2023-06-29 14:59:22 ET
Summary
- GLPI is expanding its portfolio of casino properties to support a growing dividend payout.
- The REIT's annual dividend yield currently stands at around 6% with the last quarterly distribution forming a 76.6% payout ratio against fiscal 2023 first quarter FFO.
- Casinos stand to remain resilient through what's expected to be strong macroeconomic pressures through 2023.
Gaming And Leisure Properties ( GLPI ) last declared a quarterly cash dividend payout of $0.72 per share , in line with its prior payout and for a 6% annualized forward yield. The casino REIT is the lesser-known peer to standout VICI Properties ( VICI ) but has a dividend yield that's currently 100 basis points ahead. Both equity REITs are swapping hands at a roughly similar price to forward FFO multiples with GLPI at 12.89x and VICI at 12.86x. The prize here is of course the dividend, its growth, and safety. Further, the protection of book value against one of the most disruptive macroeconomic environments also forms a core need for bulls as the REIT ramps up its investments and moves to manage quarterly interest expenses that have increased to their highest level ever.
The REIT sometimes pays out supplemental dividends which distorts its dividend trend line, but it's kept its regular payout stable. The internally managed REIT owned interests in 59 gaming and related properties as of the end of its fiscal 2023 first quarter. These properties were spread across 18 states. GLPI's largest tenant PENN Entertainment ( PENN ) operates out of 34 of these properties with Caesars Entertainment ( CZR ) operating out of seven of these to form its second most important tenant. Critically, these properties are all leased under triple-net lease arrangements which places its tenants on the hook for the property's operating expenses including property taxes and insurance.
A Secure Dividend As FFO Shoots Up
GLPI realized first-quarter revenue of $355.2 million , up 12.8% over its year-ago quarter and a beat by $8.23 million on consensus estimates. Rental income at $317.97 million was ahead by $30.2 million over its year-ago comp with interest income from lease investments seeing a 37% year-over-year growth. Further, whilst interest expenses on a $6.56 billion total debt position grew to a record $81.36 million, the REIT was still able to grow first-quarter net income by $66.98 million to $188.67 million.
This meant an FFO of $253.8 million , around $0.94 per share. Critically, this was a small $0.02 beat on consensus estimates and meant a 76.6% payout ratio against the company's current quarterly dividend. This opens up the prospect of further dividend raises throughout 2023 to maintain its growth momentum.
GLPI is swapping hands at a premium to book value, but with FFO for fiscal 2023 set to be at least $800 million, it's understandable that the stock market has used this to price the commons versus the more conventional tangible book value. Fundamentally, the REIT's growth was driven by the addition of eight new properties in 2022 and early 2023. In January of this year, we saw GLPI complete its $635 million acquisition of the property assets of Bally's ( BALY ) Tiverton and Hard Rock Hotel & Casino Biloxi. The REIT also has the option to acquire the real property assets of Bally's Twin River Lincoln Casino Resort in Lincoln, Rhode Island before the end of December 2024. This would be at a $771 million purchase price with an annual initial rent of $58.8 million.
Inflation, Interest Rates, And Total Returns
With inflation and interest rates set to remain elevated against the specter of a recession, the property sub-sector you're invested in will be a key factor of performance through the next few years and casinos stand to be less sensitive to broader recessionary pressure. GLPI's tenants are top-tier gaming companies and the possible upcoming recession is unlikely to be as severe as 2008 which saw the industry take a material hit.
Investing for dividends is not entirely easy against the current backdrop, but casinos seem to be relatively recession-resistant and should be good sources of stability and growth against the inherent volatility, disruption, and entropy of the 2023 stock market and economy. GLPI does need some respite from rising interest rates, but the Fed has stated that they see more hikes coming in 2023 and the market is currently pricing in an 81.8% chance of a 25 basis point rate hike at the July 26 FOMC. This would bring the target rate to 5.25%-5.50%. This would form the highest Fed funds rate since early 2000 and could lead to a bigger down-trend in investor sentiment that has already pulled the stock to trade at almost half of its 2021 price to trailing 12-month free cash flow.
Bears, who form the relatively insignificant 1.26% short interest, would highlight that current market sentiment is broadly on par with its pre-pandemic levels and that the near-term outlook for dividend growth could be a lot more constrained through 2023 if interest rates are yet to peak. However, I'm rating GLPI as a buy here on the back of its 6% dividend yield from an attractive industry and a payout ratio that's still conducive to further dividend raises.
For further details see:
Gaming and Leisure Properties: A 6% Yield From Casino Properties