VICI Premium Over Gaming and Leisure Seen Narrowing

• VICI usually commands a premium multiple to its rival
• That gap could narrow
• Analyst forecasts some resolution between Caesars and VICI

Likely due in part to its Las Vegas-heavy portfolio, VICI Properties (NYSE: VICI) commands premium multiples relative to rival Gaming and Leisure Properties (NASDAQ: GLPI), but that gap is expected to continue narrowing.

The gap has been narrowing as VICI shares struggled in recent months, though Jefferies analyst David Katz says both casino real estate investment trusts (REITs) are “buys,” adding that the duo represent the “most stable business models in our coverage.” Katz points out the two casino landlords are often viewed through the lens of generated fixed lease revenue.

The fixed nature of the rents bear some differences worth noting, whereby rent escalators differ across the portfolios, ‘fixed’ is not used here in the literal sense,” observes Katz. “Second, we believe there are important differences among the specific long-term real estate asset values, in that we believe Las Vegas Strip real estate bears greater durability long-term given the rising competition for regional gaming.”

VICI is the largest real estate owner on the Las Vegas Strip. Conversely, GLPI’s Sin City footprint consists of the land that’s proposed to be used for a Major League Baseball stadium.

VICI, Caesars Could Be Nearing Resolution

The primary reason the valuation gap between VICI and GLPI closed is because of a slump by the former’s shares — one largely induced by concerns over the state of its master lease agreement pertaining to regional casinos operated by Caesars Entertainment (NASDAQ: CZR). That accord accounts for 18.5% of the landlord’s lease revenue.

“Management teams of both VICI and CZR publicly indicate they are discussing alternatives for the lease, which we believe could result in a rent reduction in exchange for capital and other commitments from CZR,” adds Katz.

This oft-discussed issue has been a clear headwind to VICI shares, and it’s not a risk that’s on the table with Gaming and Leisure.

GLPI Has Positives, but it’s Not Risk-Free

Gaming and Leisure isn’t staring at the prospect of potentially lowering rent for a tenant, but its expanding relationship with Bally’s implies some level of risk.

We focus specifically on the case of BALY, where large-scale development projects in Chicago, New York and Las Vegas could involve GLPI in some fashion that bears risk, and while GLPI has demonstrated capital prudence in the past, BALY has been an evolving company from a strategic perspective with considerable lease-adjusted leverage,” notes Katz.

The REIT agreed to provide the bulk of the financing needed for Bally’s to complete its Chicago casino hotel and it could be the operator’s preferred financier for its upcoming $4 billion development in the Bronx, NY.