Summary
- GLPI has great economics due to its triple net leases and ordinarily low-volatility regional gaming assets.
- The shut down of regional casinos has caused the REIT, a quasi-creditor to operators, to sell-off as much and recover less than the operators themselves, the first sign of mispricing.
- Although already presenting an arbitrage opportunity, it is true that the sell-off makes more sense if tenant solvency was in question.
- In this article we explain why most of GLPI's income is safe and can be bought for cents on the dollar because tenant solvency is not a concern.
- We give other reasons such as PE interest and debt capacity to further highlight our conviction.
We Smell Alpha
In our previous article we explained that Gaming & Leisure Properties (GLPI) seemed a great investment for retirement, yielding a large dividend with ordinarily low volatility in cash flows compared to Las Vegas due to the local patronage of regional gaming facilities. Valuing it partially like a debt-instrument, we suggested a trickle-in approach as we expected markets to continue to fall.
However, GLPI got slammed at open last Monday due to over-the-weekend announcements that state governments like Ohio, Louisiana and Indiana were going to shut down casinos amid coronavirus concerns. We were worried this would happen, but were confident when writing our first article because we think the tenants are unlikely to default. The market did not seem to think so given that the casino lobby got in line for bailouts, and it discounted GLPI as much as it discounted the operators themselves such as Penn National Gaming (PENN) and Boyd Gaming (BYD).
The very fact that they were sold-off as much as the operators is the first evidence of a serious mispricing. Leases are almost as rock-solid as debt as far as financial obligations go, certainly senior to equity claims. As a quasi-creditor, their risks are far less than tenant equity holders. Furthermore, the operators are bound by triple-net leases, which means that operators have been obligated to make all the capital expenditures into the assets that they are leasing. They are incentivised to hold onto these tailored assets filled by tables and thousands of slot machines they've paid for. Slot machines cost between $15-25k each, and the average GLPI property has between 1000-2000 of them, so a lot of cash has already been sunk in. Operators will be determined to make the lease payments so that they can keep leveraging these regional money-makers once the coronavirus has subsided.
However, the strongest and least abstract argument for why the operators will make their payments is the following. Penn and Boyd, which together account for about 75% of GLPI's rental income, simply have the liquidity to pay the leases, even in a rather pessimistic scenario. If we can at least assume that the banking system will hold up, and it's likely to given the incredible liquidity that the Fed has committed to the system, both these companies should be able to pay in 2020.
