Krause Fund Research April 12th, 2021 Spring 2021 Current Price $43.34 Target Price $50-55 Gaming and Leisure Properties, Inc. (NYSE: GLPI) Company Overview Real Estate Gaming and Leisure Properties, Inc. (NYSE:GLPI) is the first real estate investment trust to focus on acquiring real property assets Recommendation: BUY leased to gaming operators. The portfolio currently consists of 48 gaming properties diversified across 16 states including premier Analysts tenants like Penn National Gaming, Caesars Entertainment, Boyd Gaming Corporation, and more. Through triple-net lease Adam Schliesmann arrangements, GLPI expects to grow their portfolio by acquiring [email protected] gaming facilities of which they lease back to gaming operators. In Cameron Pietzsch [email protected] an industry poised to grow as state policy is changed, GLPI is Ethan Good positioned to emerge as a leader. [email protected] Evan Pyle [email protected] Stock Performance Highlights Kyle Bucsa 52 Week High $45.75 [email protected] 52 Week Low $24.39 Beta Value 1.58 Investment Thesis Key Statistics Market Cap (B) $10.55 We recommend a BUY rating for Gaming and Leisure Properties, Shares Outstanding 232,452 Inc. due to state wide policy reform and their sound business Dividend (Yield) 2.06 (6.01%) structure. EPS (2021E) 2.16 GLPI Exhibits Potential Strength: Company Performance Highlights ● State governments are deregulating gambling restrictions ROE 10.02% due to the tax collection opportunities casinos pose. This FFO (M) $684.39 increases GLPI’s ability to accumulate new properties in P/FFO $12.56 diversified markets from the increase of non-tribal gambling. Dividend Payout Ratio 108.70% ● GLPI had near perfect rent collection even through the pandemic. We expect this to continue as COVID-19 vaccine 12 Month Performance (factset.net) rollout continues and casino traffic returns to normal levels. ● GLPI has 100% tenant capacity and will sustain this through 2028, reducing liquidity risk for the foreseeable future. ● Due to the nature of GLPI’s “triple net lease” agreements with their tenants, operating expenses are minimal, resulting in consistently high operating margins and ROE for shareholders. Valuation Methods DCF/EP $54.58 DDM $42.95 Relative P/FFO (EPS21) $48.32 Important disclosures appear on the last page of this report. Executive Summary Gaming and Leisure Properties is strongly positioned to become a leader within the Gaming REITs industry. With the continued deregulation of gambling outside of Las Vegas, GLPI’s geographically diverse portfolio affords them with a plethora of profitable investment opportunities. GLPI has shown the ability to generate consistent quarterly income and maintain high operating profit margins even Source: Seeking Alpha12 during the COVID-19 pandemic. This can be attributed to the quality of their tenants and the nature of their lease The YTD weighted average return in this industry is agreements. With GDP and tourism set to rebound in 2021 -1.61% compared to the 16.44% market return, however, and beyond, we expect GLPI to continue generating we are bullish about their future. We attribute their positive alpha for its shareholders. underperformance to the COVID-19 pandemic, forcing many casinos, restaurants, and hotels to limit capacity or Industry Analysis shut down completely. With the vaccine rollout in progress and the continued legalization of sports gambling across the country, we see the Gaming REITs as a potential Industry Description industry leader within the Real Estate sector. The Gaming REITs industry consists of 3 major players. Vici Properties and MGM Growth Properties main revenue Vici Properties (VICI), Gaming and Leisure Properties streams come from property located on the Las Vegas strip, (GLPI), MGM Growth Properties (MGP). Each company's while Gaming and Leisure Properties revenue comes from primary source of revenue is generated from long-term properties located outside of Vegas. VICI in particular has leases signed by leisure and entertainment companies. made a big attempt to expand their operations outside of This includes companies like Caesars Palace, Penn National Las Vegas, with casinos spanning from New Orleans, Gaming, and other casinos and hotels located on the Las throughout the Midwest, and some parts of the East Vegas strip and around the country. They also lease out Coast. However, Gaming and Leisure Properties Inc. has the property to restaurants, golf courses, or other advantage over Vici and MGM in terms of geographically entertainment venues around the US. With continued diverse assets. Due to zoning laws and limited state casino challenges from the ongoing COVID-19 pandemic, the licenses, this creates very high barriers to entry for Vici gaming REITs industry remained profitable driven by and MGM to expand their operations. consistent cash flows from tenants. This led the industry to 12 outperform the broader REIT sector in 2020 . Looking A key factor in the Gaming REIT industry is the way leases forward, the three companies have a combined 4.5 billion are structured. Leases require tenants to pay all property dollars of cash or credit revolver access. This allows them taxes, insurance, and operating expenses of the casinos. to acquire more properties, continue to invest in their Gaming REITs’ primary expenses are general oversight and 13 current assets, or increase their dividend to shareholders . administrative expenses - which leads to very high The table below shows the percentage breakdown of the operating margins. By writing leases in this manner, the industry in terms of market capitalization. primary sources of risk to future cash flows would be the tenant’s ability to continue to pay rent and the likelihood of tenants to renew their leases (typically last 20-40 years15). Gaming REITs have historically not had difficulty finding tenants even through the COVID-19 pandemic, boasting a 100% occupancy rate and nearly perfect rent collection Important disclosures appear on the last page of this report. 2 metrics (only 1 tenant out of 94 in the industry that fell M&A Activity behind in Q2 2020 but became current in Q3) as well12. Because of the general certainty of cash flows and high The three major players in this industry have all had major dividend yields of Gaming REITs, many investors view merger & acquisition deals in the past year. MGM Growth these securities as bond-like, which therefore makes their Properties and Blackstone Real Estate formed a 50.1/49.9 value susceptible to interest rate fluctuations12. joint venture to purchase the property of the MGM Grand and the Mandalay Bay for nearly $5 billion16. Gaming and Recent Developments and Industry Trends Leisure Properties has made multiple deals with Penn National Gaming to acquire casinos across the country Government and Regulatory Change while Penn operates the facilities17. VICI Properties has made similar purchases with Caesars Entertainment, Inc. Until the 1980s, commercial casinos were only legal in Las The two companies entered into a Master Transaction Vegas on “The Strip”, with the rest being tribal casinos, Agreement in which VICI would own the real estate assets which were mostly exempt from state regulations12. Over of Harrah’s New Orleans, Laughlin, and Atlantic City, while the next 30-40 years, a large wave of legislation has led to Caesars would own and operate the casinos18. 25 states legalizing commercial casinos largely due to realization of a “tax goldmine”. The tax revenue from these Economic Changes commercial casinos accounts for about a quarter in Pennsylvania and large percentages in New York, Nevada, Master leases are becoming the favored agreement in the and New Jersey12. Now, casino REITs own property 19 of industry, as there are many advantages for the REITs. First, the 25 states that allow it. if the tenant does not renew their lease, the gaming license for the property stays with the lessor instead of the lessee. An important trend that could lead to more opportunities Second, rent resets allow the property owner to base rent for the gaming REITs industry is the legalization of sports of the tenant’s operating performance, which is typically a gambling. Today, 18 states and Washington D.C. have 2% increase in rent. Fortunately, if the tenant’s operations legalized sports betting, 4 states have passed a bill that is are not successful, the rent is not lowered but rather not yet in effect, and 9 other states have active bills on the remains constant until operations become successful matter. Additionally, 12 states had bills that did not pass again. legislation and 7 states have not taken any action16. The legalization of sports betting could give the gaming REITs Market Driven Changes to Industry Sales or Inputs industry room for expansion across the country by building or acquiring casinos and hotels in states where it One of Gaming REITs biggest limitations is the has recently been legalized. construction of new property to acquire. In late 2020 to early 2021, three major casinos and hotels will be completed in Las Vegas with a couple others beginning construction this year. While some gaming cities are limited in space, like Atlantic City, Vegas is always adding new additions. The ever-expanding city holds a promising future for the REITs of this industry, especially considering the growing trend of casinos selling their property to the REITs just to rent back. Outside of Vegas, six new casinos have begun construction in Illinois, three more across Illinois, and a couple others across the country. Source: Seeking Alpha12 Another limitation in the industry is the amount of casino licenses issued in each state. Six states have the ability to issue an unlimited number of licenses, however, there are significant regulatory factors and competitive barriers-to-entry. Eighteen states have a limited number of Important disclosures appear on the last page of this report.