When casinos closed in mid-March due to the COVID-19 pandemic, abruptly choking off revenue, Gaming and Leisure Properties joined the rest of the gambling industry in a fraught game of “What now?”
CEO Peter Carlino said last week that he pursued the practical — buying Tropicana in Las Vegas to keep a key tenant and itself solvent — and executed the painful — furloughing workers at its two casinos while keeping them insured — to meet the future.
As a result, the Wyomissing, Pennsylvania-based real estate investment trust’s first-quarter results held up solidly. On Thursday, Gaming and Leisure reported a key cash flow measure that topped Wall Street forecasts and revenue that met them and finished roughly even with a year earlier.
Gaming and Leisure reported adjusted funds from operation, a cash flow measure excluding nonrecurring costs, of $188.8 million, or 88 cents per share, for the three months ended March 31, up from $183 million, or 85 cents per share, a year earlier.
The latest result topped the 74-cents-per-share average funds from the operation forecast of analysts surveyed by Seeking Alpha. Funds from the operation are a closely watched fiscal yardstick for real estate investment trusts that take net income and add back depreciation and amortization.
Adjusted earnings before interest, taxes, depreciation, and amortization, another cash flow measure that excludes one-time costs, were basically flat, rising 0.2% to $258.8 million from $258.4 million.
Revenue fell 1.5% to $283.5 million from $287.9 million, but basically matched the $283.5 million forecast of Seeking Alpha-polled analysts.
Eying stability, Gaming and Leisure made two deals with Penn National Gaming on March 30. First, Gaming and Leisure bought the Tropicana for $337.5 million in rental credits, thereby freeing Penn National from five months of rent payments, which totaled about $68 million per month under the two master lease agreements.
Before the deal, Penn National had been expected to pay about $900 million in rent in 2020 to Gaming and Leisure for more than 30 gaming properties. All 41 of Penn National’s casinos in 19 states have been closed amid the national push to slow COVID-19 coronavirus spread.
Also, Gaming and Leisure bought in an under-construction Morgantown, Pennsylvania, from Penn National.
“This outcome accomplished our original goal of giving us and our lenders and our shareholders’ visibility and predictability around Penn’s rent payments through the end of this year,” Carlino said in a conference call with analysts. “It also ensured that our shareholders were made economically whole, which is a huge focus of ours in beginning.”
Nomura Instinet analyst Harry Curtis called the arrangement positive for both companies.
“Following the transaction, we estimate Penn should have roughly seven months of available liquidity,” Curtis wrote March 30 in an investors’ note posted on Seeking Alpha. “While it’s impossible to determine how much longer the casinos will remain shuttered, as long as they reopen by the end of October, we think Penn should be in the clear.”
The deals bolstered Gaming and Leisure’s stock price, which had fallen 65.4% from March 6 ($43.78 close) to March 18 ($15.14). Gaming and Leisure’s stock price grew 12.5% in April, starting the month at $25.10 and finishing at $28.24.
Gaming and Leisure shares fell $1.83, or 6.48%, Friday to close at $26.41.
On March 24, Gaming and Leisure withdrew more than $530 million from its revolving credit line to access additional cash as the company manages COVID-19 pandemic-triggered casino closures. Carlino said the company furloughed a majority of its casino workers at its closed Hollywood Casinos in Baton Rouge, Louisiana, and Perryville, Maryland.
“(That) really was a very, very painful, but sadly necessary choice,” Carlino said during the call.
Carlino said the REIT will maintain the furloughed workers’ benefits until at least the end of May and said some personnel has been kept on to help the properties reopen quickly. Relief may come shortly, he said, forecasting that some casino tenants may be allowed to open in the next several weeks, perhaps with restrictions at first.
“It could be tough. We don’t know yet,” he said. “And I think, we expect to have a lot more clarity on where this is going to go, even by the end of this month, as states feel increasing pressure to make decisions, choices. We all see it happening.”
The Motley Fool’s Travis Hoium suggested Gaming and Leisure’s deals with Penn National reassured jittery investors. Nevertheless, he expected the uncertainty over how long casinos will stay closed to force a reduction in Gaming and Leisure’s dividend.
“Casino stocks have had a terrible time on the market over the last few months as operations have shut down in most parts of the world,” Hoium wrote April 9. “Eventually, that financial trouble will spill over to REITs.
“I don’t think investors should count on Gaming and Leisure Properties’ 9.5% dividend yield to be sustainable this year given the economic backdrop,” he added. “But, long term, this is still a great REIT to own, and buyers should definitely keep it on their watch list.”
Hoium was prescient about the dividend. Gaming and Leisure on April 30 cut its quarterly dividend to 60 cents per share from 70 cents per share, payable June 26 to shareholders of record May 13.
Follow Matthew Crowley on Twitter @copyjockey.
