BALY - Get A Smaller Piece Of Vegas With Gaming and Leisure Properties

2023-09-05 08:00:00 ET

Summary

• Gaming and Leisure Properties is a REIT in the gaming industry that owns 59 casino properties in 18 states.
• GLPI's properties are spread out throughout the nation, with most located in the Northeast and Midwest.
• GLPI, in conjunction with Bally's, recently entered into an agreement with MLB team Oakland A's to bring the team to Las Vegas.
• The REIT recently redefined its AFFO guidance and now expects it to come in at $3.66 to $3.68.
• GLPI has a strong balance sheet with well-laddered debt maturities and had over $1.7 billion in liquidity in Q2.

Introduction

It's hard to talk about Gaming and Leisure Properties ( GLPI ) without mentioning what I consider to be its big brother VICI Properties ( VICI ). Both are similar as they are the only two REITs in the gaming space that own casinos. VICI is much more popular and has seen exponential growth over the last 5 years. GLPI on the other hand has been jogging along at its own pace. VICI is very popular amongst SA analysts and has amassed almost 50k followers on the platform compared to GLPI's 10k.

I can't blame anyone for being a big fan of VICI. It also happens to be the biggest holding in my portfolio so you can say I'm a fan as well. And I recently covered them in an article last month. But that's not to take anything away from GLPI because I think they are also a great REIT and are trading at an attractive valuation right now.

Since I've written about VICI, I decided to do an analysis on an alternative REIT within the same sector and space. Let's take a dive into what makes GLPI a potential long-term investment for dividend investors.

Who Is Gaming And Leisure Properties?

While most of VICI's most prestigious casino properties are located on the Las Vegas Strip, GLPI casino properties are more spread out throughout the nation. They currently own 59 premier gaming and related facilities in 18 states. They own almost 16k hotel rooms with most of their properties located in the Northeast and Midwest. They also own properties in the popular gaming states of Mississippi (7 properties), Louisiana (2 properties), and Nevada (3 properties).

One property is located right off the strip, Tropicana Las Vegas. As you can see, like VICI, GLPI also collected 100% of its rent roll during COVID and has done so since inception. Investing in gaming REITs are, in my opinion, great long-term investments as casinos are somewhat resistant to economic downturns. This is because they typically have much longer leases than say, retail properties, and are difficult to build.

Barriers include state laws, costs associated with purchasing & leasing property, obtaining licenses & permits, and competing casinos. It also requires a lot of capital to start up a casino. That's why you don't just see one pop in your town or city. It's very different than opening a restaurant or movie theater. And even though things like recessions, pandemics, and inflation can put a damper on foot traffic and/or profits, casino owners will most likely still pay their rent because of the reasons I listed above.

Room For Expansion

Another thing I like about GLPI is that they have plenty of room for expansion. As of now, the REIT only has 59 properties in 18 states. With the rise of online gambling and sports betting over the last few years, the REIT still has plenty of room to grow. The REIT has little to no presence in the West Coast States besides Nevada. And although gambling is not as huge as it is in Nevada and Pennsylvania , acquiring local casino properties in the states of California and Texas could prove to be profitable over the long-term as these two are among some of the nation's largest states.

On August 29th, GLPI entered into an agreement with 815 entertainment to acquire the land under the Hard Rock in Illinois for $100 million. This will have an annual rent of $8 million and a fixed 2% annual rent escalation starting on the lease's first year anniversary throughout the term of 99 years. Their CEO stated he believes this will provide attractive returns to shareholders due to the strength of the location and depth of the market.

Ground Leases

For those who are not familiar with ground leases, it is exactly what it sounds like. Tenants sign a lease agreement with an owner/operator with expectations to build and/or develop a property during the lease period. These are highly accretive as they have extraordinary long leases of 50-99 years and allow for stable, and predictable income. In May, Bally's Corporation ( BALY ), in conjunction with GLPI did a deal with MLB team Oakland A's to site their new ballpark on a portion of their Tropicana property in Las Vegas.

GLPI also agreed to fund up to $175 million towards certain shared improvements within the future development. Bally's acquired the building and operations from GLPI last year for $148 million. The current ground lease term is 50 years with an extension to 99-years upon achieving key milestones. Las Vegas is a premier tourist destination that has been popular since the 1930's.

In May of this year, visitor volume reached over 40 million , up 13% from last year. The city currently has several new projects in the works such as additional resorts and Formula 1 racing, which also happens to be one of the hottest sports in the world right now. This will most likely continue to reel in new tourists to the city for many years to come.

Strong Dividend Coverage

During Q2 earnings GLPI reported FFO of $0.92, safely covering its dividend of $0.73. This gives the REIT a payout ratio of 79%, in-line with the sector. I expect FFO and AFFO to continue to grow in future quarters with the recent acquisitions. This has already proven accretive as management reported total income exceeded Q1 by over $30 million.

The ground lease in Las Vegas increased cash rental income by $2.6 million. This caused GLPI's management to redefine its full-year guidance AFFO from $3.63 to $3.67 to $3.66 to $3.68 per diluted share. With the current dividend even if AFFO came in at the bottom end of guidance, this would give GLPI a full-year payout ratio of less than 80%. And although I prefer my REITs to have a slightly more conservative payout ratio roughly around 75%, GLPI's doesn't concern me.

REITs are required to payout 90% of their earnings but having a lower payout ratio allows them to retain more earnings to invest in future developments. Anything higher than 80% requires a deeper dive as this could be a red flag. GLPI also rewards its shareholders with special dividends. The last one was this past March when the company announced a $0.25 special dividend. They also gave an end-of-year special in 2021 as well.

Balance Sheet

The company also has a strong balance sheet with investment grade credit ratings from 2 of the 3 major credit firms. S&P and Fitch both give them a rating of BBB- while Moody's has them below investment-grade at Ba1. Their debt is also well-laddered with $400 million maturing in September next year. I expect interest rates to be on the decline by then, with a rate cut in the first half of '24.

Also 100% of their debt is unsecured and they have a Net Debt-to-EBITDA just under 5.0x, slightly higher than Agree Realty's ( ADC ) 4.5x, who just so happens to have one of the best balance sheets amongst REITs in my opinion. GLPI also had over $1.7 billion in available liquidity at the end of Q2.

Valuation

The stock is currently trading in line with its 5-year P/AFFO ratio of 12.5 and is trading around $4 above its 52-week low of $43.46. The stock could see its price go lower next month after the FED meeting, depending on if rates are raised or remain here for the time being. I see this as a long-term hold and suggest investors add on any share price weakness in the near-term. They currently have a price target of $56 offering 19% upside from the current price.

Using the Gordon Growth Model I have an intrinsic value of $36.75 for the stock. Now readers may ask how did I come to this price? GLPI's dividend growth over the last 5 years is 2% and the REIT has an annualized total return of roughly 15% over the same period. Assuming another 2% raise to $0.7350 and an annualized 10% total return factoring in slower growth, this gives me a price of $36.75.

Due to its quality, the REIT's price may never go that low, unless there's a major disruption in the economy such as another pandemic. And this could very well be true, as quality stocks normally trade at a premium to value. I think the stock is a buy here as I view it as a long-term investment. Additionally, their Vice Chairman Barry Schwartz recently bought a total of 3500 shares on three separate occasions in the month of August at an average price of $46.97. Their CEO is also a large shareholder currently owning 12 million shares of the company.

Risks

Interest rates are said to remain higher for longer with many expecting them not to come down until 2024. This will continue to put stress on the real estate sector over the near and medium-term due to higher cost of borrowing. They also have a decent amount of debt maturing next year, although not until the later part of the year. By this time we should be seeing interest rates gradually come down but no one knows this for sure. Another potential risk is consumer spending. If we do happen to enter into a recession in the coming months, GLPI will most likely see a decrease in foot traffic at its properties as these are usually the first costs struggling consumers cut from their budget.

Investor Takeaway

GLPI has had some impressive growth over the last few years. The company recently made a splash in the ever-growing Las Vegas. They entered into a ground lease with Bally's and the Oakland Athletics, proving to be immediately accretive as total income exceeded Q1 by $30 million. The REIT also has a strong balance sheet and plenty of liquidity making them well-prepared for continued economic uncertainty.

GLPI is often overshadowed by VICI but has proven resilient with its attractive total return to shareholders over the last 5 years and special dividends. I view GLPI as a long-term investment and I believe they will continue expanding, specifically in the Las Vegas area. Investors looking to start a position should add and layer in on any share price weakness if the FED decides to raise rates next month. I think GLPI stock is a buy and a strong buy under $45.

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