Casino REITs Seen as Winning Real Estate Plays for Investors

Posted on: December 22, 2021, 12:06h. 

Last updated on: December 22, 2021, 12:48h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Casino real estate investment trusts (REITs) represent just a sliver of the expansive real estate sector. But some investors are bullish on gaming landlords.

Casino REIT Caesars Palace
Caesars Palace Las Vegas, owned by VICI Properties. Investors are bullish on casino REITs like VICI. (Image: Joe Buglewicz/Bloomberg)

Today, the universe of gaming REITs is comprised of just three companies — Gaming and Leisure Properties (NASDAQ:GLPI), MGM Growth Properties (NYSE:MGP), and VICI Properties. However, that list will be trimmed to two next year, when VICI completes its $17.2 billion all-stock acquisition of MGP.

While the casino REIT landscape is about to get smaller, the group offers investors compelling potential, particularly against the backdrop of rising inflation.

Despite their ultra-long term triple net lease structures, casino REITs provide excellent inflation hedging characteristics. VICI Properties, in particular, has one of the most inflation-hedged lease structures of any REIT,” said Hoya Capital Real Estate.

Companies such as GLPI, MGP, and VICI differ from traditional hotel REITs. That’s because the casino landlords own properties under long-term, triple-net lease agreements, whereby upkeep and maintenance are the obligations of tenants.

Casino REITs Interesting 2022 Ideas

Gaming REITs offer a compelling business model and strong dividend yields at a time when interest rates are at historic lows.

Amid low interest rates and high inflation, the casino landlords are all the more attractive. That’s because they’re showing propensity for consistent dividend increases and have pricing power. In many cases, rent escalators that either match or exceed the Consumer Price Index (CPI) are built into lease contracts with casino operators. That provides a buffer against inflation. Plus, the aforementioned trio are attractively valued relative to other REITs.

“We expect casino REITs — which are one of the newest REIT sectors, having emerged in the late 2010s — to eventually trade at multiples that are in-line or above their traditional net lease peers,” adds Hoya Capital.

The asset manager adds near-term catalysts for the group include improving balance sheets, which could lead to credit upgrades, increasing tenant diversification, more attention from sell-side analysts, and VICI eventually making its way to the S&P 500.

VICI: New King of Las Vegas

Prior to announcing the takeover of MGP, VICI owned Caesars Palace on the Las Vegas Strip. But by bringing MGP’s assets into the fold, it becomes the dominant landlord in the most desired stretch of gaming real estate in the US.

“VICI was able to acquire MGP at a roughly implied 5.7-6.0 percent cap rate, representing a 10-20 percent discount to its estimated Net Asset Value. The combination will also further diversify VICI’s tenant concentration and geographical scope, lowering its largest tenant exposure – Caesars Entertainment – from nearly 80 percent at the end of 2020 to just 41 percent,” notes Hoya.

By acquiring MGP, VICI becomes the owner of the property assets of the following Strip venues: Excalibur, Luxor, Mandalay Bay, MGM Grand, Mirage, New York New York, and Park MGM. Overall, the buyer adds the real estate of 15 gaming venues to its portfolio. That transaction is scheduled to close in the first half of 2022.