With support from surging internet casino operations, gaming real estate investment trusts (REITs) Gaming and Leisure Properties (NASDAQ:GLPI) and VICI Properties (NYSE:VICI) are “safe” avenues for investors considering the industry.
That’s the opinion of Macquarie analyst Jordan Bender. In a note to clients today, Bender downgrades MGM Growth Properties (NYSE:MGP) to “neutral” from “outperform” to account for the pending acquisition of that company by rival VICI. In August, Caesars Palace owner VICI announced a $17.2 billion all-stock takeover of MGP — a deal creating the largest property owner on the Las Vegas Strip.
Bender notes the emergence of iGaming and sports wagering as potential cash generators in the future is efficacious for the REITs because those pursuits could be additive to operators’ finances, bolstering rent coverage in the process.
While the REITs don’t have direct exposure to online gaming markets, several of their tenants have formed strategies to compete,” notes Bender. “Although this won’t benefit REIT financials, it will improve underlying rent coverages and strengthen the corporate guarantee for the assets in the leases.”
When the VICI/MGP transaction closes in the first half of next year, the combined company will count MGM Resorts International (NYSE:MGM) and Caesars Entertainment (NASDAQ:CZR) as its two biggest tenants. BetMGM and Caesars Sportsbook combine for nearly a third of the US online sports betting market, according to Macquarie estimates.
For GLPI, VICI, Rent Coverage Matters
Gaming REITs operate as toll road businesses. They own the property assets of some of the most iconic domestic gaming venues, such as Caesars Palace and Mandalay Bay, but aren’t involved in the day-to-day operations.
Nor are the landlords responsible for enhancements to the venues. Those obligations belong to the operating companies. Coupled that with lease responsibilities, the financial integrity of tenants is integral to the gaming REIT investment thesis.
That says rent coverage is vital is assessing the value of a company such as GLPI or VICI. During the darkest days of the casino shutdown caused by the coronavirus pandemic last year, there were concerns about the ability of some casino operators to meet lease obligations in a lengthy zero revenue climate. Fortunately, that never became a material issue as operators were able to access to capital markets and the REITs collected nearly all owed rent during the shutdown.
In addition to Caesars VICI’s other tenants include Century Casinos Inc., Hard Rock International, JACK Entertainment, and Penn National Gaming. GLPI’s marquee tenants include Bally’s and Penn, among others.
More Rent Coverage Coming
While operators are proving adept at boosting margins at land-based casinos in the wake of the pandemic, more margin support could be derived from iGaming.
“We expect the margin profiles will be in the 25-35 percent range at maturity (depending on tech stacks),and this could translate to an incremental $3.8 billion of online earnings before interest, taxes, depreciation and amortization (EBITDA) for PENN, CZR, MGM, Boyd Gaming and Bally’s combined under our market share assumptions,” says Macquarie’s Bender.
He adds that the incremental EBITDA from online casinos and sports wagering could cover operators’ lease responsibilities.
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