Deutsche Bank Downgrades Two Gaming REITs — Should You Gamble On Owning Them In Your Portfolio?

Many investors at one time or another have felt that sinking sensation in their stomachs as they scan their portfolios only to discover that one or more of their stocks has just been downgraded by a well-known analyst.

Sometimes the effect on the stock is just temporary and after an initial decline, it bounces back within a few days. But an analyst downgrade can also trigger other analysts to pile on with downgrades of their own, sending the unloved stock sinking by 10% or more. So, what's an investor to do?

This past week, a Deutsche Bank analyst downgraded two gaming real estate investment trusts (REITs), both of which have performed adequately in recent weeks. Are these downgrades justified? Take a look and decide for yourself.

VICI Properties Inc. VICI is a New York-based diversified REIT that specializes in owning and operating gaming, hospitality and entertainment properties. Its triple-net portfolio includes well-known Las Vegas hotels such as Caesars Palace, MGM Grand and the Venetian Hotel.

VICI Properties, formed as a REIT in 2017, was a spin-off from Caesars Entertainment Operating Co. as part of a Chapter 11 reorganization. The initial public offering (IPO) was held on Feb. 1, 2018. VICI Properties' portfolio consists of 49 gaming facilities with 60,100 hotel rooms and over 450 restaurants, bars, nightclubs and sports books.

One main reason that VICI Properties has been able to perform relatively well despite the rising interest rates of the past year is because over 40% of its leases have 2% to 3% annual lease escalators for inflation. Investors were not as concerned about rising inflation impacting VICI Properties as they were with some other REITs.

Over the past few months, several analysts have either initiated coverage on or reiterated Buy, Outperform or Market Outperform positions on VICI Properties. But on July 5, Deutsche Bank analyst Carlo Santarelli downgraded VICI Properties from Buy to Hold and lowered his price target by 12.8% from $39 to $34. 

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Gaming and Leisure Properties Inc. GLPI is like VICI Properties in that it's a specialized REIT that owns and triple-net leases 59 gaming properties across 18 states. Its tenants include Penn Entertainment Inc., Caesars Entertainment Inc., Boyd Gaming Corp. and others. It owns and operates over 14,700 hotel rooms and leases 31.1 million square feet of property. Gaming and Leisure Properties was formed in 2013 as the nation's first gaming REIT.

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Gaming and Leisure Properties has also received several Outperform and Market Outperform ratings over the past three months. But on July 5, Deutsche Bank analyst Santarelli downgraded Gaming and Leisure Properties from Buy to Hold and lowered the price target by 13.3% from $60 to $52.

Santarelli said that although he continues to view gaming REITs favorably in comparison to other REITs, a combination of current valuation, a more challenging merger and acquisition environment and increasing financing costs are likely to slow the growth of adjusted funds from operations (AFFO). 

"The valuation multiples are full and unlikely to expand much in the near to medium term," Santarelli said.

Neither stock sold off too badly from these downgrades. After initially declining about 3%, both VICI Properties and Gaming and Leisure Properties have rallied up close to their share prices prior to the downgrades.

Last year was good for both REITs. VICI Properties had a total return of 14.26%, and Gaming and Leisure Properties' total return was 13.49%. Both were in the top five of performance for all REITs last year and managed to avoid the heavy losses that other REITs encountered.

So far this year, VICI Properties has a total return of 1.76%. It pays a quarterly dividend of $0.39 and the annual $1.56 dividend yields 4.95%.

Year to date, Gaming and Leisure Properties has a total return of negative 2.25%. It pays a quarterly dividend of $0.72, and the annual $2.88 dividend yields 5.95%.

Santarelli has an overall success rate of 64.23%, which is above average, as many analysts are only correct about 50% of the time. He has had a favorable opinion of these gaming REITs for quite a while, so this marks a big change in his thinking.

Many on Wall Street are worried about higher interest rates ultimately leading the U.S. into recession. Neither of these REITs was in business during the last recession, but it's worth noting that from January 2007 to April 2009, Las Vegas Sands Corp. LVS had a total return of negative 95.93%.

Investors are urged to perform their own due diligence before making any trading decisions and not rely on the opinions of analysts alone.

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