Gaming and Leisure Properties (GLPI) Q1 2022 Earnings Call Transcript

Robert Roffulo

Table of Contents Contents:Prepared Remarks:Questions & Answers:Call participants: Image source: The Motley Fool. Gaming and Leisure Properties (GLPI -3.96%)Q1 2022 Earnings CallApr 29, 2022, 10:00 a.m. ET Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: Operator Greetings. Welcome to the Gaming and Leisure Properties, Inc. first quarter 2022 earnings conference […]

Image source: The Motley Fool.

Gaming and Leisure Properties (GLPI -3.96%)
Q1 2022 Earnings Call
Apr 29, 2022, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to the Gaming and Leisure Properties, Inc. first quarter 2022 earnings conference call. [Operator instructions] Please note that this conference is being recorded.

I will now turn the conference over to your host, Joe Jaffoni, investor relations. You may begin.

Joe JaffoniInvestor Relations

Thank you, Kyle, and good morning, everyone, and thank you for joining Gaming and Leisure Properties first quarter 2022 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-Q and 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 of Gaming and Leisure Properties.

Also joining today’s call are Desiree Burke, senior vice president and chief accounting officer and treasurer; Brandon Moore, executive vice president, general counsel and secretary; Steve Ladany, senior vice president and chief development officer; and Matthew Demchyk, senior vice president and chief investment officer. With that, it’s my pleasure to turn the call over to your host, Peter Carlino. Peter, please go ahead.

Peter CarlinoChairman and Chief Executive Officer

Well, thank you, Joe, and good morning, everyone. We are pleased on this lovely spring day here in Pennsylvania to report another strong and eventful quarter for the company. In this quarter, we completed, as you know, the acquisition of the real estate assets of the Live! Casino and Hotel in Philadelphia and in Pittsburgh with the Cordish Companies. You will recall that we closed on the Maryland Live! property in December.

And these are extremely high-quality assets, for any of you that know them, developed by one of the country’s foremost property developers. And we see considerable opportunity parenthetically with Cordish as we look to the future. The details of this attractive transaction are well outlined in our published release. Also this quarter, we closed on two properties with Bally’s Quad Cities Rock Island and Black Hawk.

So that’s four properties added to our portfolio, which I just noted with some interest to me, if not to you, that when we commenced our spin in 2011, we did so with 24 properties. And that number has grown to today 55, and we intend to keep adding to that as we have consistently over the years. A couple of other things I will quickly highlight. We are investing with Casino Queen in Baton Rouge, as you might recall, building a landside facility, which we controlled.

And since that I had a vision for that property that Queen and the team well accepted, I think the steel is up. It’s finally moving along with decent weather. If we can get all the things that we need with a target toward opening, I think, second quarter of 2023. It’s going to be a pretty cool project, if I must say.

It really will. And I think it’s going to have a significant impact in that market. Now that we are through that grouping of closings, which were — and always are somewhat uncertain from a timing point of view, I think that I am prepared to say that we will recommend to our board shortly that we resume guidance. I know that’s a question some of you have asked in the past, but we’ll recommend resuming guidance within a range in the next few weeks.

And I would hope that perhaps we can initiate with the board’s approval guidance this next quarter. In a similar vein, things have gone extremely well for us this year and expect that it’s going to be a strong year in 2022 and into 2023. With that in mind, we are also prepared to recommend to our board an increase in our dividend and would expect to do so publicly in the next few weeks. So that is certainly a goal, not absolutely certain, but we — management is prepared to recommend such an adjustment to our board.

With that, I’m going to turn it over to Desiree and give you some financial focus.

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Good morning. Thanks, Peter. Our total income from real estate outperformed the first quarter of 2021 by over $51 million. That was primarily related to the Cordish transactions, which Peter just described, which increased our cash rental income by approximately $23 million; the closing of the Bally’s transactions last year in June of 2021, which increased cash rental income by $10 million; the completion of the sale of our operations of Baton Rouge and Perryville and the following lease of the properties, which increased cash rental income by $3.7 million.

We achieved escalators on our Pinnacle, Boyd, Belterra, and Penn leases, which added $2.9 million. And lastly, we had some higher noncash straight-line rent revenue gross-ups and the investment in lease adjustments of $9 million. Our operating expenses increased by $13.7 million, and that’s primarily — these are noncash-related. It’s the charge of $26.7 million related to the provision for credit losses associated with the new Cordish lease; noncash land lease gross-ups and land rate amortization, which increased by approximately $7 million.

And those were partially offset by a decline of $19 million in gaming expense. Our gaming revenue and gaming expense are now both zero as a result of the sale of the operations on July 1 and December 17 of last year. And I should note that although G&A expense is only slightly favorable, the REIT G&A increased as compared to the first quarter of 2021 was primarily due to noncash charges for stock compensation expense and as well as a reversal of our 2020 bonus, which got reversed in the first quarter of 2021. So the number in 2021 is artificially low.

With that brief summary, I’ll turn it back to Peter.

Peter CarlinoChairman and Chief Executive Officer

Thanks, Des. One comment before we open to questions. One of our goals this year as we — in addition to the Casino Queen Baton Rouge construction is to invest more dollars where possible with our existing tenants so that we are actively pursuing dialogue. Results are unknown.

But it’s a big focus internally here to see what monies we can put to work with our strong tenant grouping. So you might keep that in mind. Hopefully, we can announce some other activity through the balance of this year. With that, operator, we can open the floor to questions.

Questions & Answers:

Operator

[Operator instructions]

Peter CarlinoChairman and Chief Executive Officer

Let me — hang on, let me slow down a second. I’m looking in the wrong direction around the table here. Matt Demchyk had some prepared comments that he’d — we’d like him to make. So sorry, Matt, I do apologize.

Matt DemchykChief Investment Officer

Thank you, Peter, and thanks to everyone for joining this morning. As macro uncertainty persists and the capital markets volatility is evident, I want to remind everyone on the call today that GLPI’s business model was built with environments like this in mind. In fact, our reported four-wall coverage has again increased across the portfolio with the number of leases now at all-time highs. This robust coverage reflects continued operating resiliency, while it also provides a buffer or margin of safety for our lease payments.

Our leverage and liquidity are at levels that strengthen and support our business model, and our balance sheet strength continues to be a key focus. The match funding strategy and capital markets discipline that we exercised in fully funding the entirety of our Cordish transaction with a creative mix of OP units, ATM issuance and then success of overnight equity and debt offerings was prudent. It’s also emblematic of a simple balance sheet mantra that was developed and refined over many years of observing the REIT space: do it right and sleep at night. When we approach transaction funding going forward and our overall business, you should expect to see the same continued discipline that results in GLPI locking in the transaction accretion.

As we move forward with our strong and sound financial foundation, our focus is squarely on unearthing opportunities the prudent deployment of our shareholders’ capital. And our objective remains increasing long-term intrinsic value per share for all of our shareholders. I’ll now turn the discussion back to Peter.

Peter CarlinoChairman and Chief Executive Officer

I don’t know. It’s dangerous, if it comes back to me, Matt. Look, I think Matt has highlighted philosophically kind of who we are and the way we think about our balance sheet and what we’re prepared to do to protect and enhance it. So with that, Matt, can I turn it over? OK.

Matt DemchykChief Investment Officer

Ready to go.

Peter CarlinoChairman and Chief Executive Officer

So we’re ready to go. Operator, please open the floor to questions.

Operator

[Operator instructions] Our first question is from Neil Malkin with Capital One Securities.

Neil MalkinCapital One Securities — Analyst

First question, I just want to make sure I understand it right. In terms of the G&A, a lot higher than we thought it was going to be, particularly with the unwinding of your last operating business. I think Desiree alluded to that. Can you — I just want to be sure, like is that burn-off going to be in effect in the second quarter? Or stated another way, are you planning to get to like a sort of lower run rate G&A level starting in the second quarter? That would be really helpful.

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

And yes — the answer is yes. I mean we will be at a lower run rate in the second quarter because of these noncash items that are hitting us in the first quarter. Stock comp expense is running a little bit higher, although our stock comp expense is normally higher in the first quarter than it is for the rest of the year due to retirement eligibility. And the accounting requires those to be expensed all immediately when those grants are awarded, so that will come down a little bit.

But our G&A run rate will definitely get lower and be more in line with where you would expect.

Neil MalkinCapital One Securities — Analyst

OK. I guess another one is on investment opportunities that you guys have mentioned the internal existing tenant investment opportunities. I was wondering if you can maybe talk about some that are closer than others, potentially the Tropicana. I think you said you might have some updates closer to the middle of the year.

Any comment there?

Peter CarlinoChairman and Chief Executive Officer

Well, let’s put Trop aside for a moment. We’ll come back to Tropicana. There’s nothing we can really identify, but you can bet that — look at our portfolio of tenants. And I think it’s safe to say that we’ve had conversations with every one of them about some prospective thing that we’re initiating that they may wish to do.

Right now, our cost of capital is becoming increasingly more attractive every day. It’s long term, it’s permanent, and it should be appealing. So we’ll see. We can’t control that.

Obviously, if we could put a hotel here or something there, there are those kind of conversations going on, but it’s dependent upon when our tenants might pull the trigger. So — but I will tell you the level of those conversations has increased. Again, no predictability whatsoever, except to say that we’re really focused on that. Steve, I think you have more conversations now than we’ve had in a while.

Steve LadanySenior Vice President and Chief Development Officer

Yes, Peter. I mean, if you look at even just Boyd’s release, right, they’re spending money and treasure chest in some other properties. We’ve already mentioned on the call today that we’re working with Casino Queen on a landside move in Baton Rouge. So property owners are starting to look at their own properties.

And with the margins where they are and the profitability where they are, they’re looking for ways to increase revenues because the pass-through is amazing. So we are having conversations. I think we’ve had a conversation with every one of our tenants in the last quarter about different things that they’re looking at. And like Peter said, no telling what will or won’t happen, but it’s a positive outcome for us to have that ongoing dialogue.

Peter CarlinoChairman and Chief Executive Officer

So you can count on that effort. And look, we consistently found transactions year in, year out that have helped us build our portfolio to the 55 properties we have today. That number will surely grow over the next year. Let’s go back to Trop then because that is a big question.

The timing, and both Matt and Steve can talk to that, each of them, it plays a big part in keeping this going. Obviously, anything we do is tied to our conversations with Bally’s. It’s been widely publicized that the Ace are looking at this site. They’ve looked at others.

I think the — I think it’s safe for me to say that they have a very, very strong interest in our site if the transaction can work to their advantage. There’s a lot of hurdles that have to be covered. We intend, as long as there’s something in it for us, I hate to sound greedy, but it’s the way it goes. That property is committed to go to Bally’s on terms we previously announced.

That’s fine. If that’s all that ever happens, we’d be happy enough. If we can facilitate something bigger, better for them and for us, then you can bet we’re going to do that. So that’s an active ongoing process right now.

I can tell you that Matt, Steve, and I were in Las Vegas last week? I lose track of time. It goes fast, a week ago, and talking in part about that and meeting with all parties. So we’ll see. There’s absolutely no certainty about where that may go.

If we can facilitate something exciting, you bet we will. So there, I must say stay tuned. We’ll let you know.

Neil MalkinCapital One Securities — Analyst

OK. Great. If I could just sneak one more in, maybe Matthew. What do you think the difference would be in your — the cap rates that you’re paying or the deals you’re making, if you actually had in your contract terms rent escalator minimums or uncapped escalators tied to CPI versus your kind of run-of-the-mill structure you do for almost all your leases?

Matt DemchykChief Investment Officer

Yes. I mean, I think it’s a little bit of a philosophical question. I’ll give you one data point, though. I mean you can look at the Cordish lease we did.

And obviously, that has a fixed escalator. So it has a minimum like you’re talking about. And that’s something that, based on a negotiation and market conditions, we did at a cap rate, 6.9. But every one of these deals is very specific to the actual asset operator, the four-wall coverage, the credit support.

And teasing out just one aspect is tough because nothing is comparable. All that said, I mean the backdrop certainly changed over the past couple of years. We’ve seen newer leases that have market terms that have some sort of CPI with ceilings, et cetera, in them. We just saw the realty income lease that was done not that long ago that after mimicking our structure, went through a CPI with a ceiling that wasn’t too much higher.

And I’ll just say it’s part of the conversations we have in real time with counterparties on new deals. That’s something we keep in mind. But I don’t want to negotiate against myself on this call as to where the terms might ultimately fall out.

Operator

Our next question is from Jay Kornreich with SMBC.

Jay KornreichSMBC Nikko Securities — Analyst

Just kind of big picture. Over the past several years, we’ve been talking about cap rate compression in the gaming REIT sector. And I wonder if you’re starting to see that narrative potentially reverse as interest rates are quickly rising or kind of how you see that playing out going forward.

Peter CarlinoChairman and Chief Executive Officer

Yes. Go ahead.

Matt DemchykChief Investment Officer

I mean it’s a great question. It’s one we ask ourselves a lot as we talk to our triple-net peers. You’re certainly seeing retrades and cap rates shifting in real time as in this week, last week. Order of magnitude, 25, 50 basis points going into closing for deals that were inked a few months ago.

All that said, we’re at a very interesting place. We don’t have as many data points for price discovery. There haven’t been that many transactions. And you’re right, we’ve got countervailing forces, where on one side, you’ve got cost of debt going up, which may actually make things a little more actionable for us for tenants that look at our capital relative to the cost of debt that they might use.

But on the other side, you’ve also got this depth of interest that appreciates the resiliency and durability of these cash flows. And I’d leave it to the next transaction or two to really see where that market-clearing price might be. We’ll certainly play a role in that dialogue. As a public company on the margin, we’re better positioned compared to private players than we were a month or two ago because the high levels of leverage and the cost of leverage they were employing for their business models has now shifted meaningfully in real time.

And we’ve got depth of access to capital through the capital markets and balance sheet strength to start with. So I think we need to let that play out a little bit more. And I’ll use Peter’s term: stay tuned.

Jay KornreichSMBC Nikko Securities — Analyst

OK. That makes sense. And then have you been seeing any incremental institutional capital interested in the regional gaming space? I know last quarter, we had a new competitor come in with the Encore Boston Harbor transaction. So just curious if you’ve seen any new players poking around the regional market.

Peter CarlinoChairman and Chief Executive Officer

Related to poking around Sure. I mean, I think people have to take a look. But in their poking, I think some of them appreciate the challenges of getting into the space, especially when it comes to limited license states that have regulatory hurdles and other challenges that we’ve kind of uniquely positioned ourselves to take advantage of and be on the right side of. But yes, I think based on the relative risk-adjusted returns, there’s certainly a lot of interest.

Operator

Our next question is from David Katz with Jefferies.

David KatzJefferies — Analyst

With respect to the Cordish partnership, you obviously have access to whatever they may do in the future. Are you able to sort of talk about any order of magnitude or qualitatively about anything they may be active on? Or how we should think about that partnership and its prospects for you in the near term, call it, two to five years?

Peter CarlinoChairman and Chief Executive Officer

Yes. David, I mean, the quick answer is not really. I mean I wouldn’t presume to get out in front of anything that they’re thinking about looking at and what have you. Look, they’ve been very aggressive, as you know, around the country in a variety of ways.

And between their casino facilities and their live facilities that all by themselves, freestanding and are incredibly attractive, they — I am sure you’re going to see them at the forefront of anything that evolves, not just with new properties but even some existing properties. I know they’ve demonstrated some interest. Again, I can’t say how, what in some existing properties where they could be a buyer. Perhaps we could work along with them in that regard as well.

Again, there’s really not much I can say. As I say, we’re not lead of that. But look, these guys are hungry people. They’re very aggressive.

You might remember that I bought the property in Kansas City, Kansas and built the NASCAR partnership. I bought that property from David way back because he — we were on a competing site and came to believe that he had a better site more likely to win. And that was probably my first significant working with the Cordish Company and with David himself. So these guys are kind of everywhere.

And all I can say is we’re optimistic that something very positive will come out of it. But that’s my usual gibberish until we actually produce it.

David KatzJefferies — Analyst

I understand. And if we can just follow that up with, again, hypothetical, just for perspective, the Cordish is involved with Caesars in Pompano, right, which is a much bigger, broader mixed-use kind of thing. Is that the kind of thing that you would take a serious look at to see if there’s a role for you to play?

Peter CarlinoChairman and Chief Executive Officer

Steve, sorry, I’m looking around the table for —

Steve LadanySenior Vice President and Chief Development Officer

Yes. David, I think our arrangement with them is with respect to gaming developments contractually, I guess, I should say. But with respect to our ongoing partnership and the dialogue we have, it’s definitely the type of project that they would come and talk with us about. At this point in time, I would defer to Matt to comment on our interest in getting involved in some of their more mixed-use and apartment or residential-type projects.

Peter CarlinoChairman and Chief Executive Officer

I don’t — let me say — let me answer that quickly. There’s nothing we turn our nose up at all. If it makes economic sense, good use of our capital, good for them, perhaps, and also for us, absolutely. We would do nongaming things.

Look, the nongaming question comes up all the time, as you know. And I’m sure we’ll get a call about that, what are we looking at. I don’t think it’s a week that goes by that we don’t consider some nongaming something. The problem is we’re in such a terrific sector today that finding its equivalent or even near equivalent is very tough.

And when pressed, I will say, do I expect someday we’ll be someplace else? I have to say, “Yes, I got to believe we will.” But are we there today? Or is there something on the near horizon? The answer is no.

Matt DemchykChief Investment Officer

Yes. And I’ll add, David, just on that broader topic as it relates to Cordish. There’s certainly a thematic in real convergence going on in real time, and it will likely continue into the future between sports-based placemaking and sports betting. And when you think about our core competencies and what we understand between real estate and also the gaming market, some of the Cordish broader projects have aspects that could certainly check the boxes that are important to us.

All that said, again, nothing is hardwired, but it’s certainly — listen, when they started this partnership with us, it was to give their incredible operating capabilities, a complement with a really strong balance sheet and a partner who could — if you put us together, compete with anyone anywhere. And I think over time, you’re going to see that manifest itself in unique ways, and we’ll have to wait and see exactly what they are.

Operator

Our next question is from Smedes Rose with Citi.

Smedes RoseCiti — Analyst

I guess you mentioned doing incremental investment with your existing tenants. And I’m just wondering, over time, would you like to have more almost like a formalized program or a goal of investing activity that you’re just existing tenants would be pursuing this year?

Peter CarlinoChairman and Chief Executive Officer

Oh, we have a goal. Whether we can get there or not is another matter. I mean — again, I’m not trying to be cute. But if we talk to, just pick anybody Penn.

Pick Penn or Boyd or any — we’re very enthusiastic about — and we’ll sometimes lay opportunities out in front of them. But in the end, they set their own priorities. They set their own timing. And our job is to keep in front of them with our little smiling faces and a hand on our back pocket where the wallet is to say, “We’re here, guys.

We’d like to help.” And so there’s nothing predictable at all. But there’s a little bit more activity in that area than there has been. So we sense and believe that we ought to be able to pull off some meaningful investment this year with one or the other of them. again, I hate to give you that kind of nonanswer, but that’s as close as I can come to it.

Matt DemchykChief Investment Officer

Yes. And we have a process within our lease, where if the tenant is undergoing a capital improvement of a certain size, they’ll notify us. And I can confirm we have received those notices and responded with terms we were willing to fund their capital improvements this year. So we don’t have a name for our program, but we would love to put money to work, and our tenants are aware of that.

Smedes RoseCiti — Analyst

OK. I just wanted to ask you, too, is what — is the budget for the Hollywood Casino Baton Rouge, has that changed at all? Or is there an update on that in terms of what you’ll be delivering?

Peter CarlinoChairman and Chief Executive Officer

Well — yes. I’m not sure that — well, back up. I don’t know what we’ve said about that project before. I think we had laid out a budget way, way, way back that has expanded significantly, not just because costs have gone up, and they have.

But we’ve improved the scope measurably. Go on land side, as you know, it’s — the new facility is, if I must say so, going to be terrifically attractive, very appealing, particularly on the sports betting side and just the whole scope of it. You’ll be able to drive up within a couple of inches of the front door almost and walk in and be playing. So it’s going to be the most convenient place in town clearly.

And the quality of it will match anything else in town. So the scale, of course, is different, but it’s going to be a first-rate property. And so we’re excited about that for them and for us because we get to put some capital to work significantly more than what we talked about before. We’re not prepared to lay out a number right now.

Probably in another 45 days or thereabouts, we should have a better handle on the buyout of that job. But steel is erected. All the pilings have long been done. The so-called risky parts of construction by the river are long past.

And the building is moving pretty quickly. So second quarter of ’23 is what we target for a finished facility. It should be cool.

Operator

Our next question is from Daniel Adam with Loop Capital Markets.

Daniel AdamLoop Capital Markets — Analyst

The nearly $27 million credit provision in the quarter, I believe, is related to the Pennsylvania Live! master lease. How did that provision come about? And what is rent coverage for the two Pennsylvania Live! properties?

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Yes. So the actual $26 million, there was actually a decrease in the Maryland portion and an increase in the Pennsylvania portion. So that is a net number, the $26 million. And it really is due to economic factors that we have to consider in calculating our credit loss as well as the rent coverage at both properties.

Clearly, the property — the Maryland property is doing much greater — has much greater rent coverage in it than the Pennsylvania properties do. But I don’t have the exact numbers.

Peter CarlinoChairman and Chief Executive Officer

We don’t expect losses.

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Yes. We definitely don’t expect losses. It’s a —

Peter CarlinoChairman and Chief Executive Officer

We just have to do that, as you know.

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

It’s a noncash charge. It’s added back for AFFO. It’s a credit loss standard that’s required known as CECL under the accounting rules.

Daniel AdamLoop Capital Markets — Analyst

OK. Got it. That makes sense. And then second, do you have any plans to refinance the term loan A or hedge your variable rate debt exposure given the rise in interest rates? And that’s it for me.

Peter CarlinoChairman and Chief Executive Officer

Thank you go ahead, Steve.

Steve LadanySenior Vice President and Chief Development Officer

Yes. Sure. Thanks for the question, Daniel. We are in — right now, in discussions with a group of lenders around potentially putting a new credit facility in place.

So we’re not looking to hedge that at this time because it won’t — those dollars won’t be there for long. And we will look to refinance that by next quarter.

Operator

Our next question is from John Massocca with Ladenburg Thalmann.

John MassoccaLadenburg Thalmann and Company — Analyst

Maybe building on that last question a little bit. As you look out into the debt market today, where could you price unsecured debt, you think, just given the term loan that is coming due in some of the nearer maturity unsecured debt you have as well?

Steve LadanySenior Vice President and Chief Development Officer

Yes. I mean I think you could look to the VICI recent bond deals as a pretty good indicator, considering both our unsecured notes and their unsecured notes have the exact same ratings from all three agencies. But I think that would triangulate — and I haven’t looked at it in the last day or so, but I think that would triangulate to a 10-year offering around 5.25 and a 30-year offering at probably 5 5/8.

John MassoccaLadenburg Thalmann and Company — Analyst

OK. And then apologies if I missed this earlier on the call. We’ve seen — I know it’s not a primary area in which you’ve kind of invested historically, but we’ve seen some kind of movement in terms of new supply in the Las Vegas Strip market, in particular. I mean, how does that impact how you underwrite some of the transactions maybe that you’re seeing come across your desk at all?

Peter CarlinoChairman and Chief Executive Officer

Well, you’re focused on the Strip? I mean the Strip itself doesn’t have a lot of meaning to us beyond the drop deal. But even that, we’re not — there’s — we have a prescribed deal there well identified. So I’m not sure exactly. Maybe, Steve, you have a different color on that question.

Steve LadanySenior Vice President and Chief Development Officer

Yes. Look, there have been a bunch of transactions on the strip. I think there’s one that some people may be aware of that’s out there now. I think that the nuance with respect to kind of 2022 in this — in the M&A marketplace for gaming REITs, the thing I think you’re going to see is I think transactions won’t be as large and bulky.

You’ve seen Strip assets trade at very tight cap rates, very large dollars. Then we closed out the year with two regional assets, but again, very large amazing performing assets. That’s not what the typical regional market is comprised of. It’s comprised of wonderful small monopolies of various sizes and shapes.

And so I think as 2022 rolls on, you’ll see a continued M&A activity in the gaming space and in the REIT gaming space. But I think the size and scope of those transactions will be very different. I think you could see things as small as $100 million, and maybe you see $1 billion. But outside of the Strip, I’m not sure that we’re going to see those outside of large corporate M&A.

Peter CarlinoChairman and Chief Executive Officer

Let me make this comment, if I may. In my sense, the Encore Boston is not a regional transaction by any measure. You got a Las Vegas asset basically built in a major market with Las Vegas kind of dollars. That doesn’t really relate to what goes on in gaming cities in the United States.

So that’s my personal bias. It’s not necessarily reflective of any “normal transaction.”

John MassoccaLadenburg Thalmann and Company — Analyst

OK. That’s very helpful color. And then one last kind of more detailed question from me. Any kind of outlook or guidance or color on the percentage rent resets for some of the leases that are resetting in May?

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Yes. So the actual certifications haven’t been provided to us yet. So we aren’t prepared to comment. But clearly, if you look at the release on Page 13, you can see the rent coverage that we’ve reported — or they’ve reported to us on a trailing 12-month basis: for the Pinnacle one, it’s 2.29; for the Boyd one, it’s 2.93.

Those are the ones that reset in May, and they only need to be at 1.8 to achieve escalation. So —

Peter CarlinoChairman and Chief Executive Officer

We’re not telling you what it is, but thank you, Des, that kind of points you in the direction.

Operator

Our next question is from Robin Farley with UBS.

Robin FarleyUBS — Analyst

Just following up on the earlier question. Can you just clarify kind of what change in assumptions in Pennsylvania created the increase in credit provisions?

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Well, the Pennsylvania lease is a brand-new lease for the quarter. So it created — it’s a setting of the reserve for the first time, which is why the number is so large.

Robin FarleyUBS — Analyst

But — so was there something specific to those properties that — it sounded in your earlier comments that you mentioned something about economic assumptions there. So I just wanted to clarify what may be different about this.

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Well, that’s how that reserve is determined. It’s based on the economic factors. We actually use a third party to do our calculations and to help us through a reserve model. But it’s because Pennsylvania, we just signed on March 1.

So, therefore, we’re setting the reserve for the first time. From here on out, you’ll see movements in that reserve dependent upon — as the interest rate environment goes up or as cost of living continues to increase, you’ll see economic impact or impact what the estimate of the reserve will be. But as Peter earlier said, we don’t really expect a cash loss. This is an accounting rule requiring you to look over the 39 years of the leases and set of reserves.

Peter CarlinoChairman and Chief Executive Officer

Let me — most of you know, I’m pretty straightforward. I think it’s [Inaudible] that we have to do that. I’ll be honest. And before you know, you got a problem.

Banks take reserves — banks, lenders take reserves all the time. But usually, you wait until you find out there’s a problem. This is something prescriptive that we have to do, and there’s a formula and a process. And as Des says, we bring in a third party to do it.

It doesn’t suggest for a moment that we expect to actually suffer those losses. I don’t know how to put it more, frankly, than that, but that’s the way I feel about it.

Robin FarleyUBS — Analyst

OK. And then also if you could just remind us in terms of your earlier comments about that you are seeing interest in the transaction market in nongaming REITs and maybe sort of some of the nontraditional buyers in this space. Can you remind us, are you contractually protected from any potential new buyers with your existing tenants? Or as long as they could match or better the terms, you’re not protected? If you could just sort of help us think about the competitive moat there.

Peter CarlinoChairman and Chief Executive Officer

You want to talk about what the lease provides, Brandon?

Brandon MooreExecutive Vice President, General Counsel and Secretary

Yes. I’m not sure I fully comprehended where you’re headed with the question, but I can address what protective measures we have with respect to our current tenant. So our leases do contain radius restrictions on new competition with our tenants. And so we are protected in some ways in new markets with tenants opening facilities down the street.

The intent of that is that a tenant shouldn’t be in a partnership with us and next door open a brand-new facility or buy a facility and move their business next door, thereby harming our business and our rent and our building. So we are protected under the leases. Outside of the leases, I wouldn’t identify any specific protections as it relates to our current tenants.

Matt DemchykChief Investment Officer

Yes. The only thing that’s tied up, Robin, as we talked about earlier, any new gaming developments that might come in the next seven years with the Cordish companies, that is one piece we’re hardwired into as a partner. And we’ve got a few other structures with other tenants to have first look at things or things that aren’t — we don’t know if they’re going to come to pass or not.

Peter CarlinoChairman and Chief Executive Officer

Given away any secrets, I think it’s no mystery that Penn has talked about a hotel in a couple of markets. We would love to participate with them if they find our offer attractive and the opportunity should arise. But as I said earlier, these things are unpredictable. Our job is to be ready, willing, and able to support these folks and others should the opportunity arise.

So I guess the point we were trying to make is that we’re front and center in front of these guys these people every day, ready, will, and enable to proceed. And we just sense a lot more momentum toward some activity. Only the year will tell whether we’re right or wrong.

Operator

Our next question is from Barry Jonas with Truist Securities.

Barry JonasTruist Securities — Analyst

Beyond just assets, what’s your view on M&A with other REITs with portfolios maybe outside of gaming? Any general parameters you would look for or require there?

Peter CarlinoChairman and Chief Executive Officer

I don’t know. Matt, do you want to take a whack at that one?

Matt DemchykChief Investment Officer

Specifically about?

Peter CarlinoChairman and Chief Executive Officer

Well, about anything outside.

Matt DemchykChief Investment Officer

Well, anything — I mean that’s small and large scale. Anything outside of gaming, we’ve got the same hurdles that we’ve talked about historically. One is to have durability and give us conviction that the business model has got resiliency like our underlying business and our gaming assets. And then it comes down to a risk-adjusted spread to our cost of capital and how it fits in with the competitive advantages we have, both underwriting and sourcing capital.

So there’s a number of things out there that could be moving pieces. The funnel is very wide at the top, but it gets pretty slimmed down when you think about the criteria we have. And then it’s a cost of capital question to see if each incremental opportunity you can — if it’s in an area that’s attractive to us, it can make sense for us financially. And we need to wait and see how it plays out.

Peter CarlinoChairman and Chief Executive Officer

Yes. We have to have an appropriate spread to our cost of capital, number one. But where these things sometimes come apart is the longevity issue. If you look at the transaction we just did with the Cordish Companies who have a very, very, very long-term horizon and you look at what typical REIT leaches look like, we’re in such a great space.

it’s really hard to accept something less. Matt?

Matt DemchykChief Investment Officer

Sorry, this is an important point to add in conjunction to Peter’s. We spent a lot of time creatively thinking about how we can partner or source these things. We’ve got a lot of ongoing discussions across people that you might know the names of and that you don’t know the names of to think about ways where we might — just like in gaming, get unique access or uniquely price something that could be a bespoke solution for someone else in some sort of off-market larger something. All that said, though, to Peter’s point, nothing is what we’ve done historically in gaming that we think could be applicable outside of gaming.

Peter CarlinoChairman and Chief Executive Officer

If you — I think you started with other REITs or you suggested that.

Barry JonasTruist Securities — Analyst

Yes.

Peter CarlinoChairman and Chief Executive Officer

We look at other things, including corporate-type transactions potentially. But suffice it to say that we haven’t found anything remotely actionable on the horizon.

Barry JonasTruist Securities — Analyst

OK. Great. Yes, that’s what I was getting at. Maybe just as a follow-up, Peter, I’d love pulling from your old operator days.

Any general thoughts on how this creeping inflation environment’s impacting your tenants and our customers?

Peter CarlinoChairman and Chief Executive Officer

That’s always a fair question. I have made a couple of points over time. I used to say that — and many of you have heard me say before that our revenue in the gaming world is bulletproof. It is absolutely both broken for a company like ours or even an operating company like, say, we’ll pick on Penn.

There’s really — who has properties literally from Maine to California. They’re so well distributed that nothing really can hurt the entire program. And I would go on to say, it would take an atomic attack to hurt revenue from a well-capitalized gaming company. We got an atomic attack, to my great har and amazing surprise, called the pandemic.

Never in American history have we shut down the country. It actually happened. But the good news in all that is everybody survived and they’re doing better than we were doing before we went into it. That is a shocking, happy surprise.

I can tell you that I’ve been around the gaming business, certainly in the racing business, since 1972 when I began as President of Penn National itself. Through every recession, except ’08, through every recession, our revenues at that facility and most of our gaming facilities went up. Now you could try to hang a reason on it. I have no idea.

And even then, as you know, looking at our numbers, we never dropped coverage below, let’s say, 1.4 times throughout the worst of the pandemic. So I believe — and again, many of you heard me say this, if you look at Maslow’s Hierarchy of Needs, it is food, it is shelter and it’s gambling. Now it sounds preposterous, but all I — it’s a way of underscoring that revenues in the gaming world are highly, highly, highly sticky. People never give up gambling.

It’s the last thing that goes. So I mean that’s the point I just can’t underscore enough. Not really worried about the recession, not worried about gas crisis. Again, people won’t give those things up very easily.

So I don’t think there’s any massive exposure on the horizon. I mean maybe there’s some set of circumstances that could evolve. But under normal conditions, I think it’s going to be companies — we were in Las Vegas last week, and you all know that performance at these facilities is staggering. I mean you can’t get a hotel room out there.

Amazing. Amazing. The convention business has not completely returned. So we’re looking at entertainment and travel.

So — and of course, as the best we know, the properties in our portfolio, as you see, are killing it. It’s amazing. So I don’t know what I’ve answered, but just sort of the environment that we find ourselves in.

Operator

[Operator instructions]

Peter CarlinoChairman and Chief Executive Officer

By the way, as Matt said, we’re sleeping well at night. I kind of like is a highlight there. We’re sleeping well. We’re not worried.

Operator

Our next question is from Spenser Allaway with Green Street.

Spenser AllawayGreen Street Advisors — Analyst

Massachusetts recently passed the bill to legalize sports betting in the state, including wagering at casinos and mobile betting. To the extent that gaming revenue increases with the addition of new users linked to sports wagering, do you think we could see leases either renegotiated between yourselves and the operators such that you’re able to capture more of the upside, perhaps via percentage rents?

Peter CarlinoChairman and Chief Executive Officer

See who wants to provide that answer. Go ahead.

Matt DemchykChief Investment Officer

I’ll start and I’ll hand it to Brandon. So you’ll recall, long ago, in a couple of conversations we highlighted our efforts over time to create a black-and-white definition around some of these features that didn’t exist back when we originally cut our leases. And the most major tenant of ours and most applicable set of circumstances were our leases with Penn. And we’ve since worked with them and have arrived at a conclusion that we think balances these points very well and effectively, geolocates the activity that happens within our casinos and our leases with them and counts all activity that someone might have on their phone, which might sound like a small thing.

But at the end of the day, if I’m sitting at the bar with you and someone else and we don’t want to get up and go to a kiosk, there’s certainly a decent amount of activity that happens in that manner. And it’s really facilitated by the environment of the real estate that the people are in. I don’t know, Brandon, what else we might add.

Brandon MooreExecutive Vice President, General Counsel and Secretary

I wouldn’t add too much to that. I mean, I think the focus for us in those leases was because of Penn’s announced omnichannel approach to building out the bars and sports bars in their facilities in our facilities to drive more traffic and revenue in there. And it was important to us with the structure of that lease that, that revenue that’s taking place in our buildings be captured. I think with respect to some of our other leases, more recent leases where the variable rent construct is not present, that will have less of an impact on us whether that takes place outside the parking lot, inside the parking lot or inside the facility.

That being said, it will add to the coverage and the health of the facility and the operations being conducted within the facility that it will have less impact on the economic consequences of the rent that we derive from it. So the Penn lease is pretty important because of the variable rent structure, less important from an economic standpoint in our newer leases.

Spenser AllawayGreen Street Advisors — Analyst

OK. That’s helpful. I couldn’t remember if the deal location was already kind of contemplated. And then it sounds like to the extent that it becomes a more like prominent attribute moving forward with other tenants that would be considered.

Peter CarlinoChairman and Chief Executive Officer

Oh, goodness, yes. Let me say this. The question we get and implied, I guess, in what you’re asking is what’s the impact going to be on the bricks-and-mortar companies. There’s no doubt that that’s going to be a growing sector and even iGaming in those places where it occurs.

But my — and these are still early days yet for this. I think the sad, maybe sad, reality is this is going to be a lot more gambling. That’s the reality. I don’t expect, and I think most operators we’ve talked to don’t expect, a hit to bricks-and-mortar performance in any meaningful way.

The reality is it’s just going to be a lot more gambling going on. For better or for worse, it’s a public policy point of view. So that’s my sense.

Operator

We have reached the end of the question-and-answer session. And I will now turn the call over to Mr. Carlino for closing remarks.

Peter CarlinoChairman and Chief Executive Officer

Well, good, and we’re happy to close out our conversation. We thank you for taking time to join us this morning. We’re feeling good about where we have been. We’re feeling good about where we’re headed.

And with that, I look forward to chatting with you all again next quarter. Thanks very much. Thanks, operator.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Joe JaffoniInvestor Relations

Peter CarlinoChairman and Chief Executive Officer

Desiree BurkeSenior Vice President and Chief Accounting Officer and Treasurer

Matt DemchykChief Investment Officer

Neil MalkinCapital One Securities — Analyst

Steve LadanySenior Vice President and Chief Development Officer

Jay KornreichSMBC Nikko Securities — Analyst

David KatzJefferies — Analyst

Smedes RoseCiti — Analyst

Daniel AdamLoop Capital Markets — Analyst

John MassoccaLadenburg Thalmann and Company — Analyst

Robin FarleyUBS — Analyst

Brandon MooreExecutive Vice President, General Counsel and Secretary

Barry JonasTruist Securities — Analyst

Spenser AllawayGreen Street Advisors — Analyst

More GLPI analysis

All earnings call transcripts


https://www.fool.com/earnings/call-transcripts/2022/04/29/gaming-and-leisure-properties-glpi-q1-2022-earning/

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