There are a lot of uncertainties about the gaming environment today from a stock investor’s perspective, but one thing seems fairly sure—consolidation will continue.
The latest announced deal, in which Penn National continues to expand its empire, followed a now familiar pattern—a REIT buys the real estate, a casino company buys the operating rights, and the seller gets a valuation significantly higher than the historic norm of seven to eight times EBITDA. In this case, Greektown is fetching 10.3 times EBITDA for owner Dan Gilbert’s JACK Entertainment.
Here are some thoughts about this transaction:
- VICI Properties and Penn National are stepping out of their long associations. It is their second deal together, with the pending purchase of Margaritaville in Bossier City, Louisiana, being the first.
VICI is a spin-off from Caesars. Penn spun off its own REIT several years ago in Gaming & Leisure Properties. Thus, VICI is broadening its tenant base beyond Caesars and Penn is doing deals beyond Gaming & Leisure.
Diversification is good for all companies involved.
- Penn National has become a regional casino powerhouse. Penn now has more than 40 properties that will generate more than $1.5 billion in EBITDAR on $5 billion-plus in revenues. It’s stock market value of around $2.5 billion is just slightly smaller than Boyd Gaming and Red Rock Resorts.
That puts Penn, Boyd and Red Rock Resorts at the top of regional gaming heap, though all still much smaller than the Big Four casino companies—Las Vegas Sands, Wynn, MGM and Caesars.
And more acquisitions can be expected.
- Size matters, of course, but profitability is the name of the game, and in that regard, Penn appears equally outstanding.
Joe Greff of JP Morgan, for example, has added Penn to his firm’s Analyst Focus List.
In his analysis, Greff expects Penn to grow post-rent EBITDA 42.5 percent by 2020 to $824 million and EBITDAR 21 percent to $1.645 billion. That is a valuation of 4.5 times 2020. He also sees debt-to-EBITDA at 5.5 times next year. Those valuations, Greff says, are silly.
Further, Penn has a free cash flow yield of 18 percent, Greff calculates.
He values Penn at $35 a share, which would be a 65 percent gain from the current stock price.
- Cash is still king. In a world of rising interest rates and concern over how long the economic boom can last, Penn is paying for Greektown operations with cash on hand, meaning that any additional cash flow from the purchase actually reduces debt-to-EBITDA ratios. Greff calculates the additional free cash flow at 19 cents a share, up 7 percent from his pre-deal forecast of $2.78 a share.
Penn’s net debt-to-EBITDA ratio now is just 2.3 times in a world where casino companies seem to be comfortable at four to 4.5 times.
Worthy of note is that VICI will pay its $700 million share from a stock sale as it remains prudent about debt, too.
- What’s true for Penn should be true for its peers. Casino stocks have been slammed in recent months, whether it’s mighty Las Vegas Sands, down 35 percent from its peak on fears of Macau growth slowing as the Chinese economy slows, or whether its Golden Entertainment down 55 percent over Las Vegas’ third quarter hiccup and a slowing Nevada slot route business.
Yet, at least for regional operators like Penn and Golden, the fact is that Greektown sold for 10.3 times EBITDA, and that should support stock prices far beyond their current levels.
