The coronavirus has upended the world economic order, weighing down businesses built around group experiences -- like casinos. It's been pretty rough, with some of the biggest names in the industry struggling to attract customers to come back now that their operations are up and running again after government-mandated shutdowns. But there's another way to play this space, and the headwinds now facing casino operators could actually be a tailwind for real estate investment trust (REIT) Gaming and Leisure Properties (NASDAQ: GLPI).
The portfolio breakdown
Gaming and Leisure owns 44 casino properties and related assets across 16 states. Although that may not sound like a huge number of assets for a REIT to own, casinos are massive structures that generally include gaming floors, hotels, entertainment venues, and various eateries (ranging from the almost-obligatory all-you-can-eat buffet to high-end steakhouses).
Gaming and Leisure was one of the first REITs to focus on the casino niche. Take that with a grain of salt, however, because there are only a few gaming REITs, notably including VICI Properties (NASDAQ: VICI) and MGM Growth Properties (NYSE: MGP), both of which are slightly larger companies market cap-wise.
One of the keys to the gaming space is the use of the net lease structure. Effectively, Gaming and Leisure Properties owns the properties, but its lessees are responsible for most of the ongoing costs of the assets they occupy. Net leases also tend to be long-term in nature, with built-in rent escalations. So unlike the casino operating business, there's some defense against economic ups and downs built into the REIT model here.
That said, there's limited upside potential during the good times, since the operating results flow to the casino company, not the landlord. This is basically the big tradeoff investors need to consider: Do you want slow and steady or exciting and volatile?
The opportunity ahead
This brings the story to 2020 and the coronavirus. When this novel illness hit, governments around the world started to shut down their economies, and travel ground to a halt. Casinos in the United States were shuttered, since the coronavirus tends to spread easily in group settings.
It was pretty bad for the casino operators early in the pandemic, and many started to emphasise online gaming and sports betting. Even when they were allowed to start reopening casinos, capacity constraints, travel restrictions, and the general weariness of patrons were all material headwinds to deal with. As 2020 draws to a close, all of these issues still remain. And while positive vaccine developments suggest 2021 will see the world get a handle on the coronavirus, there are still months or even quarters to go before vaccines are distributed widely enough to have an impact on the direction of the pandemic.
That said, Gaming and Leisure Properties never skipped a beat. Through the first nine months of 2020, the REIT collected 99% of its contractual rents, even as its tenants suffered material revenue declines. In fairness, the REIT has also been forced to work with some tenants on lease amendments, so it hasn't gotten through this difficult period completely unscathed. That, in turn, led to a dividend cut of about 15% in the second quarter, with a portion of the dividend now being paid in shares. However, these changes were probably made out of an abundance of caution, given the extreme developments the world was facing at the time.
But this is where the opportunity actually comes in. This is a very tough time for the gaming space, and one way for casino operators to raise cash is to sell gaming properties. That cash can be used to muddle through this downturn or to spend on growth-oriented investments, like online gaming. For example, in late October, Gaming and Leisure announced a roughly $500 million deal with Twin River Worldwide Holdings (NYSE: BALY) to acquire two gaming properties. This casino operator is new to Gaming and Leisure's portfolio and operates another 13 casinos. It wouldn't be surprising to see the REIT add even more properties, from this tenant and others, over the next three years.
Muddling through and growing
On some level, over the near term, Gaming and Leisure Properties will be working through the coronavirus economic downturn just like its tenants. As gaming rebounds, however, expect the REIT's dividend to switch back to fully cash. Also, look for the company to keep adding properties to its portfolio, using the gaming industry's troubles as an opportunity to increase the size of its portfolio. That's a move that would actually help casino operators deal with the headwinds today.
In fact, Gaming and Leisure is highly likely to exit the current rough patch in a stronger position than it entered it. In the meantime, investors can collect a 5.6% yield (paid partially in stock for the time being) while they wait for the coronavirus vaccine to take full effect. This probably isn't a great REIT for everyone, given its limited diversification, but for those willing to think long term (and own a "sin" stock), it's probably worth a deep dive.