According to Gaming and Leisure Properties (NASDAQ:GLPI) there are around 250 casino properties in the Untied States. The first casino-focused real estate investment trust (REIT), it owns about 10% of those properties. If all this REIT does is expand in this one sector, it's falling short of its potential.
A still tight bond
Gaming and Leisure Properties was spun off of Penn National Gaming (NASDAQ:PENN) late last year. Essentially, Penn National became a pure play casino operator by giving Gaming and Leisure its casino properties. The two signed onto a long-term triple net lease agreement, whereby Penn National handles all of the expenses of the buildings.
The transaction works for Penn National because it jettisoned the financial burden associated with owning buildings. That will boost growth since it will have less capital tied up in buildings and it should make expansion easier to fund, too. Gaming and Leisure, meanwhile, gets to sit back and collect rent checks without having to do too much work—not a bad deal.
However, the pair now have a very close bond, since Penn National is Gaming and Leisure's single largest, and practically only, tenant. In fact, because of this close relationship, you have to question one of the benefits presented at the time of the spin off: the, "Ability for [Gaming and Leisure Properties] to enter into agreements with [Penn National Gaming] competitors and utilize [its] first-mover advantage to secure transaction flow."
How many of Penn National's competitors are going to want to sell premiere properties to a REIT that's effectively captive to a competitor? There may be 250 plus casinos, but it seems doubtful that Gaming and Leisure is in line to pick up the best properties just because it's the first gaming focused REIT. It's more likely that competitors decide to follow Penn National's lead and set up their own REITs.
An alternative model to grow
So, if Gaming and Leisure wants to expand, it should strongly consider growing outside the casino space. Not only will that provide diversification, but it means there's more opportunity to find good properties to own. EPR Properties (NYSE:EPR), which yields around 6.3%, is a perfect example.
EPR started out owning just movie theaters. However, owning only this one form of entertainment property clearly left the company dependent on the performance of a single niche sector and limited its growth prospects. Realizing this, it has expanded out its portfolio.
When the company changed its name in 2012, after spending 15 years as Entertainment Properties, CEO David Brain explained, "Our new name leverages our brand heritage and provides the necessary latitude to encompass a broader set of specialty categories." In other words, the movie niche wasn't enough—and there are a lot more movie theaters for EPR to buy than there are casinos for Gaming and Leisure to acquire.
Today, about half of EPR's properties are dedicated megaplex theaters. The rest of its portfolio is far more diversified. For example that nine "entertainment retail centers" it owns are like malls, but the anchor tenants are entertainment facilities. But EPR doesn't stop there, its over 200 property portfolio also contains golf centers, water parks, vineyards, and ski parks.
After struggling a bit during the deep 2007 to 2009 recession, the top line and dividend have been heading higher again over the last few years. The top line shortfall and dividend cut during the recession, however, should stand as a warning to Gaming and Leisure shareholders since gambling is just as economically sensitive as the businesses at EPR, perhaps more so.
Too far afield?
EPR also owns over 50 eduction facilities, which my 10-year-old daughter will tell you has nothing (nothing!) to do with entertainment. However, it provides diversification and shows that EPR is willing to think outside of the box. While Gaming and Leisure is a relatively young REIT it isn't too soon for it to start looking outside its "gaming" box and add some "leisure" properties to its portfolio. Until it does, investors should be very cautious about investing in this niche REIT—the around 5.5% yield probably isn't enough to offset the inherent concentration risk.