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Valuation: Casino stocks got clobbered by COVID-19. This one is now an attractive bet

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“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Warren Buffett, Fortune, 1999

Few business models are more reliable than a casino’s. People love to gamble, and because the house has a statistical advantage over its customers in every game it runs, the more people play, the more the casino makes. Factor in all the cash people spend on dining and entertainment inside those bright, windowless boxes and you’ll understand why casinos are inherently good businesses.

In normal times, that is.  

COVID-19 turned the world upside down, especially for businesses that depend on big crowds: theme parks, cruise ships, concert halls, and, of course, casinos. While most of these businesses remain severely depressed, casinos—especially the regional ones, where people drive from their homes for an afternoon or evening of gambling—are making a remarkable and unexpected comeback. Despite this, one casino stock—Gaming and Leisure Properties (ticker: GLPI)—has not fully recovered. That makes it a very good bet, indeed.

GLP is the creation of entrepreneur Peter Carlino, who nearly 50 years ago took over Penn National, a horse track near Hershey, Pa., and turned it into the nation’s largest regional casino business. Carlino’s father, who began modestly as a florist in Philadelphia, was a serial entrepreneur who sent his son to central Pennsylvania to oversee some of the family businesses, including the racetrack. In 1989, the family won the region’s new offtrack betting concession, and Carlino’s father tapped Peter to run it.  

With little else to entertain them, central Pennsylvanians flocked to the Carlinos’ OTB parlors. It quickly became the family’s top moneymaker, and Peter Carlino sensed he’d found his calling. “Taking bets on horses at the OTB window is much more profitable than the track itself,” he remembers thinking. “We’re on to something.”

Carlino took Penn National public in 1994, around the same time that many state legislatures, eager for more tax revenue, began to legalize casinos. Carlino wanted in on the action and began to buy ones around the country. In 2000, he bought another horse track, this one in Charles Town, W.Va., in hopes that he could pass a local referendum to legalize gambling. An earlier measure had lost by a 2-to-1 margin, but Carlino spent in a year in Charles Town, applying his considerable charm and energy to reversing the outcome. When the second vote was held, the margin was 2-to-1 for instead of 2-to-1 against.

Carlino decorated the new casino with flashing lights and named it the Hollywood. Drawn by the sparkle and pizzazz, West Virginians made the Hollywood a huge success. This generated enough cash to allow Carlino to build or acquire the top casinos in St. Louis, Kansas City, Baton Rouge, and Columbus, all of them infused with the same aspirational glitz as the one in West Virginia.  

Like a rock quarry or a cable television provider, regional casinos are inherently good businesses. Local economies can support only a few of them, and states often limit the number of licenses granted, restraining the number of competitors. Combined with Carlino’s knack for bringing flair to middle America, Penn National became an enormously successful company. From its IPO to 2013, Penn National compounded shareholders’ returns at 22.5% a year, three times the average rate of the S&P 500 over that period.  

A split, and a surprise

In 2013, Penn National split in two: One company owned the casino licenses and ran the operations, while the other owned the real estate and served as the operating company’s landlord. This same structure—one “asset-light” company and one “asset-heavy”—had worked well in the hotel industry. But it surprised many when Carlino decided to run the landlord—the company that became Gaming and Leisure Properties—instead of the operator. A glimpse at the underlying fundamentals, however, explains why.  

Unlike in the hotel industry, the casino operator must pay for all capital expenditures, either maintenance or expansions. The landlord pays nothing. Even better, Carlino structured the separation so that rent expense to the landlord had to be paid even before interest was paid to the banks. With little to do but sit back and collect the rent, this makes being a landlord to a portfolio of regional casinos a very good business indeed.  

While the company’s 46 properties had to shut down early in the pandemic, they have now all reopened, with impressive results: Revenues are down 10% compared with last year, but operating profits are up 20%. How can this be? In one of COVID’s many unintended consequences, casino activities that pose a high risk of spreading the virus—table games like blackjack and poker, and all-you-can-eat buffets—are also a casino’s least profitable but have had to be shut down. Slot machines, on the other hand, can be spread far apart, require little human interaction, and are thus safe to play. Happily for casinos, slots also happen to be among their highest-margin games. 

It wasn’t a surprise when COVID slammed the shares of Gaming and Leisure Properties, but given the above it’s curious that the stock remains down more than 10% year to date. I started buying GLPI for clients this spring, and I think it remains an attractive investment today in both the long- and short-term.

GLP’s attractive economics make it a good long-term hold, especially for those seeking income. As a real estate investment trust, or REIT, the company is required to pay most of its profits out as dividends. Short-term, there are several minor clouds overshadowing the stock that may soon lift, giving investors the potential for a relatively quick 30% upside.

When COVID first struck, GLP cut its dividend roughly 15%; it also elected to pay most of it in stock. This was not because GLP’s finances were shaky; indeed, GLP is the most regionally diversified among the three American casino REITs. Back then, it wasn’t clear how GLP’s tenants would survive the pandemic, and Carlino wanted to make sure that the company could meet its obligations. Nevertheless, cutting a dividend spooks REIT investors, so GLP has trailed its peers year to date.  

The other knock on the stock is the risk of so-called iGaming, or online casino play. Just as states legalized casinos a generation ago in search of new tax revenues, states are now in the process of legalizing both iGaming and online betting on sports. Some think that iGaming may drain customers from brick-and-mortar casinos just as e-commerce has siphoned off traditional retail foot traffic. Both the evidence and common sense, however, suggest otherwise. Online gaming has been legal in New Jersey, for example, since 2013, but Atlantic City casino revenues have risen in four of the past five years. That’s because even more than shopping, gambling is something people want to experience in person. There’s a reason Carlino built his company around those flashing lights. 

“People are social animals,” Carlino says. “Will they place a bet on a game on their couch? Sure. But will they also keep coming back to the casino? Of course.” 

GLP has said it will restore its dividend to all cash in early 2021. At its current $2.40 payout, GLP trades at a nearly 6.5% yield. This is a discount to where it historically trades relative to 10-year U.S. Treasury bonds. When the dividend resumes in cash, I believe the stock will trade at a yield of less than 5%, which means that the stock should appreciate roughly 30%, from its current $38 to around $50 a share. The company should also increase the dividend next year, providing further upside potential. 

Meanwhile, Carlino remains in central Pennsylvania, doing what he has always done: running the business, keeping his eye out for new real estate deals, and letting the stock price take care of itself. “I look at the stock price maybe once a month,” he says. “My philosophy has always been, put up the numbers; investors will figure it out.”

Adam Seessel is the portfolio manager at Gravity Capital Management LLC, a registered investment adviser. Certain of the securities mentioned in the article may be currently held, have been held, or may be held in the future in a portfolio managed by Gravity. The article represents the views and belief of the author and does not purport to be complete. The information in this article is as of the publication date, and the data and facts presented in the article may change.

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Lyron Foster is a Hawaii based African American Musician, Author, Actor, Blogger, Filmmaker, Philanthropist and Multinational Serial Tech Entrepreneur.

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China’s top leaders meet this week to plan for the next five years. Here’s what to expect

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Former Facebook employee’s new book exposes Big Tech’s dirty secrets

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Shortly after Mark Luckie left his job as a manager at Facebook in 2018, he revealed in a blog post an internal memo he sent to colleagues before he left. The topic? How Facebook fails its Black employees. Now, nearly two years later, he’s written a lightly fictionalized version of how Big Tech companies operate and the burden they put on some of their employees.

The novel, Valley Girls, tells the story through the lens of four main characters working in the communications department of tech firm, Elemynt, which Luckie said has elements of companies like Google, Uber, and Facebook. The story starts with optimism and gets progressively worse as the characters—all women—are put in increasingly compromising positions at work. Luckie said he wrote the book as fiction partly to protect his sources, many of whom had signed nondisclosure agreements with their employers.

“This is very much a part of tech people don’t see or hear about,” Luckie said in an interview. “When scandals arrive, they think of CEOs and executives. They rarely think about the people crafting the message around it.”

Luckie has worked for companies including Facebook, Reddit, and Twitter, in various roles that aid with influencer and media partnerships. During his time at the tech companies he said he watched young ambitious professionals, many of whom were women, join the communication teams only to face situations in which they might have to “hide” company information or “negotiate” their way out of it even if they ultimately disagreed with the company.

With two journalism degrees and professional experience at major media companies, Luckie wanted to write again following his exit from the tech industry. He still has lingering worries about how Big Tech companies operate and the very real-world consequences, like live-streamed shootings on their services and hate groups using their tools for coordinated attacks.

Luckie recognized his privilege as a man who now had the freedom to stand up for others, and that’s ultimately what led him to write his new book. “The thing I kept thinking about is if I have to endure a little trauma to relieve others of theirs then I’m all for it,” he said.

This Q&A has been edited for length and clarity.

Fortune: How many of the stories in this book are true?

Luckie: Everything in this book is either a mashup or direct reference to something that has happened in real life in tech companies, though not one in particular. Readers who are very familiar with tech are going to recognize where these references come from.

I talked to about 40 women. Some were small conversations, some were large. But it was to understand this world from a female perspective, everything from sexual harassment to what it’s like to have feminine products in the bathroom. The biggest question I asked them is, how accurate is this as a representation of what you go through?

The name you chose for the book has already received backlash. Why did you choose Valley Girls as the title?

“Valley Girls” is a reference to the valley girls of the ’80s who were these supposedly dumb, ditzy blondes who hung at the mall. Even before I wrote a word of the book, I was thinking about how the term references how women in tech are treated as not as intelligent as men.

Having a book about women that references “girls” in the title would be controversial, but it encapsulates the sense of the book, which is the challenges they face. I had to prepare myself mentally for the kind of blowback it would receive. But what I came to realize is the title is the least controversial part of the book.

Why did you choose to focus on the experience of women?

What’s most important is this book isn’t exclusively about women’s experiences. This is the lens through which the book is presented. It’s more about how different types of women and men and people from various races and sexual orientations and abilities intersect and the friction that that causes.

The reason why I wrote the memo [upon my departure from Facebook] is because every week people reached out saying, “I had this problem with managers and the work I do.” Most of those conversations were with women. So I incorporated those experiences in this. I know this book would’ve had another dimension if it was a book about women by a woman. But I hope this is a springboard for people of all genders to tell their stories.

What did you learn while writing this book?

The biggest lesson I learned is that I was not alone in the experiences I went through, and that there are many shared stories across various demographics. It was also understanding just how bad tech companies are from the inside. When you put all this info together in 150,000 words, the ethics are quite questionable from the employee level to the CEO level.

I’ve been in a lot of rooms and have been privy to conversations about user suppression, interactions with government officials, hiding company secrets, manipulation of employees, and internal discussions. I’ve kept secrets even from family and friends about what I witnessed. And I decided I’m more obligated to making society less dysfunctional than propping up tech companies.

What might people be most surprised to hear?

People will be surprised to hear a lot. The many amenities that tech employees are afforded from childcare to spa treatments to in-flight manicures. The vending machines with free tech—keyboards, mice, headphones, things that cost hundreds of dollars are there for the taking.

As the book goes on those amenities are used to get people to work as much as possible and quell employee protest. Because if a company is giving you everything you need, if there’s a wine bar around the corner and an arcade, how bad could it really be? But there’s everything from discussions about user verification to the effects of the exploitation of celebrity culture to sexual harassment and assault.

What do you hope this book does for people who read it?

This is about sharing the torch of knowledge, putting it into the hands of people, and letting them do what they want, whether it’s to stay on the platform or not. For government and civil organizations, it’s a guide to help them hold tech companies accountable. It’s a guide for reporters and journalists to better understand the inner workings of the companies.

This is going to be useful for people who are not familiar with tech to understand what’s going on inside these companies. That’s who I really wrote it for—the average individual.

What is the fix for these problems you explore at Big Tech companies?

The fix is when tech companies’ bottom line is affected by regulation or users leaving the platform. That’s when the change is really going to happen. Right now, they have no incentive to change.

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Dow futures fall 150 points after U.S. coronavirus cases surge to record

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