Wall Street Bets is a roundup of recent notes from analysts covering the gambling industry.
Bally’s/GLPI
Wall Street analysts scrutinized Bally’s July 12 announcement that Gaming and Leisure Properties (GLPI) had secured funding for its permanent Chicago casino.
In a note the same day of the announcement, Truist Securities analyst Barry Jonas wrote “With the acquisition of Bally’s Kansas City and Shreveport, and the multi-year financing in Chicago, GLPI shows it can continue to inorganically grow its adjusted funds from operations/share (as much as +3% of adding ~$2/share to the equity) while its call option for (Bally’s Twin River) Lincoln points to a visible pipeline (and could add ~1% to AFFO/share or ~$1/share to the stock). We recently cited GLPI’s under-levered balance sheet, and they should have some funding flexibility for these transactions – benefiting from an improving capital market environment (longer-dated GLPI debt now trading ~6%).
“While we could see initial concerns around credit quality in Chicago, management believes coverage would be healthy at 2.0-2.4x once Chicago ramps. Additionally, the Chicago lease has a net leverage covenant for Bally’s at 7.25x which could ultimately trigger a default. In a downside case where Bally’s has to exit Chicago, we believe there would be demand from other well-established operators to take over at comparable terms. However, if this GLPI owned, Bally’s operated Chicago structure succeeds, we could see this being a template for developments on the Tropicana Las Vegas site, in New York (assuming Bally’s wins the process) and/or other new developments.
Analyst David Katz of Jefferies also looked at the Bally’s/GLPI deal in a July 14 note. Noting that Bally’s will receive $2.07 billion from GLPI in financing and proceeds from sale leasebacks to begin the development of the Chicago permanent facility, Katz referred to a press release that stated the new property is expected to feature ~3,300 slot machines, 173 table games, a VIP gaming area and a 500 room, 34-story hotel tower on the 30 acre site formerly rented by Tribune Publishing.
“Under the agreement, GLPI will provide Bally’s with up to $940 million in construction funding at an 8.5% initial cash yield and intends to acquire the Chicago land for ~$250 million prior to property development. The rent coverage is expected to be within 2.0X to 2.4X upon stabilization, with Bally’s indicating annual rent starting at $20M per annum.
“Furthermore, the binding term sheet includes the sale leaseback of Bally’s Kansas City and Shreveport for $395 million with an initial cash rent of $32.2 million, representing a cap rate of 8.2%. Additionally, an amendment was made to GLPI’s right to call the Bally’s Twin River Lincoln property as the purchase price has been reduced to $735 million, vs. $771 million prior, representing an initial cash yield of 8.0%, up from 7.6%. The call option can be exercised starting in Oct 2026 and the initial cash rent on the property is expected to be $58.8 million.
“From GLPI’s perspective, the three announced transactions with Bally’s will total $1.585 billion at a blended 8.3% initial cash yield. We estimate the transactions will be accretive to GLPI’s 2024/25 adjusted funds from operations/share by $0.02/share and $0.16/share, respectively. We based our analysis on the assumptions that 1) no delays in deal closing or construction starting; 2) loan draw for the construction funding occurs evenly throughout 4Q24 to 4Q26.”
Wynn Resorts
Writing about Wynn Resorts in a July 15 statement, J.P. Morgan analyst Joseph Greff stated the firm is “lowering our lowering our Macau property level EBITDAR estimate to $300 million, down from our prior $313 million, on lower margins, though our GGR forecast goes up modestly and now assumes 13%-ish share of market-wide GGR of 56.4 billion MOP. We bump our 2Q24 LV Strip EBITDA estimate to $221 million, up from our prior $215 million estimate, factoring in relatively solid fundamentals in Las Vegas, particularly at the high-end.
“We maintain our Overweight rating and see an undemanding valuation (8.4x 2024E EV/EBITDA) that takes into account a ho-hum 2Q24 in Macau and macro risks, both domestically (consumer) and in China (geopolitical). Versus a quarter ago, we don’t view near-term buy-side expectations as particularly bullish (we’d characterize as negative to apathetic, driven by Wynn’s likely quarter/quarter Macau market share decline). We also see an underappreciated development growth pipeline in Wynn Al Marjan, which is not priced into the shares at current levels.”
Casino foot traffic
Jefferies’ David Katz also looked at foot traffic trends in June. In a July 14 note, Katz wrote that “The index level of national casino foot traffic in June was up 7.5% year-over-year. Additionally, compared with 2019, volume was 6% lower during the month, which is slightly better than May’s 5.9% gap vs. 2019. We expect trends to stabilize through 2024, as comparisons have been challenging through 2Q23 and 3Q23. The Street also remains on guard for the impact of macro trends on earnings levels, including higher costs for insurance, utilities, and labor, that have challenged markets unevenly.”
Looking at key markets, Katz added that foot traffic in Ohio and Pennsylvania was up 12.3% and 13%, respectively, year-over-year. In Atlantic City, June volumes were 6.1% lower than the 2019 levels and 7.5% higher year-over-year. Illinois is running at an approximately 2.7% gap vs. 2019 and saw a year-over-year increase of 19.9%. Our take is that the monthly performance reflects the ongoing normalization of traffic trends post-COVID, where volatility remains, as well as from competition in specific locations. It is important to note there was an extra weekend this month vs. last year.”
