- Further casino asset purchases at 9x-13x EBITDA will immediately add value.
- Isle of Capri buyout could boost intrinsic value by 20%.
- Gaming and Leisure Properties will participate in a regional gaming rebound due to rent escalators.
- Diversification of casino operators will remove the perception of large customer risk for Gaming and Leisure Properties.
The following is an excerpt from the AMM Dividend Letter released August 2, 2014.
Gaming and Leisure Properties (NASDAQ:GLPI) was created when Penn National Gaming (NASDAQ:PENN) spun off its casino real estate holdings in November 2013. Gaming & Leisure Properties is a triple net lease REIT and the first REIT to focus solely on casinos and other gaming assets. The company currently operates in 13 states. The map below does not include the recently acquired Meadows Racetrack and Casino located in Pennsylvania.
From Gaming and Leisure Properties' Investor Presentation released February 2014.
Gaming and Leisure Properties just started trading as a stand alone company. It is currently paying $0.52 per share a quarter for a yield of 5.94%.
Catalysts for Dividend Growth and Price Appreciation:
For a REIT it's a simple equation, more real estate assets equals more growth. REITs can build their own asset base, which is both time consuming and capital intensive, or they can grow their assets through acquisitions. For Gaming and Leisure Properties, acquiring more casino real estate assets is the more expedient and effective way for the company to grow. However, acquisitions still need to be done at the right price.
Paying 13x EBITDA (with the right mix of equity and debt) for other casino assets immediately adds value to Gaming and Leisure Properties. The right amount of debt, according to management, is 5.5x the target acquisition's EBITDA. Gaming and Leisure Properties is only interested in owning the real estate, not running the casino. Management will sell the operations to a casino operator. The proceeds from the sale allow Gaming and Leisure Properties to pay down debt and lock-in a long-term tenant. Gaming and Leisure Properties' agreement to purchase Meadows Racetrack and Casino from Cannery Casino Resorts is a perfect example. Gaming and Leisure Properties is paying $465 million, which is 9x 2013 EBITDA of $52 Million.
According to management, there are a number of privately owned regional casino operators with too much debt. The indebted casino operators can improve their financial health by monetizing their real estate assets. Now that Gaming and Leisure Properties is no longer a part of Penn National Gaming, a competitor, the privately owned casino operators may be more inclined to do a real estate deal.
We believe that a number of gaming operators would like to de-lever or are seeking liquidity while continuing to generate the benefits of continued operations, which may present significant expansion opportunities for us to pursue. Of particular significance, we believe that a number of gaming operators would be willing to enter into transactions designed to monetize their real estate assets (i.e., gaming facilities) through sale-leaseback transactions with an unrelated party not perceived to be a competitor.
From GLPI 10Q ending March 31, 2014
It also helps the deal making process that Gaming and Leisure Properties is the only REIT and potential buyer focused on casino real estate assets right now.
Isle of Capri Deal
St. Louis Missouri-based Isle of Capri renewed discussions in recent months with Gaming and Leisure Properties, a real estate investment trust (REIT), after a broader sale process involving several potential buyers petered out earlier this year, the people said.
Isle of Capri is another regional casino operator with 15 locations.
From Isle of Capri Casino's Investor Relations
If a deal emerges, it's highly probable that Gaming and Leisure Properties will not own all the real estate assets. To obtain REIT status, Gaming and Leisure Properties could not operate hotels. 8 out of the 15 location above have hotel operations. However, if Gaming and Leisure Properties does buy Isle of Capri for 9-13x EBITDA and using the same deal structure as above, the acquisition could add up to 16%-20% in value. This is assuming Gaming and Leisure Properties ends up with 7 of the 15 properties.
A final deal will take some time. Casinos are heavily regulated and each state has its own gaming laws. Also, Gaming and Leisure Properties needs to find multiple operators to take over the locations.
Regional Gaming Improvement
Regional gaming is in a slump. The benefit of owning the company that owns the real estate is the rent still needs to be paid no matter the economic environment. The upside is when regional gaming is booming, Gaming and Leisure Properties stands to make more.
From the Master Lease Agreement between Penn National Gaming and Gaming and Leisure Properties:
a portion of which is subject to an annual 2% escalator if certain rent coverage ratio thresholds are met, and a component that is based on the performance of the facilities, which is adjusted, subject to certain floors (NYSE:I) every 5 years by an amount equal to 4% of the average change to net revenues of all facilities under the Master Lease (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding five years, and (ii) monthly by an amount equal to 20% of the change in net revenues of Hollywood Casino Columbus and Hollywood Casino Toledo during the preceding month.
From GLPI 10Q ending March 31, 2014
We're investing in the regional gaming market while it is down and we're mitigating some of the risk by owning the real estate. When the cycle turns positive, we get to participate due to the performance-based rent escalators.
The perception is that Gaming and Leisure Properties is dependent on one casino operator, Penn National Gaming. Gaming and Leisure Properties is in contract with the subsidiaries of Penn National Gaming. Each subsidiary operates different locations. Gaming and Leisure Properties is not dependent on Penn National Gaming as a whole, but on the subsidiaries. Reality is one thing and perception is another. The perception is a large customer risk for Gaming and Leisure Properties. Further deals with other casino operators will alleviate this perception. Buying Isle of Capri casinos and leasing the casinos out to multiple operators would be even bigger.
We're adding a new section the "Pre-Mortem." It is a brief rundown of what could go wrong with our investment. If we notice the company doing these things we won't have to think about it, we'll know that we made a mistake right away and cut our position.
- No one wants to do a deal. Part of the attraction of owning a casino is the real estate. If casino operators believe they can manage current debt levels and can hold onto their real estate assets, then Gaming and Leisure Properties can't grow.
- Isle of Capri deal talks break down. The two companies were in talks earlier this year, but negotiations broke down when news leaked. Current negotiations could break down again.
- Management pays too much. Building value through acquisitions only works if the deals are priced right. The lower the price paid by Gaming and Leisure Properties, the more value added by the deal. If the price is too high, then value is destroyed. Right now we like to see deal multiples in the 9-13x EBITDA range -- anything above that and management is reaching for deals.
- Gaming and Leisure Properties is no longer the only REIT focused on gaming real estate. Being the only company looking to acquire casino real estate is helpful in the negotiation process. Pinnacle Entertainment (NYSE:PNK) is another regional gaming company. The shareholder activist Orange Capital is pushing for Pinnacle to spin-off its real estate holdings too. For the time being, Pinnacle has fought off the campaign, but if another name gaming REIT emerges, then there will be competition for deals.
If Gaming and Leisure Properties continues to build out its real estate holdings through sound financial deals, its intrinsic value will keep growing along with its dividend. A deal for Isle of Capri Casinos would be an immediate catalyst for both its intrinsic value and removing the stigma of depending solely on Penn National Gaming as a casino operator. Another breakdown in talks with Isle of Capri would be an immediate negative for Gaming and Leisure Properties' stock price, but even without the deal, we still value Gaming and Leisure Properties at $42 per share.