Casino REITs Draw Praise From Real Estate Investors
Posted: December 22, 2021 at 12:06 pm
Last updated: December 22, 2021, 12:06 p.m.
Casino Real Estate Investment Trusts (REITs) represent only a fraction of the expansive real estate sector, but some investors are optimistic about gaming landlords.
Caesars Palace Las Vegas, owned by VICI Properties. Investors are optimistic about casino REITs like VICI. (Image: Joe Buglewicz / Bloomberg)
Today, the gaming REIT universe is made up of just three companies – Gaming and Leisure Properties (NASDAQ: GLPI), MGM Growth Properties (NYSE: MGP), and VICI Properties. However, that list will be shortened to two next year when VICI completes its entire MGP stock acquisition, valued at $ 17.2 billion.
While the casino REIT landscape is about to shrink, the group offers compelling potential for investors, especially against a backdrop of rising inflation.
Despite their ultra-long triple net leasing structures, casino REITs offer excellent inflation protection properties. VICI Properties in particular has one of the most inflation-protected rental structures of all REITs, ”says Hoya Capital Real Estate.
Companies such as GLPI, MGP and VICI differ from traditional hotel REITs in that the casino landlords own real estate under long-term triple-net leases, in which maintenance and servicing are the responsibility of the 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.
In the midst of low interest rates and high inflation, casino landlords are all the more attractive because they tend to steadily increase dividends and have pricing power. In many cases, rental increases that either match or exceed the consumer price index (CPI) are built into leases with casino operators to provide an inflation buffer. In addition, the aforementioned trio is attractively valued compared to other REITs.
“We expect casino REITs – one of the newest REIT sectors to emerge in the late 2010s – will eventually trade at multiples that are inline or above their traditional net leases,” added Hoya Capital.
The asset manager adds short-term catalysts to the group, including improved balance sheets that could lead to loan appreciations, greater tenant diversification, more exposure from sell-side analysts and VICI that will eventually find its way into the S&P 500.
VICI: New King of Las Vegas
Prior to announcing the acquisition of MGP, VICI owned Caesars Palace on the Las Vegas Strip, but the incorporation of MGP’s assets will make it the dominant landlord in the most desirable line of gaming properties in the United States.
“VICI was able to acquire MGP at an approximate implied cap rate of 5.7 to 6.0 percent, which is a 10 to 20 percent discount on the estimated net asset value. The merger will also further diversify the tenant concentration and geographic reach of VICI and reduce the largest tenant engagement – Caesars Entertainment – from almost 80 percent at the end of 2020 to just 41 percent, “said Hoya.
With the acquisition of MGP, VICI will own real estate assets in the following Strip locations: Excalibur, Luxor, Mandalay Bay, MGM Grand, Mirage, New York New York and Park MGM. In total, the buyer is expanding his portfolio to include properties from 15 venues. The transaction is expected to close in the first half of 2022.