While allowing that the first half of 2024 hasn’t been the best for casino-focused real estate investment trusts (REITs), Truist Securities analyst Barry Jonas saw cause for optimism. He laid out his case for REIT bullishness in an investor note published Wednesday.
Jonas blamed “an elevated and volatile [interest-] rate environment” for REIT underperformance in January through June. But he foresaw greater stability ahead.
Due to this, Jonas predicts an improving merger-and-acquisition climate, as well as even larger REITs. As an example of the latter, he cited the takeover talk swirling around Penn Entertainment, ever since Donerail Group founder Will Wyatt called for the company’s terrestrial assets to be sold.
The analyst liked both Vici Properties and comparably casino-centric Gaming & Leisure Properties. He cited the latter’s balance sheet and smaller size — “less to move the needle.” As for Vici, he lauded it as “well positioned for the next wave of large scale, non-gaming, and/or [international] transactions.”
Jonas continued by remarking that, despite a tepid stock-price environment, neither REIT had stood still this year, “demonstrating execution ability despite the lingering interest-rate uncertainty.” As one example, he cited GLPI’s acquisition of three rural casinos for $105 million, “indicative of smaller deals that are still getting done despite the lack of rate cuts so far this year.”
As for Vici, its investment of $1 billion in upgrades at the Venetian and Palazzo in Las Vegas was seen as praiseworthy. The same held true for both firms’ provision of construction loans elsewhere, viewed as potentially priming the pump for future merger activity.
Jonas demonstrated that while the S&P 500 has marched upward over the course of the past six months, both REITs’ stock prices had trended inexorably lower. But he added, “We do think the rate environment is starting to improve and our discussions with market participants suggest the deal outlook is also starting to improve.”
Saying he was skeptical of Penn-related takeover talk, Jonas pointed out that GLPI has blocking powers at its disposal, should it not approve of the deal. “For example, GLPI’s master lease with PENN has change-of-control provisions that set various conditions for an acquirer and could require GLPI’s approval for any divestitures/lease modifications.” Although rumored buyer Boyd Gaming already has relationships with GLPI, Jonas didn’t comment on that angle.
Jonas tweaked his GLPI estimates to account for $111 million in construction financing for a new iteration of the Belle of Baton Rouge casino in Louisiana. He maintained a Buy rating on the stock at a price target of $59 per share. The stock was trading at $44 at the time.
Turning to Vici, Jonas also stood by his Buy rating and price target of $40 per share. The stock traded at $28.50 a share at the time.
