JuSun
REITs are a great way for investors to own real estate without the hassles of managing properties. Moreover, while private market real estate is almost always fairly valued, the fact that REITs trade on the stock exchange can lead to opportunities for market dislocation.
That’s because the stock exchange operates more like a pari mutuel system, in which a large pool of investors is making disparate buy-sell decisions, which can lead to irrational pricing in the short term.
This system is like betting at the horse track, in which expert bet makers are able to generate profits despite the house taking a cut of the overall pie. This brings me to the REIT, Gaming and Leisure Properties (NASDAQ:GLPI), which to me, seems like a far safer bet than gambling.
GLPI has performed well since I last visited the stock, returning 15.8% since I last covered it in May, far outpacing the 1.1% return of the S&P 500 (SPY) over the same time frame. 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 just 2 publicly-traded REITs that focuses on owning properties leased to gaming operators, with the other one being VICI Properties (VICI). At present, GLPI owns 57 properties diversified across 17 states, and gets more than 85% of its rent from well-known publicly-traded gaming companies such as Caesars Entertainment (CZR), Penn National (PENN), Bally’s (BALY), and Boyd Gaming (BYD).
Together with VICI, GLPI has a big market opportunity to consolidate the real estate assets of casino companies, who seek to monetize the value of their underlying properties through sales and leaseback transactions. This benefits both parties, in that the underlying tenant gets a cash infusion with which it can be used to pay shareholders or to reinvest into faster growing segments of their business. In return, the REIT gets a steady stream of cash flow without having to handle day to day property management, taxes, and insurance due its triple-net lease business model.
GLPI continues to demonstrate strong growth, with the recent closing of its Bally’s transaction, with Bally’s acquiring GLPI’s non-land real estate assets and entering into a 50 year ground lease with GLPI for an initial annual cash rent of $10.5 million. This is on top of previously announced transactions, including the June announcement acquiring Bally’s real property assets at Twin River Lincoln Casino Resort and Triverton Casino and Hotel for $1.0 billion, resulting incremental $76.3 million in annual rent with an implied 7.6% cap rate.
Given these investment activities, management is now guiding for AFFO per share of $3.53 at the midpoint for the current fiscal year, which would represent 2.6% growth from $3.44 achieved in 2021. This also equates to a safe 80% payout ratio. 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 carries a strong BBB- investment grade rated balance sheet, and management remain disciplined around capital deployment. This may be especially true in the current high interest environment, with management noting that it intends to stay away from riskier short term borrowings with continued focus on the long-term. While this may impact near-term growth, it serves to de-risk the company from near term uncertainties. This is supported by the following comments during the Q&A session of the recent conference call:
Q: How are you thinking about interest rate environment impact in the business
A: Capital markets are affecting all of us quite a bit. The interest rate environment is something that we need to be cautious about and understand and prudent and disciplined. In our financing our transactions, we look at it. Every day, it changes. So trying to pick a cap rate to finance a transaction at this time is definitely a challenge. But we are working through it and we are continuing to look at all deals that we think we can get done in active manner.
We involved everyone on this team aforementioned around that very subject. I mean, we don’t have a crystal ball as do none of you. And we spend a lot of time talking about what the possibilities are, how we protect ourselves. Because, look, we’re in the long-term business. Short-term borrowing is not an answer to the kind of stability that we’re looking for.
Lastly, I see value in the stock at the current price of $50.14, with a 5.6% dividend yield that’s well-covered by cash flows, and a forward P/AFFO of 14.2. Analysts estimate 8.8% FFO per share growth next year, and have a consensus Buy rating with an average price target of $54.76, equating to a potential 15% total return including dividends.
Investor Takeaway
GLPI is a strong and growing triple-net REIT that’s 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 an increasing dividend rate. I see value in GLPI’s pure-play focus on the gaming segment and find value in the current share price.
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