Gaming and Leisure Properties, Inc. (GLPI) Earnings Call Transcript & Summary

Okay. We're all set. Go ahead, Felicia.

Well, thank you, Steve, and good afternoon. My name is Felicia Hendrix. I'm the gaming, lodging and leisure analyst at Barclays. And I'm very pleased to host a discussion with the management team of GLPI, Gaming and Leisure Properties, over the next 30 minutes. It's a pleasure for me to introduce to you Mr. Peter Carlino, Chairman and CEO; Mr. Steve Snyder, CFO; and Mr. Matthew Demchyk, SVP of Investments. As you know, GLPI is a triple net lease REIT and is one of 3 gaming REITs with a market cap of about $7.6 billion. We have an overweight rating on GLPI and had a 2021 enterprise value to EBITDA multiple of 13.4x versus 15.3 for the triple net. GLPI is significantly undervalued in our view. We do note that the company is collecting about 99% of its rental income and is currently engaged in the efforts to complete a rent deferral agreement for that 1%. So we view that discount as a huge buying opportunity.

Before we get into the finer details of the here and now, I thought it would be helpful to start out with some background. Peter, GLPI was spun from PENN National Gaming in 2012. At that time, you were CEO and Chairman of PENN. Can you walk us through the decision and talk about GLPI's business model and objective?

Yes. It's pretty easy, Felicia. We made a judgment, I guess, back around 2011, to start, if not earlier, to consider the idea of reading the significant income coming from PENN National. It's all about shareholder value. I mean, I am a very large shareholder of this company, probably 3 or 4 in GLPI. I was also, obviously, a major shareholder at PENN National as well, the company that I founded as a public company back in 1994. So look, it's always about value, value, value, and, clearly, to a degree, never imagined by us. We unlocked a vast amount of billions of dollars of value simply by taking the income from PENN and rolling it over into Gaming and Leisure Properties as a start, because we wanted to take over Pinnacle's assets shortly thereafter. We made a number of transactions that have moved us to be a very significant player in this space. So look, it's what we do every day. That is take a look at what we need to do next to build value for shareholders. It's as simple as that. And I must say, the result exceeded our expectations. Of course, people followed it because they like what we did. Sorry. Go ahead.

No. Thank you for that background. And as I mentioned in my introduction, there's 3 gaming REITS. So I was wondering if you could discuss why investors should favor GLPI over MGP and VICI and perhaps even more broadly among the other triple net?

Better assets, but I'll let Steve answer it. He's going to be more temperate than I.

Let me start with relative to the triple net. So let's talk about the asset class relative to the triple nets, first of all, Felicia. Obviously, we have all public tenants, except for the Casino Queen that you pointed out. So 99% of our revenue comes from public tenants. So we have greater transparency with respect to our tenants than almost any other triple net. That's also true for our peer set, VICI and MGP. In terms of drilling down as to the specifics of us relative to the others, MGP and VICI, we have all regional assets. So 100% of our portfolio is not the Las Vegas strip. We certainly just recently completed a transaction with PENN, and we brought on to our balance sheet. It's really a non-income-producing asset at the Tropicana, the Tropicana in Las Vegas. But all of our income-generating assets are in the regional markets. And I think investors, as we bounce out of this pandemic, are going to come to gain a much better appreciation for the durability and the resilience of the performance of these regional assets, these market -- these assets in regional markets. They're state-sanctioned monopolies in many cases. They're taxed at very high tax rates because they produce a lot of income for the states. And we think that, that makes us unique among our asset class in terms of 100% regional markets. And we'll see how they bounce back from this pandemic versus the destination market that Las Vegas is.

And that's actually a great segue to my next question because that is about the world that we're in right now and thinking about how things are bouncing back. So if -- Peter, if I could move back to you. Certainly, COVID-19 has turned the world upside down, especially in the gaming industry. No one would have ever thought in their wildest imaginations that casinos, which are open 24/7, would be closed for months. And obviously, that's had an impact on your tenants, especially your largest tenant, PENN National. So can you walk us through some decisions you made in response to the widespread property closures? And what were you trying to solve for with the actions that you took?

Well, as you know, we were very quick to act and actions, for which we got some early criticism, why these guys do this. Look, as you say -- have said, closing down every casino in the United States is a heretofore unheard of, unimaginable happening. There's no plan, no business plan that anyone could do to prepare for 0. I mean, it's just -- it just is impossible, but it happened. We met with PENN very, very quickly to try to assess. I mean, I can, literally, across the street from where I sit here today, in their large conference room and say, "Guys, tell us about where you find yourselves." We knew that they had just made, relatively recently, a large acquisition of Pinnacle gaming's operation business assets. That kind of stretched their leverage a bit, which would have been fine. PENN is the best operator in the business. They operated with the highest margins in the business and off to a terrific start this year, would have paid off a lot of debt and put themselves in better shape. But it was like musical chairs. The music stopped, and they were left standing. So it was incumbent upon us to understand quickly, what kind of shape are you guys in? How long can you last? And the discussion was simple. How can we move you as far down the road safely as possible so that we live to play another day? Of course, none of us had any idea how long this was going to last. But we took the view that it could be worse than maybe we thought, and it turned out to be, as a matter of fact, worse than we might have guessed up front. But we decided that taking a property at a very favorable price that they had on their balance sheet in lieu of [one] would move enough months to get them down the road, to do precisely what they did do, and that is bolster their balance sheet strength, keep them out of harm's way and allow them to reach the market, as you know they did, to raise equity and to put themselves where they are today, which is a terrific condition. So it was to move the battle or the fight, if you will, further down with the hope that we would emerge before disaster struck, and that is what happened.

Steve, just kind of stepping back for a second. As we sit here today, casinos are starting to open. We have Louisiana, Mississippi, a number of Native American casinos, and Las Vegas is opening tomorrow. So just -- can you give us any color to what you're seeing and hearing despite potential economic risks? Does it feel that the worst could be behind us?

Sure, Felicia. As of the end of this week, we'll have 21 properties in our portfolio that will be open because, to your point, Las Vegas does open later this week. West Virginia opens later this week. Iowa and Missouri, except St. Louis County, Missouri have opened. So we are seeing and experiencing firsthand what the reopenings of these businesses are going to be. We, at GLPI, have the benefit and the insights of having an asset in our taxable REIT subsidiary, the Hollywood Casino down in Baton Rouge, which we actually operate in 1 of the 2 assets in our taxable REIT subsidiary. That facility opened 2 weeks ago, Monday. It opened on May 18. And what we've seen, since that facility has opened, it opened with capacity limitations. We're limited to 25% of the fire code-rated operation. We have shut off, probably, on average, about every other slot machine. We've removed the stools from those slot machines that are turned off. We've limited the number of people at table games. And what we've actually seen is [a little bit of asset counts] maybe than we were used to seeing. So people are really looking for opportunities to get out. So mid-week days have been a little busier than we would have anticipated. Weekends, a little bit more normalized. Weekends are when the capacity limitations actually kick in, in effect, and force people to wait out in their cars until they can get into the building. And the other thing that we're seeing is we're actually seeing a higher spend per customer when they do come to the facility. So what we seem to be seeing, anecdotally is, that as people have cash in their pockets, whether it's the economic stimulus that has come from the Congress from the CARES package or, in many cases, the enhanced unemployment benefits, which have provided incomes that actually, in many cases, exceed what people were earning when they were working. People do have dollars in their pocket. And historically, in regional gaming, we've always seen this. When income tax refunds come out, business picks up in March and April. When social security checks come out at the beginning of the month, business picks up around social security checks. That seems to be the phenomenon that we're currently experiencing in Baton Rouge. And we've heard anecdotally from our operator, our tenant partners, that, that's the case from what they've seen with the facilities that they've opened to date. So we're very encouraged by what we're seeing. Don't know that we have enough data points at this point in time to suggest that it's a trend, but these businesses have certainly opened a little bit more robustly from a volume perspective than we anticipated. And we and our operating partners, our tenants, are very actively managing the expenses in these businesses. I don't think you're going to see the same complement of employees in these businesses in the future that you saw before these facilities closed because there are certain components of this business that are likely never to come back. As an example, buffets in casinos are probably not going to be reopening, if ever, because of the -- really the costs associated with that component of the business. So this has given us and our tenants an opportunity to sort of reevaluate and now reset the business as we move forward. So that's what we're seeing from an operations standpoint.

That's very helpful, although I have to say that the demise of the [indiscernible] buffet is a little disappointing to me. Steve, while we're with you, just -- can we go back to the Tropicana, okay? And acknowledging that the property is on a key strip location, but also noting that they just could have a slow recovery, we talked about that a few minutes ago, how much of a challenge do you think it'll be to sell?

Look, Felicia, and Peter will affirm this, everything sells at a price, right? We think the price that we've taken this asset on our balance sheet at under $9 million an acre just for the raw dirt, 35.1 acres at the corner of Tropicana in Las Vegas Boulevard, gives us a pretty substantial cushion when you compare it to other transactions in Clark County along or close to the Las Vegas strip, whether it's the Rio off strip, the Hard Rock off strip or, more recently, the Circus Circus property at the north end of the strip. We also believe that, that's in a portion of town that is really a focus because of the new stadium that's going to be coming online later this year. So we think we're well situated with that asset at a very reasonable valuation to realize full value for our stakeholders over time. That being said, PENN has agreed, reluctantly, to continue to operate that facility at their cost for up to 5 years. So we certainly have an ample runway for things to normalize and for investors that might be interested in doing something at that location to really get a better view on what the performance might be if they were to take that asset on or to redevelop it. So that's a high level of where we perceive the Tropicana Las Vegas to be.

That makes a lot of sense. And then, Peter, maybe you can make some comments just in terms of, what are you looking for? What aspirations do you have in terms of selling the property? PENN -- if it's sold within the first year, PENN gets 75% of proceeds above about $308 million and, in the second year, 50%. So in a way, people can interpret that you are incentivized to wait. So how are you thinking about the timing of a sale?

Well, I'm not sure how you can get to the idea that we're incentivized to wait. Yes, it's 100% after 2 years. But look, the name of the game, I think Steve said it pretty well, is to get our rent. We made, in effect, a loan to our tenant, and it's fully collateralized with ample value, we believe, in this piece of property in Las Vegas. The goal, in my mind, is to get that money back. And if somebody comes along with a clearing price, if you will, next week, they can have it. I would probably say, if I had a leaning, maybe PENN would like to see us get top dollar. There's not a lot of incentive for us to hold back for top dollar. What we have, as Steve described, is a failsafe or get a support. If it does take longer, it depends on the hook for the operating costs, the heat power, light taxes and so forth that relate to it. But goal #1 is to move the property. And to that end, we're going to stay pretty actively engaged. Remember, it's going to take a long time for somebody to plan, reposition and do whatever. So even though we're in kind of a downtime in Vegas, there are people who have thoughts about that corner, who may very well want to get started with the process sooner rather than later. So that's a hope. If it takes longer, it does, but our goal is move it as quickly as possible.

And by that answer, it seems like you're holistically focused on selling the property. But on your recent earnings call, you did say that there were some other options for the Tropicana. So I was just wondering if you could touch on that.

Well, look, the property could be subdivided. There is a significant difference front and back. Lots of people are interested in that commercial corner. I mean, it's Main and Main in Las Vegas. And with, as Steve points out, the stadium and [all the] things happening there, it's a great spot. So you can bifurcate it. We could do ground lease with it. We could partner with somebody. There's a lot of opportunity. But right now, I'll point you back to where we started. Goal #1 is move the property. Put the cash on our balance sheet, either pay down debt or give a distribution to our shareholders or a combination of both. That's goal. That's my primary thought today.

And that actually leads into my next question. So Steve, in terms of what's to do with that cash, I mean, Peter just laid out there's options, but can you maybe weigh those options or put a probability on them?

No. It's a fair question. It depends on timing. It depends on amount. If there's a transaction opportunity that is in front of us close to or sort of meshes in from a timing perspective, obviously, that would be an appropriate use of capital. Delevering, paying down $300 million of debt and taking leverage down by 3/10 of a turn would be an interesting use of capital. And Peter points out the opportunity to return capital to shareholders is something that we'd also need to consider. So it's really going to be more of a game time call when we get there. I would hate to probability weight because I think the probabilities are going to be driven by what's the transaction market at that point in time and whether or not we'd want to create dry firepower, if you will, by delevering with an anticipation of having an opportunity down the road. So it's hard to probability assess because it's all going to be driven by what the opportunities are when we get there.

And just for the listeners on the line, I'd like to just call your attention to the fact that you can ask questions via this app that we're in. So on your control panel, there should be something that looks like a question mark. And you can type in questions, and we're happy to entertain those. Matt, are you on the line via the phone?

I am, Felicia.

Well, hello. So a question for you. If maybe you could help us understand, what are further methods that you could use to protect your shareholders if the casino openings or the recoveries don't go as expected? I think everybody's well aware that VICI just announced amendments to their CapEx requirements. Is that something you'd contemplate? And then from where we stand today, how do you feel about your master lease tenant solvency profiles and related credit quality?

Sure. Yes. Well, related to the CapEx topic and what VICI did, they've got a bit of a different construct than we do [since ours is a sustained revenue as it relates to] -- self-corrects [indiscernible] in this environment. But to take the broader question, going forward, and PENN is a great example of all these points, any actions that we take is going to be fully dependent on and really tailored to circumstances of [them] in a fashion that maximizes the risk-adjusted outcome for our shareholders. And in this -- in the PENN case, it was a win-win outcome that preserved economic wellness and gave an opportunity for upside. And that's the mentality we take to any of these situations. And you'd -- just as you'd expect, our process starts with a discernment of ability to pay rent versus willingness to pay rents. And we're really focused on the ability to pay rent since our tenants, given our unique leases and the strength of the construct, the cross-default and the inability to move down the street, given the licensure and the facilities' nature, the willingness -- there's a lot of kind of protections there that ensure that we're in a good place. When it comes to ability, I mean, I'd point out, I mean, we are in a very different place now than we were at the beginning of this. PENN's probably the best poster child for that, right? A lot of analysts said, in a total closure scenario, they had something like 5 months of liquidity. And you'll see that our transaction with them, particularly [if we add] another 5 months, and, in addition, gave visibility to the future and burden them with a debt that would prevent them from getting escape velocity on the other side, which then enabled them to raise capital. And I think that's one of the key points back to the differentiation question you asked Peter about us compared to most triple net landlords, 98.6% of our income comes from public companies, whose rent gets paid both by the cash flow they get from their properties, and also the cash on their balance sheet, with the option to raise additional capital. And since PENN did that, that added another 4 to 5 months. So that initial runway of 5 months is now closer to 14 to 15 months from the same starting point. And you will also note that -- and you watched this, Boyd, which started with something like 13 months based on their conference call numbers that they gave, augmented that with a recent capital raise to put them in an even more solid position. And again, these are total closure scenarios, which is not likely. We're seeing the majority of these assets, if not all, open in the coming months. And lastly, Eldorado is in a very strong position as a stand-alone and also as a combined company with Caesars. So from all perspectives, I think that the scenario you're discussing is very unlikely compared to where we started. And also the template and the process we use with Tropicana and PENN is probably a good one to apply to understand our thinking going forward.

And we do have some questions from the audience. So I'm going to hit some of those for a few minutes. And this one is a quick one, but an important one, and that is, when do you expect Pennsylvania to open?

Can we ask the new governor?

Look, Felicia. I think Pennsylvania will follow along with what New Jersey's doing. Delaware's going to open later on this week or early next week, the casinos. New Jersey is trying to get their casinos open by the 4th of July weekend. I would hope that as the entire state of Pennsylvania opens up on Friday, June 5, moving into the governor's yellow phase, and a big chunk of the state moves into the green phase, that, hopefully, the Casino business will be not too far behind, given the revenue that these facilities generate for the Commonwealth. But at this point in time, I'm not sure that economics are as big a factor in that decision-making as you would have expected them to be. So I would hope, at some time as we get to the middle of June, that the Pennsylvania casinos would be open.

Makes sense. And then another question is, what does the sale-leaseback market looks like currently? And an investor said, "I would think that there are companies that would be more willing to do them at likely decent levels." And your cost of capital is very low currently. So wondering if there's anything going on in that market today.

Look, raising capital is something that all operators, all prudent operators are considering. And if you listen to the Boyd earnings call, they talked about sale-leaseback as being a source of capital. They obviously chose to go to the debt capital markets as an alternative. But I think as we move through this pandemic, as we see companies like PENN and MGM not only survive but thrive, I think more and more operators are going to continue to get comfortable with the notion of not needing to own their own real estate and sale-leaseback financing becomes a permanent source of relatively inexpensive capital. So I would expect those trends to continue. Right now, are we days away from announcing anything? Obviously, even if we were, we couldn't say. But there are transactions that are out in the marketplace. You saw the Eldorado and the Caesars divestitures to Twin River for purposes of satisfying regulatory compliance for their pending merger. Right now, price discovery is a little bit opaque. There's not a clear view of what an appropriate price is. So we're just going to have to wait to see how things settle down.

And can we just move to the dividends for a moment, Steve? So what is your intention regarding the quarterly dividend? Now it's 80%-20% stock and cash. Can you anticipate it being 100% cash again?

Absolutely, as we communicated to the marketplace when we declared the dividend as part of our first quarter earnings release. And I hope we were pretty transparent in telegraphing this to the market even in anticipation of that as we talk to sell-side folks and investors. When we're realizing noncash revenue in the form of rent credits, it would be a leveraging situation for the company to continue to pay out cash dividends in full as we're realizing noncash receipts. So we've communicated that the time period for the stock dividends will coincide with or is likely to coincide, the Board will make a decision with each quarterly dividend distribution based on the facts then in existence. But the stock dividend piece is likely to coincide with the rent credits, which, as you know from the PENN transaction that we announced, run through all of October, and any remainders will trickle into November. So that's the time frame that we're looking at through the fourth quarter of this year for the noncash rent receipts.

And then your retention [gets better]. So the next question is, you were talking about the Tropicana and VICI and MGP and the triple nets. Just if you could share some insights and perspectives around your growth initiatives and lowering the cost of capital.

Sure. Well, even through this pandemic, we've been playing offense. Bringing the Morgantown property in as a ground lease at a 10 cap rate is very attractive even in light of the cost of capital now. We work every day to communicate with investors to continue to try and drive down our cap rates from an equity standpoint. Right now, the debt capital markets are certainly wide open. We feel our credit spreads are a little dislocated, underappreciated in terms of how investors view, credit investors view the quality of our portfolio and how these assets are going to bounce back. So we don't need to access the debt capital markets, but we certainly monitor the debt capital markets all the time to look for opportunities because we have drawn down the revolver in full. We have a lot of liquidity in the form of cash on the balance sheet. And with the projected rent receipts that we now are very comfortable in receiving, given the liquidity profiles of our tenants, we have ample means to even meet our nearest term liquidity, which is the $449 million of term loan A-1 that is due in April of next year. So we certainly don't have a need, and we'll continue to look at things from an opportunistic standpoint.

And Peter, with about 2 and change minutes left, I'm going to combine our last investor question with a wrap-it-up kind of question. So the first one is -- and acknowledging that you're not an operator, I think this is a fair question, which is, what do you think the demand is going to be in this country in casinos once they're all open, given the economic environment? So just maybe some thoughts there. And then just to kind of wrap up any message you wanted to leave with investors regarding your business model and prospects going forward.

Okay. Look, and you and I have spoken before, I have a very robust view of what's likely to happen once the states unleash these facilities. People clearly want to be out of their homes. They want to be -- I say, if they -- if any casino at all, pick a spot, any city in America, if you were to open the doors tomorrow without masks, without gloves, without any limitations, my prediction is it's going to look like Daytona Beach or Fort Lauderdale Beach, people side by side jammed like rats together because they're that anxious, that willing to get back to business as usual. That's the nature of the gaming customer. I've been through this for many, many years, and I'm utterly satisfied the demand is there. And it's going to evolve over time, largely because of the restrictions that I think we know. So I think the future is very, very bright if government will get out of the way and let this process unfold. And your next point in that? Was there a second part? So I'm very bullish about that.

30 seconds about why GLPI.

I can say the best run company in the business, but, look, because you know us. If you care about safety, prudence, we're not in the [monument] building business -- those who've followed us for many, many years, I'm about protecting our capital. I'm a major shareholder in this company. I expect to be one 10 years from now, 20 years now and my family beyond. So it's all about prudence and doing smart stuff. That's why.

Well, thank you, everybody in the audience, for your time. Thank you, Peter, Steve and Matt. We'll talk to you soon.

Thank you, Felicia.

Thank you very much, Felicia. Appreciate it. Thanks, all.