Income

Gaming and leisure properties: a good bet for revenue and growth (NASDAQ: GLPI)

JuSun

REITs are a great way for investors to own real estate without the hassle of managing properties. Additionally, while private market real estate is almost always fairly valued, the fact that REITs trade on exchanges can create opportunities for market disruption.

In effect, the exchange operates more like a pari-mutuel system, in which a large number of investors make disparate buy-sell decisions, which can lead to irrational pricing in the short term.

This system resembles betting on the racetrack, in which expert bettors are able to generate profits even if the house takes a slice of the overall pie. This brings me to REITs, gaming and leisure properties (NASDAQ: GLPI), which seems like a much safer bet to me than gambling.

GLPI has performed well since I last visited the stock, returning 15.8% since I last covered it in May, far exceeding the 1.1% return of the S&P 500 (SPY) on the same period. In this article, I highlight why GLPI remains an attractive income stock despite its outperformance over the past 6 months.

Why GLPI?

Gaming and Leisure Properties is one of two publicly traded REITs that focuses on owning properties leased to gaming operators, the other being VICI Properties (VICI). Currently, GLPI owns 57 properties across 17 states and derives over 85% of its rents from well-known publicly traded gaming companies such as Caesars Entertainment (CZR), Penn National (PENN), Bally’s (BALY) and Boyd Gaming (BYD).

With VICI, GLPI has a great market opportunity to consolidate the real estate assets of casino companies, which seek to monetize the value of their underlying properties through sale and leaseback transactions. This benefits both parties, as the underlying tenant receives a cash injection with which it can be used to pay shareholders or reinvest in faster growing segments of their business. In return, the REIT gets consistent cash flow without having to deal with day-to-day property management, taxes and insurance due to its triple net rental business model.

GLPI continues to show strong growth, with the recent closing of its Bally’s transaction, with the acquisition by Bally’s of GLPI’s non-land real estate assets and the conclusion of a 50-year ground lease with GLPI for an initial annual rent in cash of $10.5 million. This is in addition to previously announced transactions, including the June announcement of the acquisition of Bally’s real estate assets at Twin River Lincoln Casino Resort and Triverton Casino and Hotel for $1.0 billion, resulting in additional annual rent of $76.3 million with an implied capitalization rate of 7.6%.

Given these investing activities, management now expects mid-year AFFO per share of $3.53, which would represent growth of 2.6% from the $3.44 achieved in 2021. This also equates to a safe payout ratio of 80%. This is based on GLPI’s current quarterly dividend rate of $0.705, which is 5.2% higher than the prior year period rate of $0.67.

Meanwhile, GLPI has a strong balance sheet rated BBB-investment grade, and management remains disciplined with regards to capital deployment. This may be especially true in the current high interest rate environment, with management noting that it intends to steer clear of riskier short-term borrowing by continuing to focus on the long term. While this may impact short-term growth, it serves to reduce the risk to the business from short-term uncertainties. This is supported by the following comments during the Q&A session of the recent conference call:

Q: How do you see the impact of the interest rate environment on the business?

A: Capital markets affect us all enough. The interest rate environment is something we need to be careful and understand, and careful and disciplined. In our financing of our transactions, we examine it. Every day it changes. So trying to pick a cap rate to fund a transaction at that time is certainly a challenge. But we are working on it and we continue to review all the transactions that we think we can actively close.

We have involved all members of this team mentioned above around this same subject. I mean, we don’t have a crystal ball like any of you. And we spend a lot of time talking about the possibilities, about how we protect ourselves. Because, listen, we’re in the long haul. Short-term borrowing is not the answer to the kind of stability we seek.

Finally, I see value in the stock at the current price of $50.14, with a dividend yield of 5.6% well covered by cash flow and a forward P/AFFO of 14.2. Analysts estimate 8.8% growth in FFO per share next year and have a consensus Buy rating with an average price target of $54.76, equating to a potential total return of 15%, including dividends.

Key takeaway for investors

GLPI is a strong and growing triple net REIT trading at attractive valuations. The company has demonstrated continued success in its acquisitions, with steady growth in AFFO per share and consistent dividend coverage. Meanwhile, management remains disciplined around capital deployment while simultaneously delivering shareholder value through a growing dividend yield. I see value in GLPI’s pure focus on the gaming segment and find value in the current share price.