Due in large part to rising interest rates, the real estate sector is sagging, but casino real estate investment trusts (REITs) are shining bright amid a challenging macroeconomic environment.
The widely followed FTSE Nareit Equity REITS Index is down 20.31% year-to-date, but Gaming and Leisure Properties (NASDAQ:GLPI) and VICI Properties — the two publicly traded gaming REITs — are higher by 0.06% and 11%, respectively. As such, casino landlords are the only segment of the broader real estate sector generating positive returns this year.
Casino REITs are the lone property sector in positive territory this year, benefiting from an upward valuation ‘re-rating’ and hard-earned mainstream institutional acceptance after many years of strong operational execution,” according to Hoya Capital research.
VICI and GLPI approach casino real estate fashion in divergent fashion. The former is the largest landlord on the Las Vegas Strip, among other holdings, while the latter prefers to own regional casino property assets.
Casino REITs Superior Inflation Protection
Inflation, of which the US economy has plenty, is often a catalyst for real estate stocks. This year, Gaming and Leisure and VICI are living up to that billing.
“Casino REITs have become a favorite for investors seeking inflation-hedged assets. VICI boasts inflation-linked escalators on 96% of its leases while GLPI benefits from indirect inflation hedges linked to tenant performance,” noted Hoya Capital.
GLPI and VICI are what’s known as triple-net REITs, meaning the lease terms they sign with clients are usually far longer than what’s seen in other commercial real estate segments.
Market participants tend to treat triple-net REITs on par with longer-dated bonds, meaning these stocks can be vulnerable to rising interest rates. This year, however, investors are focusing more on the inflation-fighting advantages offered by GLPI and VICI.
“Despite their ultra-long term triple net lease structures, casino REITs are better protected from inflation than many initially presumed,” added Hoya. “Inflation sensitivity is driven by several interacting factors including external growth potential, lease structure and term, tenant credit quality, and the cyclicality of the underlying property type.”
Casino REITs Love Good Deals
The current iterations of GLPI and VICI are the result of deal-making. Lots of it. VICI has a knack for acquiring gaming assets with both large and small price tags and is agnostic in terms of geography. For its part, GLPI largely eschews the volatility of Las Vegas Strip real estate, owning only the Tropicana there, but the REIT has a knack for smart buys.
Since 2016, GLPI, VICI and MGM Growth Properties, which was acquired by VICI, purchased approximately $50 billion worth of assets. There’s room for that figure to grow in the years ahead as casino operators look to monetize property assets and generate cash for other uses.
“Casino REITs now own 100 of the roughly 250-300 ‘investment grade’ commercial casinos in the United States, one of the highest concentrations of REIT ownership within any property sector,” concluded Hoya.
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