Despite a recent wave of fresh issuance, debt issued by casino landlord Gaming & Leisure Properties (NASDAQ: GLPI) is attractive.

GimmeCredit analyst Kim Noland said in a recent note to clients that the real estate investment trust (REIT) has had a busy summer due to its involvement in a number of deals that both support long-term growth and necessitated the issuance of new bonds. A portion of the earnings will go toward covering maturing debt that is due the following month.

Along with financing $110 million for the Belle of Baton Rouge to land, GLPI announced in July that it will be lending $2.07 billion to Bally's (NYSE: BALY) to help the regional casino operator finish building its permanent gaming facility in Chicago, among other things.

"The provision of construction financing to tenants has become an important part of GLPI’s growth initiatives,” wrote Noland. “In addition to the July deal, it already agreed to provide Bally’s with construction financing for a sports stadium that complements Bally’s gaming resort in Las Vegas. While construction financing is somewhat riskier than the more usual propco/opco transactions of existing properties, the higher interest income is helping to expand GLPI’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).”

The two biggest tenants of GLPI are Penn Entertainment (NASDAQ: PENN) and Bally's, while the REIT also serves other casino operators.

Bally's Rent Might Support GLPI Bonds

GLPI announced that it is purchasing the real estate of Bally's Kansas City and Bally's Shreveport for a total of $395 million in addition to the Chicago funding. $32.2 million will be the total yearly rent for those properties, "representing an initial cash capitalization rate" of 8.2%.

This increases the landlord's rental income, and since most of those agreements have escalators that raise rent progressively over time, there will be more cash flow available to fund GLPI's debt servicing activities. Furthermore, the REIT was granted the right to pay $735 million for the real estate of Bally's Twin River casino in Lincoln, Rhode Island, by the end of 2026. That represents a drop from the $771 million purchase price that was previously discussed, and if the deal goes through, the REIT would earn an additional $58.8 million in rent per year.

Noland said that while financing to clients to improve venues currently owned by REITs is not the usual operating practice in triple-net leases, it does present GLPI and competitors with a fresh growth route.

“Second quarter financial results included consolidated total revenue of $381 million (+7%) and adjusted EBITDA was $340 million, a 4.6% increase from $325 million in the prior year period,” said the GimmeCredit analyst. “While annual interest expense has increased to near $350 million (on a pro forma basis), capex is modest since the leases require the tenants to maintain the properties.”

Rates and Cash Flow Could Strengthen GLPI Bonds
Interest rate fluctuations can have an impact on REITs, which includes GLPI, the owner of a casino. This explains why the group has underperformed over the last several years and why some investors think a September reduction in borrowing costs by the Federal Reserve would lead to a rally in real estate stocks.

GimmeCredit's Noland cited the REIT's robust competitive advantages and cash flow in rating GLPI debt expiring in 2027 and 2030 as "outperforming."

“The gaming REIT has good cash flow visibility; its business model benefits from high barriers to entry due to limited supply and a significant regulatory environment for gaming operator tenants,” she concluded. “While GLPI’s rental income is still weighted toward PENN (see recent PENN report dated August 21) newer tenants such as leading gaming companies Caesars, Boyd Gaming and Bally reduce the risk of individual tenant underperformance.”