Gaming and Leisure Properties (GLPI) is a gaming REIT that, in 2013, was spun out of Penn National Gaming (PENN). GLPI’s primary business consists of acquiring, financing, and owning real estate property to be leased to gaming operators in triple-net lease arrangements with an initial term ranging from 10 to 15 years, with no purchase option, followed by successive 5-year renewal options. As of December 31, 2021, GLPI owns a large and diversified portfolio, across 17 states, of assets consisting of 53 premier properties.
As you can note from the graph below, GLPI’s main tenant is Penn Gaming which accounts for 75% of the Company’s total rental income, while it gets the other 25% from Caesars Entertainment (CZR), Boyd Gaming (BYD), Bally’s (BALY) and Casino Queen Holding Company.
The Balance Sheet
Moody’s Inc (NYSE:MCO) assigned to GLPI a corporate credit rating of Ba1 with a revised outlook to negative. But rather than focus on the reasons for the negative outlook, it is better to look at the reasons that may lead to a corporate credit rating upgrade or downgrade. As stated by Moody:
“Ratings could be downgraded if Net Debt/EBITDA were expected to remain above 6.0x and fixed charge coverage below 3.0x on a sustained basis. Deterioration in tenant credit quality or property rent coverage metrics would also put pressure on the ratings
A rating upgrade is unlikely but would reflect Net Debt/EBITDA in the low 5x range and maintenance of fixed charge coverage above 3.5x on a sustained basis. Property type diversification outside of gaming investments and increasing rent coverage for each of its largest tenants would also support a rating upgrade”
Having said that, let’s look at GLPI’s Net Debt/EBITDA and see if it is in the low 5x range. The Net Debt/EBITDA, as of 31/12/2021, is equal to 5.3x (below pre-pandemic level) and the fixed charge coverage is above 3.5x or equal to 3.7x (above pre-pandemic level). I believe that, with the given metrics, neither a downgrade nor an upgrade is likely and, overall, I see a sound balance sheet.
GLPI trades at a P/FFO of 14.79x which is well below the sector median of 19.7x (-24.09%) and it also trades below its closest peer, VICI Properties (VICI), which trades at a P/FFO of 15.26x. When compared to its peers the company seems to be undervalued, however, when compared to its historical median P/FFO of 14.18x, it is slightly overvalued.
The Company carries a dividend yield of 6.23% which is very attractive, especially, if we consider the current macro-environment. Below is displayed a dividend summary.
However, before buying a piece of a company, let’s forget for a second the yield the Company carries, and let’s try to understand what the market is trying to tell us about the Company:
- First, the competition for acquisitions is high, especially after VICI announced its plans to acquire MGM for $17.2 billion which brings uncertainty about the Company’s future M&A activity (which is likely to happen outside non-gaming assets).
- Second, FED may seriously undermine GLPI’s ability to expand its business, since interest rate hikes will translate into an increased cost of financing (GLPI faces no maturities on its’ long-term debt until 2023).
- Third, having a single tenant accounting for 75% of your total rental income is never a good sign and a higher diversification should be pursued to avoid being highly exposed to a single player (note! PENN’s EBIT margin is equal to 17.9% or 3.9% above pre-pandemic levels). On the upside, GLPI’s focus on the regional gaming space offers a more defensive exposure to the gaming industry.
Last, but not least, it is important to consider at which stage of the business cycle we are to understand if the sector, and thus the Company, is likely to outperform. Personally, I believe that we are in the late phase of the business cycle, and we are approaching the recession phase. According to a study “REITs have been resilient in late-cycle and recessions”, and thus, a good sector to be in. However, there is a big “BUT”. As shown in the study:
“The gaming industry has long been considered recession-proof. However, as the gaming industry has expanded it has increased its exposure to the lodging and convention industries. This is evidenced by the fact that the gaming industry is struggling alongside these industries.”
What does it mean? Well, it means that even if REIT may be a good sector to be in, perhaps the gaming REITs are not the best choice. However, it is important to note that the study was based in Las Vegas and the GLPI’s focus on regional gaming offers a smaller exposure to the gaming industry as compared to destination locations. Nonetheless, I believe that also regional casinos are recession-sensitive.
I rate shares as a HOLD because I don’t see near-term catalysts that may drive the stock higher. Unless something changes fundamentally, there is a high chance of a multiple contraction risk. A decline that may be supported by regional casinos’ earnings deterioration caused by a recessionary environment.
I believe that REIT is a great sector to be in, however, under the current environment the company doesn’t offer a margin of safety in line with my SAA. In particular, I will be a buyer once the price enters the area close to $36.8/share or a P/FFO of 12.21x.
Finally, below I provide some statistics for the stock.