“ In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing…” Theodore Roosevelt
We are days away from seminal casino REIT, Gaming & Leisure Properties, Inc. (NASDAQ: GLPI) 4Q21 earnings call. Analysts forecasts are looking for ~$0.57 for 4Q21 rolling into an annual haul of ~$2.32. Whether the company announces a meet, miss or beat is far less of a rationale to buy sell or hold the stock than the far more pressing questions of where the first real gaming REIT goes from here.
This is not to imply it sits in limbo, thumb sucking its future. The company has proven itself adept at rooting out properties, buying the realty at sensible multiples and duly diligent in its unblemished record of payouts.
The key question here is much larger, namely having assembled a mostly solid portfolio of 51 gaming realty properties that’s geographically diverse, but heavily weighted in the US Midwest, south and northeast, where do they go from here?
GLPI is in a sense the granddaddy of casino REITs, having been spun off by Penn National Gaming Inc. in 2013 in an initiative led by its chairman, founder and largest holder, Peter M. Carlino. It was followed by MGM Growth Properties Inc. (since sold to VICI) in 2015, a REIT formed by the former management to stave off activist pressure to unlock shareholder value. Then in 2017, Caesars Entertainment followed suit by spinning off its realty to the equally successful Vici Properties Inc. (VICI:NYSE).
The stampede to unload casino realty that began with GPLI has not abated, bringing private equity giants like Blackstone Group (NYSE:BX) into the fray, especially in Las Vegas.
From early disbeliever to fan of casino REITs as a vehicle
I confess to being a skeptic about casino REITS at the outset when news of the GLPI spinoff in 2013. My concerns sprung from my long career in the c-suite of gaming operators which inculcated a core belief that casino properties were unique, single-use realty assets not easily convertible to other usage should the gambling enterprise they housed fail.
I also believed that successful casino operations consistently grew earnings because they were cash machines. There was what I knew was the daily truth of the casino business given a viable location. Namely that no matter what, gambling as a leisure activity was so deeply ingrained in the human psyche over millennia, that a generally shorter return on sunk cost of the building was a given. So my thinking then was: Why sell a piece of valuable, unique, licensed realty—unduplicated in any other asset class, that you own down to the last brick?
It’s those bricks that would be part of a theoretical sale price when a deep pocketed buyer showed up. The multiple or premium added including the realty produced the biggest returns. Secondly how truly flexible could a REIT owner be if a tenant confronted a catastrophic decline in business, therefore squeezing the ability to meet triple net lease obligations? Would such properties begin to neglect needed capex?
I knew well about the ongoing need for maintenance in casino properties given the massive weekly footfall they experienced.
Sitting on capex committees, thinking about room renovations en masse, replacing carpeting on the casino floor, adding a restaurant, reconfiguring the casino floor lighting, was telling as the tens of millions accumulated. But there was always the comfort that capex added to the value of the property that was a soldier on the balance sheet no matter what.
So in a crisis, if you are still stuck with the capex cost on a triple net lease, but you don’t own the property anymore and you have to slash operating costs, can you turn to your REIT landlord for at least, temporary relief from your rent obligations? Well COVID came and that proposition was in the cross hairs among many casino managements.
I was wrong.
Where I got religion and why GLPI belongs in every gaming portfolio assuming they can continue to identify properties
I began to change my views on casino REITs when I realized that because gaming establishments were housed in realty assets that were literally un-duplicated anywhere else in the entire asset class that their value was best liberated by a sale. Bear in mind, casinos are licensed premises that live by the favor of regulators and state governments. In any other realty class you can just pick any piece of geography you find pregnant with possibilities for your business, buy the land, meet with local zoning or common regulatory mandates, and go to it.
Casinos can only exist where state legislatures command, where voter sentiment is positive enough to enable politicians to skate through opposition easily enough. Plus the certain knowledge that almost because of these barriers, cannibalization if not eliminated—can be contained. Anybody can plan and build a shopping center, an apartment complex and office building, a factory. Those who seek to build and operate casinos must meet far higher standards more meticulously investigated than any other sector. Therefore there’s an inherent value in the complex and sometimes bizarre process of bringing a casino to life.
It was the track record of GLPI since its inception that confirmed to me the conviction that it, and its prime competitor, Vici Properties, that casino REITs were stocks that belonged in every gaming portfolio. Since 2013 they have proven themselves able to distribute reliable returns in an effective zero interest economy. Their portfolios are comprised of settled in casino businesses with huge databases that virtually guarantee a given foundational revenue base (pre-and ex COVID of course).
Between GLPI and Vici 76 of the nation’s major casino realty properties are REIT owned. These properties deliver the overwhelming majority of the estimated $43.5B in commercial casino revenue in baseline 2019. Tribal casinos take in ~$29b.
The pent-up demand we are beginning to show up in these 75 REIT owned properties will probably result in 2022 coming very close, or possibly exceeding total revenues for the baseline pre-COVID year of 2019.
Pros and cons of GLPI at is current entry point of $44.51
As we stated at the outset a tick up down or level of GLPI’s earnings call is not the center stage metric for a decision to buy the stock here. The rapid recovery of US gaming (REITs hold no casino realty outside of the US) in this COVID endgame period signals a comfortable free cash flow situation that should assure investors that the portfolio’s lease FFOs and AFFOs are in good order. One quick comparison is telling:
GLPI dividend yield: 6.02% or $2.68 at writing
NASDAQ company dividend yield: 2.81% or $1.08
Of course this isn’t a perfect metric since Nasdaq stocks are heavy in tech issues that bring exponential rocket rides on their trading ranges over relatively short periods of time. So for investors chasing yield, good guesswork on tech portfolios can bring unmatched yields compared with the GLPI REIT. But it’s in the risk profile that lives in a different world than does a well run REIT here. GLPI and its REIT brothers in a sector that contains COVID-challenged properties in office complexes and retail is by far the best yield available propped by a proven FFO track record. So our view two days before its earnings call that GLPI is a strong buy at its price. Having laid down that foundation, we raise what we believe is the far more crucial question for management going forward: Where do you go from here? Do you continue to hunt for US casino prospects? Do you pivot to other mass entertainment sectors housed in buildings with reliable cash flows? Ex: Pro sports arenas privately held by families facing massive estate tax bites.
Over the last 52 weeks GLPI’s trading range has moved between $40.71 and $51.46. I suspect the movement has much to do with perceptions of casino revenue flows decimated by COVID and still ramping back as omicron begins to fade.
Its P/E to us indicates value at 17.77. Interestingly enough, its peer REIT, Vici, is trading at 15.17 and both companies report revenues in the $1b-plus range.
Revenue (ttm) $1.2b
Operating income: $878m. Clearly REITS don’t need casts of thousands on the payroll as do casinos themselves.
EBITDA (ttm) $1.12B
Return om Equity (ttm) 22.95
Cash on hand: $423m
Total debt: $5.95b. Herein lies the rub—as there’s always a rub in any stock in any sector. GLPI has thrived in this effectively near zero interest rate atmosphere almost since its inception. In fact, it would appear that cheap money is in fact the mother’s milk of the REIT vehicle well into the future. As we sit here, it’s widely expected that the Fed will be forced to move on rates that realistically could trigger a series of raises, ever more desperate as the inflation rate soars out of control. The basis points could begin piling up quickly.
Above: Hollywood, among multiple brands housed in GLPI owned buildings.
A serious, determined Fed moving rapidly up the rate ladder could impact the trading of GLPI stocks in the forward quarters depending on the pace. GLPI faces no maturities on its debt until May of 2023. But a ramp of rates would clearly inhibit the ability of GLPI to identify more properties to build its portfolio with borrowings generally in a very friendly environment since 2013. A high cost of money could literally wreck potential new deals by triggering multiples that would severely press GLPI to bring forth FFOs that make sense compared with its current portfolio. Yet, among the challenges it faces going forward in our view is identifying portfolio opportunities as viable casino property inventory narrows to the extent that virtually no solid deals remain in the intermediate term upon which to expand the portfolio. That means in our view that management needs an answer to a very burning question: What’s your next trick?
Also, will investor interest in REITs in general be bruised if the Fed moves up rates where quality bond issues and other asset classes considered safe ground begin to compete with GLPIs 6.02% which looks real great now? And could that trigger a cratering of REIT sector stocks in general?
Competitor Vici has to an extent acted. It now owns four golf courses in the US. That’s one direction, others include unique non-casino hotel locations, sports arenas. In short it’s hard to see at the moment in what direction GLPI’s portfolio expansion might take it outside of the casino business. A last option would clearly be scraping out small casino operators with somewhat less premier locations but decent business models with fingers crossed. It will not be easy.
Rent concessions to tenants living under dire circumstances like COVID were part of the risk on during the worst months of the crisis from early 2020 through mid to late 2021 with the omicron surge. Given the outlook that points clearly to the omicron endgame near term, propulsion by vast, pent-up demand among leisure gamblers during COVID’s worst months, we see the threat of widespread concessions to tenants as minimal. But in this terrible plague one can never totally rule out the appearance of yet another variant.
Conclusion: At its current P/E and highly stable FFO expectations, we see GLPI as a strong buy as part of a gaming or consumer discretionary portfolio. Most other mass assembly companies pose problems. Movie chains, shopping malls will be nursing the COVID wounds for many years ahead—if ever re-ramping anywhere near they were pre-COVID.
We see the stars all aligned for GLPI to continue generating a nice yield and believe its current P/E makes it attractive as its tenant roster’s revenue ramp continues highly bullish as we enter the hoped for endgame of the pandemic.
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