Gaming REITs Offer Value, Out-Performance Potential, Says Analyst

Posted on: June 27, 2020, 01:30h. 

Last updated on: June 30, 2020, 02:34h.

Companies owning property assets of domestic casinos are relatively safe value ideas, with the potential to outperform other gaming equities. That’s according to an analyst that recently launched coverage on this corner of the real estate sector.

REIT's Offer Value, Says Analyst
Caesars Palace owner VICI is among the gaming REITs favored by an analyst. (Image: Bloomberg)

Wolfe Research analyst Jared Shojaian starts Gaming and Leisure Properties, Inc. (NASDAQ:GLPI), MGM Growth Properties (NYSE:MGP), and VICI Properties (NYSE:VICI) with “outperform” ratings and price forecasts that are well above where the names currently reside.

Shojaian says the real estate investment trusts (REITs) traded at notable discounts to the larger universe of triple-net companies, adding that the gap is closing and that gaming property names are superior in many ways relative to the broader peer group.

“Gaming REITs are relatively new and price discovery for this class of real estate may take time — GLPI pioneered the model in 2013 with its long-time CEO,” said the analyst.

GLPI has outperformed the REIT average since then, but the multiple gap is still present. Investors may need to see the model through a downcycle — like now — to prove its resiliency, and note GLPI has collected ~99% of rent in 2Q, unlike other triple-net REITs. We also think some of the challenges within other REIT segments could lead to investor share shift,” the analyst continued. 

“Triple-net” refers to a lease structure whereby the tenant pays all expenses, including insurance, maintenance, and property taxes.

GLPI was separated from Penn National Gaming (NASDAQ:PENN) in 2013. That operator remains the real estate company’s largest tenant.

Shojaian has a $46 price projection on GLPI, implying an upside of more than 35 percent from Friday’s close around $34.

VICI Could Be Victorious

The analyst is also bullish on VICI, which was spun-off from Caesars Entertainment (NASDAQ:CZR) in 2017. Like rival GLPI, VICI has a diverse tenant roster, counting five gaming companies among its tenants. Its former parent is its largest client, meaning Eldorado Resorts (NASDAQ:ERI) will soon assume that mantle when it wraps up its takeover of Caesars. That deal spurs much of Shojaian’s enthusiasm for VICI.

“We believe VICI has the best growth pipeline among peers due to the ERI/CZR merger and existing put/call and right of first refusal agreements,” said the analyst. “We also think the current environment could allow VICI to acquire additional assets at attractive price points, given VICI is well-positioned to offer capital to operators for real estate, and VICI’s cost of debt is in the 4% range.”

VICI collected all rent in the current quarter, and as is the case with GLPI, Shojaian believes struggles in other corners of the triple-net space will prompt investors to give VICI a long look, particularly because it trades at lower valuations.

The analyst has a $29 target on the REIT, which represents a 45 percent upside from Friday’s close.

Catalysts for MGP, Too

Unlike its rivals, MGM Growth Properties depends on a single tenant: MGM Resorts International (NYSE:MGM). While that means MGP lacks client diversity, it also means the REIT owns some of the highest quality assets in the gaming industry.

“MGP owns 14 MGM-branded US casino properties, with seven of them on the Vegas Strip (49% of property-level revenue),” said Shojaian. “We view Vegas assets to be higher multiple assets versus regional gaming assets, and MGP’s regional assets are higher quality than typical regional assets. MGM still owns 57% of MGP.”

MGM is reducing that stake, which analysts view as a positive for the property company. The operator’s strong cash position, enhanced by a recent sale of MGP equity, ensured the REIT collected 100 percent of rent this quarter.

Shojaian sees MGP stock going to $36 by the end of 2021, or 33 percent upside from where it closed on June 26.