2023-03-28 13:12:17 ET
Summary
- Gaming and Leisure Properties, Inc. had an excellent performance in 2022, raising its share price by double digits and creating healthy profit margins.
- I attribute the company's good performance to its good business model, aggressive growth, and growing rent rates.
- I believe the recent uptick in insider buying indicates a bullish trend in the company's trajectory, as it follows the good results and reflects their confidence in the business.
Investment Thesis
Gaming and Leisure Properties, Inc. ( GLPI ) buys, finances, and owns real estate that will be leased to gaming operators under triple-net lease contracts. Although 2022 was challenging for many gaming REITs, GLPI posted impressive results, increasing its share price by double digits and generating healthy profit margins. I attribute the company's good performance to its sound business model, aggressive growth, and growing rent rates.
I believe the recent uptick in insider buying indicates a bullish trend in the company's trajectory, as it follows the good results and reflects the insiders' confidence in the business. In addition to the stock's high-profit margins and insider buying, I am bullish on it because of its promising business model and reassuring EPS trends.
The Business Model: Triple-Net Lease Agreements
Gaming and Leisure Properties, Inc. uses triple-net lease agreements with its clients. A triple net lease, also known as a triple-net or NNN lease, is an agreement to rent a property in which the tenant or lessee agrees to pay all of the property's costs, such as taxes, insurance, and maintenance. These costs are on top of what you pay for rent and utilities. In ordinary commercial lease arrangements, on the other hand, the landlord usually takes care of some or all of these payments.
Since NNN agreements are generally recognized as a reliable source of income, I think this is a very appropriate model for GLPI. This is because tenants bear most of the costs, placing a heavy load on them. This suggests that GLPI incurs relatively little expenditure when earning income from its properties. I firmly believe that this company's strong profit margins are primarily a result of its successful business model.
Most importantly, this kind of contract is good for both the tenant and the company, making it an even better choice. Tenants have greater architectural leeway and can make aesthetic improvements that promote brand consistency without incurring the costs associated with outright ownership. Another perk of these leases is their flexibility, such as rate caps for taxes and insurance premiums. Landlords can benefit from triple net leases since they provide a steady income stream with minimal out-of-pocket expenses. The landlord is also not required to participate in property management actively.
Attractive Profit Margins
Following the execution of the excellent business model and other measures I will discuss in the succeeding sections, GLPI has registered good profit margins in abstract and comparative terms. The company has an AFFO payout ratio of 61.93% compared to the industry median of 74.40%; further, they have an AFFO/total revenue of 71% against the industry median of 41.85%. For gross profit margin, EBIT margin, net income margin, and return on equity, the company is way much above the industry medians, with its figures being 95.73%, 73.63%, 52.20%, and 19.65%, respectively, compared to industry medians of 67.46%, 23.05%, and 14.05% and 4% respectively. According to these numbers, this business is significantly more profitable than its competitors.
In my opinion, Gaming and Leisure Properties, Inc. has a viable business model that is remarkably resilient to economic downturns. As a result, it will continue to enjoy excellent profitability now and in the future.
What Complemented The Business Model In Generating Attractive Profits?
The company's initiatives outside its compelling business model also generated profitable revenue. They involve ambitious growth and streamlined operations. The addition of Bally's Black Hawk and Rock Island properties led to a $3 million increase in cash rental income. The Tropicana LV land lease led to a $2.6 million increase in rental income. The recognition of escalators and 10 percent rent increases on their leases led to an additional $4 million in cash rent. The combination of higher non-cash revenue gross-ups, investment and lease adjustments, and straight-line rent adjustments also led to a year-over-year increase in cash rental income of $8 million.
Their operating costs went down by $33 million, primarily because of a reversal of provisions for credit losses on their Cordish leases from the previous period, which was caused by better property performance, and a drop of about $8 million in gaming and G&A costs, which was caused by the sale of their TRS operations in 2021. In the fourth quarter, they reached full escalation on the PENN master lease, which raised the yearly building base rent by $5.7 million, of which $1 million was recognized in 2022. Since most of these initiatives have a long-term focus, investors can rest assured that the company will continue to enjoy healthy profit margins for the foreseeable future.
EPS Trend
Since the market acts as a voting mechanism in the short term and a weighing machine in the long term, it stands to reason that stock prices will eventually track changes in EPS. As a result, there is no shortage of shareholders interested in purchasing stock from companies with rising earnings per share. Earnings per share for Gaming and Leisure Properties have increased by 13% annually over the past three years. If that pace of expansion can be maintained, that's excellent news.
Examining the progress of a company's revenue and EBIT margins is one technique to verify its expansion. The good news is that Gaming and Leisure Properties has increased its revenues and saw its EBIT margin increase from 62.2% to 74% during the past year. Those are two indicators of development that should be encouraged. Prospects for this company look very promising in light of these tendencies.
Insider Positioning
Insider trading frequently serves as a smoke signal for investors as to which stocks have the potential to ignite the market. This is because insider purchases often show that people closest to the company feel optimistic about the future performance of the share price. Of course, we can only guess what those inside think based on their behavior.
Insiders at Gaming and Leisure Properties avoided selling their shares during the previous year and spent $166k on it. That gives the company a good impression since it shows that its executives are optimistic about the business's direction. It's also important to note that Vice Chairman Emeritus Barry Schwartz paid $44.77 a share to make the most significant single purchase, amounting to $112,000.
Bulls in Gaming and Leisure Properties can take heart from the fact that insiders have amassed a sizeable position in the stock and that insiders have been buying shares. They have a sizable $584m stake in the company. This kind of insider dedication should reassure shareholders, as it guarantees corporate executives will share the stock's ups and downs.
Conclusion
The business model at the heart of Gaming and Leisure Properties, Inc.'s robust expansion is rock solid. Earnings per share [EPS] trends and insider positioning suggest a bright future for this company. I have a bullish outlook on Gaming and Leisure Properties, Inc. stock and recommend it based on its fundamentals.
For further details see:
Gaming and Leisure Properties: Stable Model Should Pillar Long-Term Success