Gaming & Leisure Properties: Limited Upside (NASDAQ:GLPI)

Share of gaming and leisure facilities (NASDAQ: GLPI) significantly outperformed the broader REIT Index/ETF (VNQ) over the past year with a total return of 27% versus -17% for the VNQ. Gaming & Leisure has benefited from contractually guaranteed cash flows in a turbulent macro environment. Its triple net lease structure.

While I expect GLPI to continue to receive timely payments from casino operator tenants, GLPI has historically traded at the high end of its valuation range. This contrasts with other subsectors of the REIT market (e.g., apartments, offices, etc.), which have traded at the lower end of historical valuation ranges.

Resilient cash flow even in a downturn

GLPI benefits from the durability of contractually guaranteed rental streams from local casinos. GLPI has long-term (15-40 year leases) agreements with powerful casino operators such as PENN Entertainment (PENN) and Bally’s (BALY).), Caesars (CZR) and the void (BYD). All of these companies appear to be in decent financial shape at the moment. Of course, the casino has a history of trouble. As such, GLPI utilizes master leases (discussed below).

As shown below, GLPI leases are structured to ensure that tenants can make payments even if they go bankrupt. A master lease structure requires tenants to pay lease payments for all properties. From a landlord’s perspective, the purpose of a master lease is to effectively prevent tenants from acquiring leases on underperforming properties that have been dismissed in bankruptcy court.

It’s also worth noting that regional gaming properties (as opposed to properties on the Vegas Strip) have been shown to be more resilient during economic downturns. The reason for this is that relatively inexpensive local trips tend to stay in the budget (while trips to more expensive destinations like Las Vegas may be curtailed). Additionally, Vegas facilities rely heavily on corporate trade shows and junket (team building) events. Finally, while new casino resorts (or redeveloped casino resorts) pop up in Las Vegas (increasing competition), regional casinos tend to be local monopolies.

Growing – Organic vs. External

The triple net lease structure makes GLPI organic growth estimates fairly straightforward. Most of GLPI’s leases are subject to a fixed escalator of 1.5-2.0%. Some of the GLPI leases are linked to the CPI, but all of these leases have narrow ceilings and floors that effectively lock in rent growth within a narrow range of 0-2% per annum.

External growth comes from acquiring properties from casino operators. GLPI’s NAV ( net asset value) will increase. ) per share. Similarly, acquiring a property with a lower AFFO multiple (higher cap rate) than his own increases his AFFO per share.

Over the past several years, GLPI has acquired approximately $2 billion worth of properties at cap rates of 6.9% to 7.6%. GLPI is currently trading at an implied cap rate of 6.4% (shown below) and 14.5x AFFO/multiple, but at the time GLPI made these acquisitions (and shares/units outstanding), GLPI was trading at It was trading at a higher implied cap rate (7+%). ) and a multiple of AFFO. As such, the incremental value to shareholders from these transactions is expected to be minimal.

Given GLPI’s share price performance over the past year, the company is currently trading at an implied cap rate of just 6.4%. To the extent GLPI can acquire properties at his 7%+ cap rate (of similar/better quality with equal or better rent growth terms), it can create value for shareholders through external growth.

One of the downsides here is that its main competitor, Vici Properties (VICI), is also trading at a premium valuation (and seeking external growth). This means that GLPI will likely face stiff competition to purchase assets. This contrasts with other real estate subsectors where competition has decreased as the cost of capital has risen (stock prices have fallen).

Overall, we expect GLPI AFFO growth to be slow (3-4%) over the medium term.

evaluation

As you can see below, at $53 per share, Gaming & Leisure appears to be fully valued at 14.7x 2023e FFO, a 5.3% dividend yield, and an implied cap rate of 6.4%.

In my cap rate calculations, I include NOI (and add debt – although GLPI will further fund this transaction through an equity issue, taking into account recent property acquisitions from BALY). There is a possibility).

The 6.4% implied cap rate traded by GLPI is at the low end (high valuation) the stock has traded since going public in late 2013 (range 6.3% to 8.2%). GLPI trades at a premium of around 15% to NAV (using a 7% cap rate which is considered optimistic). This contrasts with other subsectors such as apartments and offices, which trade at significant discounts to NAV and offer cap rates at the high end of the historical range (low valuations).

Conclusion

Gaming & Leisure has had a great performance over the past year. GLPI should produce consistent performance and dividends, but stocks are trading at historically high valuations while there are plenty of discounts across the REIT universe. As such, GLPI considers him relatively unattractive at $53 per share. I think his REIT of heavily discounted apartments and offices, which I wrote about recently on Seeking Alpha, is a much better value.