2023-05-08 07:00:00 ET
Summary
- While in Las Vegas, I will be looking hard at the drivers of the gaming industry.
- That includes consideration of the peers and the moat around the business, that is how they generate a competitive advantage that helps preserve pricing power and profitability.
- I hope that you enjoy this article today as I will be comparing the two gaming REITs: Gaming and Leisure Properties and VICI Properties.
As many of you know, we recently created a new REIT ETF Index which we're excited to be using soon as a benchmark and active ETF. I've been working on this strategy for several years, as it's a unique blueprint that's powered by our proprietary quality and valuation scoring model.
As I'm sure you know, REITs are designed to payout dividends (by law) and the most successful firms are generally the ones that are able to consistently pay and grow dividends.
I usually highlight net lease REIT, Realty Income ( O ) as one of the most successful since the company has paid and increased dividends for over 28 years in a row. I recently wrote an article on the company in which I explained that:
When rates start moving back down, you're going to thank me."
Of course, in that article I highlighted the quality and value of "the monthly dividend company" and the fact that it's my largest individual holding.
As you can see below, Realty Income is a constituent of the iREIT-MarketVector Quality REIT Index.
One of the things that we decided to do to enhance the overall performance of the Index is to include the Gaming REITs in the Net Lease sector classification.
Nareit has their own sector classifications in which they include gaming in the Lodging/Resort bucket but given the fact that Gaming REITs are net lease REITs we believe they should be part of the triple net family.
Besides, Gaming REITs generated 100% occupancy during the pandemic and Lodging REITs were virtually shut down. So, these high-quality constituents are much more likely to appear in the Index as it screens for quality and value.
However, given the fact that Gaming is a sub-sector of Net Lease, I decided to put together a deep dive.
I plan to attend the ReCon conference in Las Vegas in a few weeks in which I plan to provide iREIT on Alpha members with a "boots on the ground" video on the Las Vegas market. In addition, I will be meeting with CEOs in the mall, shopping center, and net lease sectors.
In full transparency, I may play a few hands of blackjack, although I prefer betting on casinos than in casinos, as the title my article suggests. As I remind folks, an essential element of being a value investor is the owner's orientation.
While in Las Vegas, I will be looking hard at the drivers of the gaming industry that includes consideration of the peers and the moat around the business, that is how do they generate a competitive advantage that helps preserve pricing power and profitability.
I hope that you enjoy this article today as I will be comparing the two gaming REITs: Gaming and Leisure Properties ( GLPI ) and VICI Properties ( VICI ).
Gaming and Leisure Properties
Gaming and Leisure Properties is an internally managed real estate investment trust ("REIT") that acquires and owns real estate properties that are leased to gaming operators on a triple-net basis.
They were incorporated on February 13, 2013, as a subsidiary of PENN Entertainment but were then spun-off in November 2013 as a stand-alone company.
GLPI elected to become a REIT in 2014 and filed their initial public offering in 2016. As of year-end 2022, GLPI owned or had an ownership interest in 57 gaming properties and their related facilities that are located in 17 states and encompass approximately 27.8 million square feet.
GLPI grew from 21 properties in 2013 to 57 properties in 2022, its total square footage expanded from 7.0 million SF in 2014 to 27.8 million SF in 2022, and the number of hotels rooms it owned increased from 2,792 in 2014 to 14,217 in 2022.
GLPI has high tenant concentration, having only 6 tenants which include Penn Entertainment, Caesars Entertainment, Boyd Gaming Corp, Casino Queen, Bally's, and Cordish Companies.
The chart below is somewhat outdated, but as of their most recent presentation (July 2022), 62.6% of their cash rent came from Penn National, 10.4% came from Bally's, 9.3% came from The Cordish Companies, 8.2% came from Caesars Entertainment, 7.9% came from Boyd Gaming, and 1.7% came from Casino Queen.
GLPI - IR
Gaming and Leisure Properties' profitability has remained steady since its IPO with its return on assets ("ROA"), as measured by adjusted funds from operations ("AFFO"), ranging approximately between 8% to 9%. Likewise, their AFFO profit margin has remained steady, ranging approximately between 65% to 70%.
GLPI is investment-grade rated with a credit rating of BBB- by S&P Global. Their long-term debt to asset ratio has improved over the past several years and currently stands at 56.07%, down from 61.31% in 2017. They have a long-term debt to adjusted EBITDA of 5.02x, a long-term debt to capital of 63.53%, and a fixed charge coverage ratio of 4.0x.
GLPI pays a 5.70% dividend yield that is well covered with an AFFO payout ratio of 78.87%. They have increased the dividend each year since 2017 except for in 2020 when they cut it by -8.76%, likely due to the pandemic.
I've removed the special dividend of $0.24 that GLPI paid in 2021 to normalize the growth rate. When excluding the special dividend they have an average dividend growth rate of 3.35% since 2017.
Gaming and Leisure Properties trades at a P/FFO multiple of 14.09x which is slightly above its normal P/FFO multiple of 12.18x. Casinos and gaming properties have a lot of potential as evidenced by the growth of their closest competitor VICI, and the recent entry of Realty Income into the gaming space. At iREIT we rate Gaming and Leisure Properties a Spec BUY.
VICI Properties
VICI is a gaming REIT that specializes in experiential real estate such as casinos, restaurants, and night clubs which are acquired through sale-leaseback agreements that are structured as triple-net leases.
VICI's portfolio includes iconic properties including Caesars Palace, MGM Grand and the Venetian Resort in Las Vegas. They have a total of 50 gaming properties that feature approximately 59,300 hotel rooms and roughly 450 bars, nightclubs, and restaurants.
They have properties in both the U.S. and Canada that cover around 124 million square feet. In addition to their casinos and related facilities they own 4 championship golf courses and approximately 34 acres of undeveloped land located in Las Vegas.
VICI has 11 tenants, but the majority of their cash rent comes from Caesars (40%) and MGM Resorts (36%). All of their leases are structured on a triple-net basis and 91% of their leases have parent guarantees in place. Additionally, their weighted average lease term ("WALT") is 42 years.
VICI has an average AFFO Return on Assets of 5.06%. The slight decline in 2022 is in large part due to the $17.2 billion acquisition of MGM Growth Properties at the end of April in 2022.
The acquisition almost doubled their prior asset base, but they were only able to recognize revenue from late April to year end. I expect in 2023 VICI's profitability metrics will revert closer to their average once they are able to recognize revenues for the full year on the MGM properties.
VICI is investment-grade rated with a BBB- credit rating from S&P Global. They have sound debt metrics with a LQA ("Latest Quarter Annualized ") net Leverage ratio of 5.9x and a fixed charge coverage ratio of 4.7x.
Their debt is 82% unsecured and 99% fixed rate with a weighted average term to maturity of 6.6 years. Additionally, no debt matures in 2023 and a large portion of their debt doesn't mature until 2032.
VICI pays a 4.81% dividend yield that is secure with an AFFO payout ratio of 77.72%. They have an impressive track record of dividend growth with increases of 17.29%, 7.26%, 9.96%, and 8.70% in the years 2019, 2020, 2021, and 2022 respectively. Since 2019 VICI's average dividend growth rate has been 10.80%.
VICI Properties has an average FFO growth rate of 6.92% since 2019. Analysts expect FFO growth of 10% in 2023 before moderating to 4% in 2024 and 3% in 2025.
Currently the stock is trading at a P/FFO multiple of 16.22x which is in line with their normal P/FFO multiple of 16.16x. VICI has delivered strong growth in its FFO and dividend since going public and looks to deliver strong returns going forward. At iREIT we rate VICI Properties a BUY.
Comparison - GLPI vs. VICI
In 2022 we selected VICI as one of our premium picks and as you can see below, VICI and GLPI delivered in spades (chart below is price only and does not include dividends). Including dividends, VICI returned ~12.5% in 2022 and GLPI returned 12%.
Year-to-date VICI shares are +1.3% (+7.2% including dividends) and GLPI shares are -3.0% (around 0% including dividends).
Seize the Day
On the Q1-23 earnings call VICI's CEO, Ed Pitoniak explained:
… so far in earnings season, year-over-year Q1 2023 earnings growth for S&P 500 companies of all kinds is running at negative 4% versus VICI's Q1 AFFO growth again at 18.6%. But it's not only about growth in current earnings, it's about growing our future earnings…
…within Q1, we allocated a total of $1.6 billion of incremental capital to compelling and accretive experiential property and lending investments…and even with that $1.6 billion of capital having been newly allocated in Q1, we have approximately $859 million of equity dry powder, thanks to our unsettled forward equity and approximately $650 million in cash.
Combined with $2.4 billion of undrawn revolver capacity, and we have the funding in place to seize on further opportunity if opportunity presents itself in this current environment."
Hmmm...
I mentioned Six Flags ( SIX ) as a sale-leaseback target back in 2019:
Seeking Alpha
Then, in December 2022 Jonathon Litt said it had been accumulating a stake in SIX "pushing the theme-park operator to sell or spin off its real estate to help reverse a decline in the shares."
Back in March 2022, SIX;s CEO, Selim Bassoul, said on an earnings call :
…we are open to learn from everyone and anyone, and that's what we do every single day, try to have a learner's mind."
It could certainly make sense for VICI to participate in sale-leaseback discussions with SIX, although I suspect this would be a one-off deal or two. Recently SIX priced $800 million 7.250% senior notes due 2031 which reduced SIX's 2024 maturity risk.
Yet, this is just one example of many in which VICI should be able to continue to drive shareholder value by acquiring trophy assets above the company's cost of capital. VICI has said it would consider European expansion and I fully expect that to occur sooner than later.
I'm continuing to build a larger position in VICI
Author's 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.
For further details see:
I'm Betting On Casinos (Not In Casinos)