted monthly. So we clearly have that's where we have the most variability to our rent flow stream is quite candidly in the Ohio race track. That is generally being good. I do know that those the Columbus property there has been some pretty decent amount of road constructions that's been happening in and around that property on the main belt way which has had at times has been less that wonderful. I can't give you whole lot of specifics on that but just know that we are actually fairly encouraged with where we think Ohio is going to be going forward. So short story our guidance reflects what our expectations of our tenant.
Thank you. Our next question comes from the line of Shaun Kelley with Bank of America/Merrill Lynch. Please proceed with your question.
Hi, good morning, guys. Peter, just to maybe follow-up on the first question that was asked, maybe in a slightly different way. Just thinking about the smaller properties that might be out there, I think as we compare what you guys might be willing to acquire with some of the M&A approach of others out there in the market, is there a minimal size property that sort of makes sense relative to how you kind of need to split the cash flows for these types of sale lease-back transactions? What kind of scale do you sort of need to, in a theoretical acquisition, do you need to have before you think a property owner can really evaluate GLPI as a partner?
Well, it's hard to say how small is small, we go pretty tiny. Yes, I was just going to say we do almost anything reasonable. It got to be a solid property and a solid location, got to believe that it has a future and all that but we do little ones keep going because again little one can lead the big ones, they give us more outreach with new operators, there is a lot of strategic reasons for us to be poking around some of these smaller properties right now. So we will doing and look penny here or penny there. Look, we knew purposely well what we did to Pinnacle transaction that moving the needles it is going to be were challenging but in the meantime what we've said is that our job is to get our balance sheet into down to fighting weight to be as fit as we possibly can and look and if you have to keep hitting singles we are willing to do that until we finally hit one out of the park which I fully expect in god's time we will so --
And just maybe bigger picture -- that's helpful, thank you. Bigger picture when we think about the ATM program from here. Is this sort of a preferred mechanism, you think, moving forward to store to help alleviate some of the equity overhang that was created in the Pinnacle transaction, or is this the right avenue for Meadows and maybe for a single asset but not correct for a portfolio? Just kind of how you think about how this fits into your toolkit.
Okay. Yes, the way I am thinking about it is we look at the ATM as a very cost efficient mechanism for raising equity. When you compare to that against fully underwritten deal with the commissions you pay to the bank as low as the undoubtedly usually anyway, we were very fortunate last time to get slight premium on the final offer. But normally there are some sort of performance discount there so being able to move stock out at the market price is on a very -- I'll call measured in disciplined approach. In other words being able to obviously turn it on and turn it off as we see fit, is a compelling opportunity. I think one of the things that we are looking at is we will have leverage under 5.3x by the end of the year on pro forma basis. That gives us a little bit of cushion there as well as having the ATM program; it does increase the size of transactions we can get done without having to worry about market volatility on the equity. Listen, I think I touched that last time right is that what we've experienced through the Pinnacle transaction was gut- wrenching, it's probably the best description of watching your stock move by 30% from peak to value and kind of retracing most of it fortunately in nick of time but that is not something that we are particularly anxious to go down that path again on. So the ATM program gives us, it add more flexibility in terms of adding $100 million, $200 million, $300 million of equity. It also gives us the ability to take advantage of where we think our stock is fairly priced. Relative to larger transactions I think what we've indicated before is that really large transactions are going to require from our perspective equity take back from the seller to avoid what we experienced in Pinnacle transaction. I am talking about really large transactions. So it's kind of there is really small transactions which will be easy. Those actually wouldn't require any equity because we are going to be generating somewhere in the neighbor of $120 million a year of free cash flow on undistributed earning. You added an ATM program to supplement that so you can do fairly decent size almost Meadows size transaction normally going forward just by nature of the fact that you got the undistributed earnings in little ATM supplemented and you wouldn't have to worry about at all. When you get a larger than that you might have to accelerate the ATM program or obviously since going $400 million and we plan to do $168 million relative to Meadows. We probably have to re-up the program at some point in the future. But we think this is a program that will get people very comfortable with our ability to finance transactions of reasonable size. And I think quit worrying about equity overhang.
No, I think it's a great mechanic. Last question, if I could, would be sort of targeting ending it at 5.3x is probably actually a little less than sort we were -- or I was thinking previously. Is the 5 to 5.5 the right ballpark? Would you ever dip below that opportunistically, given if the stock price works or I mean just where do you really want to be independent of movements for a specific transaction or when something's right in your sight.
I mean our -- my thoughts and obviously this is somewhat subject to change in market conditions and what's going in the world. We are comfortable what we've recognize is the vision we thought we could have 6x leverage and then bring it down and take it back to 6. And clearly that hasn't been accepted very well by rating agencies. And it is our goal to get investment grade. So the new thought process is 5.5 and bring it down below 5.5, it will be 5.3 by the end of this year. Take leverage back to 5.5 or do transaction at 5.5. And really put ourselves in, and what I'll call a bullet proof balance sheet perspective, and way I would characterize the thought process is if we find that we are under leveraged and somebody would make that determination that's problem that very easily solved, takes about 30 days. You can fix your under leveraged problem really quickly. And if you are over leveraged obviously you can spend a decade trying to get that fixed. And we look at the fact in the outer years starting in 2018 we have roughly $1 billion a year of maturities coming along. And last thing we want to be doing in that situation is to have ourselves in a situation where our balance sheet or that the market for whatever reason and obviously today we are way under leveraged but who knows where that will be in 2018. As we wanted to be in a position where the refinance ability of our maturities is without question. So you can end up in very bad cycle and we are highly focused on making sure that when we get ready to refinance our current debt maturities which start in 2018 that we are in good shape to do that. And hopefully at lower interest rate than where we are at the time we issued the debt.
Thank you. Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed with your question.
Hey, everyone, good morning. Bill, Peter, whoever kind of wants to opine, when you guys think about the discussions you've had in transactions that may or not be serious today relative to kind of the tenor of those discussions maybe prior to a new competitor emerging, are you noticing any different dynamic in kind of the potential seller or potential other side of the table, what they're asking for?
Let me give that to Steve, he is for funny -- he is looking like he wants to take that.
Well, obviously, Carlos there hasn't been any noticeable change on the seller side, it is our principal competitor in our space is basically set a threshold that obviously is materially higher than what you've heard from us and when we look at portfolio transaction that competitor as subsidiary of a larger parent obviously is not going to be conducive say a least back transaction because it is the nature of their parent. So in terms of the tone or tenor of the negotiations or the dialogue with third party sellers, it really hasn't entered into the mix in terms of the environment that we are sort of circling around.
Yes. I would add on I mean I think listen the reality is right now is markets are -- interest rates are at time lows, credibility seems to be all time high. And so people are looking at those and expecting -- they are still looking at valuation and expecting pretty rich valuation. And our view is that we have to be disciplined because doing -- anybody can do a very rich transaction. We could announce four, five transactions a year probably if we have zero discipline on price. The transaction is non accretive, it simply doesn’t work. And even marginally accretive transaction can be troublesome because quite candidly all you are doing is increasing your share count which means at some point in the future when you do get a transaction that make sense, all you've done effectively is negated the value of that transaction. So we are going to be disciplined. And we are going to continue to look to pursue opportunities and I think there will be some opportunity. But as we've said since day one of launching the spin, they are going to be lumpy, irregular and they are going to happen when they happen. And quite candidly sometimes it will take some patient, but our view is to make sure that we are in great -- we've a great balance sheet and we are ready to go, that we are obviously aggressively looking for transaction. When they are ready to go at the right time and the right price and most of that motivations on the seller not because we are knocking on the door offering too much money. So when we have the motivated seller I think there is a very, very high likelihood that we will be involved in the transaction.
Yes. I think Bill said it very gracefully. I've said on previous call a lot less gracefully that any moron can make a bad deal. And that's just not we are about. So discipline is everything. I think that and I feel that we have fiduciary responsibility to preserve our dividend structure. First and foremost I'd rather do nothing than jeopardize that and we are willing to sort of inch along and unless and until we can find something that's going to move it in a bigger way. But if we are putting out $0.60 a quarter let say currently it aren't going to be $0.59, not if we have can do anything about it. So I mean that's the first goal to make sure that our dividends are perceived by the market as solid as a rock.
Thank you. [Operator Instructions] Our next comes from the line of David Katz with Telsey Advisory Group. Please proceed with your question.
Hi, good morning, all. And I think any moron can make a bad deal is perfectly graceful. What I wanted your update on is that we've gone down the road and you've obviously completed some monumental tasks the past couple of years, or few years. When you look out ahead or even where you are today, what is the posture feel like in terms of assuming deals are a function of recent comps, interest rates, forward-looking sentiment, where do you think the posture is and how do you think that progresses, let's say, in the next 6 to 12 months in general.
It is really no way to know. I think we've answered that in a couple of different ways that this is completely unpredictable. So uses the word lumpy, it is utterly unpredictable. And we are looking at things large, we are looking at things small but there are so many factors. It takes willing seller, somebody who really wants to get it done or somebody that perhaps can be approached, we are not adverse to more hostile approaches if it seems business sensible to do that. We've also proven to be pretty smart about that but in terms of Bill think like of that but I haven't a clue.
Yes, I think the biggest motivator has to be a seller who is motivated. Obviously they want a good price. Anybody who is selling anything wants a good price but their motivation can't be just be that if the price that's so compelling that they can't say no to it. It should be a function of whatever family discord or it's desire to retire or state planning or just general retirement and getting out of the business or whatever it is that's causing somebody to make the decision or it's a private equity fund that’s at the end of their expected life of the fund, whatever it is that causing the motivation for the liquidation or the monetization of the cash. That needs to be the driving force behind the transaction not because we are coming in and offering some price that somebody says well that at such stupid price I have to take it. And that's where we are at. So I think we look at incredibly large transactions and we've looked at what I'd call in infinitesimally small transaction. I don't think we are in anyway looking at a transaction thing it doesn't work for us because it is of size nature. We will look at there have been transaction that we've passed on that we thought were too risky and we thought the future cash flow stream is over the course of 20-30 years we are incredibly insecure or unsecured so we passed on those types of transaction. But other than that I don't think there is gaming property in the United States that we wouldn't be interested in looking at and if we thought it wasn't good stable market for the foreseeable future. And if it is at evaluation that make sense.
So the market forces within a normal band are really not the driver of this necessarily, it's really a function of a property owner wanting to pursue this type of model.
Or they want to exit the business right. So if you looking at business or thought process, it takes -- maybe they are solve -- they could be solving some internal political issues.
Say cash off the table but still stays in the businesses.
So many possibilities. Right. But I think certainly up to and including they just want to get out of the business entirely. And our model is the way that gets them the best price. Right, they may want to de-leverage that certainly been a motivator in one of our transaction with a company that was over leveraged, actually that was a motivator for both -- two of the transactions. Both the Queen and the Meadows, all about the parties having a little bit too much leverage. Right now given where the debt markets are, that's not quite applying the level of pressure that we might find desirable from our own selfish purposes. But those haven't flow that changes over time. So just a matter of time, matter of being patient.
Thank you. Our next question comes from the line of James Kayler with Bank of America. Please proceed with your question.
Hey, guys, how you doing? Speaking of cheap debt, I just had one quick question to follow up, Bill. Obviously it's hard to predict exactly what the agencies will do. I get that and I know we've talked about that but just sort of big picture, with this sort of balancing strategy you laid out sort of taking leverage to the low fives, levering up to the mid-fives and doing transactions at the mid-fives, do you think that is that the goalposts that the agencies have set for an eventual upgrade --
I don't know. Obviously in my mind it is but I am somewhat irrelevant to that.
Let me throw in Bill before you get started, the irony is there is plenty of companies at six levels that our investment grade. So you tell me by what alchemy they get to what they get to.
Obviously it is a challenge. I think there was some concern from the rating agencies with the Pinnacle transaction and how that went down in terms of we kind of move leverage around although quite candidly from my perspective when I looked at all of the comp in the REIT space 6x leverage is well within the sweet spot of investment grade and the concept that we would take it up into the sweet spot alarm them I guess is the best way to describing because we had indicated somewhat that our charges were 5.5 during that whole transaction we bounced between 5.5x and 6x. We ended up at significantly less than that. And with the concept -- with the confluence of events that have happened this year and as well as the equity offering and upsizing the equity, obviously some option proceeds from employees, some de-leveraging et cetera, et cetera we are going to be well under the 5.5x and down to the 5.3x. I would say we absolutely a worthy of getting an upgrade. However, my opinion is of little value and we will be anxiously awaiting to hear what the rating agency have to say when after they had a chance to digest this earnings call as well as the fact that we are putting a place in ATM and I would hope that they find that to be a commitment to that's not just word. In other words that it is real and obviously by the next quarter we should have -- there will be some -- we'll make some progress. I am not going to guarantee that we are going to get the entire $168 million done by the end of the quarter. That might be little way to aggressive but we are certainly make some progress towards that I would expect. And we'll see that when they give us their next update.
Thank you. Mr. Carlino, there are no further questions at this time. I'd like to turn the floor back to you for final remarks.
Really none to make except thank you very much for joining us and let's hope we accomplish everything we wish to the next quarter, and have a happy call then. So thanks again. Have a great day.
Thank you. This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.
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