Gaming and Leisure Properties

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Gaming and Leisure Properties Inc. (GLPI) is a real estate investment trust (REIT) specializing in owning and acquiring properties related to the gaming industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

GLPI operates within the unique intersection of real estate and the gaming industry. It’s important to note that it’s a REIT not a casino operator, and its main focus is on owning physical assets that generate recurring revenues via leases with casino operators.

Business Overview

GLPI’s revenues are primarily derived from rental income generated through long-term triple net leases with gaming operators. In a triple-net lease, the tenant is responsible for the operating expenses, insurance, and property taxes of a building.

  • Gaming Properties: GLPI’s main revenue source comes from its extensive portfolio of regional gaming properties, including casinos and related facilities. They often feature regional casinos, hotel and entertainment venues.
  • Real Estate Lease Income: This revenue is recurring from tenants paying rent on properties owned by GLPI, and it’s by far the greatest source of revenue.
  • Other Lease Income: This includes lease income from other activities that might be related to the gaming properties, but not necessarily the main leases. It has grown, as the company expands its portfolio, but it is small compared to the main lease income.
  • Interest income from finance receivables: GLPI’s real estate and financing segments have provided financing to some tenants.
  • Other income from real estate: This is another way that the REIT generates money, although it is from additional or unexpected sources of income (e.g. gains or losses from sale of assets, including real estate and rights and other types of items). This is a small source of income, and is not significant on the long term.

In addition to revenue, GLPI has other items on their balance sheet, which affect the overall profitability of the company. These include (but not limited to)

  • Amortization of intangible assets
  • Depreciation
  • General and administrative expenses
  • Loss on debt extinguishments
  • Gain from disposition of property
  • Interest expense

Industry Analysis & Competitive Landscape

GLPI operates in a somewhat concentrated industry. The gaming market is highly competitive, often influenced by state regulations, and subject to changing consumer tastes. It has become more fragmented, due to the rise of online casino operators.

  • Competitive Landscape: GLPI faces competition in acquiring properties from other REITs and private equity firms. Within the gaming industry, operators are typically large with significant market share. A lot of the industry is consolidated, however some smaller operators still exist with local markets.
  • Industry Trends: In recent years, the gaming industry has seen a growth in online and mobile gaming. While GLPI’s portfolio is primarily physical properties, this trend could impact its tenant operators and their long-term prospects. The industry also faces macro trends that can impact it, such as inflation. The industry does not have a lot of technological advantages compared to other types of industry. It is a brick and mortar business that has a lot of fixed costs that are required to build a sustainable business.
  • Regulation: Gaming is one of the most heavily regulated industries in the world and any changes in regulation can create or destroy value for companies, such as GLPI, that operate within this space.

Moat Analysis (2/5)

Moats in the REIT sector often derive from factors like scale or contractual terms with quality tenants. GLPI has some aspects that may qualify as a narrow moat, but the presence of an overall economic moat is doubtful

  • Switching Costs: GLPI operates with long-term leases, that have some switching costs for tenants, but as real estate is somewhat interchangeable, they are not that high. A casino company might have to spend a lot to convert to a new property, but that cost will be similar for any of the properties that are available on the market. The switching costs for the tenants are not very high, as the value of the business are not impacted by the location itself, but more by the demographics of that region and how the company manages the casino.
  • Scale and Location advantages: GLPI has a vast portfolio of gaming properties, which would indicate the existence of scale advantages. They can have a lower cost of operations for having a larger amount of properties to offer different regional gaming operators. However, these properties are not a natural resource, that other companies cannot imitate, and the high capital requirements may not pose as a significant barrier to entry as it once did, due to other REITs offering the similar services with very competitive cap rates and yields.
  • Brand Name: GLPI does not have a brand that is particularly valuable to their tenants or customers.

Moat Rating: 2 / 5

I rate GLPI’s moat as a 2 out of 5. The company has some characteristics that can be deemed as a narrow moat, such as scale and the relative stability from long-term leases, however, they do not show a sustainable source of generating pricing power that could lead to higher than normal returns in the long term. The business model of a REIT is generally not that defendable, and they tend to trade at market yields with low organic growth.

Risks to the Moat

  • Economic Downturn: Changes in economic conditions can affect consumer spending, thereby impacting the gaming revenue of GLPI’s tenants and ultimately their ability to pay rent. This is a major risk, since they are affected by the macroeconomic situation and can cause severe downturns.
  • Tenant Concentration: GLPI has a concentration in few tenants, which causes a huge risk on occupancy, and on the overall financial health, due to few of its tenants being a large part of its revenues. A sudden decrease in revenue or bankruptcy of one of its top tenants would severely impact GLPI’s overall performance.
  • Changing Consumer Preferences: A shift in consumer behavior to other entertainment options or gaming alternatives can affect the gaming industry and the returns generated by GLPI’s tenants. This is particularly concerning in the face of the growing market of online casinos.
  • Regulatory Changes: Gaming regulations can be volatile and can change at any moment, which means a lot of risk for gaming operators. The REIT also does not get to pass-down all the costs imposed on them by regulators to the tenants.

Business Resilience

Despite these risks, GLPI demonstrates resilience. The company’s real estate assets are typically resistant to some forms of economic shocks. The long term triple net leases also have a degree of protection. They can only sell assets to generate cash and must re-invest in other properties to remain a REIT, therefore it’s limited in its ability to move or react quickly to changes in market conditions.

  • Established Properties: The properties GLPI owns and leases are already up and running, with high barriers to entry for other businesses. That gives them a degree of resilience against changing markets and preferences.

Financial Analysis

  • Historical Performance: Revenues at GLPI have continued to increase throughout its operations, as the company expands its portfolio. In 2022, total revenues totaled $1.3 billion, mostly driven by the base lease revenues.
  • Profitability: The company typically shows positive net income, however, they also have large non-cash expenses (such as impairment and depreciation). The operating margins are generally quite stable throughout the years. In 2022, the adjusted EBITDA was $1.2 billion.
  • Capital Structure: GLPI relies on both equity and debt. However, most of the company’s assets are financed through debt. This can lead to a riskier overall financial structure. At the end of 2022, the total debt was approximately $5.2 billion. They also have a large amount of debt maturities throughout the next decade, which creates risk on the business, as they have to manage all those maturities. However, they have been actively trying to reduce overall long-term debt in their latest earning calls.
  • Cash Flow: The company’s cash flow generation has remained strong, mainly driven by its triple net leases. In 2022, the free cash flow totaled approximately $712 million.
  • Share Repurchases and Dividends: The company has had an aggressive approach to buy back shares over the recent years. They are also commited to distribute most of their profits in form of dividends, which is consistent with REITs.
  • Recent Performance and Outlook: GLPI is facing an increasing pressure on the tenants to pay and that will affect their results. High interest rates are also impacting them. The short term outlook looks bleak, but the company is expected to grow revenues as the new assets become fully operational. They will be very impacted by the health of the consumers and any significant changes to regulations on gaming.

Understandability Rating: 2 / 5

The business model of GLPI as a REIT is fairly easy to grasp, however, understanding the mechanics of leases, property types, and its capital structure adds complexity. Their financial statements contain many noncash items, and it is not an easy business to fully understand. I rate it a 2 out of 5.

Balance Sheet Health Rating: 3/5

GLPI’s balance sheet is somewhat healthy, but there are some considerations. While their assets generate stable revenue, they are highly leveraged with debt. They have been working on reducing debt, however it is a slow process that the company has to manage while balancing growth. Due to high debt, they are more susceptible to market interest rate changes. I rate the balance sheet a 3 out of 5, due to these factors.

Additional Recent Information

CEO Change In June 2023, GLP Capital, a subsidiary of GLPI, appointed Peter M. Carlino as CEO and Chairman of the Board. Previously, Mr. Carlino has been the CEO of the parent company and also acted as Chairman of the board. This change could bring new strategies and decisions to the GLP Capital company. It is still uncertain, as it was just recently announced. Guidance In their Q1 earnings call, GLPI did not provide any guidance for the rest of 2024. They mentioned that are focused on integrating the new Bally’s properties and that any changes to estimates are speculative at the moment. Property Updates In the recent Q1 earning call, they have mentioned the completion of the construction on three gaming properties. They have also mentioned further plans to continue expansion of their operations throughout the US, specifically in the North-West. Debt Management The company has been aggressively focusing on deleveraging by buying back long-term debt, as well as having a significant amount of cash to buy new properties in the future. Dividends During the last quarterly earnings call, they declared to increase its common share dividend to $0.74 per share, reflecting a higher return to the shareholders. They have been consistent at raising dividends, and are committed to returning profit to their shareholders in the form of dividends.