Will A Bet on This Gambling Giant Pay Off?

Penn National Gaming made a bold move by spinning off a REIT, will a wager on Gaming and Leisure Properties pay off?

Apr 16, 2014 at 7:16PM

Gambling
Source: Flickr / Images of Money.

Owning property at the corporate level can be both a blessing and a curse. It ensures control of the property, but it ties up capital that could be put toward growth. That's why Penn National Gaming spun off its real estate into Gaming and Leisure Properties (NASDAQ:GLPI) -- the first gambling focused real estate investment trust (REIT). Is the opportunity for Gaming and Leisure as big as Penn would have you believe?

Weighed down
Owning a building costs a lot of money. That's why companies like W. P. Carey (NYSE:WPC) have been so successful for so long, as the company employs what's known as a triple net lease with their properties.

Lossy Page

Source: Public domain, via Wikimedia Commons.

Under a triple net lease, the REIT buys properties from companies and then leases them back to the seller under long-term agreements. Companies are happy to do this because they get the weight of a property off of their balance sheets and it ensures access to their key properties. For example, W.P Carey famously paid $225 million dollars for the space in The New York Times building occupied by the paper in New York City. The transaction gave the iconic newspaper valuable financing and provided W.P. Carey with an above-market return for the 15-year lease term.

These types of deals net Carey reliable tenants and, even better, customers willing to take care of virtually all of the expenses of owning a property. W.P. Carey essentially gets to sit back and collect rent. How good of a deal is this? W.P. Carey has increased its quarterly dividend 56 times in a row. So when Penn National was getting ready to spin off Gaming and Leisure Properties using a triple net lease structure, it sounded like a good deal.

Too focused?
There's a big difference, however, between the Carey business model and Gaming and Leisure's model. For example, Carey has exposure to over 25 industries, and about 30% of its portfolio is located overseas. Gaming and Leisure is in one industry, one country, and, basically, one tenant.

Slot

Source: Jeff Kubina, via Wikimedia Commons

Leading up to the spin-off, Penn National pointed out that there are around 250 gaming facilities in the United States. That, it suggests, will provide plenty of growth. However, Gaming and Leisure started its life owning around 30 of those properties -- not really much growth potential. Carey, for comparison, owns around 700 properties.

Add to this the fact that almost all of Gaming and Leisure's portfolio is leased to Penn, and you start to see a risky trend. That's true even though the properties are leased with a triple net lease structure. Carey, for example, has 234 tenants across its properties.

The upside...
So, Gaming and Leisure has some pretty big risks to consider. However, there are triple net lease REITs already out there with extremely concentrated portfolios that are doing just fine. One key is that those REITs quickly grew there portfolios in a short amount of time to accomplish a suitable level of diversity.

If Gaming and Leisure ventures outside of its gambling niche, it could expand rapidly, like other entertainment-focused REITs that own assets as diverse as water parks, movie theaters, and ski facilities. This would materially reduce the REIT's risk profile. 

While Gaming and Leisure is probably too small and focused for conservative investors, it has the potential to grow into something much bigger. If management starts to move beyond casinos, it may be worth another look. Right now, however, I wouldn't place a wager on this one.

Is this a better option than triple net REITs?
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers