GLPI - Who's Doubling Down On Casinos?

2023-09-05 07:00:00 ET

Summary

• Leisure and entertainment destinations were heavily impacted by the pandemic but are now experiencing increased consumer demand.
• VICI Properties and Gaming and Leisure Properties are two top leisure and hospitality REITs with different market caps.
• VICI Properties has outperformed Gaming and Leisure Properties over the past five years and has a strong portfolio of gaming, hospitality, and entertainment destinations.

During the depth of the pandemic, leisure and entertainment destinations were ghost towns, as the sector was hit extremely hard.

However, as we're now past the pandemic, consumers enjoy a built-up urge to travel to leisure destinations.

This brings me to two of the top leisure and hospitality REITs on the market today which are VICI Properties ( VICI ) and Gaming and Leisure Properties ( GLPI ).

VICI Properties has really hit the ground running, going public only a few years back in 2018. VICI is the larger of the two REITs as they have a market cap more than double that of GLPI at $31 billion.

Gaming and Leisure Properties is much smaller with a market cap of $12.5 billion. GLPI went public a few years prior to VICI back in 2015.

Over the past five years, which is roughly the time that VICI has been a public REIT, you can see the performance of the two REITs. VICI has a total return percentage of 90%, outpacing GLPI over the same time period which returned 78% itself.

You can see the steep dip in both share prices during the pandemic before returning to growth. The unique thing about VICI is the fact that they had a 100% cash collection rate throughout the pandemic which speaks to the quality of their portfolio, which we will look more closely at right now.

As you can see below, we include the two gaming REITs within our Net Lease REIT coverage spectrum.

VICI Portfolio

VICI Properties is within the S&P 500 and owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destinations. VICI happens to be the largest landlord on the Las Vegas strip, with key properties including:

• Caesars Palace
• MGM Grand
• Park MGM
• The Venetian Resort

These are some of the most iconic entertainment facilities on the Las Vegas Strip. VICI's portfolio consists of 50 gaming facilities across the United States and Canada which make up 124 million square feet and features approximately 60,300 hotel rooms and more than 450 restaurants, bars, nightclubs and sportsbooks.

VICI works with some of the best hotel and casino operators in the world today with 11 tenants, who happen to be publicly traded companies, making up 80% of rent.

Here is a look at some of those world-class operators.

VICI protects itself from inflation by connecting annual rent escalators to CPI. Each year, more and more of the company's new lease agreements include this clause and within the next 10 years, nearly all of the company's leases are expected to have CPI protections.

Since going public in 2018, becoming the 4th largest REIT IPO, the company continues to grow and expand its portfolio.

GLPI Portfolio

GLPI is very similar to VICI both in terms of sector, owning gaming and leisure properties, but also in terms of the number of assets they own, which is 59 properties.

Looking at this map below, you can see the location of GLPI's properties, and notice they are less exposed to Las Vegas and they have more properties within the Midwest and east coast.

Here is a closer look at the operators for GLPI, which includes PENN Entertainment (PENN), which is a public operator.

Looking at the list of leases above, you can see that the largest cash amount comes from the Pinnacle master lease, which includes 14 properties. Shortly after going public, GLPI purchased those 14 properties from Pinnacle and leased them back to them in a sales-leaseback transaction.

Another interesting fact about GLPI is their connection with Major League Baseball moving the Oakland Athletics potentially from Oakland to Las Vegas.

The A's ownership team is looking to build a new stadium on a 34-acre site, which is owned by GLPI. The stadium is contingent on lawmakers approving a nine figure public funds package and in addition, GLPI has committed up to $175 million towards some shared improvements.

Recent Financial Results

GLPI reported Q2 earnings that beat on both the top and bottom line:

• Q2 FFO: $0.92 per share vs $0.91 expected
• Q2 Revenue: $356.6 million vs $355.3 million expected

The company gave AFFO guidance of $3.66 to $3.68, which came in below consensus estimates of $3.69. Shares of GLPI are down nearly 6% since releasing earnings at the end of July.

VICI Properties reported their Q2 earnings the day before GLPI and also beat on both the top and bottom line:

• Q2 FFO: $0.69 per share vs $0.62 expected
• Q2 Revenue: $898.16 million vs $874.85 million

Management updated their Q2 AFFO guidance for the full year to between $2.11 to $2.14 per share. Like GLPI, shares of VICI are down nearly 6% since releasing their latest earnings report.

Dividends

If you are an investor looking for some higher yields, both GLPI and VICI fit that bill with dividend yields above 4%. The other unique thing about both of these REITs is their ability to provide growth potential as well, once the trend lower due to higher rates subsides.

Here is a comparative look at both dividends for GLPI and VICI.

GLPI Dividend

• Annual Dividend: $2.88 per share
• Dividend Yield: 6.25%
• Payout Ratio: 82%

VICI Dividend

• Annual Dividend: $1.56 per share
• Dividend Yield: 5.07%
• Payout Ratio: 76%

Valuations Look Appealing For One of the Two

If you have followed REITs for the past 12-18 months, then you are well aware that many of them have come under pressure due to higher interest rates.

However, it seems likely that the Federal Reserve is nearing the end of this rate hike cycle investors have gone through since early 2022, which should allow those REIT pressures to subside and create a growth opportunity within the space.

Let's take a closer look at valuations, beginning with GLPI.

Over the past five years, shares of GLPI have traded at an average AFFO multiple of 13x. Analysts are estimating AFFO growth slowing each of the next few years, estimating AFFO of $3.76 in 2024.

This places GLPI at a forward Price to AFFO multiple of 12.2x, which is slightly below the company's five-year average.

Now turning our attention to VICI Properties, which is a favorite REIT of ours.

Since going public in 2018, VICI has traded at an average AFFO multiple of 16.3x. Analysts are calling for 11% AFFO growth in 2023 and 5% AFFO growth each of the two years to follow, with a 2024 AFFO estimate of $2.23.

This has shares of VICI trading at a forward Price to AFFO multiple of just 13.8x, making shares look quite intriguing.

In Closing...

Realty Income ( O ) recently announced it's acquiring a 21.9% stake of The Bellagio Hotel & Casino for $5.1B (5.2% cap rate). Upon closing, Realty Income will own 21.9% along with Blackstone's ( BX ) non-traded REIT, BREIT, (73.1%), and MGM Resorts ( MGM ) (5%).

Of the $950M investment Realty Income is making, O will invest $300M into common equity (7% yield, after assuming below-market debt of 3.67%), and $650M into preferred equity (8.1%), leading to a blended yield of 7.7% for shareholders.

This $950 million investment comes on the heels of another gaming investment by Realty Income in December 2022 when it acquired the Encore Boston Harbor and Casino from Wynn Resorts ( WYNN ) resort for $1.7B.

To put that into perspective, Realty Income now has (or will soon have) $2.65B invested in casinos, compared with VICI's market cap of $31B and GLPI's market cap of $12.5B.

Could Realty Income buy GLPI with a 7.7% Equity Yield?

That's an interesting thought...

I'm betting that Realty Income pursues Spirit Realty ( SRC ) first...

(SRC's Equity Yield is 10.8%)

While it's difficult to predict with certainty whether or not the Federal will raise (or pause) interest rate hikes in the future. The elevated rate environment has made it even more advantageous for REITs to become casino landlords utilizing the sale-leaseback structure.

We see the demand increasing, which of course generates attractive growth prospects which should result in superior total returns.

Now that Store Capital is private and Berkshire Hathaway ( BRK.A ) ( BRK.B ) has no skin in the "net lease game", I would not be surprised to see the Oracle from Omaha take a spin at the VICI wheel.

He should!

Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.

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