Real estate investment trust (REIT) Gaming and Leisure Properties (NASDAQ:GLPI) isn't your typical landlord, which can be both a positive and a negative today. COVID-19 has been a particular worry among investors, pushing shares lower by nearly 20% so far in 2020 and down roughly 30% from their peak prior to the coronavirus' spread across the world. With a yield of around 7%, is this REIT a buy? Here are some important things to consider before you make the final call.
1. A highly focused REIT
Gaming and Leisure Properties is a real estate investment trust that owns casinos. These are large structures that would be difficult to repurpose. There are only so many casinos available to be purchased and there are a number of REITs looking to buy them, so competition is an issue. There's also a limited number of casino operators to which one can lease a property in the space. Moreover, gambling is a highly regulated business that is cyclical in nature. Although the expression that the house always wins is very true, that doesn't mean the house will be profitable, because it still has a lot of other costs to cover with its gambling gains.
That said, the REIT owns over 40 properties spread across 17 states, so there's some diversification in its portfolio. But being tied to just one concentrated industry that tends to do poorly when the economy hits a soft patch is a material risk that investors shouldn't ignore. Nor is it wise to underestimate the other players in the space, and what could happen to casino prices in a bidding war.
2. The minimal impact of COVID-19
As the coronavirus spread, countries effectively shut down their economies, closing non-essential businesses and asking residents to stay home. Casinos, purpose-built to bring people into close proximity with an often older clientele, were closed. On the surface, it would be logical to assume that Gaming and Leisure Properties' lessees would be suffering and having a hard time paying rent. But while casinos have struggled, the REIT basically managed to collect nearly all of its rent in April. That's impressive when you compare it to malls, where rent collection has been pretty dismal.
Still, Gaming and Leisure hasn't completely sidestepped the COVID-19 issue. It recently renegotiated a lease with a key tenant. It also reduced its second-quarter dividend by 15% and chose to pay the dividend with a mixture of cash and shares, which is something companies do to preserve cash. To be fair, 15% is a modest reduction (other REITs have eliminated their payouts), but it is pretty clear that the payment moves here suggest that management has some concerns about its business.
3. Desperate for cash
The interesting thing about COVID-19 is that it is putting material pressure on casino operators. Although properties are reopening again, they are working with heightened cleaning requirements and reduced occupancy. Although that could eventually make it hard for Gaming and Leisure's tenants to come up with rent payments, it also means casino operators may need to sell assets to raise cash. That would be an opportunity for Gaming and Leisure Properties to expand its portfolio. As noted, there are other REITs in this space, like VICI Properties and MGM Growth Properties, which could limit the bargains available in the market. But the opportunity to speed up expansion efforts is still worth keeping in the back of your mind. Note that Gaming and Leisure Properties recently sold $500 million worth of debt to pay down a credit line, which potentially frees up the line for future acquisitions.
The final call
Gaming and Leisure Properties is not a good option for most investors. So far it has done a solid job of navigating a difficult period, but the COVID-19 pandemic is far from over. That said, more aggressive investors looking to play in the casino space may want to take a closer look. Owning a landlord could be a less risky way to get exposure to the space, and there might even be some opportunity for growth in this turbulent period.
However, this is not a stock for the faint of heart -- there's likely to be a lot of uncertainty over the near term, the dividend has already been reduced (and paid partially in stock), and there's no industry diversification in the portfolio. You'll want to watch this stock like a hawk if you do decide to buy it.