Casino landlord Gaming and Leisure Properties (NASDAQ: GLPI) traded slightly higher Wednesday after an analyst upgraded the stock.
In a new report to clients, Deutsche Bank analyst Carlo Santarelli upgraded the real estate investment trust (REIT) to “buy” from “hold” while boosting his price target to $54 from $49, implying upside of about 7% from the Tuesday close. Santarelli said a more favorable interest rate climate and investors opting for lower-risk gaming equities are among the reasons GLPI shares could rise.
Given the heightened sensitivity around interest rates, GLPI shares have been an underperformer in 2024, up just 1% in the year-to-date (SPX +24% / RMZ Index +11%) and down 3% in the quarter-to-date (SPX +2% / RMZ Index -2%). In short, we believe the choppy domestic gaming environment lends to investors seeking exposure through more risk averse avenues, within which we believe GLPI firmly falls,” wrote the analyst.
Due to its capital-intensive nature, real estate is one of the sectors most negatively correlated to interest rates, indicating that looser monetary policy from the Federal Reserve could be a catalyst for shares of GLPI and rival VICI Properties (NYSE: VICI).
Speaking of Interest Rates …
In September, the Fed lowered rates for the first time in four years, trimming its benchmark lending rate by 50 basis points. That was followed by another cut of 25 basis points earlier this month.
Shares of GLPI traded slightly higher over the past 90 days, indicating some positive response to the rate cuts. Heading into 2025, the casino REIT could potentially lure new investors because if inflation shows continued signs of ebbing, the Fed is expected to lower rates multiple times in the first half of the year.
GLPI offers other benefits as well, including a strong balance sheet and a dividend yield of nearly 6%, well in excess of what investors find on low-risk government debt or most gaming equities for that matter.
Analysts have also lauded the REIT for its geographic and tenant diversification. GLPI has scant Las Vegas exposure and its client roster is deep. Conversely, rival VICI depends on Caesars Entertainment and MGM Resorts International for 74% of its cash rent and is the biggest owner of casino real estate on the Las Vegas Strip.
GLPI a Value Play
Gaming and Leisure’s attractive product portfolio and compelling valuation are among the other reasons behind Santarelli’s upgrade.
We see the following as the drivers of upside in shares; 1) a healthy pipeline post an active 2024, despite an uncooperative rate environment, 2) a well-positioned balance sheet, complemented with access to equity capital, and limited potential near-term refinancing headwinds, 3) healthy tenant coverage positions, and 4) favorable relative valuation metrics,” observed Santarelli.
That product pipeline includes ownership of the real estate tied to Bally’s permanent Chicago casino and exposure to a Major League Baseball stadium in Las Vegas, as well as a yet-to-be formalized Bally’s casino hotel on that property.
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