Wednesday, April 1, 2020

Watchlist: GLPI and Penn National Gaming

There are a number of interesting situations and potential bargains out in the markets today, I typically don't write on companies where I don't own the shares, but for the next few months (however long we're all stuck at home) I might try to push out a few more posts on ideas where I've done some work on but don't own for one reason or another (limited cash), but want to be ready to take advantage of further declines.

One such situation is Gaming and Leisure Properties Inc (GLPI) which is the 2013 REIT spin of Penn National Gaming (PENN), PENN is now the largest operator of regional casinos in the United States and rents most of their properties from GLPI, they're still attached at the hip 7 years later.  GLPI was the first of the triple-net lease gaming REITs that now also includes VICI Properties (VICI) and MGM Growth Properties (MGP); GLPI owns the real estate of 40+ casinos and leases them back to casino operators who pay all the maintenance, taxes, insurance and other property level costs of the property.  The leases are typically structured as master leases and are functionally senior to the traditional debt as their physical casinos are critical to the operation of the business (although mobile will increase in share going forward).  In addition to the triple-net lease business, GLPI owns and operates two casinos due to tax rules at the time of the spin requiring an active business, one in Louisiana and the other in Maryland, both under PENN's Hollywood brand.  Their leases are primarily with PENN, around 80%, they did previously diversify by doing a PropCo/OpCo transaction with Pinnacle Entertainment (PNK) in 2016, but PENN ended up buying PNK in 2018 causing GLPI's tenant concentration to revert back.  GLPI also has Elderado (ERI) as a tenant from when GLPI paired with ERI in the acquisition of Tropicana Entertainment (TPCA), Boyd Gaming (BYD) due to forced divestitures from the PNK tie-up, and Casino Queen (smaller distressed player) on the rent roll.

Obviously, Penn National is in a considerable amount of distress with coronavirus and social distancing, they have closed all of their casinos and furloughed much of their employee base for an indefinite amount of time.  PENN is highly levered, their annual rent is significant at ~$900MM/ year (plus another $105MM in interest on regular debt), with $820MM of that going to GLPI, PENN is current on rent through the April payment, but would be unable to manage through this crisis without some forbearance or risk being restructured which would be disastrous for both GLPI and PENN.  This past Friday, GLPI and PENN entered into a unique transaction:
  • PENN will be free delivering the Tropicana Las Vegas property and operations to GLPI, plus the land under their Hollywood Morgantown development that is scheduled to open around year end for $337MM in credits to be applied to the May, June, July, August, October, and a partial payment towards their November rent.
  • PENN will then lease back the Tropicana Las Vegas from GLPI for $1/year and continue to run the operations and maintain the property.
  • GLPI will engage in a sale process over the next 2 years to sell both the real estate and operations of the Tropicana Las Vegas in order to recoup the rent credits.  $307MM of the $337MM in rent credit is to be assigned to the Tropicana. If the property sells for more than $307MM then the excess would be split with PENN, 25% of the excess would go to GLPI if it sold in the first 12 months, and there would be a 50/50 split in year two, beyond year 2 GLPI would get 100%.  PENN had been rumored to have gotten inbound bids in the $700MM range as recently as this past January for the property, but those buyers are likely long gone.  PENN did purchase the Tropicana for $360MM in 2015 providing some assurance that the property is worth more than the rent credit GLPI is receiving (assuming Vegas isn't permanently impaired by the coronavirus).
  • PENN additionally agreed to exercise their 5 year extensions on their master leases and entered into an option to purchase the operations in 2021 of one of GLPI's owned and operated casino, Hollywood Perryville (MD), for $31MM and enter into a $7.8MM annual lease for the property.
No one will confuse the Tropicana with a high end casino like the Wynn or Bellagio, but it is 35 acres and over 1400 rooms on one of the busiest corners on the strip.  Another tired casino in much worse location, Circus Circus, was just purchased for $825MM by Phil Ruffin in January.  Again, the world has changed, but if things return to any reasonable normalcy, GLPI should eventually get their deferred rent paid via the sale of the Tropicana.  And then PENN gains itself some breathing room with the rent credits at least into the fall, if they can open up the majority of their casinos sometime in the summer, they're likely to survive, if social distancing lasts deep into the third quarter or early fourth quarter it is likely game over.  PENN might be able to raise additional cash by selling their distributed gaming business or other non-casino related assets, but following moving the Tropicana over to GLPI, essentially all their properties are leased.

But how does GLPI itself navigate the remainder of 2020?  GLPI has $5.7B of debt and pays out approximately $600MM in annual dividends to shareholders.  Below is a quick analysis on GLPI's liquidity and ability to pay their dividend.  Both Boyd and Elderado (at least pre-CZR deal) have a stronger liquidity position than PENN, but let's assume both receive similar rent forbearance arrangements and then GLPI's operating casinos are a net cash drag on the year.
As always, I'm sure I've made a few mistakes in the above, so feel free to pick it apart, but it appears that GLPI could be in a position to continue its $2.80/share dividend, which is an 11% yield at today's $25/share price. 

A lot depends on when PENN can reopen their casinos and how receptive people are to returning to gambling following both a health crisis and for many people an economic one.  Regional casinos like PENN's might hold up better than destination ones as they rely on regular customers and focus on slot machines (~93% of their gambling revenue) versus convention business travelers or high rollers.  PENN is also making an aggressive move into sports gambling with their $163MM investment for a 36% stake in sports and pop culture media company Barstool Sports in February.  Barstool has an army of loyal followers, they're truly marketing experts, and Barstool personalities pumped up the stock in the weeks following the acquisition and before coronavirus realities set in for the company.  The plan is to rebrand PENN's sports betting operation to Barstool and launch an online sports betting app, where legal, in August ahead of the NFL season.  With sports essentially cancelled for the near term, that's another blow to PENN's plans, any delay to the NFL season would be particularly painful given their investment in Barstool.

Back to GLPI, original 2020 guidance was for $1.05B in EBITDA on about an $11B enterprise value, or 10.5x, in simpler times these gaming REITs trade at 13-15x EBITDA, 14x a normalized 2021 EBITDA would make GLPI a ~$42 stock versus $25 today.  In a dream scenario, there might be an extra $1/share in the Tropicana if sold for $700MM in year two, but that feels unlikely today.  There are certainly stocks with higher upside in this market, but once the smoke clears on PENN's casinos reopening, GLPI should re-rate pretty quickly once the disaster scenario of getting the keys in the mail is off the table.  Whereas PENN clearly has more upside, but may take longer and is more exposed to how quickly the economy recovers.  Why don't I own GLPI or PENN?  Not 100% confident the dividend remains at GLPI, if its cut, might actually be the buying opportunity as other investors sell if you believe in the long term durability of their leases.  Others thoughts welcome.

Disclosure: No current position as of posting


  1. Thanks for the thoughts. Seems interesting, but tricky to guesstimate when things revert. Sometime in Q3 seems reasonable looking at Macau, though there are still restrictions on international traveling (and ongoing testing) there. As you noted though, my biggest concern isn't what cash flow looks like this year, but how things look five years from now. How will casino traffic trend vs. mobile usage, particularly if people can play slots or bet on sports from their couch. I'd guess that will affect not only lease renewal rates but viability of locations in general.

    1. The lease renewals will push out the expiration dates past 2030, so there's a fair amount of certainty there, but will PENN need to do something similar in the next downturn and the one after that? Sure over the long term, I'm generally bearish on regional casinos, I think the distributed gaming companies will take a lot of share, same with mobile. PENN would argue that local tax jurisdictions rely heavily on casino tax revenue, might insulate them through regulations, but that seems to be breaking down already.

  2. This piece reads like a more option-like long thesis for PENN. Curious if you have any thoughts on PENN?

    1. I haven't done as much work on PENN itself. Buried in another post somewhere I thought the gaming REITs might be interesting in the next recession and here we are, the rent credit deal caught my attention, need to do more work on PENN but from a portfolio management perspective, you could probably buy a small amount of PENN and get the same bang for your buck. If PENN restructures, no telling what happens to GLPI.