Fantini’s Finance

Real Estate is Asset of Choice

Gaming REITS may not be the flashiest choice for investors, but you just can’t argue with success and profitability

By Frank Fantini

It’s been exciting recently at VICI Properties, the one-time Caesars spinoff that has become one of the largest real estate investment trusts (REIT) in America.

The company began the spring by achieving investment-grade status, then closed on the acquisition of MGM Growth Properties to become the largest property owner on the Las Vegas Strip. Most recently, VICI announced its continued diversification into what it calls “experiential properties” with a $120 million draw term loan to allow Cabot to develop a destination golf resort in Florida.

All of this has, in five short years, achieved a $30 billion stock market value and inclusion into the S&P 500, making VICI a member of the exclusive club of America’s blue chip companies.

The immediate result was a spike in the stock price, as investment funds that must own S&P 500 stocks had to buy in, and, in the process, create the long-term benefit of providing something of a floor underneath the stock.

Interestingly, the stock of gaming’s first and only other REIT, Gaming & Leisure Properties, also spiked on the news as VICI brought attention to this Sector of Two in the larger sector of triple-net REITs. (GLPI, it should be noted, is no slouch at a $12 billion market cap.)

The numbers for VICI are impressive in and of themselves: approximately $2.6 billion a year in rents, plus inflation provisions in leases; ownership of 43 properties in 15 states; on the Las Vegas Strip alone, VICI owns 39,700 hotel rooms, hundreds of food and beverage outlets, 5.9 million square feet of convention and related space and some of the world’s iconic casino names—Caesars Palace, Mirage, Venetian and Mandalay Bay among them.

But what makes VICI and GLPI especially interesting and important right now is their stability in the midst of an uncertain economic future.

They have already proven themselves during one crisis, as they received 100 percent of their rent payments in 2020, the year COVID lock- downs slammed REITs focused on other industries such as shopping malls, when many tenants withheld rent.

Now, we face the scourge of inflation and possibly a recession. In that environment, hard assets are safe havens, and perhaps no tangible asset is as safe as real estate. Indeed, real estate values along the Las Vegas Strip continue to rise, as evidenced by the recent sale of 2.2 acres along the south Strip for $12.8 million, a figure that bodes well for a company that owns 660 Strip acres, most of which is occupied by properties generating billions of dollars a year in gaming and other revenues.

Inflation, and perhaps recession, will provide another test: Will the asset-light model adopted by casino companies that have sold their real estate to REITs hold up in hard times?

So far, it’s been easy going for those companies—they pocketed the sales proceeds and went on their way. But what is important is what they do with those proceeds. Initially, there is a feelgood effect as debt is reduced. But now they no longer own an appreciating asset in real estate, while retaining new expenses of rent obligations. And, while buying back shares and paying dividends are fine, ultimately it is profit growth that matters to investors.

When companies boasted of EBITDA, Steve Wynn used to remind investors that it is profits that count. The depreciation that is the D in EBITDA is there for a reason. Over time, companies have to spend real dollars to update their properties.

Today, casino operators, having become tenants, have another expense in the EBITDAR calculation—rent, and it isn’t a “someday” expense. It must be paid now and on time and regularly throughout the life of the lease, after which the property reverts to the landlord barring a lease renewal.

As such, it will be very important for the asset-light companies to wisely invest those sales proceeds in successful growth projects. Those that do will find the proceeds can accelerate growth. Others will fall behind.

Interestingly, there are casino companies holding onto their real estate. In Las Vegas that is notably Red Rock Resorts and Golden Entertainment.

Red Rock might already be demonstrating the value of owning its land. It closed and has not reopened several casinos in the Las Vegas Valley and has managed to transfer most of their customers to other Red Rock properties, meaning it has kept customer revenue while cutting operating costs. Now, Red Rock has real estate it can monetize in a number of ways. That is an option Red Rock would not have had if it had sold the land to a REIT.

In addition, as land prices continue to rise, the higher values can be embedded in the value of the stock, giving shares more stability.

Finally, REITs aren’t sexy, but they can be attractive.

They provide steady, if not spectacular, stock appreciation, and pay nice dividends. Currently, VICI’s $1.44 a share dividend yields 4.9 percent and GLPI’s $2.82 dividend yields 5.9 percent. That means investors get paid for steady growth and the comfort of owning tangible and appreciating assets in an uncertain time.

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.