Gaming and Leisure Properties (GLPI) is a publicly-traded REIT engaged in acquiring, financing, and owning real estate property leased to gaming operators in triple net lease arrangements. The company comprises the following segments – GLP Capital (leased real property) and TRS Properties (Hollywood Casino Perryville and Hollywood Casino Baton Rouge).

I like GLPI stock here – not only is the ~6% yield above par for a triple-net REIT, but the multiple gaps vs. peers also seems unwarranted. There’s always a risk that COVID drives up volatility in the coming months, but I think the worst is behind GLPI post-equity raise and with key tenants’ balance sheets also in good shape heading into FY21, expect a re-rating. In the meantime, equity investors get paid a nice ~6% yield to sit and wait.

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Cash Flow Generation Continues in 3Q20

The 3Q20 earnings report was a positive surprise, with GLPI’s net revenues, adjusted EBITDA, and adjusted funds from operations (AFFO) per share all coming in ahead of consensus. The highlight, in my view, was GLPI’s adj. EBITDA at $265m, with upside from rent (helped by a ~$4.7m tailwind from higher percentage rent in the Penn National Gaming (PENN) master lease) and ~$5.9m in EBITDA from the TRS properties. The EBITDA strength filtered through to AFFO, which came in at $194.6m ($0.89 on a per-share basis based on an average share count of 219m), and drove another >20% ROE result.

Source: Company Filings

Management’s forward-looking commentary was also bullish, citing “very strong” regional trends that appear to be “stable” heading into October. And though management does not believe casino margins are sustainable, the expectation is still for margins to normalize above trend. Given management’s tone was in-line with many of its peers’ reports over a similar period, the 4Q setup looks good. And with a ~99% rent collection YTD, and free cash flow generation for many of its properties already above pre-COVID levels, I would not be surprised to see GLPI surprise further to the upside.

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Hitting the Reset Button on Rent

The recent Meadows percentage rent reset is a net negative to the tune of ~$2.1m/year but leaves GLPI with a clear runway given no variable rent resets until FY22. And the Meadows should still generate ~$26.5m for FY20 (+5.9% YoY), though this should revert to a ~$25m run rate from FY21 onwards.

Source: Company Filings

While GLPI will not benefit from rent escalators in FY20 either due to COVID, I wouldn’t rule out step-ups in FY21, given the robust regional casino performance post-reopening. Key tenant Boyd Gaming (BYD), for instance, reported ~12% overall EBITDAR growth with particularly strong Mid-West & South EBITDAR and margins in 3Q.

Source: BYD 3Q20 Earnings Release

And it looks like higher margins are here to stay – per GLPI management, even if underlying tenant margins are not sustainable at current highs, the new normal for margins will likely be better than pre-COVID levels. Expect a tailwind as well in upcoming quarters from higher variable rent from PENN’s properties, as well as ~$3m in cash rent post-opening of PENN’s Morgantown property.

Controlled Leverage Paves the Way for Capital Return

As of end-3Q20, GLPI held ~$106m of unrestricted cash on hand against ~$5.8bn in total debt. This includes the impact of an additional $200m issuance of 4.0% senior unsecured notes maturing in 2031, with the proceeds used to repay its term loan. Backed by the strong EBITDA generation, though, leverage is manageable at ~5.5x, with room to move below 5x by FY24 assuming status quo.

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Source: Company Filings, Author’s Est

That leaves ample room for an unfolding capital return story. While GLPI paid out a $0.60/share dividend in 3Q20 (20% cash and 80% stock), it expects to begin paying its dividend all-cash again in 1Q21. The prompt reinstatement is a key positive, in my view, and I wouldn’t rule out a dividend hike in FY21 either, given the current ~67% AFFO payout (the lowest on record). For context on the scale of the capital return opportunity here, a normalized 80% AFFO payout policy would have unlocked ~$60m in additional dividends in FY20.

Source: Company Filings, Author’s Est

A Mildly Accretive Transaction

Post-3Q, GLPI also announced its intention to issue 8.0m shares (9.2m, including the greenshoe) to fund the Tropicana Evansville and Dover Downs acquisitions. Assuming the 1.2m share greenshoe is fully exercised, this brings the total net proceeds up to ~$321m (out of the ~$484m total purchase price). In exchange, Twin River Worldwide (TRWH) will be added to the tenant roster, entering into a triple-net master lease (subject to a corporate rent guarantee) with GLPI. Given the ~$40m in annualized rent ($28m for Evansville, $12m for Dover Downs), this implies a transaction multiple of 12.1x with an expected close in mid-2021.

USD’m

Total Acquisition Cost

484

(/) Rent

40

= Implied Multiple

12.1x

Source: Company Filings

More importantly, I do not see the equity raise as much of a negative. Assuming the remaining purchase price is funded by incremental debt, I see a mildly accretive AFFO/share outcome on pro-forma FY22 numbers. Naturally, the accretion could vary depending on the cash/debt mix used to fund the transaction, as well as the cost of debt, but the most likely result is mildly accretive, in my view.

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FY21 (Pre-Transaction)

Adj

FY21 (Pro-Forma)

AFFO

752

40

792

(-) Incremental Interest Expense @ 2.5%

4

4

(/) Shares Outstanding

233

9

242

= AFFO/Share

3.23

3.26

Accretion/(Dilution) (%)

0.9%

Source: Company Filings, Author’s Est

Get Paid a ~6% Yield for Discounted Equity

In a post-COVID environment, GLPI could emerge a winner as increasing distress and consolidation drive accretive opportunities (and AFFO growth) ahead. Further, GLPI’s largest tenants, PENN and BYD, are in a very healthy place financially and should exit COVID without issue. Yet, the valuation discrepancy between GLPI and its peers persists – GLPI stock currently trades at an unwarranted discount to industry leader VICI on fwd multiples, for instance. More beats and raises post-3Q, as well as improving financial health at its key tenants, should catalyze a re-rating. In the meantime, equity holders get paid a ~6% yield. Risks include deal execution, operating conditions at GLPI’s key tenants, and the interest rate environment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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