The casino sector is fairly concentrated, with a relatively small number of large players. So, too, is the casino real estate investment trust (REIT) niche, with just two notable companies focused exclusively on the property type -- Vici Properties (VICI -0.28%) and Gaming & Leisure Properties (GLPI -2.23%). There are some important differences between these two landlords, with one being that Gaming & Leisure's 5.9% yield is appreciably higher than Vici's 5%. But what else do investors need to know before making a choice here?
Big and small
Casinos are interesting. Gaming is the most important feature, and this is what draws people to the properties. However, they generally also offer restaurants, stores, retail, and hospitality aspects as well. So they aren't exactly diversified properties, but they aren't just casinos, either. With so much under one roof, these assets tend to be very, very large.
Image source: Getty Images.
At the same time, there are only so many companies that operate in the sector. There are also a limited number of locations where casinos can legally be opened. It is a highly regulated industry dominated by specialist operators. In this way, the market opportunity for a REIT is limited. It makes sense that there are only two REITs focused on the niche.
Vici is the larger company, with a market cap of about $32 billion. Gaming & Leisure's market cap is less than half that at $12.8 billion. Vici tends to garner a lot more attention from investors, but given the yield difference noted above, anyone interested in a casino REIT should probably do a deep dive on both.
Key differences
For investors focused on dividends, Vici stands out. As the chart below shows, it has increased its dividend regularly since its initial public offering. Gaming & Leisure, on the other hand, cut its dividend in 2020. To be fair, the coronavirus pandemic left non-essential businesses shut down at that point (casinos are not essential), so cutting the dividend was probably a reasonable, precautionary measure. And it has since gotten back on the growth track. But dividend investors tend to prize consistency, and Gaming & Leisure doesn't match Vici on that front.
Data source: YCharts
Drilling down into the portfolios, Vici has 11 tenants across 50 properties. Gaming & Leisure owns 57 properties, but it only has 6 tenants. That's an important distinction because Vici's top two tenant account for 40% and 36% of rents, respectively. All of the rest of the tenants are less than 10%. Gaming & Leisure's top tenant generates roughly 65% of rents. All of the rest of its tenants are less than 10%. While neither of these casino REITs stand out for customer diversification, Gaming & Leisure is much more dependent on just one operator.
Data source: YCharts
Another area of notable difference is on the balance sheet. As the chart above highlights, Vici's debt-to-equity ratio, a measure of leverage, is 0.7 times. Gaming & Leisure's figure is more than twice that at almost 1.7 times. Leverage can increase returns, but it also reduces financial flexibility in times of adversity. That probably helps to explain the dividend cut in 2020.
Too be sure, the adjusted funds from operations (FFO) payout ratios are close. However, once again, Vici comes off looking better, at least by a little bit. Its adjusted FFO payout ratio was roughly 74% in the first quarter, compared to about 78% for Gaming & Leisure. (FFO is a critical measure of REIT performance, analogous to cash flow for other companies.) Neither of those figures is particularly troubling, but Vici clearly has a touch more room to deal with adversity.
No clear winner
At the end of the day, Vici is probably the more attractive casino REIT. However, Gaming & Leisure isn't so far behind that it looks un-investable. The question is whether the extra yield is worth the extra risk. For more aggressive investors interested in the casino sector, it might be.
