Gaming and Leisure Properties, Inc., the country’s only publicly-traded REIT focusing solely on the casino gaming industry, fell short of its revenue target in its modest second quarter earnings report Tuesday morning, though it insists it’s taking a long-road, conservative growth strategy.
It was the company’s first such report since acquiring Pinnacle Entertainment’s property assets in a landmark $4.75 billion acquisition in April 2016.
While GLPI’s adjusted EBITDA and income per share were both in line with internal and analyst projections at $180 million and $0.39, respectively, net revenues checked in at $207 million – $4 million shy of company guidance.
Management attributed the missed target, in part, to underperformance at Hollywood Casino Columbus and Hollywood Casino Toledo – properties operated by Penn National Gaming, but was optimistic that these casinos would return to form moving ahead.
“With the completion of the Pinnacle Entertainment acquisition, we are more diversified by both tenant and geography, strengthening our already stable cash flow profile and enhancing our position as a leader within the triple-net REIT industry,” chief executive Peter M. Carlino said.
With the close of the Pinnacle transaction on April 28, 2016, GLPI holdings include 4,195 acres of land and 14.7 million square feet of building space across 35 casino facilities in the U.S.
18 of these properties are leased to Penn National Gaming, 14 to the new Pinnacle Entertainment operating company from which it acquired them, one to Casino Queen in East St. Louis and two to a subsidiary owned and operated by GLPI.
GLPI operates so-called “triple-net” leasing arrangements with casino gaming operators whereby the lessor tenant is required to pay all costs associated to the property being leased, including taxes, insurance and maintenance costs in addition to rent.
In a separate transaction, GLPI expects to close on its acquisition of the Meadows Casino and Racetrack in Pittsburgh. It will lease this property to Pinnacle Entertainment, which has now been spun-off and recast as strictly a casino operating company.
To finance the deal, the casino REIT announced the beginning of a continuous equity offering – known as an ATM program – in which it “may sell up to an aggregate of $400 million of its common stock from time to time through a sales agent in ‘at-the-market’ offerings.”
“We expect to raise at least $168.0 million from the ATM over the course of several months which will result in the Meadows transaction leverage of 5.5 times and anticipated total Company leverage of 5.3 times on a pro forma basis by the end of the year” Carlino said.
Some analysts approached the ATM program with caution, especially as GLPI just completed a financing round in which it issued 28.75 million shares of stock at $30.00 – raising concerns that pumping even more shares onto the market would result in equity overhang, or the dilution of common stock value.
“Although 2Q16 results were essentially in line with consensus expectations and management’s guidance, we believe shares could open modestly lower in response to this morning’s announced ATM offering,” wrote Steven Wieczynski of Stifel in an analyst note to investors, maintaining a “hold” status on GLPI shares.
“While an equity offering should not come as a surprise and leaves pro-forma leverage at more modest levels, we suspect some investors will receive the news unfavorably,” he continued.
Carlino and chief financial officer Bill Clifford defended the ATM program as a cost efficient mechanism for raising equity that will serve to assuage fears of overhang.
“The ATM program increases the size of transactions we can get done without having to worry about market volatility on the equity,” said Clifford. “We think this is a program that will get people very comfortable with our ability to finance transactions of a reasonable size.”
They declined to elaborate on what types of casino properties they are eyeing for future transactions, but iterated that there is no property too big or small that they wouldn’t consider if the proper conditions were met.
“I don’t think there’s a gaming property in the United States that we wouldn’t be interested in looking at if we thought it was in good shape for the foreseeable future and it was at a valuation that made sense,” Carlino said.
He added that any acquisitions in the near future will be dependent on the existence of motivated sellers, and that GPLI’s strategy is to hunker down and maintain its readiness to negotiate.
“Our job is to get our balance sheet down to fighting weight and to be as fit as we possibly can. If we have to keep hitting singles, we’re willing to do that until we hit one out of the park.”
