Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q 
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission file number:  001-36124 
Gaming and Leisure Properties, Inc.
(Exact name of registrant as specified in its charter) 
Pennsylvania
 
46-2116489
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
845 Berkshire Blvd., Suite 200
Wyomissing, PA 19610
(Address of principal executive offices) (Zip Code)
 
610-401-2900
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act: 
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
Title
 
April 26, 2018
Common Stock, par value $.01 per share
 
213,502,087
 



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Forward-looking statements in this document are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Gaming and Leisure Properties, Inc. ("GLPI") and its subsidiaries (collectively, the "Company") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include information concerning the Company’s business strategy, plans, goals and objectives.
 
Forward-looking statements in this document include, but are not limited to, statements regarding our ability to grow our portfolio of gaming facilities and to secure additional avenues of growth beyond the gaming industry. In addition, statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," "may increase," "may fluctuate," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors could affect future results and could cause actual results to differ materially from those expressed in such forward-looking statements:

the availability of and the ability to identify suitable and attractive acquisition and development opportunities and the ability to acquire and lease the respective properties on favorable terms;

the degree and nature of our competition;

the ultimate timing and outcome (including the possibility that the proposed transaction may not be completed or that completion may be unduly delayed) of the proposed merger transaction between Penn and Pinnacle and the related transactions with Boyd Gaming;

our increased reliance on Penn as our largest tenant following the closing of the proposed Penn acquisition of Pinnacle;

the ultimate timing and outcome (including the possibility that the proposed transaction may not be completed or that the completion may be unduly delayed) of our proposed acquisition of certain real estate assets from Tropicana Entertainment Inc. ("Tropicana") and the related acquisition of the operating assets of these properties by Eldorado Resorts, Inc. ("Eldorado") from Tropicana;

the ability to receive, or delays in obtaining, the regulatory approvals required to own and/or operate our properties, or other delays or impediments to completing our planned acquisitions or projects;

our ability to maintain our status as a real estate investment trust ("REIT"), given the highly technical and complex Internal Revenue Code (the "Code") provisions for which only limited judicial and administrative authorities exist, where even a technical or inadvertent violation could jeopardize REIT qualification and where requirements may depend in part on the actions of third parties over which the Company has no control or only limited influence;

the satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis in order for the Company to maintain its REIT status;

the ability and willingness of our tenants, operators and other third parties to meet and/or perform their obligations under their respective contractual arrangements with us, including, in some cases, their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

the ability of our tenants and operators to maintain the financial strength and liquidity necessary to satisfy their respective obligations and liabilities to third parties, including without limitation to satisfy obligations under their existing credit facilities and other indebtedness;

the ability of our tenants and operators to comply with laws, rules and regulations in the operation of our properties, to deliver high quality services, to attract and retain qualified personnel and to attract customers;

the ability to generate sufficient cash flows to service our outstanding indebtedness;

the access to debt and equity capital markets, including for acquisitions or refinancings dues to maturities;

adverse changes in our credit rating;


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fluctuating interest rates;

the impact of global or regional economic conditions;

the availability of qualified personnel and our ability to retain our key management personnel;

GLPI's duty to indemnify Penn National Gaming, Inc. and its subsidiaries ("Penn") in certain circumstances if the spin-off transaction described in Note 1 to the condensed consolidated financial statements fails to be tax-free;

changes in the United States tax law and other state, federal or local laws, whether or not specific to real estate, real estate investment trusts or to the gaming, lodging or hospitality industries;

changes in accounting standards;

the impact of weather events or conditions, natural disasters, acts of terrorism and other international hostilities, war or political instability;

other risks inherent in the real estate business, including potential liability relating to environmental matters and illiquidity of real estate investments; and

additional factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, in this Quarterly Report on Form 10-Q and Current Reports on Form 8-K as filed with the United States Securities and Exchange Commission (the "SEC").
 
Certain of these factors and other factors, risks and uncertainties are discussed in the "Risk Factors" section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and this Quarterly Report on Form 10-Q. Other unknown or unpredictable factors may also cause actual results to differ materially from those projected by the forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond the control of the Company.
 
You should consider the areas of risk described above, as well as those set forth in the "Risk Factors" section in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and this Quarterly Report on Form 10-Q, in connection with considering any forward-looking statements that may be made by the Company generally. Except for the ongoing obligations of the Company to disclose material information under the federal securities laws, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required to do so by law.


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GAMING AND LEISURE PROPERTIES, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
Gaming and Leisure Properties, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(amounts in thousands, except share data)
 
 
March 31,
2018
 
December 31, 2017
 
(unaudited)
 
 
Assets
 
 
 
Real estate investments, net
$
3,636,949

 
$
3,662,045

Land rights, net
637,421

 
640,148

Property and equipment, used in operations, net
106,259

 
108,293

Investment in direct financing lease, net
2,619,430

 
2,637,639

Cash and cash equivalents
45,420

 
29,054

Prepaid expenses
8,282

 
8,452

Goodwill
75,521

 
75,521

Other intangible assets
9,577

 
9,577

Loan receivable
13,000

 
13,000

Deferred tax assets
4,510

 
4,478

Other assets
64,078

 
58,675

Total assets
$
7,220,447

 
$
7,246,882

 
 
 
 
Liabilities
 
 
 
Accounts payable
$
492

 
$
715

Accrued expenses
6,060

 
7,913

Accrued interest
75,479

 
33,241

Accrued salaries and wages
3,129

 
10,809

Gaming, property, and other taxes
41,196

 
35,399

Income taxes
199

 

Long-term debt, net of unamortized debt issuance costs
4,401,107

 
4,442,880

Deferred rental revenue
248,640

 
232,023

Deferred tax liabilities
279

 
244

Other liabilities
27,018

 
25,411

Total liabilities
4,803,599

 
4,788,635

 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued or outstanding at March 31, 2018 and December 31, 2017)

 

Common stock ($.01 par value, 500,000,000 shares authorized, 213,498,249 and 212,717,549 shares issued at March 31, 2018 and December 31, 2017, respectively)
2,135

 
2,127

Additional paid-in capital
3,930,777

 
3,933,829

Retained accumulated deficit
(1,516,064
)
 
(1,477,709
)
Total shareholders’ equity
2,416,848

 
2,458,247

Total liabilities and shareholders’ equity
$
7,220,447

 
$
7,246,882

 
See accompanying notes to the condensed consolidated financial statements.

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Gaming and Leisure Properties, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
 
        
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
Revenues
 

 
 

Rental income
$
169,405

 
$
165,161

Income from direct financing lease
18,621

 
17,824

Real estate taxes paid by tenants
21,278

 
21,720

Total rental revenue and income from direct financing lease
209,304

 
204,705

Gaming, food, beverage and other, net
34,746

 
38,008

Total revenues
244,050

 
242,713

 
 
 
 
Operating expenses
 

 
 

Gaming, food, beverage and other
19,658

 
21,076

Real estate taxes
21,595

 
22,143

Land rights and ground leases expense
6,532

 
5,175

General and administrative
16,460

 
16,056

Depreciation
27,954

 
28,257

Total operating expenses
92,199

 
92,707

Income from operations
151,851

 
150,006

 
 
 
 
Other income (expenses)
 

 
 

Interest expense
(54,068
)
 
(53,949
)
Interest income
481

 
464

Total other expenses
(53,587
)
 
(53,485
)
 
 
 
 
Income before income taxes
98,264

 
96,521

Income tax expense
1,492

 
2,530

Net income
$
96,772

 
$
93,991

 
 
 
 
Earnings per common share:
 

 
 

Basic earnings per common share
$
0.45

 
$
0.45

Diluted earnings per common share
$
0.45

 
$
0.45

 
 
 
 
Dividends paid per common share
$
0.63

 
$
0.62

 
See accompanying notes to the condensed consolidated financial statements.


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Gaming and Leisure Properties, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Shareholders’ Equity
(in thousands, except share data)
(unaudited)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Accumulated
Deficit
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
 
 
Balance, December 31, 2017
212,717,549

 
$
2,127

 
$
3,933,829

 
$
(1,477,709
)
 
$
2,458,247

Stock option activity
297,605

 
3

 
5,241

 

 
5,244

Restricted stock activity
483,095

 
5

 
(8,293
)
 

 
(8,288
)
Dividends paid

 

 

 
(134,717
)
 
(134,717
)
Adoption of new revenue standard

 

 

 
(410
)
 
(410
)
Net income

 

 

 
96,772

 
96,772

Balance, March 31, 2018
213,498,249

 
$
2,135

 
$
3,930,777

 
$
(1,516,064
)
 
$
2,416,848

 
See accompanying notes to the condensed consolidated financial statements.


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Gaming and Leisure Properties, Inc. and Subsidiaries
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Three months ended March 31,
 
2018
 
2017
 
 
 
 
 
Operating activities
 
 

 
 

Net income
 
$
96,772

 
$
93,991

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
30,681

 
30,568

Amortization of debt issuance costs
 
3,257

 
3,257

Losses on dispositions of property
 

 
105

Deferred income taxes
 
164

 
(742
)
Stock-based compensation
 
3,987

 
4,483

Straight-line rent adjustments
 
16,617

 
16,245

(Increase), decrease
 
 

 
 

Prepaid expenses and other assets
 
(1,001
)
 
(1,070
)
Increase, (decrease)
 
 

 
 

Accounts payable
 
(225
)
 
(181
)
Accrued expenses
 
203

 
218

Accrued interest
 
42,238

 
41,928

Accrued salaries and wages
 
(7,680
)
 
(7,234
)
Gaming, property and other taxes
 
22

 
813

Income taxes
 
199

 
2,938

Other liabilities
 
522

 
(630
)
Net cash provided by operating activities
 
185,756

 
184,689

Investing activities
 
 

 
 

Capital project expenditures
 

 
(8
)
Capital maintenance expenditures
 
(822
)
 
(482
)
Principal payments on loan receivable
 

 
13,200

Deposit for pending acquisition of real estate assets
 

 
(8,230
)
Collections of principal payments on investment in direct financing lease
 
18,209

 
17,613

Net cash provided by investing activities
 
17,387

 
22,093

Financing activities
 
 

 
 

Dividends paid
 
(134,717
)
 
(129,301
)
Taxes paid related to shares withheld for tax purposes on restricted stock award vestings, net of proceeds from exercise of options
 
(7,031
)
 
4,456

Costs related to continuous equity offering
 

 
(105
)
Repayments of long-term debt
 
(45,029
)
 
(95,027
)
Net cash used in financing activities
 
(186,777
)
 
(219,977
)
Net increase (decrease) in cash and cash equivalents
 
16,366

 
(13,195
)
Cash and cash equivalents at beginning of period
 
29,054

 
36,556

Cash and cash equivalents at end of period
 
$
45,420

 
$
23,361

 
See Note 14 to the condensed consolidated financial statements for supplemental cash flow information and noncash investing and financing activities.


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Gaming and Leisure Properties, Inc.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
 
1.              Business and Operations
 
Gaming and Leisure Properties, Inc. ("GLPI") is a self-administered and self-managed Pennsylvania real estate investment trust ("REIT"). GLPI (together with its subsidiaries, the "Company") was incorporated on February 13, 2013, as a wholly-owned subsidiary of Penn National Gaming, Inc. ("Penn"). On November 1, 2013, Penn contributed to GLPI, through a series of internal corporate restructurings, substantially all of the assets and liabilities associated with Penn’s real property interests and real estate development business, as well as the assets and liabilities of Hollywood Casino Baton Rouge and Hollywood Casino Perryville, which are referred to as the "TRS Properties," and then spun-off GLPI to holders of Penn's common and preferred stock in a tax-free distribution (the "Spin-Off"). The Company elected on its United States ("U.S.") federal income tax return for its taxable year that began on January 1, 2014 to be treated as a REIT and the Company, together with its indirect wholly-owned subsidiary of the Company, GLP Holdings, Inc., jointly elected to treat each of GLP Holdings, Inc., Louisiana Casino Cruises, Inc. (d/b/a Hollywood Casino Baton Rouge) and Penn Cecil Maryland, Inc. (d/b/a Hollywood Casino Perryville) as a "taxable REIT subsidiary" ("TRS") effective on the first day of the first taxable year of GLPI as a REIT.

As a result of the Spin-Off, GLPI owns substantially all of Penn’s former real property assets and leases back most of those assets to Penn for use by its subsidiaries, under a unitary master lease, a triple-net operating lease with an initial term of 15 years (expiring October 31, 2028) with no purchase option, followed by four 5-year renewal options (exercisable by Penn) on the same terms and conditions (the "Penn Master Lease"), and GLPI also owns and operates the TRS Properties through an indirect wholly-owned subsidiary, GLP Holdings, Inc. In April 2016, the Company acquired substantially all of the real estate assets of Pinnacle Entertainment, Inc. ("Pinnacle") for approximately $4.8 billion. GLPI leases these assets back to Pinnacle, under a unitary triple-net lease with an initial term of 10 years (expiring April 30, 2026) with no purchase option, followed by five 5-year renewal options (exercisable by Pinnacle) on the same terms and conditions (the "Pinnacle Master Lease" and together with the Penn Master Lease, the "Master Leases").
 
GLPI’s primary business consists of acquiring, financing, and owning real estate property to be leased to gaming operators in triple-net lease arrangements. As of March 31, 2018, GLPI’s portfolio consisted of 38 gaming and related facilities, including the TRS Properties, the real property associated with 20 gaming and related facilities operated by Penn, the real property associated with 15 gaming and related facilities operated by Pinnacle and the real property associated with the Casino Queen in East St. Louis, Illinois.  These facilities are geographically diversified across 14 states and were 100% occupied at March 31, 2018.

GLPI expects to grow its portfolio by pursuing opportunities to acquire additional gaming facilities to lease to gaming operators under prudent terms. For example, on December 17, 2017, the Company entered into agreements to purchase two additional properties, Plainridge Park Casino and Belterra Park Gaming & Entertainment Center from Penn and Pinnacle, respectively. We will acquire these properties in connection with the proposed acquisition of Pinnacle by Penn pursuant to a definitive agreement and plan of merger between them, also dated December 17, 2017 (the "Merger"). Subject to and concurrently with the completion of the Merger, we have agreed to, among other things, amend our master lease with Pinnacle to allow for the sale by Pinnacle of the operating assets at Ameristar Casino Hotel Kansas City, Ameristar Casino Resort Spa St. Charles and Belterra Casino Resort to Boyd Gaming Corporation (“Boyd”) and to enter into a new master lease agreement with Boyd on terms similar to the Company’s existing leases for these properties and the real property underlying Belterra Park. The transaction which is subject to regulatory approval is expected to close in the second half of 2018.

2.              Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included.

In order to conform to the current presentation of the statement of income, the Company separated the general and administrative expense line item into the line items general and administrative expenses and land rights and ground lease expense on the condensed consolidated statements of income for the three months ended March 31, 2017. This new line item includes the amortization of land rights and rent expense related to the Company's long-term ground leases. These

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reclassifications were made only for presentation purposes and had no impact on the Company's financial results for the three months ended March 31, 2017.

Furthermore, in conjunction with the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), on January 1, 2018, promotional allowances representing the retail value of food, beverages and other services furnished to guests without charge are presented on a net basis within the gaming, food, beverage and other revenue, net line item on the condensed consolidated statements of income. Prior to the adoption of ASU 2014-09, promotional allowances were required to be presented as a separate line item on the condensed consolidated statements of income. This change also had no impact on the Company's financial results for the three months ended March 31, 2017.

The condensed consolidated financial statements include the accounts of GLPI and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.

Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 (our "Annual Report") should be read in conjunction with these condensed consolidated financial statements. The December 31, 2017 financial information has been derived from the Company’s audited consolidated financial statements.

3.    New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). This ASU provides clarity about which changes to the terms or conditions of a share-based payment award require the application of modification accounting. Specifically, ASU 2017-09 clarifies that changes to the terms or conditions of an award should be accounted for as a modification unless all of the following are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-09 on January 1, 2018 and does not expect the adoption of ASU 2017-09 to significantly impact its accounting for share-based payment awards, as changes to awards' terms and conditions subsequent to the grant date are unusual and infrequent in nature.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). This ASU provides clarifying guidance on what constitutes a business acquisition versus an asset acquisition. Specifically, the new guidance lays out a screen to more easily determine if a set of integrated assets and activities does in fact represent a business. Under the ASU 2017-01, when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the assets do not represent a business. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-01 on January 1, 2018 with no impact to the Company's accounting treatment of its acquisitions.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, a Consensus of the FASB Emerging Issues Task Force ("ASU 2016-15"). This ASU provides clarifying guidance on the presentation of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-15 on January 1, 2018, with no impact to its presentation of cash receipts and payments on its consolidated statements of cash flows.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). This new standard replaces all preceding U.S. GAAP guidance on this topic and eliminates all industry-specific guidance. ASU 2014-09 provides a unified five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects

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the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective approach and recorded a cumulative adjustment to retained earnings of approximately $410,000 at the adoption date.

The majority of the Company's revenue recognition policies were not impacted by the new revenue standard, as leases (the source of the Company's majority of revenues) are excluded from ASU 2014-09. Only the accounting treatment for the customer loyalty programs at the TRS properties was impacted by the adoption of ASU 2014-09. See Note 11 to the condensed consolidated financial statements for further details on the adoption impact of ASU 2014-09 at the TRS Properties.

Accounting Pronouncements Not Yet Adopted

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). This ASU simplifies an entity's goodwill impairment test by eliminating Step 2 from the test. The new guidance also amends the definition of impairment to a condition that exists when the carrying amount of goodwill exceeds its fair value. By eliminating Step 2 from the test, entities are no longer required to determine the implied fair value of goodwill by computing the fair value (at impairment testing date) of all assets and liabilities in a manner similar to that required in conjunction with business combinations. Upon the adoption of ASU 2017-04, an impairment charge is simply recorded as the difference between carrying value and fair value, when carrying value exceeds fair value. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019 and early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to significantly impact its goodwill impairment testing.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument ("ASU 2016-13"). This ASU introduces a new model for estimating credit losses for certain types of financial instruments, including loans receivable and net investments in direct financing leases, amongst other financial instruments.  ASU 2016-13 sets forth an "expected credit loss" impairment model to replace the current "incurred loss" method of recognizing credit losses, which is intended to improve financial reporting by requiring timely recording of credit losses on loans and other financial instruments. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company does not expect the adoption of ASU 2016-13 to have a significant impact on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). This ASU primarily provides new guidance for lessees on the accounting treatment of operating leases. Under the new guidance, lessees are required to recognize assets and liabilities arising from operating leases on the balance sheet. ASU 2016-02 also aligns lessor accounting with the revenue recognition guidance in Topic 606 of the Accounting Standards Codification. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018 and is required to be adopted on a modified retrospective basis, meaning the new leasing model will be applied to the earliest year presented in the financial statements and thereafter. However, in January 2018, the FASB issued a proposed ASU, which would permit companies to apply the transition provisions of the lease accounting standard at its effective date (i.e. comparative financial statements would not be required).

The Company is evaluating the impact of adopting this new accounting standard on its financial statements but does not expect the adoption of the new guidance to have a significant impact on the accounting treatment of its triple-net tenant leases, which are the primary source of revenue to the Company. Generally speaking, ASU 2016-02 will more significantly impact the accounting for leases in which GLPI is the lessee by requiring the Company to record a right of use asset and lease liability on its consolidated balance sheets for these leases.

4.              Summary of Significant Accounting Policies
 
Fair Value of Financial Instruments
 
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate.

Cash and Cash Equivalents
 
The fair value of the Company’s cash and cash equivalents approximates the carrying value of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.




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Deferred Compensation Plan Assets

The Company's deferred compensation plan assets consist of open-ended mutual funds and as such the fair value measurement of the assets is considered a Level 1 measurement as defined under Accounting Standards Code ("ASC") 820 "Fair Value Measurements and Disclosures" ("ASC 820"). Deferred compensation plan assets are included within other assets on the condensed consolidated balance sheets.

Loan Receivable

The fair value of the loan receivable approximates the carrying value of the Company's loan receivable, as collection on the outstanding loan balance is reasonably assured and the interest rate approximates market rates for a similar instrument. The fair value measurement of the loan receivable is considered a Level 3 measurement as defined under ASC 820.

Long-term Debt
 
The fair value of the senior unsecured notes and senior unsecured credit facility is estimated based on quoted prices in active markets and as such is a Level 1 measurement as defined under ASC 820.
 
The estimated fair values of the Company’s financial instruments are as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 

 
 

 
 

 
 

Cash and cash equivalents
45,420

 
45,420

 
29,054

 
29,054

Deferred compensation plan assets
23,591

 
23,591

 
22,617

 
22,617

Loan receivable
13,000

 
13,000

 
13,000

 
13,000

Financial liabilities:
 

 
 

 
 

 
 

Long-term debt
 

 
 

 
 

 
 

Senior unsecured credit facility
1,010,000

 
1,000,141

 
1,055,000

 
1,045,600

Senior unsecured notes
3,425,000

 
3,477,528

 
3,425,000

 
3,574,688

 
Revenue Recognition
 
The Company recognizes rental revenue from tenants, including rental abatements, lease incentives and contractually fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is reasonably assured. Additionally, percentage rent that is fixed and determinable at the lease inception date is recorded on a straight-line basis over the lease term, resulting in the recognition of deferred rental revenue on the Company’s condensed consolidated balance sheets. Deferred rental revenue is amortized to rental revenue on a straight-line basis over the remainder of the lease term. The lease term includes the initial non-cancelable lease term and any reasonably assured renewable periods. Contingent rental income that is not fixed and determinable at lease inception is recognized only when the lessee achieves the specified target. Recognition of rental income commences when control of the facility has been transferred to the tenant.

The Company recognizes income from tenants subject to direct financing leases ratably over the lease term using the effective interest rate method which produces a constant periodic rate of return on the net investment in the leased property. At lease inception, the Company records an asset which represents the Company's net investment in the direct financing lease. This initial net investment is determined by aggregating the total future minimum lease payments attributable to the direct financing lease and the estimated residual value of the property, less unearned income. Over the lease term, the investment in the direct financing lease is reduced and income is recognized for the building portion of rent. Furthermore, as the net investment in direct financing lease includes only future minimum lease payments, percentage rent that is not fixed and determinable at the lease inception is excluded from the determination of the rent attributable to the leased assets and will therefore be recorded as income from the direct financing lease in the period earned. For further detail on the Company's direct financing lease refer to Note 8 to the condensed consolidated financial statements.

Additionally, in accordance with ASC 606, "Revenue from Contracts with Customers," the Company records revenue for the real estate taxes paid by its tenants on the leased properties with an offsetting expense in real estate taxes within the condensed consolidated statement of income as the Company has concluded it is the primary obligor. Similarly, the Company records revenue for the ground lease rent paid by its tenants with an offsetting expense in land rights and ground lease expense

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within the condensed consolidated statement of income as the Company has concluded that as the lessee it is the primary obligor under the ground leases. The Company subleases these ground leases back to its tenants, who are responsible for payment directly to the landlord.
 
Gaming revenue generated by the TRS Properties mainly consists of video lottery gaming revenue, and to a lesser extent, table game and poker revenue. Video lottery gaming revenue is the aggregate net difference between gaming wins and losses with liabilities recognized for funds deposited by customers before gaming play occurs, for "ticket-in, ticket-out" coupons in the customers’ possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increases. Table game gaming revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens, outstanding counter checks (markers), and front money that are removed from the live gaming tables. Additionally, food and beverage revenue is recognized as services are performed.
 
Gaming revenue is recognized net of certain sales incentives, including promotional allowances in accordance with ASC 606, "Revenue from Contracts with Customers." The Company also defers a portion of the revenue received from customers (who participate in the points based loyalty programs) at the time of play and attributed to the awarded points until a later period when the points are redeemed or forfeited. See Note 11 to the condensed consolidated financial statements for a summary of the changes to the recognition of revenue at the TRS Properties related to the adoption of ASU 2014-09 on January 1, 2018.

Gaming and Admission Taxes
 
For the TRS Properties, the Company is subject to gaming and admission taxes based on gross gaming revenues in the jurisdictions in which it operates, as well as state gaming device fees, based upon a standard per game assessment. The Company recognizes gaming tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where wagering occurs. Admission taxes are only assessed in Louisiana, while state gaming device fees are only assessed in Maryland. The Company records gaming and admission taxes at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming and admission tax rates change during the year, such changes are applied prospectively in the determination of gaming and admission tax expense in future interim periods.  For the three months ended March 31, 2018 and 2017, these expenses, which are primarily recorded within gaming, food, beverage and other expense in the condensed consolidated statements of income, totaled $14.2 million and $15.1 million, respectively.

Earnings Per Share
 
The Company calculates earnings per share ("EPS") in accordance with ASC 260, "Earnings per Share." Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period, excluding net income attributable to participating securities (unvested restricted stock awards). Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options, unvested restricted shares and unvested performance-based restricted shares. In accordance with ASC 260 "Earnings per Share," the Company includes all performance-based restricted shares that would have vested based upon the Company’s performance at quarter-end in the calculation of diluted EPS. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method.














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The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three months ended March 31, 2018 and 2017
        
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Determination of shares:
 

 
 

Weighted-average common shares outstanding
213,304

 
207,880

Assumed conversion of dilutive employee stock-based awards
389

 
695

Assumed conversion of restricted stock awards
42

 
149

Assumed conversion of performance-based restricted stock awards
947

 
802

Diluted weighted-average common shares outstanding
214,682

 
209,526


The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the three months ended March 31, 2018 and 2017
        
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands, except per share data)
Calculation of basic EPS:
 

 
 

Net income
$
96,772

 
$
93,991

Less: Net income allocated to participating securities
(162
)
 
(175
)
Net income attributable to common shareholders
$
96,610

 
$
93,816

Weighted-average common shares outstanding
213,304

 
207,880

Basic EPS
$
0.45

 
$
0.45

 
 
 
 
Calculation of diluted EPS:
 

 
 

Net income
$
96,772

 
$
93,991

Diluted weighted-average common shares outstanding
214,682

 
209,526

Diluted EPS
$
0.45

 
$
0.45


There were 176,641 and 23,954 outstanding equity based awards during the three months ended March 31, 2018 and 2017, respectively, that were not included in the computation of diluted EPS because they were antidilutive.

Stock-Based Compensation
 
The Company accounts for stock compensation under ASC 718, "Compensation - Stock Compensation," which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant. The fair value of the Company's time-based restricted stock awards is equivalent to the closing stock price on the day of grant. The Company utilizes a third party valuation firm to measure the fair value of performance-based restricted stock awards at grant date using the Monte Carlo model.
 
As of March 31, 2018, there was $10.6 million of total unrecognized compensation cost for restricted stock awards that will be recognized over the grants' remaining weighted average vesting period of 2.24 years. For the three months ended March 31, 2018 and 2017, the Company recognized $1.4 million and $2.1 million, respectively, of compensation expense associated with these awards.






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The following table contains information on restricted stock award activity for the three months ended March 31, 2018:
 
Number of Award
Shares
Outstanding at December 31, 2017
344,744

Granted
283,183

Released
(269,654
)
Canceled

Outstanding at March 31, 2018
358,273

 
Performance-based restricted stock awards have a three-year cliff vesting with the amount of restricted shares vesting at the end of the three-year period determined based upon the Company’s performance as measured against its peers.  More specifically, the percentage of shares vesting at the end of the measurement period will be based on the Company’s three-year total shareholder return measured against the three-year return of the companies included in the MSCI US REIT index and the Company's stock performance ranking among a group of triple-net REIT peer companies. The triple-net measurement group includes publicly traded REITs deriving at least 75% of revenues from triple-net leases. As of March 31, 2018, there was $18.8 million of total unrecognized compensation cost, which will be recognized over the performance-based restricted stock awards' remaining weighted average vesting period of 2.19 years.  For the three months ended March 31, 2018 and 2017, the Company recognized $2.6 million and $2.4 million, respectively, of compensation expense associated with these awards.

The following table contains information on performance-based restricted stock award activity for the three months ended March 31, 2018:
 
Number of  Performance-Based Award Shares
Outstanding at December 31, 2017
1,664,000

Granted
556,000

Released
(548,000
)
Canceled

Outstanding at March 31, 2018
1,672,000


5.              Real Estate Investments
 
Real estate investments, net, represents investments in 36 rental properties and the corporate headquarters building and is summarized as follows:
 
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Land and improvements
$
2,057,928

 
$
2,057,928

Building and improvements
2,461,573

 
2,461,573

Construction in progress
2

 

Total real estate investments
4,519,503

 
4,519,501

Less accumulated depreciation
(882,554
)
 
(857,456
)
Real estate investments, net
$
3,636,949

 
$
3,662,045


6. Land Rights

Land rights, net represent the Company's rights to land subject to long-term ground leases. The Company obtained ground lease rights through the acquisition of several of its rental properties and immediately subleased the land to its tenants. These land rights represent the below market value of the related ground leases. The Company assessed the acquired ground leases to determine if the lease terms were favorable or unfavorable, given market conditions at the acquisition date. Because the market rents to be received under the Company's triple-net tenant leases were greater than the rents to be paid under the acquired ground leases, the Company concluded that the ground leases were below market and were therefore required to be recorded as a definite lived asset (land rights) on its books.


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The land rights are amortized over the individual lease term of each ground lease, including all renewal options, which ranged from 25 years to 92 years at their respective acquisition dates. Land rights net, consists of the following:

 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Land rights
$
656,666

 
$
656,666

Less accumulated amortization
(19,245
)
 
(16,518
)
Land rights, net
$
637,421

 
$
640,148


Amortization expense related to the ground leases is recorded within land rights and ground lease expense in the condensed consolidated statements of income and totaled $2.7 million and $2.3 million for the three months ended March 31, 2018 and 2017, respectively.

As of March 31, 2018, estimated future amortization expense related to the Company’s ground leases by fiscal year is as follows (in thousands):

Year ending December 31,
 
2018
$
8,183

2019
10,910

2020
10,910

2021
10,910

2022
10,910

Thereafter
585,598

Total
$
637,421


7.              Property and Equipment Used in Operations
 
Property and equipment used in operations, net, consists of the following and primarily represents the assets utilized in the TRS Properties: 
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Land and improvements
$
30,276

 
$
30,276

Building and improvements
116,288

 
116,286

Furniture, fixtures, and equipment
115,292

 
114,972

Construction in progress
509

 
8

Total property and equipment
262,365

 
261,542

Less accumulated depreciation
(156,106
)
 
(153,249
)
Property and equipment, net
$
106,259

 
$
108,293


8. Receivables

Investment in Direct Financing Lease, Net

Under ASC 840 - Leases ("ASC 840"), the Pinnacle Master Lease is bifurcated between an operating lease and a direct financing lease. The fair value assigned to the land (inclusive of the land rights) qualifies for operating lease treatment, while the fair value assigned to the buildings is classified as a direct financing lease. Under ASC 840, the accounting treatment for direct financing leases requires the Company to record an investment in direct financing leases on its books at lease inception and subsequently recognize interest income and a reduction in the investment for the building portion of rent. This initial net investment is determined by aggregating the total future minimum lease payments attributable to the direct financing lease and the estimated residual value of the property, less unearned income. The interest income recorded under the direct financing lease is included in income from direct financing lease in the Company's condensed consolidated statements of income and is recognized over the 35-year lease term using the effective interest rate method which produces a constant periodic rate of return

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on the net investment in the leased property. Furthermore, as the net investment in direct financing lease includes only future minimum lease payments, rent that is not fixed and determinable at the lease inception is excluded from the determination of the rent attributable to the leased assets and will therefore be recorded as income from direct financing lease in the period earned. The unguaranteed residual value is the Company's estimate of what it could realize upon the sale of the property at the end of the lease term.

The net investment in the direct financing lease is evaluated for impairment as necessary, if indicators of impairment are present, to determine if there has been an-other-than-temporary decline in the residual value of the property or a change in the lessee's credit worthiness. At March 31, 2018, there were no indicators of a decline in the estimated residual value of the property and collectability of the remaining receivable balance is reasonably assured.

The Company's investment in direct financing lease, net, consists of the following and represents the building assets acquired from Pinnacle:
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Minimum lease payments receivable
$
3,228,436

 
$
3,263,387

Unguaranteed residual value
689,811

 
689,811

Gross investment in direct financing lease
3,918,247

 
3,953,198

Less: unearned income
(1,298,817
)
 
(1,315,559
)
Investment in direct financing lease, net
$
2,619,430

 
$
2,637,639


Loan Receivable

In January 2014, the Company completed the asset acquisition of the real property associated with the Casino Queen in East St. Louis, Illinois for $140.7 million.  GLPI leases the property back to Casino Queen on a triple-net basis on terms similar to those in the Master Leases. The lease has an initial term of 15 years and the tenant has an option to renew it at the same terms and conditions for four successive five-year periods.

Simultaneously with the Casino Queen acquisition, GLPI provided Casino Queen with a $43.0 million, five-year term loan at 7% interest, pre-payable at any time, which, together with the sale proceeds, completely refinanced and retired all of Casino Queen’s outstanding long-term debt obligations. On March 13, 2017, the outstanding principal and interest on this loan was repaid in full and GLPI simultaneously provided a new unsecured $13.0 million, 5.5 year term loan to CQ Holding Company, Inc., an affiliate of Casino Queen, to partially finance their acquisition of Lady Luck Casino in Marquette, Iowa. The cash proceeds were net settled. The new loan bears an interest rate of 15% and is pre-payable at any time. As of March 31, 2018, the balance of the new loan is $13.0 million. The collectability of the loan balance is reasonably assured, and as of March 31, 2018, there is no indication that the obligor will not remit all mandatory principal and interest payments in full and on time. The loan balance is recorded at carrying value which approximates fair value. Interest income related to the loan is recorded in interest income within the Company's condensed consolidated statements of income in the period earned.



















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9.              Long-term Debt
 
Long-term debt is as follows: 
 
March 31,
2018
 
December 31,
2017
 
(in thousands)
Unsecured term loan A
$
185,000

 
$
230,000

Unsecured term loan A-1
825,000

 
825,000

Unsecured $700 million revolver

 

$550 million 4.375% senior unsecured notes due November 2018
550,000

 
550,000

$1,000 million 4.875% senior unsecured notes due November 2020
1,000,000

 
1,000,000

$400 million 4.375% senior unsecured notes due April 2021
400,000

 
400,000

$500 million 5.375% senior unsecured notes due November 2023
500,000

 
500,000

$975 million 5.375% senior unsecured notes due April 2026
975,000

 
975,000

Capital lease
1,201

 
1,230

Total long-term debt
4,436,201

 
4,481,230

Less: unamortized debt issuance costs
(35,094
)
 
(38,350
)
Total long-term debt, net of unamortized debt issuance costs
$
4,401,107

 
$
4,442,880


The following is a schedule of future minimum repayments of long-term debt as of March 31, 2018 (in thousands): 
Within one year
$
735,119

2-3 years
1,000,255

4-5 years
1,225,281

Over 5 years
1,475,546

Total minimum payments
$
4,436,201

 
Senior Unsecured Credit Facility

The Company has a $1,825 million senior unsecured credit facility (the "Credit Facility"), consisting of a $700 million revolving credit facility, a $300 million Term Loan A facility, and an $825 million Term Loan A-1 facility. The revolving credit facility and the Term Loan A facility mature on October 28, 2018 and the Term Loan A-1 facility matures on April 28, 2021.

At March 31, 2018, the Credit Facility had a gross outstanding balance of $1,010 million, consisting of the $1,010 million Term Loan A and A-1 facilities. Additionally, at March 31, 2018, the Company was contingently obligated under letters of credit issued pursuant to the senior unsecured credit facility with face amounts aggregating approximately $0.4 million, resulting in $699.6 million of available borrowing capacity under the revolving credit facility as of March 31, 2018.

The Credit Facility contains customary covenants that, among other things, restrict, subject to certain exceptions, the ability of GLPI and its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations or pay certain dividends and other restricted payments. The Credit Facility contains the following financial covenants, which are measured quarterly on a trailing four-quarter basis: a maximum total debt to total asset value ratio, a maximum senior secured debt to total asset value ratio, a maximum ratio of certain recourse debt to unencumbered asset value and a minimum fixed charge coverage ratio. In addition, GLPI is required to maintain a minimum tangible net worth and its status as a REIT. GLPI is permitted to pay dividends to its shareholders as may be required in order to maintain REIT status, subject to the absence of payment or bankruptcy defaults. GLPI is also permitted to make other dividends and distributions subject to pro forma compliance with the financial covenants and the absence of defaults. The Credit Facility also contains certain customary affirmative covenants and events of default, including the occurrence of a change of control and termination of the Penn Master Lease (subject to certain replacement rights). The occurrence and continuance of an event of default under the Credit Facility will enable the lenders under the Credit Facility to accelerate the loans and terminate the commitments thereunder. At March 31, 2018, the Company was in compliance with all required financial covenants under the Credit Facility.




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Senior Unsecured Notes
 Each of the 4.375% Senior Unsecured Notes due 2018 (the "2018 Notes"), 4.875% Senior Unsecured Notes due 2020 (the "2020 Notes"), 4.375% Senior Unsecured Notes due 2021 (the "2021 Notes"), 5.375% Senior Unsecured Notes due 2023 (the "2023 Notes"), and 5.375% Senior Unsecured Notes due 2026 (the "2026 Notes") and collectively with the 2018 Notes, 2020 Notes, 2021 Notes and 2023 Notes, the "Notes") contain covenants limiting the Company’s ability to: incur additional debt and use its assets to secure debt; merge or consolidate with another company; and make certain amendments to the Penn Master Lease. The Notes also require the Company to maintain a specified ratio of unencumbered assets to unsecured debt. These covenants are subject to a number of important and significant limitations, qualifications and exceptions.
 
At March 31, 2018, the Company was in compliance with all required financial covenants under the Notes.

Capital Lease

The Company assumed the capital lease obligation related to certain assets at its Aurora, Illinois property. GLPI recorded the asset and liability associated with the capital lease on its balance sheet. The original term of the capital lease was 30 years and it will terminate in 2026.

10.              Commitments and Contingencies
 
Litigation

The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions, and other matters arising in the normal course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming, and unpredictable and, therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters. 

11. Revenue Recognition

As of March 31, 2018, 20 of the Company’s real estate investment properties were leased to a subsidiary of Penn under the Penn Master Lease and 14 of the Company's real estate investment properties were leased to a subsidiary of Pinnacle under the Pinnacle Master Lease. The obligations under the Penn and Pinnacle Master Leases are guaranteed by Penn and Pinnacle, respectively, and by most of Penn's and Pinnacle's subsidiaries that occupy and operate the facilities leased under the respective Master Leases. A default by Penn or its subsidiaries with regard to any facility will cause a default with regard to the Penn Master Lease and a default by Pinnacle or its subsidiaries with regard to any facility will cause a default with regard to the Pinnacle Master Lease. Additionally, the Meadows real estate assets are leased to Pinnacle under a single property triple-net lease separate from the Pinnacle Master Lease. GLPI also leases the Casino Queen property back to its operator on a triple-net basis on terms similar to those in the Master Leases (the "Casino Queen Lease").
 
The rent structure under the Penn Master Lease includes a fixed component, a portion of which is subject to an annual 2% escalator if certain rent coverage ratio thresholds are met, and a component that is based on the performance of the facilities, which is adjusted, subject to certain floors (i) every five years to an amount equal to 4% of the average net revenues of all facilities under the Penn Master Lease (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding five years, and (ii) monthly by an amount equal to 20% of the change in net revenues of Hollywood Casino Columbus and Hollywood Casino Toledo during the preceding month.

Similar to the Penn Master Lease, the Pinnacle Master Lease also includes a fixed component, a portion of which is subject to an annual 2% escalator if certain rent coverage ratio thresholds are met and a component that is based on the performance of the facilities, which is adjusted, subject to certain floors every two years to an amount equal to 4% of the average annual net revenues of all facilities under the Pinnacle Master Lease during the preceding two years.

 GLPI leases the Meadows real property assets to Pinnacle under a triple-net operating lease separate from the Pinnacle Master Lease with an initial term of 10 years with no purchase option and the option to renew for three successive 5-year terms and one 4-year term, at Pinnacle's option (the "Meadows Lease"). The Meadows Lease contains a fixed component, subject to annual escalators, and a component that is based on the performance of the facility, which is reset every two years to a fixed amount determined by multiplying (i) 4% by (ii) the average annual net revenues of the facility for the trailing two year

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period. The Meadows Lease contains an annual escalator provision for up to 5% of the base rent, if certain rent coverage ratio thresholds are met, which remains at 5% until the earlier of ten years or the year in which total rent is $31 million, at which point the escalator will be reduced to 2% annually thereafter.

The rent structure under the Casino Queen Lease also includes a fixed component, a portion of which is subject to an annual 2% escalator if certain rent coverage ratio thresholds are met, and a component that is based on the performance of the facility, which is reset every five years to a fixed amount equal to the greater of (i) the annual amount of non-fixed rent applicable for the lease year immediately preceding such rent reset year and (ii) an amount equal to 4% of the average annual net revenues of the facility for the trailing five year period.

In addition to rent, as triple-net lessees, all of the Company's tenants are required to pay the following executory costs: (1) all facility maintenance, (2) all insurance required in connection with the leased properties and the business conducted on the leased properties, including coverage of the landlord's interests, (3) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor) and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

The Company determined, based on facts and circumstances prevailing at the time of each lease's inception, that neither Penn, Pinnacle (excluding the Meadows Lease as described below) nor Casino Queen could effectively operate and run their respective business without the properties that are leased to it under the respective lease agreements with GLPI. Furthermore, at lease inception, all of Casino Queen's revenues and substantially all of Penn's and Pinnacle's revenues were generated from operations in connection with the leased properties. There are also various legal restrictions in the jurisdictions in which Penn, Pinnacle and Casino Queen operate that limit the availability and location of gaming facilities, which makes relocation or replacement of the leased gaming facilities restrictive and potentially impracticable or unavailable. Moreover, under the terms of the Penn and Pinnacle Master Leases, Penn and Pinnacle must make their renewal election with respect to all of the leased property together; the tenant is not entitled to selectively renew certain of the leased property while not renewing other property. Accordingly, the Company concluded that failure by Penn, Pinnacle or Casino Queen to renew the lease would impose a significant penalty on such tenant such that renewal of all lease renewal options appears at lease inception to be reasonably assured. Therefore, the Company concluded that the term of the leases with both Penn and Casino Queen is 35 years, equal to the initial 15 year term plus all four of the 5-year renewal options. The lease term of the Pinnacle Master Lease is also 35 years, equal to the initial 10 year term plus all five of the 5-year renewal options.

As described above, subsequent to purchasing the majority of Pinnacle's real estate assets and leasing them back to Pinnacle, GLPI entered into a separate triple-net lease with Pinnacle to lease the newly acquired Meadows real estate assets to Pinnacle. Because this lease involves only a single property within Pinnacle's portfolio, GLPI concluded it was not reasonably assured at lease inception that Pinnacle would elect to exercise all lease renewal options. The Company concluded that failure by Pinnacle to renew the Meadows Lease would not impose a significant penalty on such tenant as this property's operations represent only an incremental portion of Pinnacle's total business at lease inception. Therefore, the Company concluded that the lease term of the Meadows Lease is 10 years, equal to the initial 10-year term only.

Gaming revenue generated by the TRS Properties mainly consists of video lottery gaming revenue, and to a lesser extent, table game and poker revenue. Video lottery gaming revenue is the aggregate net difference between gaming wins and losses with liabilities recognized for funds deposited by customers before gaming play occurs, for "ticket-in, ticket-out" coupons in the customers’ possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increases. Table game gaming revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens, outstanding counter checks (markers), and front money that are removed from the live gaming tables. Additionally, food and beverage revenue is recognized as services are performed.

On January 1, 2018, the Company adopted ASU 2014-09, which altered the recognition of revenue at the TRS Properties related to the customer loyalty programs. Specifically, the recognition of revenue associated with these points based programs was impacted by eliminating the current accrual for the cost of the points awarded at the time of play and instead deferring the portion of the revenue received from the customer at the time of play and attributed to the awarded points until a later period when such points are redeemed or forfeited. The revenue deferral is calculated by allocating a portion of the transaction price to the points based upon their retail value. Under the former guidance, the cost of the points was recorded as an operating expense through the gaming, food, beverage and other expense line item of the Company's condensed consolidated statement of income. Under ASU 2014-09, promotional allowances representing the retail value of food, beverages and other services furnished to guests without charge are no longer presented as a separate line item on the condensed consolidated statements of income, rather they are presented on a net basis within gaming, food, beverage and other

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revenue, net. This change has no impact to total revenues and is for presentation purposes only. The impact of adopting ASU 2014-09 was immaterial to our total revenue for the three months ended March 31, 2018.

The following table discloses the components of gaming, food, beverage and other revenue, net within the condensed consolidated statements of income for the three months ended March 31, 2018 and 2017:
        
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Video lottery
$
29,012

 
$
31,698

Table game
4,284

 
4,803

Poker
308

 
314

Food, beverage and other
2,188

 
2,445

Promotional allowances
(1,046
)
 
(1,252
)
Total gaming, food, beverage and other revenue, net
$
34,746

 
$
38,008

    
12.              Shareholders' Equity

Common Stock

During August 2016, the Company commenced a continuous equity offering under which the Company may sell up to an aggregate of $400 million of its common stock from time to time through a sales agent in “at the market” offerings (the “ATM Program”). Actual sales will depend on a variety of factors, including market conditions, the trading price of the Company's common stock and determinations of the appropriate sources of funding for proposed transactions. The Company may sell the shares in amounts and at times to be determined by the Company, but has no obligation to sell any of the shares in the ATM Program. The ATM Program also allows the Company to enter into forward sale agreements. In no event will the aggregate number of shares sold under the ATM Program (whether under any forward sale agreement or through a sales agent), have an aggregate sales price in excess of $400 million. The Company expects, that if it enters into a forward sale contract, to physically settle each forward sale agreement with the forward purchaser on one or more dates specified by the Company prior to the maturity date of that particular forward sale agreement, in which case the aggregate net cash proceeds at settlement will equal the number of shares underlying the particular forward sale agreement multiplied by the relevant forward sale price. However, the Company may also elect to cash settle or net share settle a particular forward sale agreement, in which case proceeds may or may not be received or cash may be owed to the forward purchaser.

In connection with the ATM Program, the Company engaged a sales agent who may receive compensation of up to 2% of the gross sales price of the shares sold. Similarly, in the event the Company enters into a forward sale agreement, it will pay the relevant forward seller a commission of up to 2% of the sales price of all borrowed shares of common stock sold during the applicable selling period of the forward sale agreement.
No shares were sold under the ATM Program during the three months ended March 31, 2018. Program to date, the Company has sold 5,186,871 shares of its common stock at an average price of $35.91 per share under the ATM Program and generated gross proceeds of approximately $186.3 million (net proceeds of approximately $185.0 million). The Company used the net proceeds from the ATM Program to partially fund its acquisition of the Meadows' and Tunica real estate assets. As of March 31, 2018, the Company had $213.7 million remaining for issuance under the ATM Program and had not entered into any forward sale agreements.














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Dividends

The following table lists the dividends declared and paid by the Company during the three months ended March 31, 2018 and 2017:
Declaration Date
 
Shareholder Record Date
 
Securities Class
 
Dividend Per Share
 
Period Covered
 
Distribution Date
 
Dividend Amount
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
2018
 
 
 
 
 
 
 
 
 
 
 
 
February 1, 2018
 
March 9, 2018
 
Common Stock
 
$
0.63

 
First Quarter 2018
 
March 23, 2018
 
$
134,490

 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
February 1, 2017
 
March 13, 2017
 
Common Stock
 
$
0.62

 
First Quarter 2017
 
March 24, 2017
 
$
129,007


In addition, for the three months ended March 31, 2018 and 2017, dividend payments were made to GLPI restricted stock award holders in the amount of $0.2 million and $0.3 million, respectively.

13.       Segment Information

Consistent with how the Company’s Chief Operating Decision Maker reviews and assesses the Company’s financial performance, the Company has two reportable segments, GLP Capital, L.P. (a wholly-owned subsidiary of GLPI through which GLPI owns substantially all of its assets) ("GLP Capital") and the TRS Properties. The GLP Capital reportable segment consists of the leased real property and represents the majority of the Company’s business. The TRS Properties reportable segment consists of Hollywood Casino Perryville and Hollywood Casino Baton Rouge.

The following tables present certain information with respect to the Company’s segments.
 
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
(in thousands)
 
GLP Capital
 
TRS Properties
 
Eliminations (1)
 
Total
 
GLP Capital 
 
TRS Properties
 
Eliminations (1)
 
Total
Total revenues
 
$
209,304

 
$
34,746

 
$

 
$
244,050

 
$
204,705

 
$
38,008

 
$

 
$
242,713

Income from operations
 
144,874

 
6,977

 

 
151,851

 
142,034

 
7,972

 

 
150,006

Interest, net
 
53,588

 
2,600

 
(2,601
)
 
53,587

 
53,486

 
2,600

 
(2,601
)
 
53,485

Income before income taxes
 
93,887

 
4,377

 

 
98,264

 
91,149

 
5,372

 

 
96,521

Income tax expense
 
171

 
1,321

 

 
1,492

 
370

 
2,160

 

 
2,530

Net income
 
93,716

 
3,056

 

 
96,772

 
90,779

 
3,212

 

 
93,991

Depreciation
 
25,615

 
2,339

 

 
27,954

 
25,424

 
2,833

 

 
28,257

Capital project expenditures
 

 

 

 

 
8

 

 

 
8

Capital maintenance expenditures
 
48

 
774

 

 
822

 

 
482

 

 
482

 
(1)              Amounts in the "Eliminations" column represent the elimination of intercompany interest payments from the Company’s TRS Properties business segment to its GLP Capital business segment.

14.       Supplemental Disclosures of Cash Flow Information and Noncash Activities

Supplemental disclosures of cash flow information are as follows:
 
Three Months Ended March 31,
 
2018
 
2017
 
(in thousands)
Cash paid for income taxes, net of refunds received
$
22

 
$

Cash paid for interest
8,549

 
8,739


Noncash Investing and Financing Activities

During the three months ended March 31, 2018 and 2017, the Company did not engage in any noncash investing and financing activities.


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15.       Supplementary Condensed Consolidating Financial Information of Parent Guarantor and Subsidiary Issuers
 
GLPI guarantees the Notes issued by its subsidiaries, GLP Capital, L.P. and GLP Financing II, Inc. Each of the subsidiary issuers is 100% owned by GLPI. The guarantees of GLPI are full and unconditional. GLPI is not subject to any material or significant restrictions on its ability to obtain funds from its subsidiaries by dividend or loan or to transfer assets from such subsidiaries, except as provided by applicable law. None of GLPI's subsidiaries guarantee the Notes.
 
Summarized balance sheets as of March 31, 2018 and December 31, 2017, statements of income for the three months ended March 31, 2018 and 2017 and statements of cash flows for the three months ended March 31, 2018 and 2017 for GLPI as the parent guarantor, for GLP Capital, L.P. and GLP Financing II, Inc. as the subsidiary issuers and the other subsidiary non-issuers is presented below.
 

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At March 31, 2018
Condensed Consolidating Balance Sheet
 
Parent 
Guarantor
 
Subsidiary 
Issuers
 
Other 
Subsidiary 
Non-Issuers
 
Eliminations
 
Consolidated
 
 
(in thousands)
Assets
 
 

 
 

 
 

 
 

 
 

Real estate investments, net
 
$

 
$
1,771,758

 
$
1,865,191

 
$

 
$
3,636,949

Land rights, net
 

 
58,218

 
579,203

 

 
637,421

Property and equipment, used in operations, net
 

 
20,098

 
86,161

 

 
106,259

Investment in direct financing lease, net
 

 

 
2,619,430

 

 
2,619,430

Cash and cash equivalents
 

 
17,693

 
27,727

 

 
45,420

Prepaid expenses
 

 
5,926

 
2,356

 

 
8,282

Goodwill
 

 

 
75,521

 

 
75,521

Other intangible assets
 

 

 
9,577

 

 
9,577

Loan receivable
 

 

 
13,000

 

 
13,000

Intercompany loan receivable
 

 
193,595

 

 
(193,595
)
 

Intercompany transactions and investment in subsidiaries
 
2,416,848

 
5,066,140

 
2,918,767

 
(10,401,755
)
 

Deferred tax assets
 


 

 
4,510

 

 
4,510

Other assets
 

 
43,986

 
20,092

 

 
64,078

Total assets
 
$
2,416,848

 
$
7,177,414

 
$
8,221,535

 
$
(10,595,350
)
 
$
7,220,447

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$

 
$
460

 
$
32

 
$

 
$
492

Accrued expenses
 

 
858

 
5,202

 

 
6,060

Accrued interest
 

 
75,479

 

 

 
75,479

Accrued salaries and wages
 

 
1,424

 
1,705

 

 
3,129

Gaming, property, and other taxes
 

 
21,616

 
19,580

 

 
41,196

Income taxes
 

 
(154
)
 
353

 

 
199

Long-term debt, net of unamortized debt issuance costs
 

 
4,401,107

 

 

 
4,401,107

Intercompany loan payable
 

 


 
193,595

 
(193,595
)
 

Deferred rental revenue
 

 
234,346

 
14,294

 

 
248,640

Deferred tax liabilities
 

 

 
279

 

 
279

Other liabilities
 

 
25,430

 
1,588

 

 
27,018

Total liabilities
 

 
4,760,566

 
236,628

 
(193,595
)
 
4,803,599

 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity (deficit)
 
 

 
 

 
 

 
 

 
 

Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued or outstanding at March 31, 2018)
 

 

 

 

 

Common stock ($.01 par value, 500,000,000 shares authorized, 213,498,249 shares issued at March 31, 2018)
 
2,135

 
2,135

 
2,135

 
(4,270
)
 
2,135

Additional paid-in capital
 
3,930,777

 
3,930,778

 
9,495,703

 
(13,426,481
)
 
3,930,777

Retained accumulated (deficit) earnings
 
(1,516,064
)
 
(1,516,065
)
 
(1,512,931
)
 
3,028,996

 
(1,516,064
)
Total shareholders’ equity (deficit)
 
2,416,848

 
2,416,848

 
7,984,907

 
(10,401,755
)
 
2,416,848

Total liabilities and shareholders’ equity (deficit)
 
$
2,416,848

 
$
7,177,414

 
$
8,221,535

 
$
(10,595,350
)
 
$
7,220,447

 



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Three months ended March 31, 2018
Condensed Consolidating Statement of Income
 
Parent 
Guarantor
 
Subsidiary 
Issuers
 
Other 
Subsidiary 
Non-Issuers
 
Eliminations
 
Consolidated
 
 
(in thousands)
Revenues
 
 

 
 

 
 

 
 

 
 

Rental income
 
$

 
$
101,820

 
$
67,585

 
$

 
$
169,405

Income from direct financing lease
 

 

 
18,621

 

 
18,621

Real estate taxes paid by tenants
 

 
10,900

 
10,378

 

 
21,278

Total rental revenue and income from direct financing lease
 

 
112,720

 
96,584

 

 
209,304

Gaming, food, beverage and other, net
 

 

 
34,746

 

 
34,746

Total revenues
 

 
112,720

 
131,330

 

 
244,050

Operating expenses
 
 

 
 

 
 

 
 

 
 

Gaming, food, beverage and other
 

 

 
19,658

 

 
19,658

Real estate taxes
 

 
10,919

 
10,676

 

 
21,595

Land rights and ground lease expense
 

 
2,019

 
4,513

 

 
6,532

General and administrative
 

 
10,921

 
5,539

 

 
16,460

Depreciation
 

 
23,601

 
4,353

 

 
27,954

Total operating expenses
 

 
47,460

 
44,739

 

 
92,199

Income from operations
 

 
65,260

 
86,591

 

 
151,851

 
 
 
 
 
 
 
 
 
 
 
Other income (expenses)
 
 

 
 

 
 

 
 

 
 

Interest expense
 

 
(54,068
)
 

 

 
(54,068
)
Interest income
 

 

 
481

 

 
481

Intercompany dividends and interest
 

 
107,103

 
(315
)
 
(106,788
)
 

Total other income (expenses)
 

 
53,035

 
166

 
(106,788
)
 
(53,587
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before income taxes
 

 
118,295

 
86,757

 
(106,788
)
 
98,264

Income tax expense
 

 
171

 
1,321

 

 
1,492

Net income (loss)
 
$

 
$
118,124

 
$
85,436

 
$
(106,788
)
 
$
96,772


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Three months ended March 31, 2018
Condensed Consolidating Statement of Cash Flows
 
Parent
Guarantor
 
Subsidiary
Issuers
 
Other
Subsidiary
Non-Issuers
 
Eliminations
 
Consolidated
 
 
(in thousands)
Operating activities
 
 

 
 

 
 

 
 

 
 

Net income (loss)
 
$

 
$
118,124

 
$
85,436

 
$
(106,788
)
 
$
96,772

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization
 

 
24,018

 
6,663

 

 
30,681

Amortization of debt issuance costs
 

 
3,257

 

 

 
3,257

Deferred income taxes
 

 

 
164

 

 
164

Stock-based compensation
 

 
3,987

 

 

 
3,987

Straight-line rent adjustments
 

 
14,328

 
2,289

 

 
16,617

(Increase) decrease,
 
 

 
 

 
 

 
 

 
 
Prepaid expenses and other assets
 

 
(2,913
)
 
274

 
1,638

 
(1,001
)
Intercompany
 

 
(9
)
 
9

 

 

Increase (decrease),
 
 

 
 

 
 

 
 

 
 
Accounts payable
 

 
(160
)
 
(65
)
 

 
(225
)
Accrued expenses
 

 
98

 
105

 

 
203

Accrued interest
 

 
42,238

 

 

 
42,238

Accrued salaries and wages
 

 
(6,408
)
 
(1,272
)
 

 
(7,680
)
Gaming, property and other taxes
 

 
124

 
(102
)
 

 
22

Income taxes
 

 
152

 
1,685

 
(1,638
)
 
199

Other liabilities
 

 
949

 
(427
)
 

 
522

Net cash provided by (used in) operating activities
 

 
197,785

 
94,759

 
(106,788
)
 
185,756

Investing activities
 
 

 
 

 
 

 
 

 
 

Capital maintenance expenditures
 

 
(48
)
 
(774
)
 

 
(822
)
Collection of principal payments on investment in direct financing lease
 

 

 
18,209

 

 
18,209

Net cash (used in) provided by investing activities
 

 
(48
)
 
17,435

 

 
17,387

Financing activities
 
 

 
 

 
 

 
 

 
 

Dividends paid
 
(134,717
)
 

 

 

 
(134,717
)
Taxes paid related to shares withheld for tax purposes on restricted stock award vestings, net of proceeds from exercise of options
 
(7,031
)
 

 

 

 
(7,031
)
Repayments of long-term debt
 

 
(45,029
)
 


 

 
(45,029
)
Intercompany financing
 
141,748

 
(141,749
)
 
(106,787
)
 
106,788

 

Net cash (used in) provided by financing activities
 

 
(186,778
)
 
(106,787
)
 
106,788

 
(186,777
)
Net increase in cash and cash equivalents
 

 
10,959

 
5,407

 

 
16,366

Cash and cash equivalents at beginning of period
 

 
6,734

 
22,320

 

 
29,054

Cash and cash equivalents at end of period
 
$

 
$
17,693

 
$
27,727

 
$

 
$
45,420


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Table of Contents

At December 31, 2017
Condensed Consolidating Balance Sheet
 
Parent
Guarantor
 
Subsidiary
Issuers
 
Other
Subsidiary
Non-Issuers
 
Eliminations
 
Consolidated
 
 
(in thousands)
Assets
 
 

 
 

 
 

 
 

 
 

Real estate investments, net
 
$

 
$
1,794,840

 
$
1,867,205

 
$

 
$
3,662,045

Land rights, net
 

 
58,635

 
581,513

 

 
640,148

Property and equipment, used in operations, net
 

 
20,568

 
87,725

 

 
108,293

Investment in direct financing lease, net
 

 

 
2,637,639

 

 
2,637,639

Cash and cash equivalents
 

 
6,734

 
22,320

 

 
29,054

Prepaid expenses
 

 
4,067

 
2,746

 
1,639

 
8,452

Goodwill
 

 

 
75,521

 

 
75,521

Other intangible assets
 

 

 
9,577

 

 
9,577

Loan receivable
 

 

 
13,000

 

 
13,000

Intercompany loan receivable
 

 
193,595

 

 
(193,595
)
 

Intercompany transactions and investment in subsidiaries
 
2,458,247

 
5,087,893

 
2,959,174

 
(10,505,314
)
 

Deferred tax assets
 

 

 
4,478

 

 
4,478

Other assets