Pinnacle: A World-class Casino Site For Indian Players – Play on: Within the Hoya Capital Casino REIT Index, we track three casino REITs and their respective casino operator tenants: VICI Properties ( NYSE:VICI ) — which was spun off by Caesars Entertainment ( CZR ) in 2017, Gaming and Leisure Properties ( NASDAQ:GLPI ) — which was spun off by Penn National Gaming ( PENN ) in 2013, and MGM Growth Properties ( MGP ) — which was spun off by MGM Resorts ( MGM ) in 2016. Together, these casino REITs represent nearly $40 billion in market capitalization and owns nearly 100 casinos and recreational facilities across the United States.
A new king of Vegas? VICI took the throne as the new king of the Strip after its blockbuster $17 billion purchase of fellow REIT MGM Growth, which merged to form one of the world’s largest real estate owners with an enterprise value of nearly $50 billion. One of several REITs announced last quarter, MGP shareholders will receive 1,366 shares of newly issued VICI stock — a 15.9% premium to MGP’s Aug. 3 closing price. VICI expects the deal to be immediately accretive to AFFO per share, while announcing a 9.1% increase in its quarterly dividend to $1.44.
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MGP was initially spun off in 2016 by MGM Resorts and now owns a portfolio of 15 primarily “destination” casinos with revenue streams that include a relatively more diverse mix that includes lodging, hospitality and event revenues. VICI was formed in 2018 as part of the bankruptcy restructuring of Caesars Entertainment and owns a portfolio of 28 regional and destination casinos. GLPI — the first casino REIT — went public in 2013 as a spinoff from Penn National and now owns a portfolio of 52 mostly regional casinos that rely more heavily on gaming revenue than its peers.
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The mega-merger, which is expected to close later this year, will give the combined company a superior competitive position in the important Las Vegas market and appears to be a win-win for VICI and MGP shareholders. We’ve noted in previous reports how MGP has been trading at a persistent relative discount, in part due to their exposure to one tenant – MGM Resorts – under a single master lease. As a result, VICI was able to purchase MGP at approx. 6.0% cap rate, which is equivalent to a 10-20% discount on the appraised value of the property. VICI’s management team will continue to run the company and expects “minimal need to increase G&A.” The combined company will have 43 properties in 15 states and 56,000 hotel rooms, including 3 of the 5 largest hotels in the country.
The combination will also diversify VICI’s tenant concentration and geographic reach, reducing its largest tenant exposure – Caesars Entertainment – from nearly 80% at the end of 2020 to just 41% following the closing of the MGP deal and the previous acquisition at the $4 billion The Venetian. This year. In addition to the aforementioned operators, other major casino operators include Las Vegas Sands ( LVS ), Wynn Resorts ( WYNN ), Churchill Downs ( CHDN ), Boyd Gaming ( BYD ), Bally’s Corporation ( BALY ), and Century Casinos ( CNTY ). Over time, we believe this diversification and scale will lead to more favorable lease terms and warrant valuations in line with or above those of other large net lease REITs – Property Income (O), W.P. Carey (WPC) – trading at 20-30% FFO/share price.
Casino REITs were recommended when the epidemic began early amid a stifling economic shutdown that forced the majority of real estate across the country to temporarily close. Casino REITs fell by approx. 60% between late February and early March 2020 on fears that their tenants were in serious financial trouble, but recovered in dramatic fashion in the second half of 2020 and ended the year as one of the REIT sector’s best performers. The momentum continued through the first eight months of 2021, as the casino REIT added another 23.4% this year, outperforming the S&P 500 ETF ( SPY ) but trailing only the Vanguard Real Estate ETF ( VNQ ).
These valuation discounts have persisted for casino REITs since the sector’s emergence in the mid-2010s, despite their strong historical returns and consistent performance during the pandemic, which came despite significantly reduced use of casino facilities. Critically, unlike their hotel REIT peers, casino REITs use ultra-long-term (15-50 years) triple net master lease structures, leaving most of the financial and operational risk—both upside and downside—with their tenants. As discussed in our review of REIT earnings, once again led by VICI, these REITs posted a second quarter of flawless rental collections and average AFFO growth of nearly 16% in the second quarter compared to last year. VICI reiterated its FFO guidance, which calls for another 12.5% growth in 2021 at the mid-range.
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Like the net leases of their retail-oriented REIT peers, external growth through acquisitions is the modus operandi of the casino REIT sector and should continue to provide a steady source of FFO growth for the foreseeable future given these REITs’ favorable cost of capital and the unique competitiveness. location. Prior to the VICI and MGP merger, the three casino REITs had acquired approximately $30 billion in assets since the beginning of 2016, including VICI’s purchase of the Venetian real estate property from Las Vegas Sands for $4 billion in cash — the largest REIT participant . deal after GLPI acquired the Pinnacle real estate portfolio in 2016. Upon closing later this year, the deal will add 20% to VICI’s annual rent and is expected to be immediately accretive to AFFO per share.
If they thrive in a “longer” environment, investors should note that the “bond-like” rental structure of REITs carries increased exposure to inflation and interest rates, as rents reset much less frequently than other REIT sectors. VICI is the only casino REIT that uses an explicit CPI bond in its master lease with Caesars. GLPI’s master lease with PENN has no explicit rate guarantee, but has a higher percentage rent component—4% of the facility’s net income under the master lease—that has implicit inflation protection. MGP’s master lease with MGM Resorts is not index-linked and has a smaller percentage rent component.
While Las Vegas has fared relatively better among domestic tourism destinations during the pandemic, casino REITs are not immune to the lingering effects of the COVID outbreak. Recent data on high-frequency activity — including TSA checkpoint data, open table reservation data, Apple mobility data and the Dallas Federal Reserve Bank’s Mobility Index suggest economic reopenings have stalled — and even reversed. in some areas – in the conditions of the “fourth wave” of the pandemic. In early August – before the recent re-acceleration of COVID-19 – casino operators reported very high occupancy in the second quarter. Caesars reported 89% occupancy in the second quarter with weekend occupancy of 99% and midweek occupancy of 85% and reported signs of improvement in group booking trends.
With an average dividend yield above 5%, we see casino REITs as an attractive – and perhaps “under the radar” – alternative to other seemingly “cheap” sectors facing stronger secular headwinds. Like their net lease peers, casino REITs are some of the most operationally efficient real estate sectors, leaving most of the financial risk and capital expenditures to their tenants. As noted, while these features are obvious positives in times of low growth and low inflation, they can become potential risks if recent inflation is not temporary.
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By combining some of the better features of each of the net rental, hotel, and healthcare REIT sectors, casino REITs have emerged much like many lodging REITs as “spinoffs” designed to separate the capital-intensive real estate business from the operational-intensive business. . real estate management. Casino REITs now own 95 of the approx. 250-300 commercial “investment grade” casinos in the United States, one of the greatest advantages of REIT ownership in any real estate sector. Together, these three REITs have a combined market capitalization of nearly $45 billion and comprise approximately 2% of the broad “Core” REIT ETFs.
Headquartered in Las Vegas, gambling is one of the most regulated industries in the United States. By the 1980s, casinos were banned outside The Strip, leaving the lucrative gaming business to Native American tribes, which were largely exempt from state bans. Over the past forty years, there has been a wave of commercial casino legalization as states increasingly realized the “tax gold mine” they were sitting on. Tax revenues from gambling represent, for example
Of state tax revenue collected by Pennsylvania. Twenty-five states currently allow commercial casinos, and these three REITs own properties in nineteen of those states.
One pandemic trend with uncertain impact is the rise of online gambling, facilitated by a 2018 Supreme Court ruling that legalized sports betting. Nearly two dozen states now allow – or have recently approved – some form of online gambling. We see online gaming as a long-term headwind to brick-and-mortar casino demand, but should be a mid-term benefit as several of these REITs’ key tenants have developed strong footholds in the online gaming ecosystem, which should help support profitability and rentals. – pay
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