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FANTINI’S FINANCE
Inflating Investments At a time of economic uncertainty, where should you park your money?
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here isn’t any argument, anymore. We are in a period of significant inflation. How long it will last, how high inflation will rise and where interest rates will go are still being debated. But there is no debate that inflation is a new fact of investing life. And that raises the eternal question: Where should I put my money? One answer: the gaming REITs. The truth is that tangible assets hold their value when money loses its value, whether that be precious metals, commodities, maybe cryptocurrencies in our new age and, of course, real estate. Gaming REITS have three advantages: 1. They pay good dividends. Gaming and Leisure Properties and VICI Properties have respective dividend yields of 5.5 percent and 4.9 percent. Combine with stock price appreciation and it’s a formula to beat inflation. 2. Real estate is an appreciating asset. In times of inflation it’s good to own something that grows in value while money loses its value. Real estate appreciation is especially true in the Las Vegas Valley and along the Las Vegas Strip, and VICI owns a lot of Strip property. 3. Their rents are about as secure as anything can be in an uncertain financial world. That was proven during the Covid panic of 2020. REITs focused on shopping malls, apartments and office buildings had to worry about their rents. VICI and GLPI did not. Casinos paid their rents month after month even as they slashed spending elsewhere. Further, casinos have their own pricing power, and leases are adjusted for inflation. Talking about real estate, Red Rock Resorts and Golden Entertainment own 100 percent of the land their casinos occupy. And they have excess real estate. And they are in booming Las Vegas Valley. And they don’t have to pay rent to a landlord. And, well, you get the idea. There is still a lot to be decided about how the sale-leaseback phenomenon will work out for casinos that have chosen to go asset-light. Getting big wads of cash to invest in growth sounds appealing. But those companies also now have big new ex-
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By Frank Fantini
pense lines in rents. And they no longer have an appreciating asset to offset inflation.
YAY, DIVIDENDS… …Was the rallying cry of the late Las Vegas Sands CEO Sheldon Adelson, and in his spirit, dividends might be coming back as companies have cleaned up balance sheets and are generating increasing free cash flow. IGT is leading the way, initiating a 25 cents-ashare quarterly dividend. Others may follow. Two names mentioned above, the land-owning Las Vegas-focused Red Rock Resorts and Golden Entertainment, are in the payout game, too, the former for sure and the latter likely. Red Rock Resorts has announced a $3a-share dividend, an impressive sum that yields nearly 6 percent based on the price of the stock on the day it was announced. That big a special payout might presage a regular dividend later. Golden has all but promised a special dividend in the foreseeable future, with the catalyst being $60 million received from Caesars as a contractual obligation related to Caesars’ purchase of William Hill, which ran Golden’s sportsbooks. These companies aren’t the only ones that have been talking returning of capital to shareholders. Expect to see more stock buybacks and more dividend announcements in 2022.
But the reality is much simpler. Over time, there is only one metric that matters: It’s the profit, Stupid. That reality is setting in on many investors. Penn National and DraftKings stocks, for example, have come well down from dizzying highs that were based on extraordinarily high valuations of revenues projected three and four years out. There also is a growing understanding that at some point costs to acquire players have got to become rational. Some companies have had this understanding all along. Rush Street Interactive has lived by the idea that the goal is profitability and that market share is not an end in itself. The company says its efficient marketing strategy turns customers profitable six months after signing on. Others, such as Churchill Downs CEO Bill Carstanjen, have adamantly proclaimed that, while the company must invest in player acquisition when it enters new markets, the purpose is profitability. Caesars CEO Tom Reeg expects to use the power of the company’s brand and existing relationships with the 65 million players in its database to become profitable at 50 percent margins. Most recently, Wynn Resorts CEO Matt Maddox announced his company’s commitment to rationality, saying on the company’s third quarter investor call: “Competitors are spending too much to get customers. The economics are just not something in which we’re going to participate in the short term…we’re going to be focused on building a long-term business that’s sustainable, that is not losing lots and lots of money.” That is a clarity of message that James Carville can admire.
time, there “isOver only one metric
that matters: It’s the profit, Stupid. That reality is setting in on many investors.
IT’S THE PROFIT, STUPID When Bill Clinton successfully ran for president in 1992, campaign manager James Carville famously simplified the campaign message to his staff by plastering the sign: It’s the economy, Stupid. For those investing in online sports betting and iCasino in the U.S., it is easy to get lost among all the ARPUs and MAUs and market share claims.
Global Gaming Business DECEMBER 2021
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Frank Fantini is the editor and publisher of Fantini’s Gaming Report. For a free 30-day trial subscription email subscriptions@fantiniresearch.com.
