Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) Q4 2022 Earnings Conference Call February 24, 2023 10:00 AM ET

Company Participants

Joe Jaffoni - Investor Relations
Peter Carlino - Chairman and Chief Executive Officer
Desiree Burke - Chief Financial Officer and Treasurer
Brandon Moore - Chief Operating Officer, General Counsel and Secretary
Matthew Demchyk - Senior Vice President and Chief Investment Officer
Steven Ladany - Senior Vice President and Chief Development Officer

Conference Call Participants

Greg McGinniss - Scotiabank
Brad Heffern - RBC
Haendel St. Juste - Mizuho
Rich Anderson - SMBC
Barry Jonas - Truist Securities
David Katz - Jefferies
Daniel Gulino - Capital One
Ronald Kamdem - Morgan Stanley
John Massocca - Ladenburg Thalmann
Robin Farley - UBS
John DeCree - CBRE Securities
Mitch Germain - JMP Securities

Operator

Greetings. Welcome to the Gaming and Leisure Properties, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time all participants’ are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

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

Joe Jaffoni

Thank you. Good morning, everyone, and thank you for joining Gaming and Leisure Properties fourth quarter 2022 earnings call and webcast. The press release distributed yesterday afternoon is available in the Investor Relations section on our website at www.glpropinc.com.

On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. Forward-looking statements may include those related to revenue, operating income and financial guidance, as well as non-GAAP financial measures such as FFO and AFFO.

As a reminder, forward-looking statements represent management's current estimates, and the company assumes no obligation to update any forward-looking statements in the future. We encourage listeners to review the more detailed discussions related to the risk factors and forward-looking statements contained in the company's filings with the SEC, including its 10-Q and in 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, our Chairman and Chief Executive Officer of Gaming and Leisure Properties. Also joining today's call are Brandon Moore, Chief Operating Officer, General Counsel and Secretary; Desiree Burke, Chief Financial Officer and Treasurer; Steven Ladany, Senior Vice President and Chief Development Officer; and Matthew Demchyk, Senior Vice President and Chief Investment Officer.

With that, it's my pleasure to turn the call over to Peter Carlino. Peter, please go ahead.

Peter Carlino

Well, thank you, Joe, and good morning, everyone. Let me [Technical Difficulty] there's noise on the line. Let me announce at the outset that several of us have dialed in from out of the office. And hopefully, that won't affect the smooth flow of our presentation. We are very pleased to announce another positive and eventful year here at GLPI documented with considerable detail in our published release.

Some of the highlights, which we will look at in more detail as we go through this call includes notably reaching a new fixed rent agreement with PENN Entertainment, which significantly limits the rent volatility that we've experienced in the past. Additionally, we've signed agreements that define the arrangement by which we will fund the previously announced relocation of PENNs properties in Aurora, Illinois and Joliet, Illinois, along with providing long-term funding for a new hotel in Columbus, Ohio and supporting the second hotel tower at the M in Las Vegas. This is a pretty exciting stuff, and we're delighted to be doing this with PENN.

Also this quarter, we closed on Bally's Tiverton, Rhode Island property and Bally’s Hard Rock in Biloxi. And additionally, as we'll probably discuss in more detail, we worked hard this past year and last quarter to perfect our balance sheet, now achieving the lowest leverage we've ever enjoyed in positioning us to do -- with the option to do things using that now if we wish and still stay within the 5% to 5.5% leverage range that we have discussed.

I'm going to ask Desiree to put some numbers behind some of these things that I've just outlined. So Desiree, please go ahead.

Desiree Burke

Thank you, Peter, and good morning, everyone, and thanks for joining our call. We reported record results for the fourth quarter of 2022, and our total income from real estate exceeded Q4 ‘21 levels by over $50 million. This growth was driven by the quarter's Live! transactions, which increased cash rental income by approximately $31 million. The addition of Bally's Black Hawk and Rock Island properties, which drove an increase in cash rental income of $3 million, the Tropicana LV land lease, which increased rental income by $2.6 million, the recognition of escalators and 10 percentage rent increases on our leases, which added approximately $4 million of cash rent, as well as the combination of higher non-cash revenue gross-ups, investment and lease adjustments and straight-line rent adjustments, which drove collectively a year-over-year increase of approximately $8 million.

Our operating expenses declined $33 million, primarily due to a reversal of prior period provisions for credit losses on our Cordish leases resulting from improved property performance and a decline of approximately $8 million in gaming and G&A expense related to the 2021 sale of our TRS operations. We continue to see strong coverage ratios across our leases. In the fourth quarter, we realized full escalation on the PENN master lease, which increased annual building base rent by $5.7 million, $1 million of which was recognized in 2022.

In connection with the PENN transactions, which created a new master lease, it amended the existing PENN master lease and terminated the Perryville and Meadows leases. The portion of our rents that are variable as a percentage of our cash rents will decline to approximately 5.3% in 2023 from 11.7% in ‘22 providing additional visibility into uncertainty of our future revenue streams from this tenant.

From a balance sheet perspective, we had a very busy fourth quarter. During the quarter, we sold 3.2 million shares of common stock under our ATM program, raising net proceeds of $156 million. We also settled the forward sale agreement in February of 2023 and issued 1.3 million shares, raising net proceeds of $64.6 million.

We used these proceeds to partially fund the early redemption in February of ‘23 of the $500 million, 5.375% notes, which were coming due in November of ‘23. Our net leverage is now just under 5 times EBITDA. In addition, we entered into a new $1 billion at-the-market program, which remains unused as of today.

In today's release, we provided full-year 2023 guidance for AFFO per diluted share and OP units, ranging from $3.61 to $3.67 per diluted share and OP unit. Please note that this guidance does not include the impact of any future transactions. For modeling purposes, our non-cash straight-line rent adjustment for 2023 will be approximately $39 million, which will need to be included in revenue, but then deducted for AFFO as it is non-cash, and it is changing due to the new leases that we entered into in 2023.

I would also like to note that we declared a first quarter dividend of $0.72 per share on the company's common stock as well as a special earnings and profits dividend of $0.25 per share. The special dividend is related to the earnings and profits from the sale of the Tropicana building, which was completed in the third quarter of 2022.

With that, I will turn over the call back to Peter.

Brandon Moore

Peter, do you have any other further comments? If not, I think Matt had a few things he'd like to address?

Peter Carlino

I had put the – I put my speaker on hold. My apologies. Yes, indeed, I’d turn it over to Matt. So Matt, go ahead. I know you wanted to focus on a couple of points you thought were critical.

Matthew Demchyk

Sure. Thanks, Peter, and thanks for everyone for joining us in the busy earnings season. In an environment, the economic and monetary environment with significant cross currents, volatility and uncertainty, I want to remind everyone that GLPI's business model was built with environments like this in mind. So our shareholders can benefit from a platform that is strong, resilient and opportunistic.

We've worked hard and long on the effort to strengthen our balance sheet; our leverage and liquidity levels serve both as a ballast and also a strong foundation for growth. Our net leverage positions us for significant optionality as we look to fund future opportunities. At that end, we've also worked diligently the past many years to expand our tenant roster, sow the seeds of future growth through various structures of specific assets, open dialogue with new potential partners and to fortify our reputation as a collaborative landlord, problem solver that is interested in enhancing the long-term success of our tenant partners.

We've got a seat at the table for opportunities and continue healthy conversations across the board. And to the extent, one of our many conversations leads to an opportunity of interest, we're poised to pounce. We take our role as stewards of shareholder capital very seriously and remain resolutely focused on increasing intrinsic value per share over the long-term.

With that, I'll turn the call back to Peter.

Peter Carlino

Well, this time, thanks, Matt. I don't have my mute button on. No, I think that says very well what we're all about here. And I must say, just one editorial comment that I'm very pleased with where we find ourselves today.

So with that, let's open the floor to questions. Somali, would you please open the mics.

Question-and-Answer Session

Operator

Sure. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your questions.

Greg McGinniss

Hey, good morning. Just looking at the guidance range, as we’re a bit surprised by the low-end of the range given what appears to be a pretty straightforward story on lease escalators and limited percentage rent impact in November and December. And I guess based on our math, the guidance range does imply another 2 million shares outstanding versus where you stand today? So could you just touch on your expectations in terms of utilizing the ATM or settling forward equity? And what would end up driving you to the bottom end of the guidance range?

Desiree Burke

Yes. So certainly. So we did actually use the forward, which was 1.3 million shares that I think that you're missing from where we ended ‘22 to where we begin ’23. We did pull that forward, as I mentioned in my notes, in order to repay the $500 million bond that was coming due that we redeemed early. So I think that is the biggest share count change that you have.

As far as the high to low, I mean our interest rate environment, we now have $600 million of variable rate debt. So as you know, the interest rates are changing daily. So we have some -- like up to a 1% change in the interest rate that could happen in our low-end, as well as we do not plan for [Technical Difficulty] that is another difference between our high-end and our low-end.

And the third item to think about is just M&A transactions and how many things we review in the course of the year and go and due diligence on and do some tax work on and legal work on that will change our G&A number based on how many of those transactions we look at. So that is what's causing the range from the high to low and I think the biggest number that you would be missing in the share count.

Greg McGinniss

Okay. No, thank you very much for that. Just a second quick second question here. Now that we're kind of closer to the end of Q1, do you have more visibility into how that reduce development is coming along with respect to timing and spend?

Steven Ladany

Sure.

Peter Carlino

Steve, why don't you take that?

Steven Ladany

Thanks, Peter. Yes. So with respect to the Hollywood Casino in Baton Rouge, at this point in time, we are continuing to move forward. A lot of the major expenditures have been bought out. But we are still facing scheduling and timing disruption associated with supply chain and labor market. So I think at this point, our best approximation of hard cost spend funded by GLPI will be $70 million. And our expectation of timing for opening is likely to be sometime around the start of the fourth quarter. It could be sooner if some things go right, but I don't want to overpromise.

Greg McGinniss

Okay. And even though the spend is going up, you guys are getting a return on that investment, right, still the full amount that you end up spending?

Steven Ladany

Correct. Yes. There was no cap on the conversion or whatever to rent. So yes, we'll get 8.25% cap rate applied to whatever the total hard cost spend ends up.

Peter Carlino

Yes. I must say looking at from Bally's point of view, looking recently at the construction and the progress there, it's very impressive. I must admit it's pretty exciting. I kind of wish we still were operating there. So I think it's in partnership with Valley, this is going to be a terrific project for them, and it's well on its way, really quite exciting.

Greg McGinniss

Thanks, Peter.

Peter Carlino

Thank you.

Operator

Our next question comes from the line of Brad Heffern with RBC. Please proceed with your question.

Brad Heffern

Hey, everyone. I was just curious if you could talk through what you're seeing on the deal flow front and maybe where you're expecting cap rates to trend.

Peter Carlino

Steve, do you want to talk about that? I mean, yes. Why don’t you take that.

Steven Ladany

Sure. Yes. Look, as far as deal flow goes, I'd say we're arguably as busy as we've kind of ever been. There are lots of different things that are coming in from every direction. Some of its development related. Some of it's domestic. Some of it's not -- we're seeing all sorts of different transactions come our way, and it's mostly related to the gyrations in the capital markets, presenting some opportunity.

And maybe that dovetails to your other part of your question, which is I mean, I think from an expectation perspective, I think that you're going to see cap rates potentially float a little bit higher. The kind of counterbalance to that is, I think that our asset class has really outperformed over the last few years. And it's taking -- starting to get noticed by other people. So we're seeing increased competition coming in at times or at least an interest in the sector, and as you saw in Boston, for example. But at the same time, I think the capital markets and the cost of capital are kind of offsetting that. And so I do think you'll see deals get done at slightly higher cap rates than we've seen in the past two years.

Brad Heffern

Okay, and any updated thoughts on potentially acquiring Lincoln at some point down the road?

Steven Ladany

Yes. I mean our best -- right now, our best expectation is that it's likely a 2024 event. I don't see a lot of reasons why Bally's would be incented to try to effectuate receiving that approval in 2023. But I do think there are a number of reasons that they may be, in fact, in position in 2024 to look to go that direction. So that's our expectation here.

Brad Heffern

Okay, thank you.

Operator

Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Haendel St. Juste

He, good morning. Thank you. I wanted to go back to the capital allocation in the quarter. You guys were very active in the quarter. And I was hoping you could provide some color on some of the decisions you made, including paying down your $500 million notes with cash while you also issued looks like about $200 million of equity from 4Q into early 1Q while also receiving the $200 million back from Bally's. And so you're sitting here with lots of great liquidity and leverage. So I guess, help us understand the -- some of the decisions made in the quarter?

And how do you expect to, I guess, the poise excess liquidity over the near term? I see you have some development projects in the pipeline. So help us understand the balance sheet philosophy as well. Thanks.

Desiree Burke

Sure. So we wanted to repay the $500 million, because, as you know, issuing 10-year debt in this market is probably a low six handle, not something that we would really love to live with for 10-years, as well as the fact that we had the Bally's transaction, which was requiring us to have debt financed proceeds that needed to be guaranteed by Bally's. So we had to borrow $600 million. So we thought it was a prudent to use some equity in order to do that. We paid down some debt and borrowed new debt. So, there were some equity utilized for the Bally's transaction even though in essence, it was a debt finance transaction. Anybody want to...

Peter Carlino

So let me -- I'm sorry. Desiree, do you want to go ahead? I was going to say that look, we walk a tightrope especially in our industry, because there's not a long string of predictable acquisitions on the horizon. So we kind of take the temperature of where we are, what's in the shop at any given time and try to pick a prudent level to be prepared and not be cut unprepared if and when we need to have cash. I mean, you raise money when you can. And as favorably as you can.

Sometimes -- and I've said this on earlier calls that we'll accept some, at least, I will, some drag from over equitizing, because it's a safer place to be. And that's the model that we operate with, safety, safety, safety for our investors. So we are opportunistic about that. Obviously, it says something about what we hope to have in the future. And I think Desiree explained where short-term needs were that made this the prudent way to raise cash. The debt market obviously was very unappealing. Go ahead.

Haendel St. Juste

Got it. Got it. Yes, go ahead. [Indiscernible] Was there more?

Peter Carlino

Anything from...

Matthew Demchyk

This is Matthew. I'll add a little nuance taking a step back. Our long-term approach of targeting a 5 times to 5.5 times leverage range remains really important to us. At the same time, tactically, when we issue equity, it's really with -- it’s permanent capital. It's with a long-term view in mind. So the approximate use of the cash towards the debt wasn't the driving decision. It was to prefund what our future opportunity set might be and to add optionality into our business model as I mentioned in the intro.

So whenever those next opportunities might come to the past, we have the option to choose using more leverage to the extent we wish to at that time or equity in the mix. Remember, we've got a very deep tool chest between overnights, spot deals, ATM that we've used with and without forward the different debt strategies between the term loan we used and also long-term unsecured that we've -- really, to Peter's point, artfully woven together to get the best outcome for shareholders. And the punchline is, as we fund whatever is next, we've got more choices than we've ever had as a company to do what's best.

Haendel St. Juste

Great. Guys, appreciate that color. Separate question, one for you, perhaps, Peter. I think the Governor of Texas mentioned the other day that he'd be open to experiential assets that have an element of gaming “if it can be built in the way that professional provides a form of entertainment for people”. So I guess, I was curious if you could provide your thoughts on the potential legalization of commercial and destination casinos in Texas. And if you would see that as more of an opportunity or a threat.

Peter Carlino

Well, certainly not a threat. It would indeed be an opportunity for one or other of our operators. But -- and we do stay fairly closely to that. My sense is at the moment nothing material is going to happen. You may see sports betting, because remember, the teams are involved. The professional teams are involved in Texas, so I have a feeling that that's what you may see first move to sports betting.

Flat out casinos, I think, are further down the line and who knows. I've always said somewhere in my lifetime, I hope that Texas gets full gaming. But my sense is, and from what I'm hearing, that's not likely to happen in this first round. So -- but what it's worth, which is not a lot. That's my sense of where Texas stands today. But we keep a close eye on it. And obviously, we want to make sure that we're around the hoop for any state, any activity anywhere, and you can bet that we are. Texas is tough. We'll see. I think it's going to be a multistep process.

Haendel St. Juste

Got it. Got it. Thank you, guys. I’ll leave.

Peter Carlino

Thank you.

Operator

Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Rich Anderson

Thanks. Good morning, everyone. So you get some form of this question every quarter probably, but a lot of talk about expanding outside of gaming. And I wonder if it's in between the four walls of GLPI, if it's going something like the TRS deal that Peter, you got talked into taking that off the books and going full triple net lease on those situations. Are you sort of -- you got poker chips coursing through your veins. Are you -- is it hard to sell you on non-gaming investments? Or do you think that is in the reasonably short future for you guys in terms of expanding your horizons?

Peter Carlino

You know, we've said from the beginning, we'll look at anything, absolutely anything. And I've used this silly analogy time and time again, and I mean it. Look, I would take a shack on the beach with no windows and doors if it had demonstrably stable cash flow, I mean all the goals that we have. But the problem is we're in such a terrific space right now. So rock solid, and as I've said many -- over many years, our revenues are bulletproof and I stand by that. Show me something that can offer the same thing. It's hard to go backwards when you're already at the top of the heap.

So look, we look all the time. And again, I have said someday, I expect we'll be somewhere else. There's probably not a week go by that we don't look at or aren't presented some non-gaming activity. But I don't think we get any point for jumping off the cliff with or without a parachute. I think our job is to look at everything and anything. But frankly, we're not going to hurry to go elsewhere. There's enough -- first off, a, as I've said, we can't find anything the equal of where we are. But b, we've not run -- as Steve highlighted, we're not out of opportunity quite yet. And I'm not sure over the next couple of years that we're going to be there anyway. So we see enough stuff on the horizon to say we'll stick to our knitting until we don't.

Rich Anderson

Okay. Fair enough. Second question is the talk about a smoking ban in Atlantic City that the workers like, but I wonder what you think the net would be in that case or if this were to be something that got legs around the country. Do you think a smoking ban would be a good thing or a bad thing for your business when you kind of roll it all up?

Peter Carlino

Well, for GLPI, it's not going to have an impact. It really won't. It's just not going to affect us. It will affect operators. And the thought that somehow you can put a smoking -- gamblers smoked. I mean that's a simple factor. We've seen time again; you impose a smoking ban. You're going to see a 15% -- as much as a 15% drop in revenue, and it doesn't come back, it doesn't come back. Now what a lot of businesses are doing in states where it's possible, are building these smoking platforms, that qualify as outside so long as there is the ability to do that and companies operate.

Again, this doesn't affect us. But operating’s have gotten pretty clever and building some very, very nice smoking facilities did work. So a lot depends on how the legislation go. But by and large, the smoking bans are not a good thing for operators. I'll leave it at that. It won't affect us.

Rich Anderson

Okay. Yes, I remember the smoking section on a plane when I was much younger, it didn't seem like that was really a creative approach to addressing the issue. But yes, we'll see how it plays out in the gaming space. Thanks for your color.

Peter Carlino

Well, I think if were in this -- think in the seat right behind the guy smoking.

Rich Anderson

I didn't quite get that one, but whatever. Thank you.

Peter Carlino

You’re welcome.

Operator

Our next question comes from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Barry Jonas

Hi, hey guys. Good morning. Congrats on a great year. I think years ago, you used to talk about a target of like $500 million a year of M&A. Curious how you think about that today?

Peter Carlino

Look, I'll just answer quickly. I think we're still there. It may not be in a particular year, but I think you can pretty well -- but we were willing to stand by that. Anybody else on the GLPI side want to opine.

Steven Ladany

I mean, I'll throw in two second answer, I guess. I mean I think $500 million is fine as a goal. I think we continue to outperform that in the past. And I don't necessarily believe that we would underperform it in the future. So I think it's fine for a target. I think between the PENN transactions that we hope to fund over the next few years, and some of the capital improvement dollars that we expect to put out to different tenants for different projects. I think we're going to be there again or through it. So I think all signs point to that as a continued goal and continued purpose of outperforming it.

Barry Jonas

Great. Great. And then just for a follow-up, why don't I touch on iGaming and cannibalization. Just really how it plays into any long-term strategy or how you may start underwriting future deals. Peter, I think I asked you this question like a year ago, and you said it was too early, but curious another year of data. Any updated thoughts here or still too soon? Thanks.

Peter Carlino

Barry, no, look, I'll stay with where I was a year ago. And for this reason, look, iGaming provided the convenience that obviously we all understand. But people are social animals. I mean, my whole feeling about that is that people may -- look, you're going to place a bet on a college game, for example. So we'll look at some sports betting in your driveway to bet on your college team or some other game around the country. But that's not an experience that people like.

I look at it this way. I look at how well the Cordish people are doing with their Live! Facilities, that don't even offer gaming. Pack, damned, my 23-year-old granddaughter this year could have watched the Eagles at home on a giant screen and watch the play. Where did she go? She went all the way down to Philly Live. And joined all the other crazies down there, drinking, partying, having a grand old time. Because, look, gambling is a social experience. And you can play poker on your iPhone, but it's not the same who looks as the guy in the sunglasses and the baseball hat turned backwards across the table from you trying to figure out where that person is – actually is, that dynamism is what people want.

So I'm suggesting there's going to be a hell of a lot more gambling going on, but I don't think it's going to have a negative effect at all. In fact, I'm more convinced to that now on the bricks-and-mortar properties.

Barry Jonas

Great. Thanks so much.

Peter Carlino

Thank you.

Operator

Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

David Katz

Hi, good morning, everyone. Thanks for taking my question. One of the areas I continue to ask about and think about is the ways in which you might engage with Native American entities, who are more and more expanding what they have on reservation land as well as trying to grow off-reservation land or contiguous to reservation land. If you could update us on your pursuit of those potential opportunities, if there is any, please?

Peter Carlino

We look at such things and of course, recognize the potential if you can figure out a way to make it work. I don't know, Brandon, you've been kind of saddling for a while that kind of rolls into the legal area as much as the business opportunity. What --could you add any color?

Brandon Moore

Yes. I mean we do spend a lot of time looking at opportunities in tribal gaming. I think there are some obvious challenges in dealing with the tribes from a protection standpoint because there's only so much you can do to exercise on the collateral. And so for us, it's a prudent research and development project to see if there's a way that we could finance or otherwise invest in some of these commercial developments that tribes are doing in a way that we can protect our asset, our investment, our shareholders.

So it's something that we do focus on. It's an effort that we've engaged in for a number of years. We obviously haven't done anything to date. But if not to say that we don't think that there's an opportunity there. I think there is an opportunity there with the right tribe, the right project and the right investment.

David Katz

Okay. Thank you very much.

Peter Carlino

Thank you, David.

Operator

Our next question comes from the line of Daniel Gulino with Capital One. Please proceed with your question.

Daniel Gulino

Hey, everyone. Thank you for taking my question. Just one for me. So services inflation is still elevated in the U.S. even though you all run a light operating model, your tenants are large employers in their various locations. Are there certain things you all are watching out for into 2023? Thank you.

Peter Carlino

Look, my own opinion is not really. Again, we’re so far buffered with the kind of coverages we have with our tenants that it has to be a catastrophe of unimagined proportions for it to actually get down to us in any meaningful way. So, there's nothing – I’m not losing any sleep this year over any real harm to our tenants. Anybody else have -- I mean, that's my flat-out answer, but anybody else have a thought about that?

Matthew Demchyk

Yes, I'll add one, and it's -- there's another angle here and it's what do we think about when we look at acquisitions and we're very thoughtful in disaggregating the income statements and finding coverage that has an appropriate margin of safety given the asset location, operating history, et cetera. And a piece of that is assessing this very point. And it's something on the acquisition side, we give a lot of thought to.

Daniel Gulino

Okay, thank you.

Peter Carlino

Thank you.

Operator

Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Please proceed with your question.

Ronald Kamdem

Great. Just two quick ones for me. One, just on bigger picture, regional gaming revenue operating trends, some of the data we've seen in December had shown it was sort of down year-over-year, I think down a percent, no alarm by any means. But just curious what you guys are seeing on the regional gaming front, if any commentary there would be helpful. Thanks.

A - Peter Carlino

Well, remember, we don't get any information that you don't get. We're not privy to accept what's publicly available. But we see nothing that suggests there's a problem on the horizon. I think the 1% is an aberration that’s ignorable. So we have the general feel that our tenants are doing well, and they have a long, long way to go before we have even given any thought to it at all. Anybody again, on the GLPI side have a -- any insight around that?

Desiree Burke

Yes, sure. So even though coverage may come down due to these items that we're seeing in the regional markets, we still feel that our tenants are strongly -- their rent coverage is stronger than it was in 2019. And we will also recall that it's coming down 1% off an all-time high after COVID and what has happened in 2021. So we're not concerned at all. It certainly won't impact our business from the perspective that in my opening remarks -- I noticed that I noted that only 5.3% of our rent is variable in any way. So even if it did impact revenues at the tenants and dropped their coverage a little bit, we have such strong coverage well over 2 times at our master lease tenants that it will not have an impact on GLPI.

Ronald Kamdem

Great. Helpful. And then my second question was just going back to the guidance on the AFFO growth of 2.5%. Just sort of curious, what's baked into that in terms of organic growth or rent bumps? And presumably, what's baked into that for the external drivers? Thanks.

Desiree Burke

So we have baked in all fixed escalators that will happen in 2023. We have baked in the transaction that we did with Valleys or the recent one with Biloxi and Tiverton. We have not baked in any additional acquisitions into the 2023 guidance number.

Ronald Kamdem

Great. That’s it from me. Thanks so much.

Peter Carlino

Thank you.

Operator

Our next question comes from the line of John Massocca with Ladenburg Thalmann. Please proceed with…

John Massocca

Good morning.

Peter Carlino

Good morning, John.

John Massocca

So maybe going at the cap rate question from a different angle. You've seen a couple of transactions in the regional space closed or be announced in the last couple of months. And kind of in a rough high 7% cap rate, low to mid-8% cap rate range. Do you think that's an appropriate level of return given what we've seen in terms of interest expense and cost of capital increases, both for landlords and operators?

Peter Carlino

Probably not. But Steve, do you want to -- Steve or Matt, do you want to opine on that.

Matthew Demchyk

I'll hop in. Firstly, I'd say I hope that's an achievable rate for the kind of things we like to buy. I mean those were both nuanced transactions with a lot of characteristics that, for various reasons, didn't work for us. And the reality is in the broader world, I think you've seen more of an expansion in cap rates in broader triple-net than in gaming to Steve's earlier comments around appreciating the stability of these cash flows.

So the good news is for our business model and for our inputs to our cost of capital equation, we can get a healthy risk-adjusted spread at rates like those the situations we like, and it's really going to come down to asset by asset.

John Massocca

Okay. And then a quick kind of detailed question on the balance sheet. Any updated thoughts on swapping out the term loan? And I guess if you were to do it today, what would kind of be rough pricing on that?

Desiree Burke

So we only have about 9.5% of our total debt at a variable rate debt, and we have looked at the swap rate, and we are comfortable that we at this time, do not intend to swap that out.

John Massocca

Okay. I guess any broad thoughts on where pricing is today or even pricing is today relative to last year, just…

Desiree Burke

Right. So the last time that I looked at it, a three-year swap was around 5.2%.

John Massocca

Okay. That’s helpful. Thank you very much.

Peter Carlino

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Robin Farley with UBS. Please proceed with your…

Robin Farley

Great. Thanks. I wanted to ask as a follow-up. You kind of made a passing reference to it earlier in the Q&A, but can you talk a little bit about the environment for transactions in terms of other buyers that you're competing with sort of the appetite and the number of buyers in the field and kind of how those have changed in the last quarter or two? Thanks.

Peter Carlino

Yes, Robin. Yes, it's clearly a lot of people, a lot more people are interested in our space for obvious reasons. It's a great place to be. I'll make my general comment that we're generally not in the bidding business. Most of the transactions we have done were crafted to solve some other issues. I mean I'd like to say that in a flat-out auction, the bidder loses. We generally don't like to be there. Typically, we are not there. It's because we can provide something other than the last dollar to make a transaction effective. I think Steve was right that there are seemingly more people out there, but it hasn't affected us yet. I mean we don't lose many things that we go after. Steve, do you want to comment on that? Agree or disagree?

Steven Ladany

Sure. I'll say one or two senses and then let Matt jump in, too. Look, I think there were a number of -- there have been a number of competitors who have come in and who have then disappeared. I think that could be somewhat capital markets related or based on their funding structures. But it's undeniable that this asset class is gaining attention. Based on ours and our competitors' performance from a total return perspective in the past and based on just the stability of our performance through COVID.

And I think as you look forward and some people have various views on what the economy may do going forward. But I think looking back at COVID is a pretty good glimpse and gives you a sense of what may or may not happen to folks tenants. And in our case, our tenants performed wonderfully through that, and we would expect the same to be true going forward. So Matt, I don't know if you have something to add.

Matthew Demchyk

I mean, it's kind of interesting. If you look -- if you went back to last June or summer of last year and asked the question, there would have been some names that we were thoughtful about that were kind of inside the bidding tent that aren't there anymore. And anecdotally, at least 1 of them view this as kind of a mispriced credit and got into the space. And then I think came to the conclusion based on the capital markets and opportunities in gaming debt or other places that the better return would be elsewhere. It's a lot of hassle to be a landlord.

And you've also seen headlines from some noteworthy large private equity folks that clearly are not playing offense as aggressively as they were. And a lot of that speaks to they're reliant on really where real interest rates in real time, where is inflation and what's the cost of the, the juice that you can get from the debt side of things. And we've got an arrow in our quiver from a competitive perspective with our cost of equity and access across all those areas I mentioned earlier, when you think about our capital sourcing that now gives us a competitive advantage in that bidding scenario. So again, we've positioned ourselves to use that thoughtfully throughout this year to the extent we get opportunities. And we're hopeful that backdrop stays about the same.

Robin Farley

Great. That’s very helpful. Thank you.

Peter Carlino

Thank you, Robin.

Operator

And our next question comes from the line of John DeCree with CBRE Securities. Please proceed with your question.

John DeCree

Good morning, everyone. Maybe to kind of continue the conversation rather than potential competitors for new deal activity maybe Peter or Steve, wondering if you could elaborate on the type of activity. I think, Steve, in the prepared remarks, you've mentioned you are kind of seeing similar potential deal volume over the last couple of quarters. Curious kind of what the mix of that is. Is it existing tenants looking at M&A? Is it maybe sellers looking for an exit? And then the follow-up would be, how is the bid ask evolved? I think last year, given the volatility in capital markets that we're still facing today, the bid-ask has seemingly widened for potential transactions. Curious if you've seen any normalization or reasonable expectations among different parties in the market.

Peter Carlino

Steve?

Steven Ladany

Yes, sure. As you would expect, sales processes, which were launched prior to the capital markets, and the debt market, in particular, dislocating. Many of those are probably not going to kind of reach finality other than DOA. So I think that in those cases, the seller expectation was dramatically different from the reality as the debt markets corrected and the cost of capital just rapidly increased on people. So I think that things that are coming to market now, everyone at least had the same lens that they're looking at the world through. So I feel like things are probably a little more achievable at this point than they were the beginning of last year. So that would be my first commentary on that piece.

But I mean, with respect to what we're seeing, look, our current tenants are in various places within their life cycle. So some of them are looking to grow with whatever type of assets may be available. Some are looking for certain geographic locations or certain sizes. But there's dialogue and no one's looking to be stagnant. So we have dialogue with them around potential acquisitions. We also have many more partnerships and relationships with folks that -- and dialogues than have materialized into tenancy. So at this point, I think we're very hopeful that transactions will continue to be able to be created and constructed, and we're working hard to make sure that's achieved.

Matthew Demchyk

This is Matt. Let me add 1 thought. Remember, there was some subset of counterparties that used to say hey, you guys are an expensive form of permanent debt. And they were comparing us against the prices in the wider market. The other side of that equation has moved meaningfully and the competitiveness of our cost of capital versus all those other options is certainly converge to an extent that's favorable for us.

John DeCree

Thanks, Matt. Thanks, I appreciate the color.

Operator

Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your question.

Mitch Germain

Good morning. How should we think about the economics behind the OP units associated with the Valley deal?

Desiree Burke

So they -- we only issued 15 million shares, I think, of OP units in the Valleys deal. $15 million, yes, sorry, did I say units? I'm sorry, we only issued $15 million, that was around 300,000 shares. So it is a pretty small drag, but it is in our guidance that we've provided.

Mitch Germain

Understood. And then last one for me. I assume Penn funding is not in guidance, but should we think of any of that potentially starting to hit towards the back part of ‘23 or is it really more of a ‘24 event?

Peter Carlino

It's hard to know. But if we had to guide you some place, we would say later rather than earlier. Candidly, I don't have a real good handle on where they are in the design phases. I mean, I think there's a high degree of confidence that these things are going to happen, but the when is just not real clear.

Steven Ladany

Yes. I mean, I think, PENN -- this is Steve. I think PENN has been public with stating that they expect to start these projects by the end of ‘23, but that all four projects are likely to not open until sometime in 2025. So the -- they are not obligated to take dollars from us from day one for all these projects. So they do have some flexibility around when they would want to access our capital. So it's just an evolving timeline that we're going to continue dialogue with them and kind of as soon as we know, you'll know.

Mitch Germain

And the way [Multiple Speakers]

Peter Carlino

I was just going to say that look, [Indiscernible], depending upon what their own cash needs are or whatever else is going on at the company, they may or may not need the money sooner. Look, if they can fund it internally, it will be later, but it's the long-term solution and probably in the short run, they use their own cash if they had it. So we'll just have to see how it plays out.

Mitch Germain

Got it. Congrats on the year.

Peter Carlino

Thank you.

Operator

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Peter Carlino for closing remarks.

Peter Carlino

Well, thank you very much. And thanks to everyone who has dialed in today. We are really excited about having closed out a very eventful year. But we think that 2023 is going to be a strong year for us as well. Fingers cross, working hard and hope to see you all next quarter. Thank you.

Operator

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.