Posted on: September 22, 2023, 05:40h.
Last updated on: September 22, 2023, 05:40h.
As tenant diversification increases, corporate debt issued by Gaming and Leisure Properties (NASDAQ: GLPI) could be appealing to fixed income investors, although potential gains may be limited.
Gimme Credit analyst Kim Noland believes that Gaming and Leisure Properties’ bonds maturing in 2030 present an “outperform” opportunity for investors, but warns that the capital appreciation potential may be limited. These bonds currently offer a yield-to-worst of 6.8%.
“We think partially debt-financed mergers and acquisitions has the effect of temporarily increasing leverage and likely deters ratings upgrades,” wrote Noland.
At the end of Q2, Gaming and Leisure’s leverage ratio was 4.8x, and Noland expects it to remain stable in the 5x range. Fitch Ratings has assigned a “BBB-” rating, the lowest investment grade, to the REIT’s corporate debt.
Tenant Diversification Benefiting Gaming and Leisure
Gaming and Leisure Properties was spun out of Penn Entertainment (NASDAQ: PENN) ten years ago, and over that time, it has become the REIT’s largest tenant.
However, analysts and investors recognize the importance of tenant diversification in the gaming REIT sector, and Gaming and Leisure Properties has been actively adding Bally’s, Cordish Cos., and other casino clients to its portfolio in recent years. Just last month, the REIT announced a $100 million investment in the real estate associated with the Hard Rock Casino development in Rockford, Ill., bringing in another new tenant, 815 Entertainment.
“The 815 deal involves providing construction financing to the tenant, like several others the company has pursued in the last few years. The innovative nature of these REIT deals has helped GLPI diversify its gaming REIT business, and it now has seven gaming operator tenants in addition to the original PENN,” added Noland.
Currently, GLPI owns the property assets of 59 gaming venues across 18 states. The Hard Rock will be the sixth Illinois venue in the REIT’s portfolio.
Las Vegas Could Provide Opportunities for GLPI
As the largest casino center in the US, Las Vegas is dominated by VICI Properties (NYSE: VICI), the leading owner of gaming real estate. However, GLPI, with a preference for regional casino real estate, does own the property assets associated with the Tropicana on the Las Vegas Strip. This positions the REIT to potentially benefit if the Oakland Athletics carry out their planned move to Sin City. Bally’s, the operator of Tropicana, has already agreed to fund up to $175 million in property improvements in exchange for a rent increase.
“GLPI is providing 9 acres of the Tropicana Las Vegas site for the construction of a home venue stadium that will complement the Bally’s Tropicana resort,” concluded Noland. “GLPI will provide construction financing ($175 million) and receive rent under the original ground lease, as well as additional rent during development of 8.5% of funded costs. While construction funding carries risks, the financial strength of partners and governmental support limit potential downsides.”