“The important thing to investing shouldn’t be assessing how a lot an trade goes to have an effect on society, or how a lot it can develop, however slightly figuring out the aggressive benefit of any given firm and, above all, the sturdiness of that benefit.”
—Warren Buffett, Fortune, 1999
Few enterprise fashions are extra dependable than a on line casino’s. Folks like to gamble, and since the home has a statistical benefit over its clients in each sport it runs, the extra individuals play, the extra the on line casino makes. Think about all of the money individuals spend on eating and leisure inside these vivid, windowless packing containers and also you’ll perceive why casinos are inherently good companies.
In regular occasions, that’s.
COVID-19 turned the world upside down, particularly for companies that depend upon huge crowds: theme parks, cruise ships, live performance halls, and, after all, casinos. Whereas most of those companies stay severely depressed, casinos—particularly the regional ones, the place individuals drive from their properties for a day or night of playing—are making a exceptional and sudden comeback. Regardless of this, one on line casino inventory—Gaming and Leisure Properties (ticker: GLPI)—has not totally recovered. That makes it an excellent wager, certainly.
GLP is the creation of entrepreneur Peter Carlino, who almost 50 years in the past took over Penn Nationwide, a horse monitor close to Hershey, Pa., and turned it into the nation’s largest regional on line casino enterprise. Carlino’s father, who started modestly as a florist in Philadelphia, was a serial entrepreneur who despatched his son to central Pennsylvania to supervise among the household companies, together with the racetrack. In 1989, the household gained the area’s new offtrack betting concession, and Carlino’s father tapped Peter to run it.
With little else to entertain them, central Pennsylvanians flocked to the Carlinos’ OTB parlors. It rapidly turned the household’s high moneymaker, and Peter Carlino sensed he’d discovered his calling. “Taking bets on horses on the OTB window is way more worthwhile than the monitor itself,” he remembers pondering. “We’re on to one thing.”
Carlino took Penn Nationwide public in 1994, across the similar time that many state legislatures, longing for extra tax income, started to legalize casinos. Carlino wished in on the motion and commenced to purchase ones across the nation. In 2000, he purchased one other horse monitor, this one in Charles City, W.Va., in hopes that he may move a neighborhood referendum to legalize playing. An earlier measure had misplaced by a 2-to-1 margin, however Carlino spent in a yr in Charles City, making use of his appreciable attraction and power to reversing the end result. When the second vote was held, the margin was 2-to-1 for as an alternative of 2-to-1 in opposition to.
Carlino adorned the brand new on line casino with flashing lights and named it the Hollywood. Drawn by the glint and pizzazz, West Virginians made the Hollywood an enormous success. This generated sufficient money to permit Carlino to construct or purchase the highest casinos in St. Louis, Kansas Metropolis, Baton Rouge, and Columbus, all of them infused with the identical aspirational glitz because the one in West Virginia.
Like a rock quarry or a cable tv supplier, regional casinos are inherently good businesses. Native economies can help just a few of them, and states usually restrict the variety of licenses granted, restraining the variety of rivals. Mixed with Carlino’s knack for bringing aptitude to center America, Penn Nationwide turned an enormously profitable firm. From its IPO to 2013, Penn Nationwide compounded shareholders’ returns at 22.5% a yr, 3 times the typical price of the S&P 500 over that interval.
A break up, and a shock
In 2013, Penn National split in two: One firm owned the on line casino licenses and ran the operations, whereas the opposite owned the actual property and served because the working firm’s landlord. This similar construction—one “asset-light” firm and one “asset-heavy”—had labored properly within the lodge trade. Nevertheless it stunned many when Carlino determined to run the owner—the corporate that turned Gaming and Leisure Properties—as an alternative of the operator. A glimpse on the underlying fundamentals, nonetheless, explains why.
Not like within the lodge trade, the on line casino operator should pay for all capital expenditures, both upkeep or expansions. The owner pays nothing. Even higher, Carlino structured the separation in order that lease expense to the owner needed to be paid even earlier than curiosity was paid to the banks. With little to do however sit again and accumulate the lease, this makes being a landlord to a portfolio of regional casinos an excellent enterprise certainly.
Whereas the corporate’s 46 properties needed to shut down early within the pandemic, they’ve now all reopened, with spectacular outcomes: Revenues are down 10% in contrast with final yr, however working earnings are up 20%. How can this be? In certainly one of COVID’s many unintended penalties, on line casino actions that pose a excessive threat of spreading the virus—table games like blackjack and poker, and all-you-can-eat buffets—are additionally a on line casino’s least worthwhile however have needed to be shut down. Slot machines, however, might be unfold far aside, require little human interplay, and are thus protected to play. Fortunately for casinos, slots additionally occur to be amongst their highest-margin video games.
It wasn’t a shock when COVID slammed the shares of Gaming and Leisure Properties, however given the above it’s curious that the inventory stays down greater than 10% yr up to now. I began shopping for GLPI for purchasers this spring, and I believe it stays a horny funding right this moment in each the long- and short-term.
GLP’s enticing economics make it an excellent long-term maintain, particularly for these looking for earnings. As an actual property funding belief, or REIT, the corporate is required to pay most of its earnings out as dividends. Quick-term, there are a number of minor clouds overshadowing the inventory which will quickly raise, giving traders the potential for a comparatively fast 30% upside.
When COVID first struck, GLP reduce its dividend roughly 15%; it additionally elected to pay most of it in inventory. This was not as a result of GLP’s funds had been shaky; certainly, GLP is essentially the most regionally diversified among the many three American on line casino REITs. Again then, it wasn’t clear how GLP’s tenants would survive the pandemic, and Carlino wished to make it possible for the corporate may meet its obligations. Nonetheless, slicing a dividend spooks REIT traders, so GLP has trailed its friends yr up to now.
The opposite knock on the inventory is the chance of so-called iGaming, or on-line on line casino play. Simply as states legalized casinos a era in the past looking for new tax revenues, states are actually within the strategy of legalizing each iGaming and on-line betting on sports activities. Some assume that iGaming might drain clients from brick-and-mortar casinos simply as e-commerce has siphoned off conventional retail foot visitors. Each the proof and customary sense, nonetheless, counsel in any other case. On-line gaming has been authorized in New Jersey, for instance, since 2013, however Atlantic Metropolis on line casino revenues have risen in 4 of the previous 5 years. That’s as a result of much more than procuring, playing is one thing individuals need to expertise in particular person. There’s a purpose Carlino constructed his firm round these flashing lights.
“Individuals are social animals,” Carlino says. “Will they place a wager on a sport on their sofa? Certain. However will in addition they preserve coming again to the on line casino? In fact.”
GLP has stated it can restore its dividend to all money in early 2021. At its present $2.40 payout, GLP trades at an almost 6.5% yield. This can be a low cost to the place it traditionally trades relative to 10-year U.S. Treasury bonds. When the dividend resumes in money, I imagine the inventory will commerce at a yield of lower than 5%, which signifies that the inventory ought to admire roughly 30%, from its present $38 to round $50 a share. The corporate must also enhance the dividend subsequent yr, offering additional upside potential.
In the meantime, Carlino stays in central Pennsylvania, doing what he has at all times finished: operating the enterprise, conserving his eye out for brand spanking new actual property offers, and letting the inventory value deal with itself. “I take a look at the inventory value possibly as soon as a month,” he says. “My philosophy has at all times been, put up the numbers; traders will determine it out.”
Adam Seessel is the portfolio supervisor at Gravity Capital Administration LLC, a registered funding adviser. Sure of the securities talked about within the article could also be presently held, have been held, or could also be held sooner or later in a portfolio managed by Gravity. The article represents the views and perception of the creator and doesn’t purport to be full. The data on this article is as of the publication date, and the information and info offered within the article might change.
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