Q1 2022 Gaming and Leisure Properties Inc Earnings Call
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Now I'll turn the conference over to your host Joseph Oni Investor Relations you may begin.
Thank you Kyle and good morning, everyone and thank you for joining gaming and leisure properties first quarter 2022 earnings call and webcast. The press release distributed yesterday afternoon is available on the Investor Relations section on our website at Www Dot G L.
Inc. Dot com.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements as defined in the private Securities Litigation Reform Act of 1995 forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.
Forward looking statements may include those related to revenue operating income and financial guidance as well as non-GAAP financial measures such as F. O F F O S.
As a reminder, forward looking statements represent managements current estimates and the company assumes no obligation to update any forward looking statements in the future.
We encourage listeners to review the more detailed discussions related to risk factors and forward looking statements contained in the company's filings with the SEC, including its 10-Q and the earnings release as well as the definitions and reconciliations of non-GAAP financial measures contained in the company's earnings release.
On this morning's call. We are joined by Peter Carlino, Chairman and Chief Executive Officer of gaming and leisure properties also joining today's call are Deseret Burke Senior Vice President and Chief Accounting Officer, and Treasurer, Brandon Moore Executive Vice President General Counsel and Secretary, Steve <unk> Senior Vice President Chief Development Officer, and Matthew them check Senior Vice President Chief Investment Officer.
With that it's my pleasure to turn the call over here host Peter Carlino. Peter Please go ahead.
Well, thank you Joe and good morning to everyone.
We are pleased on this lovely spring day here in Pennsylvania to report another strong and eventful quarter for the company.
In this quarter, we completed as you know the acquisition of the real estate assets of the live Casino and hotel in Philadelphia.
And in Pittsburgh with the Cordish companies.
You will recall that we closed on the Maryland live property in December .
And.
These are extremely high quality assets for any of you that know them developed by one of the country's foremost property developers and.
And we see considerable opportunity parenthetically with.
Cordish as we look to the future.
The details of this attractive transaction are well well outlined in our in our published release.
Also this quarter, we closed on two properties with a bally's.
Quad cities.
Rock Island and in the Black Hawk.
So that's four properties added to our portfolio, which I just noted with some interest to me if not to you that when we.
Commenced our spin in 'twenty 11.
We did so with 24 properties and that number has grown to today I'm 55 and we.
We intend to keep adding to that as we have consistently over that.
Over the years.
A couple of other things I will quickly highlight we are investing.
With.
With casino Queen in Baton Rouge, as you might recall.
Building, a landside facility, which we control and sense that I had a vision for that property that does that queen and the team well accepted I think steel is up it's finally, moving along with decent weather. If we can get all the all the things that we need with a target two.
Words opening I think second quarter of 2023, it's gonna be a pretty cool project, if I must say it it really well and I think it's gonna have a significant impact in that in that market.
Now that we are through that grouping of closings.
Which were and always are somewhat uncertain and from a timing point of view I think that I am prepared to say that we will recommend to our board shortly that we resume guidance I know that's a question. Some of you have asked in the past, but we will.
Recommend.
Resuming guidance with a range Hum in the next few weeks and I would hope that perhaps we could initiate with the board's approval guidance. This next quarter.
In a similar vein things have gone extremely well for us this year.
And expect that it's gonna be a strong year in 2022 and into 2023.
With that in mind, we're also prepared to recommend to our board.
An increase in our dividend.
We'd expect to do so publicly.
In the next few weeks so that is certainly a goal not absolutely certain but we management is prepared to recommend such an adjustment to our board.
With that I'm going to turn it over to to Deseret and give you some financial focus.
Good morning, Thanks, Peter.
Our total income from real estate outperformed in the first quarter of 2021 by over $51 million and that was primarily related to the cordish transactions, which Peter just described which increased our cash rental income by approximately 23 million. The closing of the bally's transactions last year in June of 'twenty, 'twenty, one which increased.
Cash rental income by 10 million.
The completion of the sale of our operations as Baton Rouge, and Perry, though and the following lease up the properties, which increased cash rental income by $3 7 million.
We achieved escalators on our pinnacle, Boyd Bell parent and Penn leases, which added $2 9 million.
And lastly, we had some higher noncash straight line rent revenue gross up and the investment at least adjustments of 9 million.
Our operating expenses increased by $13 7 million and that's primarily these are noncash related its the charge of $26 7 million related to the provision for credit losses associated with the new cordis lease noncash land lease gross ups on land right amortization, which increased by approximately $7 million and that.
Were partially offset by a decline of 19 million and gaming expense.
Gaming revenue and gaming expense are now below zero as a result of the sale of the operations on July 1st in December 17th of last year, and I should note that although G&A expenses only slightly favorable the REIT G&A increased as compared to the first quarter of 2021 was primarily due to noncash charges for stock compensation expense.
And well as well as a reversal of our 'twenty 'twenty bonus, which got reversed in the first quarter of 'twenty 'twenty. One so the number in 2021 is artificially low.
With that brief summary, I'll turn it back to Peter.
There's one comment before.
We are open to questions one of our goals. This year as we in addition to the.
Casino Queen Baton Rouge, construction is to invest more dollars where possible with our existing tenants. So that we are actively pursuing dialogue.
Results are unknown, but it's a big focus internally here to see what moneys, we can put to work with our strong tenant grouping. So that you might keep that in mind hopefully we can announce some other activity through the balance of this year with that operator, we can open the floor to questions.
At this time, we will be going away, let me hang on let me slow down in a second.
Uh huh.
I mean looking in the wrong direction around the table here that demchak has some prepared comments that he would like him to make so sorry that I do apologize. Thank you Peter.
Thanks to everyone for joining this morning.
As macro uncertainty persists in the capital markets volatility was evident.
To remind everyone on the call today Jill P is business model was built with environments like this in mind.
In fact, our reported four wall coverage has again increased across the portfolio with a number of leases now at all time highs.
This robust coverage reflects continued operating resiliency while it also provides a buffer for margin of safety for at least payments.
Our leverage and liquidity or at levels that strengthen and support our business model.
<unk> strength continues to be a key focus the.
Our match funding strategy and capital markets discipline that we exercise and fully funding the entirety of our cordis transaction with a creative mix of O. P units ATM issuance and then successive overnight equity and debt offerings was prudent.
It's also emblematic of a simple balance sheet mantra that was developed and refined over many years of observing the REIT space do it right and sleep at night.
We approached transaction funding going forward and our overall business you should expect to see the same continued discipline that results in G. O P I locking in a transaction accretion.
As we move forward with their strong and sound financial Foundation, our focus is squarely on our nursing opportunities for the prudent deployment of our shareholders' capital.
And our objective remains increasing long term intrinsic value for sure for all of our shareholders.
Now turning that discussion back to Peter I don't know, it's dangerous if it comes back to me Matt.
Look I think Matt.
As highlighted philosophically kind of who we are and the way we think about our balance sheet and what we are what we're prepared to do to protect and enhance it so with that.
Can I turn it over okay.
Ready to go so we're ready to go operator, please open the floor to questions.
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One moment, please while we poll for questions.
Yeah.
Our first question is from Neil Malkin with capital One Securities. Please proceed with your question.
Good morning, everyone appreciate.
The the banter back and forth on a Friday morning, Peter.
First question first question I, just want to make sure I understand it right in terms of the.
The G&A.
A lot higher than we thought it was gonna be particularly with the the unwinding of your last operating our business.
Desert, you made and I alluded to that can you I just wanted to be sure like is that burn off going to be in effect in the second quarter or stated another way are you planning to get to like a sort of lower run rate G&A level, starting in the second quarter.
That'd be really helpful. Thanks.
Fair enough.
And the answer is yes, I mean, we will be at a lower run rate in the second quarter because of these noncash items that are hitting us in the first quarter.
Stock comp expense is running a little bit higher although our stock comp expense is normally higher in the first quarter than it is for the rest of the year due to retirement.
Retirement eligibility and the accounting requires us to be Expensed all immediately when those grants are awarded.
So that will come down a little bit, but our G&A run rate well, well definitely get lower and be more in line with where you would expect.
Okay. Thanks, Greg for that.
Another one is on the investment opportunities that you guys have mentioned the internal existing tenant.
That's an opportunity I was wondering if you can maybe talk about some that are you know you know closer than others.
You know potentially the Tropicana I think you said you might have some updates closer to the middle of the year.
You know any any any comment there.
Well, let's put trop aside for a moment, we will come back to the drop in Tropicana.
Nothing we can really identify but you can bet that looked at our portfolio of tenants and I think it's safe to say that we've had conversations with every one of them about some prospective thing that.
We're initiating that they may wish to do right now our cost of capital has.
Becoming increasingly more attractive every day, it's long term, it's permanent and it should be appealing. So we'll see we can't control that obviously, if we can put a hotel ear or something there there are those kind of conversations going on but.
It's dependent upon what our.
Tenants might pull the trigger so but I will tell you the level of those conversations has increased again, no predictability whatsoever, except to say that we're really focused on that Steve I think you have more conversations now then.
And we've had in a while yes, yes, Peter I mean, if you look at even just boyd's release right, there, they're spending money and treasure chest and in some other properties. We've already mentioned on the call today that we are working with casino Queen.
Landside move in Baton Rouge so.
Property owners are starting to look at their own properties and with the margins, where they are and our profitability where they are there. They are looking for ways to increase revenues because the pass through is is amazing. So we are having conversations I think we've had a conversation with every one of our tenants in the last quarter about different things that they're looking.
And like Peter said, no, telling what will or won't happen, but.
It's a positive outcome for us to have that ongoing dialogue.
So you can count on that effort and look we've consistently found transactions year in year out are there.
To help us build a portfolio to the 55 properties. We have today that number will surely grow over the next year.
Let's go back to trapped in because that is a big question.
The timing and.
Both Matt and Steve can talk to that each of them. It plays a big part in keeping us going obviously anything we do is tied to.
Our conversations with valleys.
It's been widely publicized that the A's are looking at this site.
They've looked at others.
I think they I think safe for me to say that they have a very very strong interest in our side if the transaction can work to their advantage.
There's a lot of hurdles that have to be covered.
We intend as long as there's something in it for us I hate to sound greedy, but then its the way. It goes that property is committed to go to valleys on terms that we previously announced that's fine if that's all that ever happens.
Happy enough, if we can facilitate something bigger better for them and for US then you can bet, we're going to do that so that's an active ongoing profit a process right now.
I can tell you that.
That Steve and I were in Las Vegas last week I'm, just track of time goes fast a week ago and talking in part about that and meeting with all parties so well.
You will see there's absolutely no certainty about where that May go if we can facilitate something exciting you bet we will so.
They are I must say stay tuned.
Well, let you know.
Okay, great if I could just sneak one more in maybe Matt Matthew what do you think the difference would be in your the cap rates that you're paying or the deals you're you're making if you actually had in your contract terms you know.
Rent escalator minimums.
Or uncapped escalators, you know tied to CPI versus your kind of you know.
The run of the mill structure, you you do for almost all your leases.
Yeah, I mean, I think it's a little bit of a philosophical.
Philosophical question I'll give you one data point, though I mean, you can look at the Cordish at least we did and obviously that has a fixed escalator. So it has a minimum like you're talking about.
And that's something that based on our negotiation and market conditions, we did at a cap rate six nine.
But every one of these deals is very specific to the actual assets. The operator of the four wall coverage the credit support and teasing out is just one aspect is tough because nothing is comparable all that said, though I mean, the backdrop certainly changed over the past couple of years, we've seen new releases that have market terms that happened.
Some sort of CPI with ceilings etcetera, and then we just saw that Realty income lease that was done not that long ago that after mimicking our structure went to a CPI with a feeling that it wasn't too much higher.
And I'll just say, it's part of the conversations we have in real time with Counterparties on new deals that's something we keep in mind, but I don't want to negotiate against myself on this call as to where the terms might ultimately fall out.
Okay.
Thank you.
Our next question is from Jay Kornreich with M. D. C. Please proceed with your question.
Hey, good morning, guys.
You don't just kind of big picture over the past several years, we've been talking about cap rate compression in the gaming REIT sector and I wonder if you're starting to see that narrative essentially reverse as interest rates are a quickly rising or kind of how you see that playing out going forward.
Yeah got it.
I mean, it's a great question. It's one we ask ourselves a lot if we talk to our triple net peers, you're certainly seeing a re trades and cap rate shifting in real time and then this week last week.
Order of magnitude 25, 50 basis points going into closing for deals that were inked a few months ago. All of that said, we're at a very interesting place. We don't have as many data points for price discovery, there haven't been that many transactions.
And you're right. We've got countervailing forces on one side, you've got cost of debt going up which may actually make things a little more actionable for us for tenants that look at our capital relative to the cost of debt they might use but on the other side. You've also got this depth of interested appreciates the resiliency and durability of these cash flows.
And I'd leave it to the next transaction or two to really see where that market claim clearing price might be will certainly play a role in that dialogue.
As a public company on the margin, we're better positioned compared to private players than we were a month or two ago, because the high levels of leverage and the cost of leverage they were employing for their business models.
Now shifted meaningfully in real time, and we've got depths of access to capital through the capital markets and balance sheet strength to start with so I think we need to let that play out a little bit more and I'll use Peters term stay tuned.
Okay that makes sense and then.
It's been seen any incremental institutional capital interested in the regional gaming space I know last quarter, we had a new competitor come in with the Encore Boston Harbor transaction. So just curious if you've seen any any new players poking around the regional market.
Okay.
Related to poking around sure I mean, I think people have to take a look but and they're poking I think some of them appreciate the challenges of getting into the space, especially when it comes to limited license states that have regulatory hurdles and other challenges that that we've kind of uniquely positioned ourselves to take advantage of and beyond.
The right side of but yeah, I think based on the relative risk adjusted returns, there's certainly a lot of interest.
Okay I appreciate the time, thanks, guys. Thank you.
Our next question is from David Katz with Jefferies. Please proceed with your question.
Hi, good morning, everyone. Thanks for taking my questions.
With respect to the Cordish partnership.
No.
You you obviously have access to whatever they may do in the future.
Are you able to sort of talk about any.
Order of magnitude or qualitatively about anything they may be active bond or how we should think about that partnership and its prospects for you in the near term call. It you know two to five years.
Yeah David.
Quick answer is not really I mean, I wouldn't presume to get out in front of anything that they're thinking about looking at and what have you look they've been very aggressive as you know around the country in a variety of ways and between their casino facilities and their life facilities.
All by themselves freestanding and are incredibly attractive.
They are.
I am sure you're going to see them at the forefront of anything that evolves.
Not just with new properties, but even some existing properties I know they've demonstrated some interest again I can't say, how what in some existing properties, where they could be a buyer, perhaps we could work along with them and in that regard as well again. This is really not much I can say as I say, we're not lead of that but look these guys are.
Hungry people are they're very aggressive you might remember that I bought the prop.
Property in Kansas City, Kansas and built the NASCAR.
Partnership I bought that property from David way back Mhm.
He he was.
Competing site and.
And came to believe that he had to better better site more likely to win and.
That was probably my first significant.
Working with with the gorgeous company and with David himself. So these guys are kind of everywhere and.
All I can say is we're optimistic that something very positive will come out of it but that's you know my usual gibberish until we actually produce it.
I understood and if if we can just follow that up with again hypothetical.
Just for perspective.
The court issues involved with.
With Caesars in Pompano, right, which is a much bigger broader mixed use kind of thing is that the kind of thing.
That you know you would take a serious look at to see if there's a role for you to play.
Yeah.
Steve what we I'm, sorry, I'm looking around the table for yeah, David I think you know our arrangement with them as well as with respect to gaming development.
Well contractually I guess, I should say, but but with respect to our ongoing partnership and the dialogue we have.
It's definitely the type of project that they would come and talk with US about at this point in time I would defer to Matt to comment on on our interest in getting involved in some of their more mixed use in an apartment or residential type projects.
Let me see I'll, let me answer that quickly if there's nothing we turn our noses up at all if it makes economic sense good use of our capital good for them and perhaps.
Also for US absolutely we would do that gave me things like the non gaming question comes up all the time as you know and I'm sure, we'll get a call about that and what are we looking at you know I don't think there's a week that goes by that we don't consider some non gaming something.
The problem is we're in such a terrific sector today.
That finding its equivalent or even near equivalent is very tough.
When pressed I will say to do I expect someday will be someplace else I have to say yeah I got to believe we will but I'll be there today or is there something on the near horizon.
Answer is no.
And all of that David just on that broader topic as it relates to the Cordish, There's certainly a thematic and in real convergence going on in real time and that will likely continue into the future between sports base place, making and sports betting and what do you think about our core competencies and what we under.
Stand between real.
Este and also the gaming market some of the Cordish broader projects have aspects that could certainly checks. The boxes that are important to us all of that said again nothing nothing is hard wired, but it certainly listen when they started this partnership with US it was to give their incredible operating capabilities.
Our complement with really strong balance sheet and a partner who could if you put us together compete with anyone anywhere.
Think over time, you're going to see that manifest itself in unique ways and we'll have to wait and see exactly what they are.
Understood I appreciate the answers.
Thank you and thanks David.
Our next question is from Smedes Rose with Citi. Please proceed with your question.
Hi, Thanks.
You mentioned.
Incremental investment with your.
Tenants and I was just wondering over time would you like to have more almost like a formalized program, where our goal looks.
Investing activities that here just 15 minutes can be.
Pursuing this year.
Oh, we have a goal.
Whether we can get there or not is another matter.
Again, I'm not trying to be cute, but if we talk to just pick anybody pay pan or Boyd or any.
We're very enthusiastic about it.
Well, sometimes late opportunities out in front of them, but in the end they set their own priorities they set their own timing.
And our job is to keep in front of them, where they're a little smiling faces.
Our hands on our back pocket, where the wallet is to say, where your guys', we'd like to help them.
And so there there's nothing predictable at all but there's a little bit more activity in that area than there has been so we sense, we sense and believe that we ought to be able to pull off some meaningful investment this year with one or the other of them again I hate to give you that kind of non answer, but that's as close as I can come to it.
Yeah, we have.
We have a process within our lease where if the tenant is undergoing a capital improvement of a certain size they'll notify us and I can confirm we have received those notices and responded with terms we were willing to fund their capital improvements this year. So.
We don't have a name for our program, but we would love to we'd love to put money to work and our tenants are aware of that.
Okay I just wanted to ask you what.
For the Hollywood Casino Baton Rouge is that.
Changed at all or is there an update on that in terms of what you'll be delivering well.
Well, yeah, I'm not sure that well, let me back up I don't know what we've said about that project before I think we had laid out a budget way way way back that has expanded significantly not just because costs have gone up they've and they have.
But.
And improves the scope measurably going land side as you know.
It's a the new facility is if I must say, so we're gonna be terrifically attractive.
Very appealing, particularly.
On the.
The sports betting side and.
Just the whole scope of it you'll be able to drive up within a couple of inches at the front door almost.
And walk in and be plain. So it's gonna be the most convenient place in town clearly and the quality of it will back to anything else in town. So scale of course is different but it's gonna be a first rate property and so we're excited about that for them and for us because we get to put some capital to work, but significantly more than what we talked about before we're not.
Paired to lay out a number right now are probably in another 45 days or thereabouts, we should have a better.
Handle on the buyout of that job, but steel is a is a erected all the pilings have long been done to the so-called risky parts of construction by the river are long past and the buildings are moving pretty quickly. So second quarter of 'twenty three is what we target for a finish.
Facility should.
She'll be cool.
Okay, great. Thank you.
Thank you.
Our next question is from Daniel Adam with Loop capital markets. Please proceed with your question.
Hi, good morning, Thanks for taking my questions good morning.
The nearly $27 million credit provision in the quarter I believe is related to the Pennsylvania law as master lease how did that provision come about and what is rent coverage for the two Pennsylvania last Congress.
And so the actual $26 million there was actually a decrease in the Maryland portion and an increase in the Pennsylvania portion.
So that is a net number the $26 million and it it really is due to economic factors that we have to consider in calculating our credit loss as well as the rent coverage at both properties clearly and the property and the Maryland property is doing much greater has much greater rent coverage.
Then the Pennsylvania properties do but.
I don't have the exact number.
[laughter], Yeah, we definitely don't expect losses, and then we just have to do that as you know it's a noncash charge. It's added back for a oh its a credit loss standard that's required.
So under the accounting rules.
Okay got it that makes sense.
And then second.
Do you have any plans to refinance the term loan a or hedge your variable rate debt exposure given the rise in interest rates and that's it for me. Thank.
Thank you.
Go ahead, Steve Yeah sure. Thanks for the question Daniel.
We are in right now and in discussions with a group of lenders around potentially putting a new credit facility in place. So we're not looking to hedge that at this time because it won't those dollars won't be there for long.
And we will look to to refinance that.
By next quarter.
Okay, great. Thanks, so much.
Yep.
Our next question is from John <unk> with Ladenburg Thalmann. Please proceed with your question.
Good morning, Good morning, John .
Maybe building on that last question a little bit.
As you look out into the debt market today, where could you price.
Secured debt you think just given a the term loan is coming due and in some of the year.
Yes near maturity unsecured debt you have as well.
Yeah, I mean, I think you could look to the V. G. Recent bond deals as a pretty good indicator considering both our unsecured notes and their unsecured notes had the exact same ratings from all three agencies.
But I think that would triangulate and I haven't looked at it in the last day or so, but I think that would triangulate to a 10 year.
Offering around five and a quarter and a 30 year offering at probably five and five eights.
Okay.
And then apologies if I missed this earlier on the call.
We've seen I know, it's not a primary area in which he kind of that that historically, but we've seen some kind of movement in terms of new supply in the Las Vegas strip market in particular, I mean, how does that impact how you underwrite some of the transactions maybe that you're seeing come across your desk at all.
While you're focused on the strip.
I mean, I I mean, the strip itself doesn't have a lot of meaning to us.
And the trop deal, but even that we're not.
We we haven't prescribed deal there are well identified.
I'm not sure exactly maybe maybe see if you have different color on that question, you'll look because there've been a bunch of transactions on the strip I think there's one there's one that some people may be aware of that that's out there now I think that I think that the nuance with respect to kind of 2022 English any M&A mark.
Its marketplace for gaming reach the the thing I think you're going to see is as I think transactions won't be as large and bulky you've seen strip assets trade at very tight cap rates very large dollars. Then we closed out the year with two regional assets, but again I'm.
Very large amazing performing assets, that's not what the typical regional market is comprised of its comprised of wonderful small monopolies of various sizes and shapes and so I think as 2022 roles on you'll see a continued M&A activity into gaming.
<unk> space and in the gaming space, but I think the size and scope of those transactions will be very different I think you could see things as small as $100 million and you know maybe you see a billion but outside of the strip.
Not sure that we're going to see those outside of large corporate M&A.
I make this comment if I may and my sense. The encore Boston is not a regional transaction by any measure you Gotta Las Vegas asset basically built in a major market with with with Las Vegas kind of dollars that doesn't really relate to what goes on in.
90% of the gaming cities in the United States. So that's my personal bias, it's not necessarily reflected.
Of any normal quote unquote transaction.
Okay. That's very helpful color and then one last kind of a more detailed question for me.
Any kind of outlook or guidance or color on.
Rent resets for some of the leases that are resetting in may.
Yeah. So the actual certifications haven't been provided to us yet and we aren't prepared to comment but clearly if you look at the release on page 13, you can see the rent coverage that we have for our partner and they reported to us on a trailing 12 month basis.
For the Pinnacle, one at $2 29, and avoid wanted to 293 those are the ones that reset in may and they only need to be at 1.8 to achieve escalations. So.
We're not telling you what you know what it is but.
Thank you guys that kind of points you in a direction.
Okay.
Is it for me. Thank you very much thanks.
Our next question is from Robin Robin Farley with UBS. Please proceed with your question.
Great. Thanks, just following up on the earlier question can you just clarify kind of what change in assumptions in Pennsylvania created the increase in credit provisions.
Well at the Pennsylvania based with a brand new leases for the quarter. So it created it it's in that.
Setting up the reserve for the first time, which is why the number is that like.
But it was there something specific to those properties that it sounded in your earlier comments that.
You mentioned something about economic assumptions there. So I just wanted to clarify what.
It may be different sometimes well, that's how that reserve and it was determined based on the economic factors, we actually use a third party to do our calculations and to help US do in reserve model, but and you know, it's because Pennsylvania, we just signed on March 1st. So therefore, we're setting the reserve for the first time.
From here on out you'll see movement in that reserve, depending upon you know as the interest rate environment goes up or as you know cost of living continues to increase you'll see economic impact there's impact what the estimate of the reserve will be but as Peter earlier said, we don't really expect a cash loss.
Counting rule, requiring you to look over the 39 years of the leases and set a reserve.
Most of you know I'm pretty straightforward I think it's crap that we have to do that I'll be honest and before you know you've got a problem banks take reserves.
Thanks lenders take reserves all the time, but usually you wait until you find that there's a problem. This is something prescriptive that we have to do.
And there's a formula and a process and we as Doug says we bring in a third party to do it it doesn't suggest for a moment that we expect to actually suffered those losses.
Okay, great, where frankly than that but that's the way I feel about it.
Thank you for clarifying.
Also.
If you could just remind us in terms of.
You know your earlier comments about that you are seeing interest in the transaction.
He's actually marketing and non gaming reach and maybe sort of some of the non traditional buyers in the space can you remind us are you contractually.
Protected from any potential new buyers with with your existing tenants or as long as they could match or better the terms you're not protected if you just sort of help us think about the competitive moat there. Thanks.
Talk about what the lease provides.
I'm not sure I fully comprehended, where you were headed with the question, but what I can I can address what protective measures we have with respect to our current tenants so our leases.
Do contained radius restrictions on new competition with our tenants in and so we are protected in some ways in new markets with tenants.
Opening facilities down the street the intent of that is that the tenants shouldn't be in a partnership with US and next door open a brand new facility or by facility and move their business next door, thereby harming our business in our rent and our building. So we are protected under the leases outside of the leases I wouldn't identify any specific.
Protections as it relates to our current tenants.
The only thing that's tied up Robin as we talked about earlier any new gaming developments that might come in the next seven years with the Cordish companies that is one piece, we're hard wired into as a partner.
We've got a few other structures with other tenants to have.
First look at things or things that aren't we don't know if they're going to come to pass or not.
Thank God, we quit giving away any secrets.
It's no mystery that Penn has talked about a hotel in a couple of markets are we would love to participate with them if they find our offer attractive and the opportunity should arise, but as I said earlier these things are unpredictable.
Our job is to be a.
The ready willing and able to support these folks.
And others should the opportunity arise so I.
I guess the point, we were trying to make is that we're front and center in front of these guys. These people every day ready willing and able to proceed and we just sensors a lot more momentum towards some activity only the year will tell whether we're right or wrong.
Okay, great. Thank you. Thanks.
Thanks Robyn.
Our next question is from Barry Jonas with Truest Securities. Please proceed with your question.
Oh, great. Thanks.
Beyond just assets Whats your view on M&A with other reach with.
Portfolios, maybe outside of gaming any general parameters, you would look for or require there. Thanks.
I don't know.
Do you want to take a whack at that one specifically about well about anything outside.
Why do you think of anything I mean, it's small and large scale anything outside of gaming. We've got the same hurdles that we've talked about historically one is to have durability and give us conviction that the business model has got resiliency like our underlying business and our gaming assets.
And then it comes down to a risk adjusted spread to our cost of capital and how it fits in with the competitive advantages, we have both underwriting and sourcing capital. So there's a there's a number of things out there that could be moving pieces. The funnel is very wide at the top but it gets pretty slimmed down when you think about the criteria. We have and then its a cost of capital.
Question to see if each incremental opportunity even if it's in an area that's attractive to us can make sense for us financially.
Well.
See how it plays out yeah, we have to have an appropriate spread to our cost of capital number one but the way. These things sometimes come apart is the longevity issue. If you look at the transaction. We just did with Cordish companies, who have a very very very long time horizon and you look at what typical of a REIT leases look like.
Hey, wait and such a great space, it's really hard to accept something less.
I mean, we.
Okay.
Sorry, sorry.
This is an important point to add in conjunction to Peters. We spent a lot of time creatively thinking about how we can partner were sourced. These things we've got a lot of ongoing discussions across people that you might know the names of them that you don't know the names of to think about ways, where we might just like in gaming.
<unk> unique accessory uniquely price something that could be a bespoke solution for someone else in some sort of off market larger something.
All that said, though Peter's point, nothing yet crossed the threshold, but that's an extra tool in our tool chest. If you look at what we've done historically in gaming that we think could be applicable outside of gaming.
Yeah.
Thank you started with other Reits are you suggested.
We look at other things, including.
Corporate type transactions potentially.
But suffice it to say that we haven't found anything remotely actionable on the horizon.
Okay, Great Yeah, that's what I was getting at and maybe just as a follow up Peter I'd Love you know pulling from your old operator days any general thoughts on how this creeping inflation environment impacting your tenants and their customers.
You know that's always a fair question I I have made a couple of points overtime I used to say that many of you have heard me say before that our revenue in the gaming World is bulletproof. It is absolutely bought broken for a company like.
Hours or even at an operating company like I say, we'll pick on Penn.
It really.
Who has properties literally from Maine to California does so well distributed but nothing really can hurt the entire program and I would go on to say, we'd taken atomic attack to hurt revenue from a well capitalized.
Capitalized.
A gaming company.
We got an atomic attack to my Great Har, an amazing surprise called the pandemic never in American history, if we shut down the country. It actually happened, but the good news in all of that is.
Everybody survived and they're and they're doing better than it was before we went into it that is a shocking happy surprise.
I can tell you that I've been in and around the gaming business certainly in our racing business since 1972, when I began as president of Penn National itself.
So every recession, except Oh eight so.
So every recession.
Our revenues at that facility at most of our gaming facilities went up now.
Could try to hang a reason on it I have no idea and even then as you know looking at our numbers, we we never dropped coverage below let's say one four.
Times are.
Throughout the worst of the pandemic so I believe.
Again, many of you heard me say this that if you look at the <unk> hierarchy of needs. It is food it as shelter and it's gambling no. It sounds preposterous, but oh, it's a way of underscoring that revenues in the gaming world are highly highly highly sticky people never give up there I think 10 minutes the last thing that goes.
<unk>.
So I I mean, that's the point I just cannot underscore enough not really worried about the recession not worried about gas crises again people won't give those things up very easily so I don't think there's any massive exposure.
On the Horizon I mean, maybe there's some set of circumstances it could evolve but under normal conditions I think it's gonna be a company that we were in Las Vegas last week and you all know that performance at these facilities is staggering.
Can't get a hotel room out there are amazing.
Amazing in the convention business is not completely retired so we were looking at.
Entertainment and travel so.
And of course as the best we know the properties in our portfolio as you see.
Killed it it's amazing.
So I don't know what I've answered, but I, just sort of the environment that we find ourselves in.
No that's really helpful. Thank you so much.
Thank you.
That's right.
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By the way as Matt said, we're sleeping well at night I kind of like us.
Highlight there were sleeping well, but I'm not worried.
Our next question is from Spencer all the White with Green Street. Please proceed with your question.
Thank you.
Massachusetts recently passed a bill to legalize sports betting in the state, including wagering at casinos and mobile betting to the extent that gaming revenue increases with the addition of new users linked to sports Wagering do you think we could see leases either renegotiated between yourself and the operator, such that you're able to capture more of.
The upside, perhaps see a person on trench.
Hum.
Who wants to provide that answer go ahead, I'll start and I'll hand, it to Brandon So you'll recall long ago.
A couple of conversations.
We highlighted our efforts over time to create a black and white definition around some of these features that didn't exist back when we originally cut our leases and the most major tenant of ours and most applicable set of circumstances, where our leases with Penn.
And we've worked with them and have arrived at the conclusion that we think balances these points very well and effectively G. O locates the activity that happens within our casinos and our leases with them.
And counts all activity that someone might have on their phone, which might sound like a small thing, but at the end of the day, if I'm sitting at the bar with you with someone else and we don't want to get up and go to a kiosk theres certainly a decent amount of activity that happens in that manner, and that's really facilitated by the environment in the real estate that the people around so I don't know Brad.
And what else, we might add I wouldn't add too much to that I mean, I think the focus for us in those leases was because of pins announced omni channel approach to building out the bars and sports bars in their facilities and our facilities to drive more traffic and revenue in there and it was important to us with the structure of that at least at that revenue that's taking place in our buildings.
I think with respect to some of our other lease there's more recent leases where the variable rent construct is not present that will have less of an impact on us whether that that takes place outside the parking lot inside the parking lot or inside the facility that being said it will add to the coverage and the health of the facility and the operations being conducted with.
The facility that it'll have less impact on the economic consequences of the rent that we derive from it so dependent Lisa is pretty important because of the variable rent structure less important from an economic standpoint and in our new releases.
Okay. That's helpful. I couldn't remember the Geo location was already kind of contemplated and then it sounds like to the extent that it becomes the more like prominent you know attribute moving forward with other tenants that would be.
Concern.
Oh goodness, yes.
I say this.
The question, we get an implied I guess in what you're asking is what's the impact going to be on the bricks and mortar companies.
There's no doubt that that's going to be a growing sector and even I gaming in those places where it occurs but my these are still early days yet for this I think theres sad maybe sad reality is is gonna be a lot more gambling that that's the reality I don't expect that I think most operators that we've talked to you don't expect a hit to <unk>.
And mortar performance in any meaningful way. The reality is it just going to be a lot for gambling going on for better or for worse is a public policy point of view. So that's my sense.
Yeah, No we would agree with you. Thank you.
Thank you that's it.
We have reached the end of the question and answer session and I will now turn the call over to Mr. Carlino for closing remarks.
Well. Good then we're happy to close out our conversation we thank you for taking time to join US. This morning, we're feeling good about where we have been we're feeling good about where we're headed and with that I'll look forward to chatting with you all again next quarter. Thanks very much. Thanks operator.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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