Posted on: February 15, 2021, 12:12h.
Last updated on: February 15, 2021, 12:12h.
Last year, the real estate sector languished as hotel and office real estate investment trusts (REITs) were punished at the hands of the coronavirus pandemic. Surprisingly, gaming landlords proved sturdy despite multi-month casino closures.
MGM Grand Las Vegas. An asset manager is bullish on owner MGP and other gaming REITs. (Image: Bloomberg)The three publicly traded casino REITs — Gaming & Leisure Properties (NASDAQ:GLPI), MGM Growth Properties (NYSE:MGP) and VICI Properties (NYSE:VICI) — offer a compelling business model and strong dividend yields at a time when interest rates are at historic lows.Unlike hotel REITs, casino REITs typically own properties under a long-term, triple-net master lease structure, leaving most of the financial and operational risk to their tenants — the casino operators,” according to Hoya Capital research. “Owing to this lease structure, rent collection and occupancy rates have remained essentially spotless throughout the pandemic.”Owing to capital markets being open to gaming companies during the darkest days of the pandemic, GLPI, MGP and VICI encountered little difficulty in collecting rent. There were occasions when the real estate companies — thanks to their own sturdy positions — worked with clients on financing, but no foreclosures arrived.With Casino REITs Selectivity MattersWhile GLPI, MGP and VICI operate in the same realm, the companies are not carbon copies of each other. Pennsylvania-based GLPI prefers to maintain a portfolio comprised largely of regional casinos. To that end, it’s looking to unload one of its few Nevada properties — the Tropicana Las Vegas.Conversely, the bulk of MGP’s revenue is derived from the Strip. There, it either completely controls or partially owns the real estate assets of all of MGM Resorts International’s venues except the Bellagio. For its part, VICI depends on Sin City for less than a third of rental income although it owns the property of Caesars Palace.“Selectivity is critical, and we prefer the ‘destination’ casinos and tenant operators with a solid foothold into the online gaming ecosystem,” said Hoya Capital.While the firm views online gaming and sports betting as a potential long-term headwinds for land-based casinos, it sees near- to medium-term benefits because those iGaming and sports wagering will support profitability and tenants’ ability to pay rent.The REITs’ major clients — Caesars Entertainment, MGM and Penn National Gaming — are among the major players in both internet casinos and mobile sports betting.Tradition of Out-PerformanceIn financial markets, history doesn’t always repeat, but it often rhymes. That’s relevant for the likes of GLPI, MGM Growth and VICI because their performances are often correlated and the trio has a history of beating broader REIT benchmarks.“Through the end of 2020, Casino REITs have outperformed the broader REIT index in four of the past five years,” said Hoya Capital. “Since the start of 2015, the casino REIT sector as a whole has produced an annualized total return of 14.5 percent, outperforming the 6.5 percent annualized total return on the Equity REIT Index.”Even with that, GLPI, MGP and VICI are more attractively valued than the broader real estate sector. The casino REITs trade at 13.7x funds from operations (FFO), well below the ratio of 21.1x for the average REIT.