Although 2020 was tough for casino operators, casino landlords like Gaming and Leisure Properties (GLPI 0.57%) held up surprisingly well. In fact, the real estate investment trust (REIT) collected 100% of the rent it was owed despite the pandemic shutdowns last year. And, even as the gaming industry continues to work back from the lockdowns, Gaming and Leisure is finding new ways to grow, a fact that has investors talking about the stock and its generous 5.8% yield.
What it owns
Gaming and Leisure's portfolio includes 55 properties across 17 states. Casinos are huge assets, and its holdings span almost 25 million square feet.
And while gaming is the big draw, tenants include related businesses such as retail, entertainment, restaurants, and hotels. On the hotel front, Gaming and Leisure's portfolio includes more than 15,700 hotel rooms. It's a huge player in the casino industry.
Gaming and Leisure was spun off by Penn National Gaming in late 2013. Penn National to this day is its biggest customer, accounting for about 75% of its rent roll. That, however, is down from basically all of its rent at the time of the spinoff. Since the spinoff, the company has broadened its portfolio by acquiring assets from well-known gaming companies, including Bally's, Caesars, and Boyd Gaming.
The REIT has a sound balance sheet that earns an investment-grade credit rating. And the funds from operations (FFO) payout ratio was a healthy 75% in the third quarter of 2021. In fact, Gaming and Leisure actually paid a special dividend of $0.24 per share to close out 2021. That suggests there's ample room for setbacks before a dividend cut would be a risk.
So what's all the fuss about?
That's the background, but the big discussion on Wall Street is almost always about the future. And for Gaming and Leisure, the near-term future includes adding another major tenant and three new properties. The purchase of these assets from Cordish Cos., which will account for 10% of total rents, will push former parent Penn National down to about 68% of the REIT's total rent roll. Diversification like this is a great move.
The deal is also expected to be immediately accretive to Gaming and Leisure's FFO. Moreover, the lease term is roughly 60 years, with built-in annual rent increases of 1.75%. So these properties should be a net benefit for decades to come.
So far, so good. But there are a couple of other pieces to the deal that could turn out to be even more important.
First off, Gaming and Leisure is getting a right of first refusal on another Cordish gaming property for five years. So, this trio of assets could eventually turn into a quartet.
Second, for seven years, Gaming and Leisure will have the right to be a 20% passive investor (relative to Cordish's investment) in any gaming-related development that Cordish undertakes. Cordish has a strong history of redevelopment, so this could be a good avenue for both capital investment and creating a pipeline for future property acquisitions.
Third, Gaming and Leisure and Cordish are talking about future relationships beyond gaming, which would help to further diversify Gaming and Leisure's portfolio.
One deal, but so much more
At the end of the day, the acquisition of the Cordish properties is really just one deal. But it's a big one, with the potential for adding even more growth opportunities in the future, including a chance to create a pipeline of deals outside of gaming.
With a generous yield and an increasingly attractive portfolio of assets, long-term investors looking for a solid dividend payer should probably take a deep dive here. Notably, given the new assets and that special dividend, it wouldn't be a little shocking if the dividend wasn't raised in 2022.