Gaming real estate investment trusts have performed well during the coronavirus pandemic, a reflection of their triple-net lease structures, ability to expand margins by cutting costs and pent-up consumer demand.
The U.S. gaming sector was hit hard in the first two quarters of 2020 but made a relatively swift recovery, outperforming the Dow Jones Equity All REIT Index by the end of that year and throughout most of 2021.
Analysts said the sector is well-positioned for more growth, as the pandemic-weary public continues to flock back to Las Vegas and regional casino facilities. The ongoing legalization of sports betting and expansion of online gaming should also help casino operators collect more income, fortifying their ability to pay rent to their landlords.
"Gaming REITs are sitting very favorably at this point in the pandemic and maybe better than other sectors," SMBC Nikko Securities America Inc. Research Division analyst Jay Kornreich said.
The three U.S. public gaming REITs — VICI Properties Inc., MGM Growth Properties LLC and Gaming & Leisure Properties Inc. — have existed for less than a decade. Each REIT was spun out of major casino owners between 2013 and 2017, separating the physical real estate from the operations.
Gaming REITs specialize in triple-net leases, where tenants are responsible for paying property taxes, insurance and maintenance costs, in addition to base rent.
The resiliency of gaming REITs remained untested until the pandemic, when the sector showed that it could withstand economic disruption. Unlike other types of businesses, casino operators typically have access to large amounts of cash. Despite being closed or at low occupancy, most gaming tenants were still able to make their triple-net lease payments.
Casino tenants also used the pandemic to create margin expansion by reducing labor and marketing costs and becoming more efficient overall, according to Jefferies LLC Research Division analyst David Katz. When casinos began to reopen in June 2020, some businesses saw "especially high" margins, Katz said.
Those margins are expected to eventually normalize, but the expectation is that operators will retain better margins than they had pre-pandemic.
"They hope to come through this with a more efficient business model and better margins. And that's true, not just for regional [casinos], but across the casino industry," Katz said.
Changing growth stories
Vici Properties announced plans in August 2021 to acquire MGP for $17.2 billion, and the transaction is expected to close in the first half of 2022.
The transaction will make Vici the largest owner of gaming real estate assets on the Las Vegas strip, with significant holdings elsewhere in the U.S. The firm is also in the process of closing on the Venetian Resort Las Vegas and the Sands Expo and Convention Center for $4 billion.
Kornreich said that prior to the merger, all three gaming REITs were focused on external growth and competing for casino assets. Following the merger and the acquisition of the Venetian, Vici's growth story will look different.
"[Vici is] in position to become an investment-grade company. And so it'll be harder for it to creatively grow in size with each one-off deal, being that the overall ship is just so much bigger," Kornreich said.
Katz said the merger and question of future growth may lead to Vici investing in non-gaming entertainment assets, such as theme parks.
"It begs the interesting question of, what's next for them? How do they continue to grow or move the needle? And for them, the thesis has always been to move on to non-gaming assets and start owning those," Katz said.
Huge deal difficulties
Despite growing investor enthusiasm for gaming assets, it will be challenging for new gaming REITs to form in the future, said Richard Anderson, research division analyst at SMBC Nikko Securities America Inc.
Casinos tend to be very large, expensive assets that trade hands infrequently, and casino owners that own both the operations and the real estate have to be willing to sell.
"These are huge deals, particularly in Vegas. One transaction can equal a thousand conventional triple-net Walgreens transactions. They're just huge undertakings. And so again, [that] perhaps makes it even more difficult," Anderson said.
Private equity players also pose serious competition for high-quality assets. Blackstone Inc., which has already made multiple investments on the Las Vegas strip, has deep pockets and a competitive cost of capital.
"The involvement of Blackstone is sort of a double-edged sword. It's a stamp of approval ... but also can make it more difficult to acquire [assets] creatively. Because if they're interested in something, they're likely going to get it," Anderson said.