Q1 2020 Earnings Call
Ladies and gentlemen. This is your operator today's conference is scheduled to begin the momentarily until that time. Your line will again be placed on music cool. Thank you for your patience.
[music].
Her 2020 earnings conference call.
It's time all participants are in listen only mode. Please note. This conference call is being recorded today may 1st 2020, I would now turn the call over to Samantha Gallagher General Counsel for featured properties. Please go ahead.
Thank you operator, and good morning, everyone should have access to the company's first quarter 2020 earnings release and supplemental information.
The release and supplemental information can be found in the Investor section of the Beachy properties website at Www Dot Beachy properties Dot com.
Celebrate comments today well be forward looking statements within the meaning of the federal Securities laws forward looking statements, which are usually identified by the use of words, such as we'll expect should guidance in Penn projects or other similar phrases are subject to numerous risks and uncertainties that could cause actual results.
Could differ materially from what we expect.
Therefore, you should exercise caution in interpreting and relying on.
I refer you to the company's FCC filings for a more detailed discussion of the risks that could impact future operating results and financial condition.
During the call we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance.
These measures should not be considered in isolation or as a substitute for financial results prepared in accordance with GAAP.
A reconciliation of these matters to the most directly comparable GAAP measure it's available in our first quarter 2020 earnings release and our supplemental information.
Hosting the call today, we have added to Tony <unk>, Chief Executive Officer, John Pain, President and Chief Operating Officer, David Kiosky, Chief Financial Officer, and gave Wasserman Chief Accounting officer at didn't team will provide some opening remarks, and then we'll open the call to questions with that I'll turn the call overhead.
Thank you Samantha.
Good morning, everyone and thanks for joining us.
Here is what.
His foremost at this time for us and that is that we hope that all our stakeholders are weathering. This crisis as best as can be hoped.
Our hearts go out to any weapons shrinking by this virus and to the hundreds of thousands of U.S. gaming industry employees, who have been furloughs for the past few weeks.
Stricken we wish a speedy recovery into those have been furloughs, we wish her reopenings become sue income safely.
We held her last earnings call on Thursday February Twentyth and in my opening remarks, they focused on the ways in which beat cheese relationships.
Last year, the building and battering, although Reid.
I talked to them that call about our relationships with gaming operators, an asset controllers are creditors are old people and of course you are stockholders.
Today about two months after our last earnings call I want to talk about another critical Vg relationship.
That is our relationship to reality.
Yes, each of our relationship to reality is yes.
We don't Die reality, we don't fight reality, we manage our business. So that makes the best weekend a reality.
Reality has changed a lot since our last earnings call to the point, where reality can feel sort of unreal.
Here's what we know with real certainty 28.
28 of our assets are close.
Here's what we do not know with any certainty.
When our assets will all we open.
At the recovery pace of our kids business just won't be.
There are many different scenarios for winter assets could reopen in many different scenarios for what the recovery pace of American regional in Las Vegas, gaining could be.
We're modeling all those scenarios and digging deep into what the implications of each scenario could be for BG and for attendance.
It's too early to commit to any strategy that only works if a certain scenario prevails, because we don't know which scenario will prevail.
We are working and we'll continue to work day by day week by week month by month.
Our tenants to determine how we best mutually navigate this crisis.
Which may ultimately means boarding or tenants during the short term in ways, we believe will benefit us over the long term.
But there is one strategy we've committed to it happened in fact and committed to since day, one and BG and that's to be prepared for heavy weather and scenarios that had the weather made great.
One strategy works for most Reits heavy whether it's in liquidity focused strategy.
Strategy that centers on R&D, possessing and having ready access to cash is sufficient to meet the companys fundamental financial obligations for a long period of heavy weather.
Our cash position supported by the way, we run our business low G.N., a high margins high flow through of revenue gross profit growth.
Strong cash retention driven by a payout ratio with the lower end of Triple net REIT standards.
As our CFO, David keeps you will make clear later in this call beaches liquidity position today is a position we will work to preserve everyday going forward.
I've talked about what we know and what we don't know the outlook for reopening in recovery, but let me close out these opening remarks by turning to what we strongly believe.
We believe we own high quality well located real estate that is and Moreover will remain mission critical to our tenants.
We believe that our tenants are in a business.
Naming.
That has proven its deep and enduring consumer appeal over decades.
And through February 2020, American Casino traffic revenue and profit were at their highest levels. In recent years American gaming is a consumer sector that did not come into the cobot 19 crisis with pre existing conditions.
And while we don't know what the pace of gaming recovery will be close Kobin 19, we believed that there will come a time in the future when consumer demand for the gain experience will return to prior levels.
All of this to say that because of the long term durability gaming as a consumer experience. We believe strongly in the enduring value of gaining real estate.
Meat cheese owners, you our stockholders own this fundamentally valuable real estate, we believe strongly the value your real estate will endure long past the passing of this crisis.
That will turn the call over to John pain, our President and Chief operating Officer John.
Thanks, Ed good morning, everyone.
To start the first quarter of 2020 remain productive for be cheap on January 24th we closed on the acquisition of Jack Cleveland Casino and Jack This whole downwards see no in a sale leaseback transaction with Jack Entertainment, we paid a total of $843 million an added 65.9 billion of annual.
Rent to our portfolio through a master lease, which represents an attractive 7.8% cap rate for urban real estate in Ohio.
Just last week on April 24, we and our tenant Caesars announced the disposition of Bally's Atlantic City for total proceeds of $25 million.
Not only will we receive approximately $19 million out the gross proceeds from the sale, but we will retain ownership of the wild Wild West Casino area in Sportsbook, which we folded into our Caesars asset and importantly, there'll be no change to the existing annual rent under the master lease.
Swiss Caesars.
This transaction helps balance our geographic diversification as we work to complete the acquisition of Harrah's Atlantic City and it's just another example of how Beachy works constructively with our tenants even in this current environment.
Turning to our tenants and the outlook of the gaming industry.
Unlike many other Reits, who have hundreds of tenants. We currently benefit from only having five tenants and we continue to have active dialogue would eat with each of our tenants during this unprecedented times.
We collected 100% of our rent in April and with respect to the outlook for May We believe all we believe all rent will be received this month.
Many of you ask about our diversification strategy on prior calls.
Typically as it relates to investments outside a gaming.
We have been very thorough and our evaluation of other sectors and have not made an investment today by design. We believe this measured diligent approach has benefited our investors given the current environment, while we'll continue to evaluate the investment characteristics and overall attractiveness of other sector.
As we will remain intensely focused on gaming as we believe at the right time gaming will yield opportunities for Beachy to continue to grow accretively.
In addition to our tenants I'm spending time with other casino operators to better understand the potential reopening timelines across the industry.
As Ed mentioned every Kid commercial casino property across the United States remain close and at this time, we're not yet aware of a definitive timeline for reopening.
As many of you know in normal times. The gaming industry operates 24 hours a day seven days a week 52 weeks a year and operators have extensive experience developing communicating in executing detailed operational plans.
This energy expertise in rigor will be key to reopening safely successfully and profitably.
We are firm believers in the resilient enduring nature of the gaming industry. The game industry has an extremely loyal customer base and its proven its resilient through challenges in prior economic cycles as Ed noted gaming did not suffer from any pre existing condition heading into this pandemic.
In fact January and February of this year were among the best month, many properties have experienced in decades, and we believe customers are eager to return to our facilities, particularly at the local level upon reopening.
While we do not know exactly what tomorrow brings we believe that the importance of our assets will only increase in the months in years ahead, given the mission critical nature of the asset to the operators. The revenues collected by the states from gaming tax and the total jobs the casinos create in their respective acumen.
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We retain a strong liquidity position as David will discuss and we stand ready to support our tenants to the extent absolutely necessary in ways that create value for beachy over the long term.
And lastly, with respect to the Eldorado transaction El Dorado stated in their press release last Friday morning that they continue to remain intensely focused on closing the transaction with Caesars, we stand ready to close on our portion of the overall transaction as our financing is complete which.
David will discuss.
Now I'll turn the call over to David who will discuss our financial results and balance sheet.
Thanks, John.
Before I discuss our financial results and balance sheet, let me take a moment to express my sincere gratitude to our accounting asset management finance and legal teams for all their efforts and relentless focus closing the quarter remotely during this pending truly a remarkable effort.
I'd like to point out that we added an additional scheduled to the back of our earnings release, which breaks down our cash revenue by lease and the corresponding non cash adjustments in order to tie to GAAP revenue as presented on the face of our income statement.
We also disclose this breakdown as well as other detailed financial information.
And our quarterly financial supplement which is located in the investors section of our web site under menu heading financials.
For the quarter total GAAP revenues in Q1, 20 increased 19.2% over Q1 19 to 255 million well total cash revenue in Q1, 20 was 257.6 million an increase of 21.8% over Q1 2019.
These increases were the result of adding 44.1 million of rent during the quarter from the Greektown hard rock, Cincinnati, and a century acquisitions, which closed in 2019.
And the Jack Cleveland careful down acquisition and related loan, which closed on January 24 2020.
If AFFO was 180 million or 38 cents per diluted share for the quarter or DNA was 7 million for the quarter and as a percentage of total revenues was 2.8% for the quarter, which is inline with our full year projections and represents one of the lowest ratios in the triple in that sector.
Our results once again highlight our highly efficient triple net model flow through of cash revenue to adjusted EBITDA was nearly 100 person.
Beginning January 1st 2020, we adopted Cecil a new accounting standards, which required us to estimate and record a noncash provision or allowance for future credit losses relating to all existing and any future investments in direct financing and sales type leases similar assets.
Diesel is applicable to us as we account for our investments at finance leases.
Which are subject to the new accounting standard as opposed to operating leases like our gaming reap peers, which are scope out of the standard.
We have historically determined that our leases effectively have 35 year duration, given the mission criticality of the assets toward tenants. This lease duration and other factors lead to our leases being classified as finance leases for accounting purposes.
These all allowance is derived from estimated probabilities of leased default in any resulting losses over the full life of the leases inclusive of all extension options.
The impact of the covert 19 pandemic has caused <unk> loans to increase in the first quarter of 2020 to reflect the current economic environment.
This resulting non cash allowances recorded through our statement of operations impacting net income in AFFO, but is excluded from the calculation of FFO due to its noncash major.
The first quarter that noncash allowance related the Cecil was 149.5 million drag on net income in a 32 cents drag on net income per share like to again make the point that this is a noncash allowance and as such there's no impact FFO and AFFO per share.
Moving onto the balance sheet and capital markets activities.
January 24, 2020, we amended our credit agreement, which reduced the interest rate on our term loan b from LIBOR, plus 2% to LIBOR, plus 175, with a LIBOR floor as zero percent.
On February 5th 2020, we closed on a 2.5 billion dollar unsecured notes offering comprised of 750 million a five year notes at 3.5%.
750 million of seven year notes at three in three quarters percent in a billion of 10 and a half your notes at 4.1% to 5%.
We placed 2 billion of the net proceeds into escrow pending the consummation of the El Dorado transaction, which amount.
Subject to a special mandatory redemption, if the Eldorado transaction does not close.
The remaining 500 million of proceeds were used to retire the 8% secondly notes, which were redeemed on February twentyth.
On February 7th we sold 7.5 million common shares under our at the market equity Pro program for net proceeds of 200 million.
Our total outstanding debt at quarter end with 6.9 billion inclusive of the 2 billion of unsecured notes currently held in escrow with a weighted average interest rate of 4.19 per se. The weighted average maturity of our debt is approximately 6.9 years, we have no debt maturing until 2024.
As of March 30, Onest or net debt to LTM EBITDA was approximately five times.
Our stated range and focus of maintaining that leverage between five and five and a half time.
This includes the impact of the restricted cash that sits in escrow.
We currently have approximately 1.3 billion in liquidity comprised of approximately 310 million in cash on hand, and 1 billion of availability under our revolving credit facility, which is undrawn.
In addition, the company has access to approximately 1.3 billion in proceeds from the settlement of the 65 million shares that are subject to the forward sale agreements entered into in June of 2019.
Between the proceeds from the equity forward agreements and the 2 billion of unsecured notes in escrow, we have 3.2 billion of capital earmarked for the closing of the Eldorado transaction.
As noted in the press release, we put on April 16, 2020, given the economic uncertainty in a rapidly evolving circumstances related to the cobot 19 been dynamic to get together with the implementation of the new Cecil accounting standards, which significantly impacted net income we withdrew our previously issued 2020 guidance and then.
Not providing an updated outlook at this time.
As many of you know or guidance does not include acquisitions that have been announced but not yet closed. We believe this approach to guidance is prudent and responsible though it is typically resulted in a material difference between the range. We provide consensus estimates, which do include pending acquisitions. Accordingly, we will evaluate the overall structure.
Okay, and usefulness of guidance going forward.
Finally, as it relates to the dividend during the first quarter, we paid a dividend of 29 in three quarters since based on the annualized dividend of $1.19 per share our AFFO payout ratio for the first quarter was 78%.
Well above our long range target of 75% as a result of the June 2019 equity offering.
That operator, please open the line for questions.
At this time if anybody has a question. Please press star one on your telephone keypad again.
One on the telephone.
Your first question will come from spends runs from Citi. Your line is open.
Hi, good morning.
I don't want to ask you about some of the language in your more recent filings who are you in the context of your leases you talk about ongoing dialogues with your tenants.
So I'm, assuming that rent deferrals or concessions are kind of not on the table at this point. The could you talk about some of the things that you are considering or what you you know you might need to work with tough mine to help them through this time and then my second question.
No you talked about liquidity, a little that and is there a point, where you would consider paying a portion or all of your dividend and in stock or combination of Soc and cash.
Yeah. Thanks me if I could here can you John why didn't you take the first part of the question regarding how we approach 10 discussions and then David can address the dividend funding question John.
Yes made good morning, as I said in my opening remarks, one of the advantages. We do have we have five tenants and not hundreds of tenants. So.
As you can imagine we are actively engaged in discussions with our tenant.
Not only about our leases and potential modifications, but really about their business, what they're seeing how they think they're going to ramp and we've had a variety of that's from our tenants based on a variety of potential scenarios as it relates to the openings and timelines and ramps and currently right now as as you know you follow this space there.
Not real clarity about exactly when these assets are in open and then there's a variety of models that we run on how they're going to ramp.
So as you can imagine the tenants are are beginning to ask somebody asked kind of included.
Partial rent for relief for deferral of rent, but there are other temporary lease modifications like capex spend.
That could help our tenants preserve cash so.
We're looking at this holistically it is important to realize that.
We think that value needs to be traded for value and we do think that this is a.
Temporary problems, so temporary problems need temporary solutions and so that's how our discussions continue to go they've been productive them.
Hopefully, we'll continue to have greater visibility in the next day or in weeks of when the assets will open and then we'll get a better idea how the assets will ultimately ramp.
So I'll turn it back to you.
Yeah, David you want to address the dividend funding question, Yeah Lakes made so if you're well.
Okay as most people know or <unk> as you know we set the payout ratio very low from day. One we've always had a targeted payout ratio of and around 75%, obviously were a little bit above that given that the equity offering from last June but part of the reason part of the reason we set the payout ratio at low is to to be able to weather all storms.
And to maintain a dividend and we're obviously in a hell of a storm right now and so we're real relentlessly focused on maintaining that dividend.
As we work with our work with our tenants, we feel confident that we will be able to maintain that dividend as we sit here today, we have the liquidity to maintain that dividend I think I mean part of your question was would we consider paying some of that stock.
If needed we might evaluate that option that would not.
Our first choice, but.
If things continue on and we don't know what tomorrow brings that's something we might evaluate but at this time as we sit here today.
Very focused on maintaining that cash dividend.
Great. Thank you.
Your next question will come from Carlo Santarelli from Deutsche Bank. Your line is open.
Hey, everybody good morning.
I saw you.
So the deals that you did both equity and some working capital markets transactions.
Ratio for the acquisition.
Our close on plans to close on Lux yourself in a very nice liquidity.
Joining us liquidity position.
Since about the balance.
Going through these upcoming transactions.
Whatever it is that they close.
Still.
So how they have a pretty good buffer of cash I guess my question.
Interesting that you guys could consider in terms of Oh, maybe some creativity around how you put that cost of works in the short term whether that is cash.
Really support.
Fewer tenants or catheters to go out kind of look to be a little bit more aggressive.
On the M&A front as you know one could surprise that there will be other other assets out there that are in need of some form of capital markets helper liquidity.
Yeah, Carl I'll start on that and good to hear me Carlo you're well.
I want to start by actually recognizing it keeps me for his leadership on that the the bond debt financing. We did in late January I remember talking to David in early January going really you really want to go that soon and he said yeah I want to go that soon and Oh God Bless us that we did when we did.
You may have seen that Netflix, which is obviously a pretty good credit. These days went out to raise money last week and they still couldn't reach our benchmark on our five year.
So anyway again, thanks, thanks to save it for that in terms of how we think about use of our cash.
Though.
The agenda will approach, we're taking right now and it's an approach was really dug into with airport yesterday on our Q1 Board meeting if an approach that we define as situational readiness at this point given the uncertainty reopening given Moreover, the answer.
Ramp that.
We have to be ready.
The teacher cleanly and economically for the broad as possible away.
Situations or scenarios and that's a rate ranges from the highly highly defensive on one end with a highly offensive on the other.
And at this time, we really can't free commit to being highly highly defensive or highly opex is because again too early to tell but if things.
Arts and show Green shoots if we see the consumer coming back and we see yes, it's really opening and producing.
Good result, you are absolutely right on liquidity position puts us in a position where we can make the job often potentially before others again.
Thanks, Dave leadership, our balance sheet totally undrawn revolver, we have got ample past you referred to but at this point, what we'd really like about our position. It makes it situationally ready for the broadest raised situations from again be extremely defensive to the highly offensive.
That's helpful. Thank you very much at.
Thank you Hello.
Next question will come from rich Hightower from Evercore. Your line is open.
Hi, Good morning, guys trusts, everybody is doing well.
Yes, thanks rich.
I guess, it's just too just to follow Oh go ahead sorry.
No.
Okay.
Just a follow up I guess on that last question as we as we think about.
You no longer term, maybe with respect to the external growth prospects for this sector.
Turning to the extent that you are having the you know those sorts of discussions right now with potential sellers you know depending on their situation do you.
You detect a an extra sensitivity around.
Maybe layering on the added fixed costs.
The lease to an operators capital structure do you think more equitized capital structures, you know will be the norm going forward and then maybe as we think about how coverage ratios and everything everything along those lines will change just stuff.
Just in the context of greater uncertainty, obviously, no one runs that business with a zero revenue outlook, but.
You know just said added level of conservatism as we think about the potential rent revenue there could be.
To be out there does that diminish kind of you know in light of what's happened.
Yeah, It's a really good question rich and and I think the answer.
The could be fairly complex in fairly variable.
Based upon that situation.
Operator, I think I think one point you make is absolutely right I think you could see for both operators and reach a more conservative approach to balance sheet management and cash flow.
I think in hedge fund Lexus activist lexicon, but term lazy balance sheet is not going to get used for awhile here I think companies will generally get rewarded for being conservative I do think where gaming reach could have appealed to gaming operators, who are still on critical.
The property is that you know we can be another form of capital.
I think you can presume their equity is going to be quite expensive their debt has gotten more expensive.
To the extent that we can provide another form of permanent capital at at that.
Affordable prices that could be appealing, especially when combined with the fact that our capital does not bring with it any kind of bullet maturity and I think anybody right now is facing any kind of bullet maturity is in probably a pretty high state inertia and and we are a form of capital.
It does not growing.
That's kind of anxiety with it.
Yeah, I think I think that makes a lot of sense you know and then just a quick sort of modeling question.
I know you've got.
Sometime before the coverage test on the Caesars leases and certain other leases you know.
Before this test chicken, but I think on the two pen leases those come up in year two.
You care to sort of ballpark, where we are maybe with respect to getting those escalators by that time.
John and David.
Yeah, rich as David will be well the two leases you referred to obviously, margaritaville and and Greektown Margaritaville a reset.
Earlier this year 111, 20, and we got that escalator.
We're coming up on your to agree town, we close that may of last year. So June one of this year will be the reset.
Yeah, the reset excuse me.
And we're in discussions with Penn around that unlikely that reset happens just given the performance of the I said.
Okay. Thanks, I appreciate that.
Your next question will come from Stephen Grambling from Goldman Sachs. Your line is okay.
So on thanks for taking the question I guess my first is for John I guess, given your experience as an operator, how would you generally think through cash needs to reopen some of these properties and how cash generation or breakeven to might change in an environment, where theres just lower occupancy is due to social distance and.
Well, there I'll remind you I'm recovering operator, so you all you can only take what I said with the [laughter] that I've been there look I think that I've got great confidence in these operators.
It reminds me of the time Churchill said never let a good crisis got a waste and what I mean by that is this is something that no one would ever wish upon an industry or a country.
But these operators have now had a few weeks without operating business to think about how they reopen album.
In new ways, and I think what you're going to see is obviously, there's going to be restrictions on.
Whether that's mask or social distancing restrictions, but they're also as those pass over time, a different ways of how the company's think about operating the business. So to answer your question I think that will in the short term when revenues aren't going to be the the way they were in 2019.
You're going to see some some margin differences in those performances, but I think over long period of time, you're going to see those businesses come back and the teams are laser focused operating teams are preserving cash ensuring they got the right amount of cash in the cage not too much not to level and.
Well just have to see again, how these businesses ultimately rap.
[laughter] fault current.
Even if I could just a little more color to that as a follow recovering operator in this case.
Schemes off in my case.
You know when you're an operator your two main inventory items are the utilization of space and that utilization time.
The social this sensing.
Strategies that are operators undertake as John had spoken out.
They will obviously to do space utilization at one time, but what you're talking whatever operators. The other day and it's an example of how how energetically vigorously gaming operators think about the management. If there are two key inventory items space and time, they're taking a very innovative approach to how they manage.
The utilization time and have identified.
Segments in the day, where specific customer demographics will be given a specific invitation to come at a specific time of day and basketball. The overall space utilization, maybe somewhat lower you could potentially get higher utilization of Daypart you had previously because of that.
Customers willingness to adapt their behavior in order to safely visits and enjoy the casinos and again I I take a lot of I take a lot of encouragement saw solid but I get a lot of encouragement from our operators about how they're going to manage their business in that respect and what we're seeing the example, close to home as.
You know within our Trs, we own for golf courses to what you're going to reopen tomorrow.
And in southern Indiana, our T. She is full for the day and we're selling T. times based on social business practices are right up until the four talk time slot in any of you never been in golf course operations no. It's usually very tough to well well four o'clock in the afternoon time slot and it's an example of how.
Oh, I think the American consumer will adapt their behavior in order to enjoy what they really want to enjoy.
Great. Thanks, and then.
Not to beat a dead horse, but with the stock trading where it is it seems like the market or investors are expecting some kind of relatively permanent rent reduction I guess are you considering or how are you thinking about permanent amendments such as when coverage floors or just an outright change in leases at this point.
David.
Yeah, It's Steven Toby will.
And to use a business school answered it all depends right. It's.
Tenant by tenant specific and what the individual circumstances are you know I think you heard John say, you know because it'd be a form of.
Temporary liquidity the bridge them you know through a period of back to carloads are back to the question around what would the cage cash and what are the Albrecht operating need.
For the couple of next couple of months, Yeah, we benefit from the fact that we do have liquidity.
So could we buy additional assets from our tenants could we provide some form of true liquidity versus Uh huh.
Trading and asset for rent.
Deferred rent.
And I guess, there would it comes down to as John said, making sure that we trade value for value. The do you need.
Correct about that sector is that these are mission critical assets for these tenants. Unlike the broader triple in that sector, where.
A lot of tenants are just walking and not paying not going to pay rent and may not ever come back you know given the licenses given the importance of the assets to the tenant to the employees to the state from a tax revenues they generate.
There.
Tenants need to maintain these boxes and need to stay in these boxes. So we we will find ways to help support our tenants if needed but you know we're still in early stages here as we sit here maybe first and.
The outlook for opening its still a little bit unclear, but there's some green shoots up there.
Great. Thanks, so much.
Your next question will come from Todd Stender from Wells Fargo. Your line is open.
Hi, Thanks, just on the theme of a cash in the cage.
See visibility when states will reopen remains unclear, but can you speak to what states what else. They can do to lower the barrier to entry.
Modifier loosen regulations, we heard about cash in the case, but anything else that you can think of.
John.
Yeah, I mean, I think you're you're you're thinking about this correctly again, we are not.
The operator or our tenants are but we stand contacted and I think you're thinking about it right and that these operators are going to these states and saying look.
This is unprecedented time, we don't know yet exactly the demand from our consumers. When we first open up are there some things here that can help our liquidity position that ultimately over the next month to month six month year, we'll get back to quote unquote normal operations.
So I don't have the specifics cash is obviously one that's been but there are other regulations that had put in place over time remember many of these regulations. In these states were created 2025 years ago. It made sense.
I do think there that there'll probably be a push over time.
To continue to you know find new ways to make it more efficient for the properties. So I don't have any specifics, but I'd tell you that that is what the operators are doing are pushing the state that find ways that they can have some temporary solutions to this unique situation.
That's helpful. Thank you.
Thank you Todd.
Next question will come from Thomas Allen from Morgan Stanley. Your line is open.
I'm wondering can you just talk a little bit more about the bally's Atlantic City transaction and kind of how you got to the results that you did.
Thank you that yes, good to hear me Thomas John.
Yeah. I mean this is a discussion I mean, we announced it as I said on April 24.
As we continue to look at that market as you know Thomas where you will be acquiring as part of the Eldorado deal.
Harrah's Atlantic City, we saw this unique opportunity to kind of decrease our position airware at the same time.
The wild Wild West.
Casino and Sportsbook will be rolled into Caesars, so not all of the real estate or the asset is is being sold and.
It also was the negotiations that allowed our rent out of the non CPL V lease to remain the same.
And we just saw this has a unique opportunity to to make that transaction and for for those reasons thought it was good for for us to do that.
I guess, you Ravi expectation that your tenant.
Income will go down because event and a hand, you wanted to get some incremental cast in or for that or how did you got to $19 million.
Calculation.
[noise] Davis splitting up the twin go ahead David.
John.
Yes or no.
Go ahead David.
During the time, if there was down somewhat of the Reno transaction, where we split the proceeds 70 525 with Caesars that we announced at the end of the beginning of this year.
<unk> proceeds split roughly 75% the total.
Total consideration went to the beaches landlord and then Caesars is as operator.
Okay. Thank you.
Your next question will come from John Massocca from Atlanta, Atlanta for.
And your line is open.
Good morning.
Morning.
I know, it's kind of belabored this point, a little bit, but just given some of your commentary on on prior questions. I mean, it's fair to categorize your view of negotiations with tenants, but you prefer some kind of.
Asset for.
Asset exchange or asset for liquidity exchange to the traditional.
For all that maybe we're seeing more of in kind of the.
Retail oriented net lease space.
John.
Okay, I think yeah I think that's.
The way you should think about it I I think it's important I understand the also <unk> for us that it's made its may 1st today that the clarity on when the assets are going to open. It is not great hopefully in the next week or so we'll get greater clarity and then how these assets ultimately ramp.
It's not real clear and you can see there's numerous scenarios run by every operator in buyout.
So it's important for us to continue to see how this ultimately is going to play out but your description is exactly how we've been thinking about it is that these are temporary issues.
There needs to be temporary solutions and those temporary solutions have to have value for value trade.
And not so that's a quick way of.
Our overview of our philosophy.
Very helpful.
And then switching gears a little bit is it kind of enter what might be a more challenging environments for kind of Las Vegas in Las Vegas strip market, how does that change maybe philosophically the way you look at at your Ropers there.
Yes, maybe make it more attractive because you might be able to potentially get into it a.
Property at a lower basis or.
It's a little more uncertainty would you potentially think about.
You're not executing on on those opportunities arose.
Yeah, I I'll turn it over to John pain in a moment John.
But you know I think our starting point would be that.
Well well Vegas me.
You know.
Recover somewhat more slowly.
Then the region over the long term, we have no. There's no flagging our conviction that it is one of the world's great destinations, but John I'll jump pain.
How are you more color.
Yeah, I think Ed you started out the answering the question perfectly I mean, we're a long term investors of real estate as you all know David open up by saying, we look at our leases over 35 years.
Yeah. This is this pandemic as Dan just awful and unprecedented but we do think that it is temporary now whether temporary is months or a temporary as a year or a year and a half we'll have to wait and see that ultimately plays out and I sure can't predict that.
But it doesn't change our long term view of Las Vegas, and our long term view of the very limited amount of assets that are on the strip in Las Vegas.
So we still think that that is a community and a destination that over the long term, we'll continue to perform and we'll continue to evaluate opportunities there whether that's in the short term or in the long term. So I hope that gives you some visibility and how we're thinking about it.
No I appreciate all the color that's it for me. Thank you guys very much.
Thanks, John.
Your next question will come from David Katz from Jefferies. Your line is open.
Hi, good morning, everyone.
You know covered a lot of detail, but I wanted to just follow up on she so and I did get on a minute or too late so apologies. If you you've touched on this but just thinking and recognizing that it is noncash and optical.
And what it represents.
You know how could we think about what that will look like.
A quarter from now two quarters, you know three quarters from now on the assumption that we start to.
Moving down the road toward you know properties starting to open up. It you know is this kind of the one big shot for it and what we see as an incremental from here is that how we might expect that to look.
Yeah, David Katz, good to hear me I'll turn it over to do keep skiing, and just a moment but.
Let me give you my perspective as a non accounting my perspective as an asset manager.
And what seems to first came along I confess I was really got to do that why but what I've come to appreciate about the Cecil practice well. It is I believe a valuable management tool when it comes to being situationally ready.
What Cecil requires us to do is first of all to look forward, which is always valuable in of itself and as we look forward ethic credit quality credit conditions and operating performance our tenants the forecasted.
Performance of our tenants it requires us to be honest and rigorous about what's the various scenarios could be and it is a further tool than our tool kit to make us situationally ready.
Or what may transpire in the coming periods based a reasonable and rigorous forecast as to the volatility this diesel could bring in coming quarters in years I'll turn that over the two keys.
Great. Thanks, Ed It David Katz, yet is that said.
So reflects the deterioration, especially in Q1 in the broader economy, it's not management's expectation for any losses in the current portfolio. It is simply an accounting standards and noncash allowance.
And if you look at notes six page 28, 29 of our 10-Q Weve put some good disclosure in their around how Cecil evolved over the first first quarter on one 120 20, we had to.
Gordon initial allowance that was 2.88% of our total investment balance.
That number on a normalized.
Normal economic environment should try to answer your question, David should move around 510, maybe 15 basis points a quarter.
Given covert giving the downturn it spiked up to about 100 basis points this quarter so that.
It's the.
The model is.
All identifiable inputs really around credit rating in the economic outlook of the economy and so that's what drove the change, but once we get back to normalized run rate.
Right, David it should be much.
It will be less volatile and stay within a little more of a stated range.
Okay perfect. Thank you you said.
Thanks, David.
Your next question will come from Barry Jonas from Suntrust. Your line is open.
Hey, guys good morning.
I I guess just at a high level.
Any color on how this crisis may change or say influence spot structured deals in the future.
Yeah, I'll give you some first thoughts very good to hear from you and your well.
I said in regard to what rich Hightower asked about you know I do think you know this.
This whole experience will cause all of us expand the rigor with which we account for or you know extreme scenarios.
Performance or or operating condition.
Until I think you know there will be a lot of focus obviously on tenant credit quality as there always Oregon was with us and coverage and various lease terms and conditions that that give us and the tenant comfort that ah that even in the most dire times weaken.
Page you know mutually survive and ultimately to arrive John and David Kiki want add anything to that.
No I think you just described it well.
Thank God, we will.
So I have nothing better.
Yeah.
Great and then I guess, just a follow up from me any color on golf operations, just curious any expectations.
On when that business could reopen and what the ramp could look like for that particular business.
John Yeah, I'll take I'll take that as Ed mentioned, we're opening two of our courses today and two of our courses tomorrow.
And no Nevada escape to go ahead to your two days ago. So we've not had a lot of preselling, there and those will open tomorrow or course in Mississippi in our course in Indiana open today, and as Ed mentioned that the T. sheets.
We're we're we're quite full so we'll continue to.
Watch that the operations like we're seeing other hospitality areas are not full operations, meaning our club houses.
Or not open or food and beverage not open I think we'll have some really good visibility over the next six weeks as we're able to start marketing to consumers and our destination courses in Las Vegas, we'll obviously be more focused at the time on a locals and in some of these courses like as Scott.
Auto, which I'm not currently a golfer, but I know from golfers. That's a bucket list scores that we will price.
At a feed to allow locals to come out in play. So we should see some good demand to start getting that business up and running.
So to answer your specific question I I think we need a couple of weeks to better understand how it's going to ramp but the early results at least what we're seeing in Indiana and Mississippi are quite encouraging.
Alright and heritage.
What I would just that.
Well, obviously the economic impact at this at IGI is not all that material I think the greater meaning for us and perhaps for you as well.
The is the pent up demand they get out of that God Damn house or Dave. So strongly test in America right now I mean, you're seeing it manifests itself on the beach is people just want to get out.
And while we see data measures public perception of safety and their willingness to go back out again, while we do see a high percentage of Americans rightly, saying, you're going to be careful and how they return to leaving home.
There's a lot of people.
Oh.
Including me [laughter].
Next question will come from Sean Kelly.
From Bank of America. Your line is open.
Hi, everyone. Good morning on.
I'm not sure.
Just a question is best for but.
I'm just kind of curious as we think about the the reopening plan from the operator perspective.
Well just wondering if you guys have any thoughts about.
How like the you know which properties reopened a you know by the operators could could impact sort of a difference in coverages between sort of four wall properties and the broader corporate guarantee so maybe just your broad view on sort of.
How does the corporate guarantee help you in that kind of at the end this type of landscape and how could that fluctuate around the portfolio or impact operator decisions. Thanks.
Sure David you want to take that.
Yeah, Thanks, Sean and as Yoga Yogi Berra once said, it's tough to make predictions, especially about the future. So yeah. This is where we take this is where we take.
Comfort in the master lease and especially across the Caesars portfolio, which obviously have assets all across the country Vegas and Im very very good regional network.
So we came into this north of three times when a corporate coverage.
Even given the wholly owned assets in the Caesars.
The Caesars portfolio, primarily on the biggest strip look that corporate coverage will come down and nobody really knows where you know what the ramp will be with EBITDA will be but.
The corporate coverage is key to us and obviously, we have that with century Penn and yeah, we have individual leases with Penn where we are.
Pursue with Joe Pie.
Corporate coverage.
And then hard rock is.
Well sort of corporate coverage, but given the investment grade nature of that tenant we feel very very comfortable that we have a corporate coverage on the smaller entity with Jack very meaningful investment we're doing gilbert's one of the owners there so.
Well have to fee, it's hard to it's hard to say, it's hard to predict the the coverage as.
We will come down, but we don't really you know we don't have a good sense as John talked about how this oakley opens and ramps.
Thanks her thanks for entertaining that David and then my other question was just on the on the.
The Jack portfolio, specifically can you just remind us of what sort of eat the extra collateral or what what is kind of <unk>.
What maybe in that corporate guarantee beyond the you know the obvious operating properties that's it for me.
David and John.
Yeah, I can do to go into showing them to forgive another entertain that one.
And entity called Rock, Ohio ventures are over you.
It owns the two casinos, Jack Cleveland injectable checked Cleveland actually sits within the he'd be building, which is part of our Ob rock, Ohio ventures, as well as a garage next next door and in some additional land.
In that area so.
Hi, this for the reason, we ultimately did that loan to Jack is there's a.
Digital real estate collateral within that entity.
Thank you very much.
Your next question will come from Daniel Adam from Nomura. Your line is open.
Hey, guys. Thanks for taking my questions and I hope, everyone safe and well.
Thank you then I'll same for you.
Yeah.
Well here thanks.
Hi, I was planning to ask the softball question, but.
So far down in the queue I think after you guys have a curve ball.
So my first question relates to the pending Eldorado transaction when.
When you guys way the benefits of deal accretion with.
The risks associated with the pro forma leverage and credit profile of the tenant I guess my question is this V cheap necessarily even want the deal to close and you know I fully recognize of course that.
The decision as in the hands at this point of the regulators and totally out of your control, but just curious as to how you guys think about it.
Yeah, I'll start Daniel Yes, we absolutely want it close we think it's a it's the best outcome procedures. We think it's the best outcome for Beachy Ah, We think the resulting company will have the best footprint in American gaming or the biggest broadest regional footprint the best CRM system in American gaming, which.
We'll now also put horsepower into the Eldorado assets.
He will feed the best hub to.
Hub and spoke network in American gaming.
Got a great management team that we think it's going to run the business very energetically at Moreover is taking it approach to a two decision decision, making accountability and operational energy that's very much focused out at the property level, which we think is going to be absolutely key and at times like this where.
As these gaming assets.
He opened and as they recover.
Each single asset is gonna have to be intensely in touch with its own marketplace to make the best assistance for that marketplace and that's very much the strategy that Tom Reeg has talked about since day, one for the for the New company, but it's even more critical now so yeah. We're we're very excited and what comes at a low.
Leverage or Tom Reeg said all along.
They will fiercely work to de lever and de risk that company, we take a lot of topical than that.
Okay, Great I appreciate that color it and a question for John.
I think you alluded to it to some extent in my prepared remarks, but just wondering if you know your experience from the current crisis has altered in anyway, the company's appetite for diversifying into non gaming real estate asset classes.
For me thanks.
Oh, Yeah, we've talked about that yeah, we've talked about this quite a bit I mean, it as I said in my opening remarks, and I've said throughout the.
Any any median GE pad over the past couple of weeks is we've been very thorough and looking outside of gaming and.
You know even before the pandemic, we elected not to make any.
Any investment into assets.
Outside gaming.
I think right now we're laser focused on.
On our tenants and the gaming industry, and we will remain that way.
But I don't think again and we're talking short term long term I think in the long term.
We will continue to do our diligence on scenarios that we have found interesting.
But I wouldn't expect an investment outside a gaming and they're relatively short term.
Great. Thanks, guys.
Thank you Daniel.
Next question will come from John Kerry convenient gambling your line is open.
Hey, everyone. Good morning.
I just want but for me and it's give me a little higher level or conceptual.
But we think about the trend devaluation here, which is obviously hard to discover given casinos are closed comment on the other side of this on I think when we talked in the past about the cap rate compression story here to keep the idea was by as much real estate as you can before the market realizes how valuable it isn't when when I compare.
Guys to other Reits in the space. It we still haven't seen a change in dividend policy from your rent concession yet we're in a zero revenue environment from your tenants. So.
Kind of wondering how you think about.
The market's perception of your business as we kind of crossover on onto the other side of this and your views.
We've already saw some some third party interest.
From the likes Blackstone and the casino industry prior to the pandemic I mean do you think the sector.
Comes a lot higher profile on the other side of this given what you've done we've been able to do just so far with with your tenants and the resilience that you've kind of proven so far.
Yeah, you know if it's a it's a very good question John degree and.
Well.
It is a time will tell answer to your question.
I can tell you what I hope and I hope that the gaming.
I think that gaming as they consumer sector ends up coming through this whole crisis and relatively good shape versus other consumer discretionary sectors.
I believe it will I think if it does and it will help who value the resiliency of our gaming real estate model, you're certainly seeing across many other real estate asset classes.
Obviously, you know rent payment performance. It certainly does not equal what you're seeing in our gaming REIT sector. So far.
And I think you're also seeing you know what happens when a real estate asset class comes into a situation with pre existing condition as you're seeing again in so many other especially retail focused asset classes.
So.
I'm hopeful that it is going to validate our our model.
It will validate our values than potentially.
I have them higher in the future, but again I'm, a time will tell and it showed dependent now they see.
When we get real.
How we recover.
Thanks, Ed I appreciate the thoughts.
Thank you John.
Your next question will come from Jay.
And rich from S. M. B C. Your line is open.
Hi, Thanks for taking the question I was just curious you somehow knew for sure that the Eldorado merger would close would you still have to separate guidance.
David you can take that.
Given the via they've got.
On acquisitions anyway.
Yeah. Jay this is as I mentioned in my remarks in our guidance would which was about 50 to Buck 54 Didnt include the Eldorado deal. So it would that.
No not related is really around the.
The noise that the a FIFO allowance was creating and given the net income obviously is negative if if those are the same as our net income given there's no reconciling item between the two line items in our business, but obviously an add back for if AFFO. So that was really what drove it.
Got it thanks for the clarity there and then also as it relates to the critical nature of casinos I'm wondering if you are your tenants have had any conversations with state government about potential tax relief to support beginning recovery.
John pain.
Yeah, I I can't tell you what every operator has gone we have not.
But.
As I mentioned earlier in my remarks.
If I was an operator I know there that that some are there there they are digging into all the things that affect therapy in l.
And I'm sure there have been some discussions about temporary relief or reduction of taxes I have not seen any state given goes.
But it wouldn't be surprised if there were those discussions I just don't don't know [noise].
What the outcome and if there would be any change at this time, obviously the states.
Our.
Need those tax dollars.
Is there and a tough situation as well.
Okay. Thanks, very much that's it for me.
Your next question will come from Spencer and away from Green Street Advisors. Your line is open.
Good morning centre in Q.
Hi, good morning.
I just wanted to clarify in something related to see full adjustments recorded one keel I know you've I said that moving forward the adjustments will be well should be less volatile, but as it relates to the reduced values and Mems and leases on the balance sheet is this one I know you will can do you revised upward environment improves or is this a permanent reduction.
Yeah that Spencer hopefully well no it will.
Reverse over time, it's one of the main drivers as the credit ratings over tenants and a couple of the tenants were downgraded during Q1, so as those as lot of people know agencies are quick to downgrade and will take some time for them to.
Oh, absolutely upgrade them, but.
As they do get upgraded the economic environment improve.
You could this will be reversed overtime.
Okay. Thanks, and then just sneak one more finance and as it relates to your Vegas assets when when the classroom and these are ultimately like uplift did you I suspect that operators will open casinos all at once or anything that we could perhaps see select openings on the strip just due to the unique nature of in nearby competition potentially lower traffic and.
And obviously the higher cost than operating these assets.
Yeah sensors I have done Aspen, Oh have Spencer John John answer that question directly in a moment, but before he does I just I wanted to say something you actually pointed out in Fourq you put out earlier this week, which isn't that a California represents I think it was about 23% of bids.
Taishan to Las Vegas, and I, just want to say for this for the benefit of everybody asked we think about the recovery of Las Vegas.
We we need to appreciate the fact that Las Vegas, while it is an international destination is a regional destination for the California gaming customers and I would not underestimate the extent to which California traffic will bring the vitality back to Vegas, you would not have anymore.
Slated location they are highly proximate to whatever it is 30 odd million people and I think that is going to be the benefit of Las Vegas as to the way in which managers may choose to open properties in sequence in Vegas, they'll turn that over to John.
Yeah I believed for the operators that have Bob multiple assets I believe in fact jet MGM yesterday released earnings and I believe they talked about opening a few assets at a time that wouldn't surprise me. If that's the case in the Caesars network they have not come out obviously.
The plan because they don't know yet when they they can open.
But I think your your thought process is right as as demand gets built up supply will continue to open up and hopefully that'll be a quicker than longer.
Okay. Thank you and yes, and yes, great point on the California visitors and really that's why we are trying to make that you know I'm thinking it could recover faster and then I mean Sam.
Based on those I think the point that some people might not be aware so.
Thank you nice color.
Thanks.
I have no further questions in queue I turn the call back over to the percentage for closing remarks.
Thank you operator.
And I hope all of you found the calls.
And maybe even a little bit entertaining one of our owners Texted me during the call. So let me know pretty sure. This first earnings call that involved both Winston Churchill and Yogi Berra. So again, we hope you found the time value and let me just close by reiterating I think all of you.
Paul with each passing we will learn more about what our collective recovery from coal with my team will look like.
Hi, Andy.
I mean, the gaming industry and as the plumbing series unfolds, we'll share learning with U.S. can you just you always reach out to less whenever we can be a hockey, but now you have a best wishes for good health.
Thank you very much.
Thank you definitely operator.
You're welcome. Thank you everyone. This will conclude today's conference call you may now disconnect.
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