|Shares Out. (in M):||115||P/E||0.0x||0.0x|
|Market Cap (in $M):||4,100||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||2,500||EBIT||0||405|
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Ticker: GLPI (Long)
Event Type: Transformational spin ---Liquidity provider to a capital-starved space (the only company in the industry that is able to leverage their cost of capital advantage to consolidate the gaming/hospitality space)
Risk / Reward: Down 2 Up 'a lot'
GLPI is the propco, which was spun-off from Penn National on November 4, 2013. GLPI is headed by Peter Carlino (owns ~10%) and CFO Bill Clifford both were previously CEO and CFO of Penn National. Fortress is also involved in GLPI. GLPI initially had PENN as a single tenant across 19 of 20 properties in the QRS with a goal of diversifying over time. The leases are triple net leases with PENN responsible for all expenses. GLPI has communicated that it will be aggressive, yet disciplined, in pursuing acquisitions. GLPI management team has been very active in acquisitions over the past 10 years at PENN. Every $50 million of rental EBITDA acquired by GLPI is approximately $3-$4 per share of value to GLPI (using current multiples and yield). The GLPI pitch is that it is the friendly bank vs. aggressive lenders and that GLPI can do up to $40-$50 mm in acquired EBITDA from acquisitions annually at approximately 10x EBITDA.
What the market thinks
What the market is missing / what is the misunderstanding?
GLPI management has discussed diversifying tenants through M&A. Per management, GLPI will pursue gaming targets at first and non-gaming acquisitions after some period. Further management has said they have received several reverse inquiries from gaming operators and are at various stages of discussions with several parties (and are clearly hiring for M&A - http://investors.glpropinc.com/releasedetail.cfm?ReleaseID=837131). We believe that GLPI’s M&A pipeline is fertile and have modeled 11% AFFO accretion (year-1) assuming $500mm of acquisitions at constant leverage (including Queens Casino - http://investors.glpropinc.com/releasedetail.cfm?ReleaseID=820932 ) at a 10x multiple paid on GLPI Rental Income.
Sample Acquisition Analysis
Casino Queen Acquisition Analysis – Completed January 2014
Note: January and February 2014 regional gaming revenues were down meaningfully as payroll taxes, gas prices, delays in tax refunds and worse weather weighed on consumer spend relative to 2012/2013.
GLPI Exposure to Variable Rent from Ohio:
Current Takeaway: GLPI’s exposure to PENN’s consumer and gaming competition in the near term is primarily in the Columbus and Toledo markets. These markets represent approximately 10% of total GLPI’s EBITDA from PENN. Further, 2014 is largely understood to be a low year for PENN EBITDA as 2013 EBITDA was $70 million higher and 2015 is projected to be $80 million higher as new expansion projects come online in late 2014.
Current Takeaway: GLPI’s single tenant exposure will be reduced as the Company makes acquisitions in the coming months/years. GLPI has communicated the desire to diversify its tenant base via acquisitions. Penn is currently in stable financial condition with rent coverage ratio north of 1.8x and debt/ebitda less than 4.5x.
In terms of other gaming companies looking to emulate GLPI structure, Pinnacle (PNK) and Boyd (BYD) have been mentioned as potential REIT candidates in the medium term. Both PNK and BYD have NOLs which likely won’t expire for several years (PNK- 2017/18 with over $500 million in NOLs) and BYD (2020/21- with over $1 billion in NOLs). Management of both PNK and BYD will not comment specifically on copying GLPI’s REIT model but have indicated a desire to exhaust NOLs in the short to medium term (BYD activist investors would like to see GLPI work with BYD management on a sale lease-back transaction to free up liquidity). Further, GLPI/PENN took nearly 2 years to successfully convert to a REIT. Our understanding from tax advisors is that should PNK or BYD choose to convert to a REIT it would likely take 12 months, and there have not been any pre-notifications or exploratory talks as there were with PENN.
While we have yet to see a significant deal by GLPI we believe that GLPI’s terms are likely to appeal to many owners of gaming real estate as a result of: 1) industry leverage which motivates owners to de-lever and pay maturities; 2) fragmented ownership of gaming assets with many non-strategic owners looking to monetize; 3) weakening general regional industry trends. GLPI in conference calls and management presentations has commented on the significant interest from operators on structuring acquisitions either via sale-and-leaseback transactions or partnering with a third-party operator to purchase an asset together. Further, industry contacts and recent news reports indicate GLPI has been bidding on several transactions including a deal with Foxwoods to fund 55% of its proposed $1B Massachusetts development (deal ultimately didn’t get voter approval) and a $150 million purchase of a Miami Jai-Lai facility (GLPI lost in bid similar to Casino Queen style transaction).
GLPI M&A Opportunity:
In addition, changes in taxes by states on the gaming industry, which vary widely by state is a risk that can directly affect the financial status of tenant’s profitability and competitive positioning.
Net/Net: We believe after various discussions with investors and counterparties that GLPI is on several REIT investors’ screens and is being actively researched. Upon execution of a deal GLPI will become more attractive to REIT investors both through the equity offering via increase in the float as well as the growth of the dividend.
Downside: 12.5x 2014E AFFO or 6% Dividend Yield = $33+ divi = $35 (~6% yield)
Base Case: ~15x 2015E AFFO (~$2.90 base AFFO + M&A = $3.3+-) and implied divi yield of 2.65 (80% payout) or 5.25% = $50 (with $50 million annual rental income from M&A, although 2014-15 they prob generate $150mm ex large scale transformational deal)
Upside Case: no reason to even discuss in detail - we can get to $7-$8bb equity value and could be a takeout candidate. At some point Peter will be ready to exit stage left like Sam Zell (my best guess is in early 2017)
Additional Levers not discussed
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