Games and Leisure, VICI Downgraded on Valuation Concerns
Two publicly traded casino owners, Gaming and Leisure Properties (NASDAQ: GLPI ) and VICI Properties (NYSE: VICI ), were downgraded due to stretched valuations and limited near-term acquisition opportunities.
In a note to clients on Wednesday, Deutsche Bank analyst Carlo Santarelli downgraded two gaming real estate investment trusts (REITs) to "hold" from "buy." He lowered his gaming and leisure price target to $52 from $60, while lowering his forecast for Caesars Palace owner VICI to $34 from $39. The shares closed at $48.15 and $31.33 today.
Importantly, our downgrade is not due to a change in our view of the business or cash flow stability, but rather due to the overall environment, its impact on M&A activity and deal growth, and our expectation that "Valuation multiples have expanded significantly in the short to medium term," Santarelli wrote.
Both REITs, especially VICI, use acquisitions to increase geographic and tenant diversity.
High interest rates can have serious consequences
The real estate sector is one of the sectors most negatively correlated with the Fed tightening interest rates. With interest rates high today, both Gaming and Leisure and VICI are feeling the pinch, as both companies have struggled under pressure since the start of the year.
There are also concerns that the central bank may raise interest rates more than expected in the second half of the year. This would apply if inflation remains high, employment figures are growing faster, or both. Higher borrowing costs mean higher funding costs for companies such as Games & Leisure and VICI. This may impact trading activity.
“Additionally, given refinancing activity in 2024 and 2025, we expect funds received from operations (AFFO) growth to continue to slow in the absence of M&A activity, which we note will result in lower growth in near-term deals, " Santarelli added.
AFFO is a key metric when evaluating REITs. Specifically, at GLPI and VICI, casino owners used smart acquisitions as a way to grow AFFO.
Games and Leisure, VICI Basics
While downgrading the stocks, Santarelli noted that fundamentals for both Gaming and Leisure and VICI remain solid and attractive relative to broader real estate stocks.
We continue to believe that gaming REIT complexes have many positive aspects compared to other REIT verticals, and we also believe in the stability of tenant cash flow as demonstrated during the COVID-19 pandemic The sex is almost unparalleled. ” Deutsche Bank analysts concluded.
While financing costs may be an issue, both REITs have expressed interest in further acquisitions. Particularly in the gaming and leisure sector, this property owner could reap significant financial benefits by building a Major League Baseball (MLB) stadium on the grounds of the Las Vegas Tropicana Hotel and Casino.
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Source: www.casino.org
