GAMING AND LEISURE PROPERTIES, INC. Our Operations GLPI is a self-administered and self-managed Pennsylvania REIT. The Company was formed from the 2013 tax-free spin-off of the real estate assets of Penn and was incorporated inPennsylvania onFebruary 13, 2013 , as a wholly-owned subsidiary of Penn. OnNovember 1, 2013 , Penn contributed to GLPI, through a series of internal corporate restructurings, substantially all of the assets and liabilities associated with Penn's real property interests and real estate development business, as well as the assets and liabilities ofHollywood Casino Baton Rouge andHollywood Casino Perryville (which are referred to as the "TRS Properties ") and then spun-off GLPI to holders of Penn's common and preferred stock in a tax-free distribution (the "Spin-Off"). The Company elected on itsU.S. federal income tax return for its taxable year that began onJanuary 1, 2014 to be treated as a REIT and the Company, together with an indirect wholly-owned subsidiary of the Company,GLP Holdings, Inc. , jointly elected to treat each ofGLP Holdings, Inc. ,Louisiana Casino Cruises, Inc. (d/b/aHollywood Casino Baton Rouge ) andPenn Cecil Maryland, Inc. (d/b/aHollywood Casino Perryville ) as a "taxable REIT subsidiary" effective on the first day of the first taxable year of GLPI as a REIT. As a result of the Spin-Off, GLPI owns substantially all of Penn's former real property assets (as of the consummation of the Spin-Off) and leases back most of those assets to Penn for use by its subsidiaries, under the Penn Master Lease and owns and operates theTRS Properties through its indirect wholly-owned subsidiary,GLP Holdings, Inc. The assets and liabilities of GLPI were recorded at their respective historical carrying values at the time of the Spin-Off. InApril 2016 , the Company acquired substantially all of the real estate assets of Pinnacle for approximately$4.8 billion . GLPI originally leased these assets back to Pinnacle, under a unitary triple-net lease with an initial term of 10 years, with no purchase option, followed by five 5-year renewal options (exercisable by Pinnacle) on the same terms and conditions. OnOctober 15, 2018 , the Company completed its previously announced transactions with Penn, Pinnacle and Boyd to 40
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accommodate Penn's acquisition of the majority of Pinnacle's operations, pursuant to a definitive agreement and plan of merger between Penn and Pinnacle, datedDecember 17, 2017 . Concurrent with the Penn-Pinnacle Merger, the Company amended the PinnacleMaster Lease to allow for the sale of the operating assets ofAmeristar Casino Hotel Kansas City ,Ameristar Casino Resort Spa St. Charles and Belterra Casino Resort from Pinnacle to Boyd and entered into a new unitary triple-net master lease agreement with Boyd for these properties on terms similar to the Company's Amended PinnacleMaster Lease . The Boyd Master Lease has an initial term of 10 years (from the originalApril 2016 commencement date of the PinnacleMaster Lease and expiringApril 30, 2026 ), with no purchase option, followed by five 5-year renewal options (exercisable by Boyd) on the same terms and conditions. The Company also purchased the real estate assets ofPlainridge Park from Penn for$250.0 million , exclusive of transaction fees and taxes and added this property to the Amended PinnacleMaster Lease . The Amended PinnacleMaster Lease was assumed by Penn at the consummation of the Penn-Pinnacle Merger. The Company also entered into a mortgage loan agreement with Boyd in connection with Boyd's acquisition ofBelterra Park , whereby the Company loaned Boyd$57.7 million . In addition to the acquisition ofPlainridge Park described above, onOctober 1, 2018 , the Company closed its previously announced transaction to acquire certain real property assets from Tropicana and certain of its affiliates pursuant to the Real Estate Purchase Agreement datedApril 15, 2018 betweenTropicana and GLP Capital , which was subsequently amended onOctober 1, 2018 . Pursuant to the terms of the Amended Real Estate Purchase Agreement, the Company acquired the real estate assets of Tropicana Atlantic City, Tropicana Evansville, Tropicana Laughlin,Trop Casino Greenville and the Belle ofBaton Rouge from Tropicana for an aggregate cash purchase price of$964.0 million , exclusive of transaction fees and taxes. Concurrent with the Tropicana Acquisition,Eldorado acquired the operating assets of these properties from Tropicana pursuant to an Agreement and Plan of Merger datedApril 15, 2018 by and among Tropicana,GLP Capital ,Eldorado and a wholly-owned subsidiary ofEldorado and leased the GLP Assets from the Company pursuant to the terms of a new unitary triple-net master lease with an initial term of 15 years, with no purchase option, followed by four successive 5-year renewal periods (exercisable byEldorado ) on the same terms and conditions. Additionally, onOctober 1, 2018 the Company entered into a loan agreement withEldorado in connection withEldorado's acquisition of Lumière Place, whereby the Company loanedEldorado $246.0 million . GLPI's primary business consists of acquiring, financing, and owning real estate property to be leased to gaming operators in triple-net lease arrangements. As ofDecember 31, 2019 , GLPI's portfolio consisted of interests in 44 gaming and related facilities, including theTRS Properties , the real property associated with 32 gaming and related facilities operated by Penn, the real property associated with 5 gaming and related facilities operated byEldorado , the real property associated with 4 gaming and related facilities operated by Boyd (including one financed property) and the real property associated with theCasino Queen inEast St. Louis, Illinois . These facilities, including our corporate headquarters building, are geographically diversified across 16 states and contain approximately 22.1 million square feet. As ofDecember 31, 2019 , our properties were 100% occupied. We expect to continue growing our portfolio by pursuing opportunities to acquire additional gaming facilities to lease to gaming operators under prudent terms. As ofDecember 31, 2019 , the majority of our earnings are the result of the rental revenues we receive from our triple-net master leases with Penn, Boyd andEldorado . Additionally, we have rental revenue from theCasino Queen property which is leased back to a third-party operator on a triple-net basis and the Meadows property which is leased to Penn under a single property triple-net lease. In addition to rent, the tenants are required to pay the following executory costs: (1) all facility maintenance, (2) all insurance required in connection with the leased properties and the business conducted on the leased properties, including coverage of the landlord's interests, (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor) and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Additionally, in accordance with ASC 842, we record revenue for the ground lease rent paid by our tenants with an offsetting expense in land rights and ground lease expense within the condensed consolidated statement of income as we have concluded that as the lessee we are the primary obligor under the ground leases. We sublease these ground leases back to our tenants, who are responsible for payment directly to the landlord. Gaming revenue for ourTRS Properties is derived primarily from gaming on slot machines and to a lesser extent, table game and poker revenue, which is highly dependent upon the volume and spending levels of customers at ourTRS Properties . Other revenues at ourTRS Properties are derived from our dining, retail and certain other ancillary activities. 41
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Our Competitive Strengths We believe the following competitive strengths will contribute significantly to our success: Geographically Diverse Property Portfolio As ofDecember 31, 2019 , our portfolio consisted of 44 gaming and related facilities, including 41 rental properties, theTRS Properties and one property we had a financial interest in, pursuant to a real estate loan we made to the respective casino owner-operator. Our portfolio, including our corporate headquarters building, comprises approximately 22.1 million square feet and over 5,600 acres of land and is broadly diversified by location across 16 states. We expect that our geographic diversification will limit the effect of a decline in any one regional market on our overall performance. Financially Secure Tenants Three of the company's tenants, Penn,Eldorado and Boyd, are leading, diversified, multi-jurisdictional owners and managers of gaming and pari-mutuel properties and established gaming providers with strong financial performance. Additionally, all of the aforementioned tenants are publicly traded companies that are subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and are required to file periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K with theSecurities and Exchange Commission ("SEC"). Readers are directed to Penn's,Eldorado's and Boyd's respective websites for further financial information on these companies. Long-Term, Triple-Net Lease Structure Our real estate properties are leased under long-term triple-net leases guaranteed by our tenants, pursuant to which the tenant is responsible for all facility maintenance, insurance required in connection with the leased properties and the business conducted on the leased properties, including coverage of the landlord's interests, taxes levied on or with respect to the leased properties (other than taxes on our income) and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Flexible UPREIT Structure We have the flexibility to operate through an umbrella partnership, commonly referred to as an UPREIT structure, in which substantially all of our properties and assets are held byGLP Capital or by subsidiaries ofGLP Capital . Conducting business throughGLP Capital allows us flexibility in the manner in which we structure and acquire properties. In particular, an UPREIT structure enables us to acquire additional properties from sellers in exchange for limited partnership units, which provides property owners the opportunity to defer the tax consequences that would otherwise arise from a sale of their real properties and other assets to us. As a result, this structure potentially may facilitate our acquisition of assets in a more efficient manner and may allow us to acquire assets that the owner would otherwise be unwilling to sell because of tax considerations. We believe that this flexibility will provide us an advantage in seeking future acquisitions. Experienced and Committed Management Team Our management team has extensive gaming and real estate experience.Peter M. Carlino , our chief executive officer, has more than 30 years of experience in the acquisition and development of gaming facilities and other real estate projects.Steven T. Snyder , our chief financial officer and previously our senior vice president of corporate development, is a finance professional with more than 20 years of experience in the gaming industry, including identifying and analyzing potential acquisitions. Through years of public company experience, our management team also has extensive experience accessing both debt and equity capital markets to fund growth and maintain a flexible capital structure. Segment Information Consistent with how our Chief Operating Decision Maker (as such term is defined in ASC 280 - Segment Reporting) reviews and assesses our financial performance, we have two reportable segments,GLP Capital and theTRS Properties .The GLP Capital reportable segment consists of the leased real property and represents the majority of our business.The TRS Properties reportable segment consists ofHollywood Casino Perryville andHollywood Casino Baton Rouge .
Executive Summary
Financial Highlights
We reported total revenues and income from operations of$1,153.5 million and$717.4 million , respectively, for the year endedDecember 31, 2019 , compared to$1,055.7 million and$593.8 million , respectively, for the year ended 42
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• Total income from real estate was
the years ended
from real estate increased by
primarily due to the Tropicana Transactions, the Penn-Pinnacle Merger and
our entry into the Belterra Park Loan, as well as the impact of the rent
escalators under our master leases, the partial recognition of income
previously deferred under the Penn Master Lease and the Meadows Lease and
the recognition of cash rent that was previously applied against the lease
receivable on our balance sheet as rental income.
These increases were partially offset by the elimination of the revenue gross-up for real estate taxes paid directly by our tenants under ASC 842 and the first percentage rent reset under the Penn Master Lease, which resulted in a rent decrease.
• Net revenues for our
ended
revenues at both TRS properties. The largest driver of the decrease
resulted from general market deterioration in the Baton Rouge region and
the smoking ban at all Baton Rouge, Louisiana casinos that went into
effect during the second quarter of 2018.
• Total operating expenses decreased by $25.9 million for the year ended
December 31, 2019 , as compared to the prior year, primarily driven by a
decrease in real estate tax expense, as we are no longer required togross-up our financial statements for the real estate taxes paid directly
by our tenants under ASC 842 and by the absence of retirement costs and
goodwill impairment charges in the current year. These decreases were
partially offset by a loan impairment charge of
the write-off of the Company's Casino Queen Loan and an increase in
depreciation expense resulting from the addition of the Tropicana and
Plainridge Park real estate assets to our real estate portfolio, the
reclassification of the Pinnacle building assets to real estateinvestments on our balance sheet and the acceleration of depreciation
related to the closure of the
in the second quarter of 2019. Land rights and ground lease expense also
increased resulting from the acquisition of rights to six long-term ground
leases in connection with the
acceleration of land rights amortization expense related to the closure of
the
Tunica property by our tenant will not impact the rent collected from Penn
under the Penn Master Lease, as our lease with Penn is unitary and
cross-collateralized and does not allow for rent reductions for individual
property closure.
• Other expenses, net increased by $72.4 million for the year ended
December 31, 2019 , as compared to the prior year, primarily due tointerest expense related to the debt refinancing in the second quarter of
2018 and debt issuances in the third quarter of 2018, the proceeds of
which were utilized for the
Transactions and the acquisition of
funding of the Belterra Park Loan in connection with the
Penn-Pinnacle Merger. Also driving the increase was a$21.0 million loss on the early extinguishment of debt related to the Company's cash tender of a portion of its 2020 Notes and the issuance of$1.1 billion in new unsecured notes during the third quarter of 2019, in connection with our efforts to reduce our borrowing costs and lengthen our average debt maturity. • Net income increased by$51.4 million for the year endedDecember 31, 2019 , as compared to the prior year, primarily due to the variances explained above. Segment Developments
The following are recent developments that have had or are expected to have an impact on us by segment:
GLP Capital • OnOctober 15, 2018 , Penn's acquisition of Pinnacle closed, and the Company completed its previously announced transactions with Penn, Pinnacle and Boyd. Concurrent with Penn's acquisition, the Company amended the PinnacleMaster Lease to allow for the sale of the operating assets ofAmeristar Casino Hotel Kansas City ,Ameristar Casino Resort Spa St. Charles and Belterra Casino Resort from Pinnacle to Boyd and entered into a new triple-net master lease agreement with Boyd for these properties on terms similar to the Company's existing master leases. The Company also purchased the real estate assets ofPlainridge Park Casino from Penn for$250.0 million , exclusive of transaction fees and taxes, and added this property to the Amended PinnacleMaster Lease . We also entered into a loan agreement with Boyd in connection with 43
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Boyd's acquisition of
• OnOctober 1, 2018 , the Company purchased the real property
assets
of five properties from Tropicana for $964.0 million ,exclusive of
taxes and transaction fees. Concurrent with the acquisition of these
properties, Eldorado purchased the operating assets of these
Tropicana properties and Lumière Place and entered into a new
triple-net master lease with the Company for the lease of the five
Tropicana properties purchased by us for a 15-year initial term,
with no purchase option, followed by four successive 5-year renewal
periods (exercisable by Eldorado ). The Company also made a loan to
Eldorado in the amount of $246.0 million in connection with
Eldorado's acquisition of Lumière Place.
• During the second quarter of 2018, a smoking ban went into effect at
all Baton Rouge, Louisiana casinos, which in combination with the
general market deterioration in the Baton Rouge region has
contributed to the poor performance of our Hollywood Casino Baton
Rouge property, resulting in an impairment charge of $59.5 million
during the fourth quarter of 2018.
Critical Accounting Estimates
We make certain judgments and use certain estimates and assumptions when
applying accounting principles in the preparation of our consolidated financial
statements. The nature of the estimates and assumptions are material due to the
levels of subjectivity and judgment necessary to account for highly uncertain
factors or the susceptibility of such factors to change. We have identified the
accounting for leases, income taxes, real estate investments, and goodwill and
other intangible assets as critical accounting estimates, as they are the most
important to our financial statement presentation and require difficult,
subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate
amounts reflected in our consolidated financial statements are appropriate.
However, if actual experience differs from the assumptions and other
considerations used in estimating amounts reflected in our consolidated
financial statements, the resulting changes could have a material adverse effect
on our consolidated results of operations and, in certain situations, could have
a material adverse effect on our consolidated financial condition.
Leases
As a REIT, the majority of our revenues are derived from rent received from our
tenants under long-term triple-net leases. Currently, we have master leases with
Penn, Eldorado and Boyd under which we lease 31, five and three properties,
respectively, to these tenants. We also have a long-term lease with Casino Queen
and a separate single property lease by which we lease the Meadows' real estate
assets to Penn. The accounting guidance under ASC 842 is complex and requires
the use of judgments and assumptions by management to determine the proper
accounting treatment of a lease. We perform a lease classification test upon the
entry into any new tenant lease or lease modification to determine if we will
account for the lease as an operating or sales-type lease. The revenue
recognition model and thus the presentation of our financial statements is
significantly different under operating leases and sales-type leases.
Under the operating lease model, as the lessor, the assets we own and lease to
our tenants remain on our balance sheet as real estate investments and we record
rental revenues on a straight-line basis over the lease term. This includes the
recognition of percentage rents that are fixed and determinable at the lease
inception date on a straight-line basis over the entire lease term, resulting in
the recognition of deferred rental revenue on our consolidated balance sheets.
Deferred rental revenue is amortized to rental revenue on a straight-line basis
over the remainder of the lease term. The lease term includes the initial
non-cancelable lease term and any reasonably assured renewal periods. Contingent
rental income that is not fixed and determinable at lease inception is
recognized only when the lessee achieves the specified target.
Under the sales-type lease model, however, at lease inception we would record an
investment in sales-type lease on our consolidated balance sheet rather than
recording the actual assets we own. Furthermore, the cash rent we receive from
tenants is not entirely recorded as rental revenue, but rather a portion is
recorded as interest income and a portion is recorded as a reduction to the
lease receivable. Under ASC 842, for leases with both land and building
components, leases may be bifurcated between operating and sales-type leases. To
determine if our real estate leases trigger full or partial sales-type lease
treatment we conduct the five lease tests outlined in ASC 842 below. If a lease
meets any of the five criteria below, it is accounted for as a sales-type lease.
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1) Transfer of ownership - The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. 2) Bargain purchase option - The lease contains a bargain purchase option, which is a provision allowing the lessee, at its option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable and that is reasonably certain to be exercised. 3) Lease term - The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. 4) Minimum lease payments - The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. 5) Specialized nature - The underlying asset is of such specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. Additionally, the adoption of ASC 842 requires us to record right-of-use assets and lease liabilities on balance sheet for the assets we lease from third-party landlords, including equipment and real estate. As a lessee, we utilize our own incremental borrowing rate as the discount rate utilized to determine the initial lease liability and right-of-use asset we record on balance sheet, as well as the lease's classification as an operating or finance lease, using the same tests outlined above. Although both operating and finance leases result in the same right-of-use asset and lease liability being recorded on balance sheet at lease inception, the expense profile of the two lease types differs, in that expense is straight-lined over the term of an operating lease, while the expense profile under a finance lease is front-loaded. Furthermore, expense under the operating lease model is classified simply as lease expense, whereas the finance lease model breaks the expense into the interest expense and asset amortization expense. The tests outlined above, as well as the resulting calculations, require subjective judgments, such as determining, at lease inception, the fair value of the underlying leased assets, the residual value of the assets at the end of the lease term, the likelihood a tenant will exercise all renewal options (in order to determine the lease term), the estimated remaining economic life of the leased assets, the interest rates implicit in our leases for which we act as the lessor and our own incremental borrowing rates for leases of various maturities and amounts in which we are the lessee. A slight change in estimate or judgment can result in a materially different financial statement presentation. Income Taxes We elected on ourU.S. federal income tax return for our taxable year that began onJanuary 1, 2014 to be treated as a REIT and we, together with an indirect wholly-owned subsidiary of the Company,GLP Holdings, Inc. , jointly elected to treat each ofGLP Holdings, Inc. ,Louisiana Casino Cruises, Inc. andPenn Cecil Maryland, Inc. as a "taxable REIT subsidiary" effective on the first day of the first taxable year of GLPI as a REIT. We intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to shareholders determined without regard to the dividends paid deduction and excluding any net capital gain, and meet the various other requirements imposed by the Code relating to matters such as operating results, asset holdings, distribution levels, and diversity of stock ownership. As a REIT, we generally will not be subject to federal income tax on income that we distribute as dividends to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject toU.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate income tax rates, and dividends paid to our shareholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to shareholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. It is not possible to state whether in all circumstances we would be entitled to this statutory relief. 45
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OurTRS Properties are able to engage in activities resulting in income that would not be qualifying income for a REIT. As a result, certain activities of the Company which occur within ourTRS Properties are subject to federal and state income taxes. Real Estate Investments Real estate investments primarily represent land and buildings leased to the Company's tenants. Real estate investments that we received in connection with the Spin-Off were contributed to us at Penn's historical carrying amount. We record the acquisition of real estate at fair value, including acquisition and closing costs. The cost of properties developed by GLPI includes costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. We consider the period of future benefit of the asset to determine the appropriate useful lives. Depreciation is computed using a straight-line method over the estimated useful lives of the buildings and building improvements. We continually monitor events and circumstances that could indicate that the carrying amount of our real estate investments may not be recoverable or realized. The factors considered by the Company in performing these assessments include evaluating whether the tenant is current on their lease payments, the tenant's rent coverage ratio, the financial stability of the tenant and its parent company, and any other relevant factors. When indicators of potential impairment suggest that the carrying value of a real estate investment may not be recoverable, we estimate the fair value of the investment by calculating the undiscounted future cash flows from the use and eventual disposition of the investment. This amount is compared to the asset's carrying value. If we determine the carrying amount is not recoverable, we would recognize an impairment charge equivalent to the amount required to reduce the carrying value of the asset to its estimated fair value, calculated in accordance with GAAP. We group our real estate investments together by lease, the lowest level for which identifiable cash flows are available, in evaluating impairment. In assessing the recoverability of the carrying value, we must make assumptions regarding future cash flows and other factors. Factors considered in performing this assessment include current operating results, market and other applicable trends and residual values, as well as the effect of obsolescence, demand, competition and other factors. If these estimates or the related assumptions change in the future, we may be required to record an impairment loss.Goodwill and Other Intangible Assets Under ASC 350 - Intangibles -Goodwill and Other ("ASC 350"), we are required to test goodwill and other intangible assets for impairment at least annually and whenever events or circumstances indicate that it is more likely than not that goodwill or other intangible assets may be impaired. We have elected to perform our annual goodwill and intangible asset impairment tests as ofOctober 1 of each year.Goodwill is tested at the reporting unit level, which is an operating segment or one level below an operating segment for which discrete financial information is available. ASC 350 prescribes a two-step goodwill impairment test, the first step which involves the determination of the fair value of each reporting unit and its comparison to the carrying amount. In order to determine the fair value of theBaton Rouge reporting unit, where the Company's goodwill resides, the Company utilizes a discounted cash flow model, which relies on projected EBITDA to determine the reporting unit's future cash flows. If the carrying amount of the reporting unit exceeds the fair value in step 1, then step 2 of the impairment test is performed to determine the implied value of goodwill. If the implied value of goodwill is less than the goodwill allocated to the reporting unit, an impairment loss is recognized. In accordance with ASC 350, we consider theHollywood Casino Perryville gaming license an indefinite-lived intangible asset that does not require amortization based on our future expectations to operate this casino indefinitely as well as the gaming industry's historical experience in renewing these intangible assets at minimal cost with various state gaming commissions. Rather, the gaming license is tested annually, or more frequently if indicators of impairment exist, for impairment by comparing the fair value of the recorded asset to its carrying amount. If the carrying amount of the indefinite-life intangible asset exceeds its fair value, an impairment loss is recognized.Hollywood Casino Perryville's gaming license will expire inSeptember 2025 , fifteen years from the casino's opening date. We expect to expense any costs related to the gaming license renewal as incurred. We assess the fair value of our gaming license using the Greenfield Method under the income approach. The Greenfield Method estimates the fair value of the gaming license assuming we built a casino with similar utility to that of the existing facility. The method assumes a theoretical start-up company going into business without any assets other than the intangible asset being valued. As such the value of the license is a function of the following items: • Projected revenues and operating cash flows;
• Theoretical construction costs and duration;
• Pre-opening expenses;
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• Discounting that reflects the level of risk associated with receiving
future cash flows attributable to the license; and
• Remaining useful life of the license.
The evaluation of goodwill and indefinite-lived intangible assets requires the use of estimates about future operating results to determine the estimated fair value of the reporting unit and the indefinite-lived intangible assets. We must make various assumptions and estimates in performing our impairment testing. The implied fair value includes estimates of future cash flows that are based on reasonable and supportable assumptions which represent our best estimates of the cash flows expected to result from the use of the assets. Changes in estimates, increases in our cost of capital, reductions in transaction multiples, changes in operating and capital expenditure assumptions or application of alternative assumptions and definitions could produce significantly different results. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from our estimates. If our ongoing estimates of future cash flows are not met, we may have to record additional impairment charges in future accounting periods. Our estimates of cash flows are based on the current regulatory and economic climates, as well as recent operating information and budgets. These estimates could be negatively impacted by changes in federal, state or local regulations, economic downturns, or other events. Forecasted cash flows can be significantly impacted by the local economy in which our subsidiaries operate. For example, increases in unemployment rates can result in decreased customer visitations and/or lower customer spend per visit. In addition, new legislation which approves gaming in nearby jurisdictions or further expands gaming in jurisdictions in which we operate can result in increased competition for the property. This generally has a negative effect on profitability once competitors become established, as a certain level of cannibalization occurs absent an overall increase in customer visitations. Lastly, increases in gaming taxes approved by state regulatory bodies can negatively impact forecasted cash flows. Assumptions and estimates about future cash flow levels are complex and subjective. They are sensitive to changes in underlying assumptions and can be affected by a variety of factors, including external factors, such as industry, geopolitical and economic trends, and internal factors, such as changes in our business strategy, which may reallocate capital and resources to different or new opportunities which management believes will enhance our overall value but may be to the detriment of our existing operations. A change in any of our assumptions or estimates could result in additional impairment charges in future periods. The Company's adoption of ASU No. 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment onJanuary 1, 2020 (as described in Note 3) is expected to simplify the analysis required under the Company's future goodwill impairment tests.
Results of Operations
The following are the most important factors and trends that contribute or may contribute to our operating performance:
• The fact that several wholly-owned subsidiaries of Penn lease a
substantial number of our properties, pursuant to two master leases and a
single property lease and account for a significant portion of our
revenue.
• The risks related to economic conditions and the effect of such conditions
on consumer spending for leisure and gaming activities, which may
negatively impact our gaming tenants and operators and the variable rent
and annual rent escalators we receive from our tenants as outlined in the
long-term triple-net leases with these tenants.
• The fact that the rules and regulations of
are constantly under review by legislators, the
thereof, with or without retroactive application, could materially and
adversely affect GLPI's investors or GLPI.
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The consolidated results of operations for the years ended
Year Ended December 31,
2019 2018
(in thousands)
Total revenues $ 1,153,473 $ 1,055,727 Total operating expenses 436,050 461,917 Income from operations 717,423 593,810 Total other expenses (321,778 ) (249,330 ) Income before income taxes 395,645 344,480 Income tax expense
4,764 4,964
Net income $ 390,881 $ 339,516
In accordance with the SEC's recent amendments to modernize and simplify
Regulation S-K, the Company has omitted the discussion comparing its operating
results for the year ended December 31, 2018 to its operating results for the
year ended December 31, 2017 from its Annual Report on Form 10-K for the year
ended December 31, 2019 . Readers are directed to Item 7 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2018 for these disclosures.
Certain information regarding our results of operations by segment for the years
ended
Total Revenues Income (Loss) from Operations
Year Ended December 31, Year Ended December 31,
2019 2018 2019 2018
(in thousands)
GLP Capital $ 1,025,082 $ 923,182 $ 694,215 $ 630,122
TRS Properties 128,391 132,545 23,208 (36,312 )
Total $ 1,153,473 $ 1,055,727 $ 717,423 $ 593,810 FFO, AFFO and Adjusted EBITDA
Funds From Operations ("FFO"), Adjusted Funds From Operations ("AFFO") and
Adjusted EBITDA are non-GAAP financial measures used by the Company as
performance measures for benchmarking against the Company's peers and as
internal measures of business operating performance, which is used as a bonus
metric. The Company believes FFO, AFFO and Adjusted EBITDA provide a meaningful
perspective of the underlying operating performance of the Company's current
business. This is especially true since these measures exclude real estate
depreciation and we believe that real estate values fluctuate based on market
conditions rather than depreciating in value ratably on a straight-line basis
over time.
FFO, AFFO and Adjusted EBITDA are non-GAAP financial measures that are
considered supplemental measures for the real estate industry and a supplement
to GAAP measures. The National Association of Real Estate Investment Trusts
defines FFO as net income (computed in accordance with GAAP), excluding (gains)
or losses from sales of property and real estate depreciation. We define AFFO as
FFO excluding stock based compensation expense, the amortization of debt
issuance costs, bond premiums and original issuance discounts, other
depreciation, amortization of land rights, straight-line rent adjustments,
direct financing lease adjustments, losses on debt extinguishment, retirement
costs and goodwill and loan impairment charges, reduced by maintenance capital
expenditures. Finally, we define Adjusted EBITDA as net income excluding
interest, taxes on income, depreciation, (gains) or losses from sales of
property, stock based compensation expense, straight-line rent adjustments,
direct financing lease adjustments, amortization of land rights, losses on debt
extinguishment, retirement costs and goodwill and loan impairment charges.
FFO, AFFO and Adjusted EBITDA are not recognized terms under GAAP. These
non-GAAP financial measures: (i) do not represent cash flows from operations as
defined by GAAP; (ii) should not be considered as an alternative to net income
as a measure of operating performance or to cash flows from operating, investing
and financing activities; and (iii) are not alternatives to cash flows as a
measure of liquidity. In addition, these measures should not be viewed as an
indication of our ability to fund our cash needs, including to make cash
distributions to our shareholders, to fund capital improvements, or to make
interest payments on our indebtedness. Investors are also cautioned that FFO,
AFFO and Adjusted EBITDA, as presented, may not be comparable to similarly
titled measures reported by other real estate companies, including REITs due to
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the fact that not all real estate companies use the same definitions. Our presentation of these measures does not replace the presentation of our financial results in accordance with GAAP.
The reconciliation of the Company's net income per GAAP to FFO, AFFO, and Adjusted EBITDA for the years endedDecember 31, 2019 and 2018 is as follows: Year Ended December 31, 2019 2018 (in thousands) Net income$ 390,881 $ 339,516 Losses from dispositions of property 92 309 Real estate depreciation 230,716 125,630 Funds from operations$ 621,689 $ 465,455 Straight-line rent adjustments 34,574
61,888
Direct financing lease adjustments - 38,459 Other depreciation 9,719 11,463 Amortization of land rights 18,536 11,272
Amortization of debt issuance costs, bond premiums and original issuance discounts (1)
11,455 12,167
Stock based compensation 16,198 11,152
Losses on debt extinguishment 21,014 3,473
Retirement costs - 13,149
Loan impairment charges 13,000 -
Goodwill impairment charges - 59,454
Capital maintenance expenditures (3,017 ) (4,284 )
Adjusted funds from operations $ 743,168 $ 683,648
Interest, net 300,764 245,857
Income tax expense 4,764 4,964
Capital maintenance expenditures 3,017 4,284
Amortization of debt issuance costs, bond premiums and original issuance discounts (1)
(11,455 ) (12,167 )
Adjusted EBITDA $ 1,040,258 $ 926,586 (1) Such amortization is a non-cash component included in interest, net.
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The reconciliation of each segment's net income per GAAP to FFO, AFFO, and Adjusted EBITDA for the years endedDecember 31, 2019 and 2018 is as follows: GLP Capital TRS Properties Year Ended December 31, Year Ended December 31, 2019 2018 2019 2018 (in thousands) Net income (loss)$ 382,184 $ 390,341 $ 8,697 $ (50,825 ) Losses from dispositions of property 8 76 84 233 Real estate depreciation 230,716 125,630 - - Funds from operations$ 612,908 $ 516,047 $ 8,781 $ (50,592 ) Straight-line rent adjustments 34,574 61,888 - - Direct financing lease adjustments - 38,459 - - Other depreciation 1,992 2,066 7,727 9,397 Amortization of land rights 18,536 11,272 - - Amortization of debt issuance costs, bond premiums and original issuance discounts (1) 11,455 12,167 - - Stock based compensation 16,198 11,152 - - Losses on debt extinguishment 21,014 3,473 - - Retirement costs - 13,149 - - Loan impairment charges 13,000 - - - Goodwill impairment charges - - - 59,454 Capital maintenance expenditures (22 ) (55 ) (2,995 ) (4,229 ) Adjusted funds from operations$ 729,655 $ 669,618 $ 13,513 $ 14,030 Interest, net (2) 290,360 235,453 10,404 10,404 Income tax expense 657 855 4,107 4,109 Capital maintenance expenditures 22 55 2,995 4,229 Amortization of debt issuance costs, bond premiums and original issuance discounts (1) (11,455 ) (12,167 ) - - Adjusted EBITDA$ 1,009,239 $ 893,814 $ 31,019 $ 32,772
(1) Such amortization is a non-cash component included in interest, net.
(2) Interest expense, net for theGLP Capital segment is net of an intercompany interest elimination of$10.4 million for the years endedDecember 31, 2019 and 2018. Net income, FFO, AFFO, and Adjusted EBITDA for ourGLP Capital segment were$382.2 million ,$612.9 million ,$729.7 million and$1,009.2 million , respectively, for the year endedDecember 31, 2019 . This compared to net income, FFO, AFFO, and Adjusted EBITDA, for ourGLP Capital segment of$390.3 million ,$516.0 million ,$669.6 million and$893.8 million , respectively, for the year endedDecember 31, 2018 . The decrease in net income in ourGLP Capital segment was primarily driven by a$37.8 million increase in operating expenses and a$72.4 million increase in other expenses, net, partially offset by a$101.9 million increase in income from real estate. The increase in income from real estate in ourGLP Capital segment was primarily due to the Tropicana Transactions, the Penn-Pinnacle Merger, our entry into the Belterra Park Loan, the impact of the rent escalators under our master leases and the partial recognition of income previously deferred under the Penn Master Lease and Meadows Lease. These increases were partially offset by the elimination of the revenue gross-up for real estate taxes paid directly by our tenants under ASC 842 and the first percentage rent reset under the Penn Master Lease, which resulted in a rent decrease. The increase in operating expenses in ourGLP Capital segment was driven by an increase in depreciation expense resulting from the addition of the Tropicana and Plainridge Park real estate assets to our real estate portfolio, the reclassification of the Pinnacle building assets to real estate investments on our balance sheet and the acceleration of depreciation related to the closure of theResorts Casino Tunica property by our tenant in the second quarter of 2019. Land rights and ground lease 50
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expense also increased resulting from the acquisition of rights to six long-term ground leases in connection with theOctober 2018 Tropicana Acquisition and the acceleration of land rights amortization expense also related to the closure of theResorts Casino Tunica property. As a result of the Penn-Pinnacle Merger, the Amended PinnacleMaster Lease is treated as an operating lease in its entirety and our investment in the direct financing lease was unwound. Also driving the increase in total operating expenses for the year endedDecember 31, 2019 , as compared to the prior year is a loan impairment charge of$13.0 million related to the Company's write-off of itsCasino Queen Loan . These increases were partially offset by a decrease in real estate tax expense, as we are no longer required to gross-up our financial statements for the real estate taxes paid directly by our tenants under ASC 842 and the absence of retirement costs in the current year. The increase in other expenses, net was driven by an increase in interest expense related to the debt refinancing in the second quarter of 2018 and debt issuances in the third quarter of 2018, the proceeds of which were utilized for the October closings of the Tropicana Transactions and the acquisition of Plainridge Park, as well as the funding of the Belterra Park Loan in connection with the Penn-Pinnacle Merger. Also driving the increase was a$21.0 million loss on the early extinguishment of debt related to the Company's cash tender of a portion of its 2020 Notes and the issuance of$1.1 billion in new unsecured notes during the third quarter of 2019, in connection with our efforts to reduce our borrowing costs and lengthen our average debt maturity. The changes described above also led to higher FFO for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 . The increase in AFFO for ourGLP Capital segment was primarily driven by the changes described above, as well as higher stock based compensation charges, partially offset by the elimination of direct financing lease adjustments and lower straight-line rent adjustments, all of which are added back for purposes of calculating AFFO. Direct financing lease adjustments represent the portion of cash rent we received from tenants that was applied against our lease receivable and thus not recorded as revenue. These adjustments were eliminated due to the unwinding of the direct financing lease inOctober 2018 , as the cash received is now recorded as rental income and no add-back to AFFO is necessary. The increase in Adjusted EBITDA for ourGLP Capital segment was primarily driven by the increases in AFFO described above, as well as, a higher add-back for interest. The net income of$8.7 million for ourTRS Properties segment for the year endedDecember 31, 2019 as compared to the net loss of$50.8 million for ourTRS Properties segment for the year endedDecember 31, 2018 is primarily related to a goodwill impairment charge of$59.5 million at ourHollywood Casino Baton Rouge property during the year endedDecember 31, 2018 . This charge was the result of general market deterioration in theBaton Rouge region and the smoking ban at allBaton Rouge, Louisiana casinos that went into effect during the second quarter of 2018. The absence of an impairment charge in 2019 also led to higher FFO for ourTRS Properties segment for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 .
Revenues
Revenues for the years endedDecember 31, 2019 and 2018 were as follows (in thousands): Year Ended December 31, Percentage 2019 2018 Variance Variance Rental income$ 996,166 $ 747,654 $ 248,512 33.2 % Income from direct financing lease - 81,119 (81,119 ) (100.0 )% Interest income from real estate loans 28,916 6,943 21,973 316.5 % Real estate taxes paid by tenants - 87,466 (87,466 ) (100.0 )% Total income from real estate 1,025,082 923,182 101,900 11.0 % Gaming, food, beverage and other 128,391 132,545 (4,154 ) (3.1 )% Total revenues$ 1,153,473 $ 1,055,727 $ 97,746 9.3 % Total income from real estate For the years endedDecember 31, 2019 and 2018, total income from real estate was$1,025.1 million and$923.2 million , respectively, for ourGLP Capital segment. In accordance with ASC 842, the Company records revenue for the ground lease rent paid by its tenants with an offsetting expense in land rights and ground lease expense within the consolidated statement of income as the Company has concluded that as the lessee it is the primary obligor under the ground leases. The Company subleases these ground leases back to its tenants, who are responsible for payment directly to the landlord. 51
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Total income from real estate increased$101.9 million , or 11.0%, for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , primarily due to the Tropicana Transactions and the Penn-Pinnacle Merger (including the Plainridge Park acquisition, the increased rent under the Amended PinnacleMaster Lease and the Belterra Park Loan) both of which occurred in the fourth quarter of 2018, the impact of the rent escalators under our master leases, the partial recognition of income previously deferred under the Penn Master Lease and Meadows Lease and the recognition of cash rent that was previously applied against the lease receivable on our balance sheet as rental income. As a result of the Penn-Pinnacle Merger, the Amended PinnacleMaster Lease is treated as an operating lease in its entirety and all cash rent received from our tenants is recognized as revenue when earned. These increases were partially offset by the first percentage rent reset on the Penn Master Lease, which resulted in a rent decrease and the elimination of the revenue gross-up for real estate taxes paid directly by our tenants under ASC 842.
Details of the Company's income from real estate for the year ended
Boyd Master Penn -
Year Ended December 31, Penn Master Amended Pinnacle Eldorado Master Lease and Meadows Casino Queen
2019 Lease Master Lease Lease and Loan Mortgage Lease Lease Total
Building base rent $ 274,841 $ 225,842 $ 61,223 $ 74,810 $ 13,803 $ 9,101 $ 659,620
Land base rent 93,969 71,108 13,360 11,731 - - 190,168
Percentage rent 86,351 31,622 13,360 11,182 11,168 5,424 159,107
Total cash rental income $ 455,161 $ 328,572 $ 87,943 $ 97,723 $ 24,971 $ 14,525 $ 1,008,895
Straight-line rent
adjustments 8,926 (25,273 ) (11,579 ) (8,937 ) 2,289 - (34,574 )
Ground rent in revenue 3,661 7,217 8,868 1,601 - - 21,347
Other rental revenue - - - - 498 - 498
Total rental income $ 467,748 $ 310,516 $ 85,232 $ 90,387 $ 27,758 $ 14,525 $ 996,166
Interest income from real
estate loans - - 22,471 6,445 - - 28,916
Total income from real
estate $ 467,748 $ 310,516 $ 107,703 $ 96,832 $ 27,758 $ 14,525 $ 1,025,082 Gaming, food, beverage and other revenue
Gaming, food, beverage and other revenue for ourTRS Properties segment decreased by$4.2 million , or 3.1%, for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , due to decreased gaming, food, beverage and other revenues of$3.6 million and$0.6 million atHollywood Casino Baton Rouge andHollywood Casino Perryville , respectively. The largest driver of the decrease resulted from general market deterioration in theBaton Rouge region and the smoking ban at allBaton Rouge, Louisiana casinos that went into effect during the second quarter of 2018.
Operating Expenses
Operating expenses for the years endedDecember 31, 2019 and 2018 were as follows (in thousands): Year Ended December 31, Percentage 2019 2018 Variance Variance Gaming, food, beverage and other$ 74,700 $ 77,127 $ (2,427 ) (3.1 )% Real estate taxes - 88,757 (88,757 ) (100.0 )% Land rights and ground lease expense 42,438 28,358 14,080 49.7 % General and administrative 65,477 71,128 (5,651 ) (7.9 )% Depreciation 240,435 137,093 103,342 75.4 % Loan impairment charges 13,000 - 13,000 N/A Goodwill impairment charges - 59,454 (59,454 ) (100.0 )% Total operating expenses$ 436,050 $ 461,917 $ (25,867 ) (5.6 )% 52
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Gaming, food, beverage and other expense
Gaming, food, beverage and other expense for our
Real estate taxes
Real estate taxes decreased as we are no longer required to gross-up our financial statements for the real estate taxes paid directly by our tenants under ASC 842. InDecember 2018 , the FASB issued ASU 2018-20, which clarifies that lessor costs paid directly to a third-party by a lessee on behalf of the lessor, are no longer required to be recognized in the lessor's financial statements. Therefore, upon the adoption of ASU 2016-02 onJanuary 1, 2019 , we are no longer required to gross-up our financial statements for real estate taxes paid directly to third-parties by our tenants.
Land rights and ground lease expense
Land rights and ground lease expense includes the amortization of land rights and rent expense related to the Company's long-term ground leases. Land rights and ground lease expense increased by$14.1 million , or 49.7%, for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , primarily due to our acquisition of rights to six long-term ground leases in connection with the Tropicana Acquisition, as well as accelerated land rights amortization expense related to the closure of theResorts Casino Tunica property by our tenant in the second quarter of 2019. In connection with the Tropicana Acquisition, we acquired land rights to long-term leases which are recorded on our consolidated balance sheet as land right assets and amortized over the term of the leases, including renewal options. We also record rent expense related to these ground leases with offsetting revenue recorded within the consolidated statements of income as we have concluded that as the lessee we are the primary obligor under the ground leases. We sublease these ground leases back to our tenants, who are responsible for payment directly to the landlord.
General and administrative expense
General and administrative expenses include items such as compensation costs (including stock-based compensation awards), professional services and costs associated with development activities. General and administrative expenses decreased by$5.7 million , or 7.9%, for the year endedDecember 31, 2019 , as compared to the year endedDecember 31, 2018 , primarily due to the absence of retirement costs (related to the retirement of our former Chief Financial Officer in 2018), partially offset by higher stock-based compensation charges in the current year. Depreciation expense Depreciation expense increased by$103.3 million , or 75.4%, to$240.4 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , primarily resulting from the addition of the Tropicana and Plainridge Park real estate assets to our portfolio, the reclassification of the Pinnacle building assets to real estate investments on our balance sheet as a result of the Penn-Pinnacle Merger, which required the Amended PinnacleMaster Lease to be treated as an operating lease in its entirety and the acceleration of depreciation related to the closure of theResorts Casino Tunica property by our tenant in the second quarter of 2019.
Loan impairment charges
OnMarch 17, 2017 the Company provided theCasino Queen Loan toCQ Holding Company , to partially finance its acquisition ofLady Luck Casino inMarquette, Iowa . During 2018, the operating results ofCasino Queen declined substantially andCasino Queen defaulted under its senior credit agreement and also theCasino Queen Loan . As a result, the operations ofCasino Queen were put up for sale during the fourth quarter of 2018. AtDecember 31, 2018 , active negotiations for the sale ofCasino Queen's operations were taking place and full payment of the principal was still expected, due to the anticipation that the operations were to be sold in the near term for an amount allowing for repayment of the full$13.0 million of loan principal due to GLPI. During 2019, the operating results ofCasino Queen continued to decline, the secured debt ofCasino Queen was sold to a third-party casino operator at a discount and the Company no longer expected the loan to be repaid. Thus, because the Company did not expectCasino Queen to be able to repay the$13.0 million of principal due to it under theCasino Queen Loan , the full$13.0 million of principal was written off atMarch 31, 2019 . The Company has recorded an impairment charge of$13.0 million through the consolidated statement of income for the year endedDecember 31, 2019 to reflect the write-off of the 53
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Casino Queen Loan . Additionally, atDecember 31, 2019 , all lease payments due fromCasino Queen remain current, howeverCasino Queen was in violation of the rent coverage ratio required under its lease with the Company and the Company provided notice and a reservation of rights toCasino Queen and its secured lenders of such default.
During the year endedDecember 31, 2018 , the Company recorded a goodwill impairment charge of$59.5 million in connection with its operations atHollywood Casino Baton Rouge . This charge was driven by general market deterioration in theBaton Rouge region and the smoking ban at allBaton Rouge, Louisiana casinos that went into effect during the second quarter of 2018, both of which significantly impacted the Company's forecasted cash flows for this reporting unit. Subsequent to conducting its impairment tests on other long-lived assets, including the gaming license atHollywood Casino Perryville , the Company performed Step 1 of the goodwill impairment test, which indicated a potential impairment. Step 1 of the goodwill impairment test involved the determination of the fair value of theBaton Rouge reporting unit and its comparison to the reporting unit's carrying amount. Using a discounted cash flow model, which relied on projected EBITDA to determine the reporting unit's future cash flows, the Company calculated a fair value that was less than the reporting unit's carrying value and proceeded to Step 2. In Step 2 of the goodwill impairment test, the Company performed a fair value allocation as if the reporting unit had been acquired in a business combination and assigned the fair value of the reporting unit calculated in Step 1 to all assets and liabilities of the reporting unit, including any unrecognized intangible assets. Any residual fair value was allocated to goodwill to arrive at the implied fair value of goodwill. After completing the Step 2 allocation, the Company determined the goodwill on itsBaton Rouge reporting unit had an implied fair value of$16.1 million and recorded the impairment charge of$59.5 million during the fourth quarter of 2018.
Other income (expenses)
Other income (expenses) for the years endedDecember 31, 2019 and 2018 were as follows (in thousands): Year Ended December 31, Percentage 2019 2018 Variance Variance Interest expense$ (301,520 ) $ (247,684 ) $ (53,836 ) 21.7 % Interest income 756 1,827 (1,071 ) (58.6 )% Losses on debt extinguishment (21,014 ) (3,473 ) (17,541 ) 505.1 % Total other expenses$ (321,778 ) $ (249,330 ) $ (72,448 ) 29.1 % Interest expense For the year endedDecember 31, 2019 , interest expense related to our fixed and variable rate borrowings was$301.5 million , as compared to$247.7 million in the year endedDecember 31, 2018 . Interest expense increased primarily due to the issuance of an aggregate$2.1 billion of new senior unsecured notes during May andSeptember 2018 and to a lesser extent the issuance of$400 million of 3.35% senior unsecured notes due 2024 and$700 million of 4.00% senior unsecured notes due 2030 during the third quarter of 2019. These increases were partially offset by decreases in interest expense related to the termination of the Term Loan A facility, partial repayment of our Term Loan A-1 facility, repayments of borrowing under our revolving credit facility and the 2018 and 2019 Tender Offers (as defined below). The proceeds from the issuance of the senior unsecured notes issued inSeptember 2018 were used to finance the Tropicana Transactions, to purchase Plainridge Park and to fund the Belterra Park Loan, while the proceeds from the unsecured notes issued in 2019 were used to finance the 2019 Tender Offer, repay borrowings under our revolving credit facility and repay a portion of outstanding borrowings under our Term Loan A-1 facility. The 2019 issuances and tender offer were part of our efforts to reduce our borrowing costs and lengthen our average debt maturity.
Losses on debt extinguishment
OnSeptember 12, 2019 , the Company completed a cash tender offer (the "2019 Tender Offer") to purchase its$1,000 million aggregate principal amount 4.875% Senior Unsecured Notes due 2020 (the "2020 Notes"). The Company received early tenders from the holders of approximately$782.6 million in aggregate principal of the 2020 Notes, or approximately 78% of its outstanding 2020 Notes, in connection with the 2019 Tender Offer at a price of 102.337% of the unpaid principal amount plus accrued and unpaid interest through the settlement date. Subsequent to the early tender deadline, an additional$2.2 million in aggregate principal of the 2020 Notes were tendered at a price of 99.337% of the unpaid principal amount plus accrued and unpaid interest through the settlement date, for a total redemption of$784.8 million of the 2020 Notes. The Company recorded 54
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a loss on the early extinguishment of debt related to the 2019 Tender Offer, of approximately$21.0 million , for the difference between the reaquisition price of the tendered 2020 Notes and their net carrying value. OnMay 21, 2018 , the Company entered into the second amendment to its senior unsecured credit facility (the "Credit Facility"), which increased the Company's revolving commitments, eliminated the Term Loan A facility, required the Company to repay a portion of the Term Loan A-1 facility and extended the maturity date of the revolving credit facility toMay 21, 2023 . The Company recorded a loss on the early extinguishment of debt, related to the second amendment to the Credit Facility, of approximately$1.0 million for the proportional amount of unamortized debt issuance costs associated with the extinguished Term Loan A facility and related to the banks that are no longer participating in the Credit Facility. Also onMay 21, 2018 , the Company completed a cash tender offer (the "2018 Tender Offer") to purchase any and all of the outstanding$550 million aggregate principal of its 4.375% Senior Unsecured Notes due 2018 (the "2018 Notes"). The Company received tenders from the holders of approximately$393.5 million in aggregate principal of the 2018 Notes, or approximately 72% of its outstanding 2018 Notes, in connection with the 2018 Tender Offer at a price of 100.396% of the unpaid principal amount plus accrued and unpaid interest through the settlement date. The Company recorded a loss on the early extinguishment of debt, related to the 2018 Tender Offer of approximately$2.5 million for the difference between the reaquisition price of the tendered 2018 Notes and their net carrying value. OnAugust 16, 2018 , the Company redeemed the remaining 2018 Notes for 100% of the principal amount and accrued and unpaid interest to, but not including, the redemption date.
Taxes
Our income tax expense decreased$0.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . During the year endedDecember 31, 2019 , we had income tax expense of approximately$4.8 million , compared to income tax expense of$5.0 million during the year endedDecember 31, 2018 . Our income tax expense is primarily driven from the operations of theTRS Properties , which are taxed at the corporate rate. Our effective tax rate (income taxes as a percentage of income before income taxes) was 1.2% and 1.4% for the years endedDecember 31, 2019 and 2018, respectively. 55
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Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flow from operations, borrowings from banks, and proceeds from the issuance of debt and equity securities.
Net cash provided by operating activities was$750.3 million and$654.4 million during the years endedDecember 31, 2019 and 2018, respectively. The increase in net cash provided by operating activities of$95.9 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 was primarily comprised of an increase in cash receipts from customers/tenants of$151.0 million and a decrease in cash paid to employees of$3.3 million , partially offset by increases in cash paid for interest and operating expenses of$44.8 million and$6.4 million , respectively. The increase in cash receipts collected from our customers and tenants for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 was primarily due to the Tropicana Transactions and the Penn-Pinnacle Merger both of which occurred in the fourth quarter of 2018, partially offset by a decrease in ourTRS Properties' revenues. The increase in cash paid for interest was related to the Company'sSeptember 2018 borrowings which were used to fund the Tropicana Transactions, the acquisition of Plainridge Park and the Belterra Park Loan. Investing activities used net cash of$2.8 million and$1,509.8 million during the years endedDecember 31, 2019 and 2018, respectively. Net cash used in investing activities during the year endedDecember 31, 2019 primarily consisted of capital expenditures of$3.0 million , partially offset by proceeds from sales of property and equipment of$0.2 million . Net cash used in investing activities during the year endedDecember 31, 2018 primarily consisted of cash payments of$1,243.5 million related to the acquisition of five Tropicana properties and Plainridge Park and$304 million of cash paid for the origination of real estate loans to casino owner-operators, partially offset by$38.5 million of rental payments received from tenants and applied against the lease receivable we had on our balance sheet prior to the Penn-Pinnacle Merger. Financing activities used net cash of$746.4 million during the year endedDecember 31, 2019 and provided net cash of$852.1 million during the year endedDecember 31, 2018 . Net cash used in financing activities for the year endedDecember 31, 2019 was driven by repayments of long-term debt of$1,477.9 million , dividend payments of$589.1 million ,$18.9 million of premium and related costs paid on the tender of senior unsecured notes, taxes paid related to shares withheld for tax purposes on restricted stock award vestings, net of stock option exercises of$9.1 million and financing costs of$10.0 million , partially offset by$1,358.9 million of proceeds from the issuance of long-term debt. During the year endedDecember 31, 2019 , the Company issued$1,100.0 million par value in new senior unsecured notes, completed a cash tender for a portion of our 2020 Notes, partially repaid borrowings under our Term Loan A-1 and revolving credit facilities and launched a$600 million ATM Program. Net cash provided by financing activities for the year endedDecember 31, 2018 was driven by proceeds from the issuance of long-term debt of$2,593.4 million and proceeds from stock option exercises, net of taxes paid related to shares withheld for tax purposes on restricted stock award vestings, of$7.5 million , partially offset by dividend payments of$550.4 million , repayments of long-term debt of$1,164.1 million , financing costs of$32.4 million and$1.9 million of premium and related costs paid on the tender of senior unsecured notes. During the year endedDecember 31, 2018 , the Company issued$2,100.0 million par value of new senior unsecured notes, completed a tender and redemption of the 2018 Notes, repaid a portion of the Term Loan A-1 facility and extinguished the Term Loan A facility. Capital Expenditures Capital expenditures are accounted for as either capital project or capital maintenance (replacement) expenditures. Capital project expenditures are for fixed asset additions that expand an existing facility or create a new facility. The cost of properties developed by the Company include costs of construction, property taxes, interest and other miscellaneous costs incurred during the development period until the project is substantially complete and available for occupancy. Capital maintenance expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair. During the years endedDecember 31, 2019 and 2018 we spent approximately$3.0 million and$4.3 million , respectively, for capital maintenance expenditures. The majority of the capital maintenance expenditures were for slot machines and slot machine equipment at ourTRS Properties . Our tenants are responsible for capital maintenance expenditures at our leased properties. 56
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Debt
Senior Unsecured Credit Facility
The Company's Credit Facility consists of a
AtDecember 31, 2019 , the Credit Facility had a gross outstanding balance of$495 million , consisting of the$449 million Term Loan A-1 facility and$46 million of borrowings under the revolving credit facility. Additionally, atDecember 31, 2019 , the Company was contingently obligated under letters of credit issued pursuant to the Credit Facility with face amounts aggregating approximately$0.4 million , resulting in$1,128.6 million of available borrowing capacity under the revolving credit facility as ofDecember 31, 2019 . The interest rates payable on the loans are, at the Company's option, equal to either a LIBOR rate or a base rate plus an applicable margin, which ranges from 1.0% to 2.0% per annum for LIBOR loans and 0.0% to 1.0% per annum for base rate loans, in each case, depending on the credit ratings assigned to the Credit Facility. AtDecember 31, 2019 , the applicable margin was 1.50% for LIBOR loans and 0.50% for base rate loans. In addition, the Company is required to pay a commitment fee on the unused portion of the commitments under the revolving facility at a rate that ranges from 0.15% to 0.35% per annum, depending on the credit ratings assigned to the Credit Facility. AtDecember 31, 2019 , the commitment fee rate was 0.25%. The Company is not required to repay any loans under the Credit Facility prior to maturity and may prepay all or any portion of the loans under the Credit Facility prior to maturity without premium or penalty, subject to reimbursement of any LIBOR breakage costs of the lenders. The Company's wholly owned subsidiary,GLP Capital is the primary obligor under the Credit Facility, which is guaranteed by GLPI. The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of GLPI and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations or pay certain dividends and other restricted payments. The Credit Facility contains the following financial covenants, which are measured quarterly on a trailing four-quarter basis: a maximum total debt to total asset value ratio, a maximum senior secured debt to total asset value ratio, a maximum ratio of certain recourse debt to unencumbered asset value and a minimum fixed charge coverage ratio. In addition, GLPI is required to maintain a minimum tangible net worth and its status as a REIT. GLPI is permitted to pay dividends to its shareholders as may be required in order to maintain REIT status, subject to the absence of payment or bankruptcy defaults. GLPI is also permitted to make other dividends and distributions subject to pro forma compliance with the financial covenants and the absence of defaults. The Credit Facility also contains certain customary affirmative covenants and events of default, including the occurrence of a change of control and termination of the Penn Master Lease (subject to certain replacement rights). The occurrence and continuance of an event of default under the Credit Facility will enable the lenders under the Credit Facility to accelerate the loans and terminate the commitments thereunder. AtDecember 31, 2019 , the Company was in compliance with all required financial covenants under the Credit Facility. Senior Unsecured Notes
At
OnAugust 29, 2019 , the Company issued$400 million of 3.35% Senior Unsecured Notes maturing onSeptember 1, 2024 at an issue price equal to 99.899% of the principal amount (the "2024 Notes") and$700 million of 4.00% Senior Unsecured Notes maturing onJanuary 15, 2030 at an issue price equal to 99.751% of the principal amount (the "2030 Notes"). Interest on the 2024 Notes is payable semi-annually onMarch 1 andSeptember 1 of each year, commencing onMarch 1, 2020 . Interest on the 2030 Notes is payable semi-annually onJanuary 15 andJuly 15 of each year, commencing onJanuary 15, 2020 . The net proceeds from the sale of the 2024 Notes and 2030 Notes were used to (i) finance the Company's cash tender offer to purchase its 4.875% Senior Unsecured Notes due 2020 (described below) (ii) repay outstanding borrowings under the Company's revolving credit facility and (iii) repay a portion of the outstanding borrowings under the Company's Term Loan A-1 facility. OnSeptember 12, 2019 , the Company completed a cash tender offer (the "2019 Tender Offer") to purchase its$1,000 million aggregate principal amount 4.875% Senior Unsecured Notes due 2020 (the "2020 Notes"). The Company received early tenders from the holders of approximately$782.6 million in aggregate principal of the 2020 Notes, or approximately 78% of its outstanding 2020 Notes, in connection with the 2019 Tender Offer at a price of 102.337% of the unpaid principal amount plus accrued and unpaid interest through the settlement date. Subsequent to the early tender deadline, an additional$2.2 million in 57
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aggregate principal of the 2020 Notes were tendered at a price of 99.337% of the unpaid principal amount plus accrued and unpaid interest through the settlement date, for a total redemption of$784.8 million of the 2020 Notes. The Company recorded a loss on the early extinguishment of debt related to the 2019 Tender Offer of approximately$21.0 million for the difference between the reaquisition price of the tendered 2020 Notes and their net carrying value. The Company may redeem the Senior Notes of any series at any time, and from time to time, at a redemption price of 100% of the principal amount of the Senior Notes redeemed, plus a "make-whole" redemption premium described in the indenture governing the Senior Notes, together with accrued and unpaid interest to, but not including, the redemption date, except that if Senior Notes of a series are redeemed 90 or fewer days prior to their maturity, the redemption price will be 100% of the principal amount of the Senior Notes redeemed, together with accrued and unpaid interest to, but not including, the redemption date. If GLPI experiences a change of control accompanied by a decline in the credit rating of the Senior Notes of a particular series, the Company will be required to give holders of the Senior Notes of such series the opportunity to sell their Senior Notes of such series at a price equal to 101% of the principal amount of the Senior Notes of such series, together with accrued and unpaid interest to, but not including, the repurchase date. The Senior Notes also are subject to mandatory redemption requirements imposed by gaming laws and regulations. The Senior Notes were issued byGLP Capital, L.P. andGLP Financing II, Inc. (the "Issuers"), two wholly-owned subsidiaries of GLPI, and are guaranteed on a senior unsecured basis by GLPI. The guarantees of GLPI are full and unconditional. The Senior Notes are the Issuers' senior unsecured obligations and rank pari passu in right of payment with all of the Issuers' senior indebtedness, including the Credit Facility, and senior in right of payment to all of the Issuers' subordinated indebtedness, without giving effect to collateral arrangements. See Note 21 for additional financial information on the parent guarantor and subsidiary issuers of the Senior Notes. The Senior Notes contain covenants limiting the Company's ability to: incur additional debt and use its assets to secure debt; merge or consolidate with another company; and make certain amendments to the Penn Master Lease. The Senior Notes also require the Company to maintain a specified ratio of unencumbered assets to unsecured debt. These covenants are subject to a number of important and significant limitations, qualifications and exceptions.
At
Finance Lease Liability
The Company assumed the finance lease obligations related to certain assets at itsAurora, Illinois property. GLPI recorded the asset and liability associated with the finance lease on its consolidated balance sheet. The original term of the finance lease is 30 years and it will terminate in 2026.
Distribution Requirements
We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, in order to qualify to be taxed as a REIT (assuming that certain other requirements are also satisfied) so thatU.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject toU.S. federal corporate income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified underU.S. federal income tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code. LIBOR Transition The majority of our debt is at fixed rates and our exposure to variable interest rates is currently limited to our revolving credit facility and our Term Loan A-1. Both of these debt instruments are indexed to LIBOR which is expected to be phased out during late 2021. The discontinuance of LIBOR would affect our interest expense and earnings. As the Term Loan A-1 matures in mid-2021, only the borrowings under our revolver will be subject to the expected LIBOR transition. LIBOR is currently expected to transition to a new standard rate, the Secured Overnight Financing Rate ("SOFR"). We are currently monitoring the transition and cannot be certain whether SOFR will become the standard rate for our variable rate debt. However, the transition away from LIBOR rates will likely require us to renegotiate our revolving credit facility, which does not provide for reference rate replacement. We expect to successfully renegotiate this agreement and do not expect the reference rate transition to have a significant impact to our overall operations. 58
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Outlook
Based on our current level of operations and anticipated earnings, we believe
that cash generated from operations and cash on hand, together with amounts
available under our senior unsecured credit facility, will be adequate to meet
our anticipated debt service requirements, capital expenditures, working capital
needs and dividend requirements. In addition, we expect the majority of our
future growth to come from acquisitions of gaming and other properties to lease
to third parties. If we consummate significant acquisitions in the future, our
cash requirements may increase significantly and we would likely need to raise
additional proceeds through a combination of either common equity (including
under our ATM Program) and/or debt offerings. Our future operating performance
and our ability to service or refinance our debt will be subject to future
economic conditions and to financial, business and other factors, many of which
are beyond our control. See "Risk Factors-Risks Related to Our Capital
Structure" of this Annual Report on Form 10-K for a discussion of the risk
related to our capital structure.
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Commitments and Contingencies Contractual Cash Obligations The following table presents our contractual obligations atDecember 31, 2019 : Payments Due By Period Total 2020 2021 - 2022 2023 - 2024 2025 and After (in thousands) Senior unsecured credit facility Principal$ 495,000 $ -$ 449,000 $ 46,000 $ - Interest (1) 26,445 17,590 8,250 605 - 4.875% senior unsecured notes due 2020 Principal 215,174 215,174 - - - Interest 10,490 10,490 - - - 4.375% senior unsecured notes due 2021 Principal 400,000 - 400,000 - - Interest 26,250 17,500 8,750 - - 5.375% senior unsecured notes due 2023 Principal 500,000 - - 500,000 - Interest 107,500 26,875 53,750 26,875 - 3.35% senior unsecured notes due 2024 Principal 400,000 - - 400,000 - Interest 67,074 13,474 26,800 26,800 - 5.25% senior unsecured notes due 2025 Principal 850,000 - - - 850,000 Interest 245,438 44,625 89,250 89,250 22,313 5.375% senior unsecured notes due 2026 Principal 975,000 - - - 975,000 Interest 340,641 52,406 104,813 104,813 78,609 5.75% senior unsecured notes due 2028 Principal 500,000 - - - 500,000 Interest 244,375 28,750 57,500 57,500 100,625 5.30% senior unsecured notes due 2029 Principal 750,000 - - - 750,000 Interest 377,625 39,750 79,500 79,500 178,875 4.00% senior unsecured notes due 2030 Principal 700,000 - - - 700,000 Interest 290,578 24,578 56,000 56,000 154,000 Finance lease liability 989 129 277 305 278 Operating lease liabilities (2) 712,810 14,071 27,425 27,255 644,059 Other liabilities reflected in the Company's consolidated balance sheets (3) 505 505 - - - Total$ 8,235,894 $ 505,917 $ 1,361,315 $ 1,414,903 $ 4,953,759 (1) The interest rates associated with the variable rate components of our senior unsecured credit facility are estimated, reflected of forward LIBOR
curves plus the spread over LIBOR of 150 basis points. The contractual
amounts to be paid on our variable rate obligations are affected by
changes in market interest rates and changes in our spreads which are
based on our leverage ratios. Future changes in such ratios will impact
the contractual amounts to be paid. For
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considerations surrounding the phase out of LIBOR refer to the Liquidity and Capital Resources discussion in this Annual Report on Form 10-K.
(2) The Company's operating leases liabilities include the fixed payments due
under those ground leases for which the Company subleases the land to our
tenants who are responsible for payment directly to the landlord, as we
are considered the primary obligor under these leases. Variable lease
costs, including lease payments tied to a property's performance and
changes in an index such as the CPI that are not determinable at lease
commencement, are excluded from our operating lease liabilities.
(3) Primarily represents liabilities associated with reward programs at our TRS Properties that can be redeemed for free play, merchandise or services. Other Commercial Commitments The following table presents our material commercial commitments as ofDecember 31, 2019 for the following future periods: Total Amounts Committed 2020 2021 - 2022
2023 - 2024 2025 and After
(in thousands)
Letters of credit (1) $ 395 $ 395 - - -
Total $ 395 $ 395 - - -
(1) The available balance under the revolving credit portion of our senior
unsecured credit facility is reduced by outstanding letters of credit.
Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as ofDecember 31, 2019 and 2018.
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