Casino REITs: The House Always Wins

Summary

  • The lone property sector in positive-territory this year, Casino REITs have defied macro headwinds much like their traditional net lease peers, benefiting from an upward valuation re-rating and institutional acceptance.
  • 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.
  • The recent outperformance can be attributed to VICI’s inclusion in the S&P 500 in June following its merger with MGM Properties, becoming the fastest REIT to be included in the benchmark.
  • For the critical Las Vegas market, robust leisure demand has fueled a near-full recovery in hotel occupancy despite still-weak convention-related demand. Still, tenant operators aren't immune from the risks of a potentially prolonged recession.
  • While the solid degree of inflation protection is certainly compelling given the macro environment – and should drive strong same-store growth in 2023 - with Casino REITs trading at 20-25% premiums to their historical P/FFO, we’re looking for a pull-back to re-enter the sector.
  • This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

Croupier holds poker cards in his hands at a table in a casino.

Lacheev

REIT Rankings: Casino & Gaming

This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on September 15th.

casino REITs

Hoya Capital

The House Always Wins? Defying the broader macro headwinds much like their traditional net lease peers, 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. Within the Hoya Capital Casino REIT Index, we track the two casino REITs: VICI Properties (VICI) - which owns a dominant share of the Las Vegas market following its acquisition of MGM Properties - and Gaming and Leisure Properties (GLPI) - which owns a portfolio of regional casinos. These two casino REITs account for nearly $45B in market value and own 100 casino and entertainment facilities across the United States.

casino REITs

Hoya Capital

VICI was spun out from Caesars Entertainment (CZR) in 2018 and has seen its market capitalization swell by 5x since its IPO. The new "King of Vegas," VICI now owns 57 properties across 15 states and 59k hotel rooms including 3 of the 5 largest hotels in the country. The combination further diversifies VICI's tenant concentration and geographical scope, lowering its largest tenant exposure - Caesars - from nearly 80% at the end of 2020 to just 42% following the closing of the MGP deal and the $4B acquisition of The Venetian from Las Vegas Sands earlier this year. The MGM Growth Properties portfolio - which was initially spun out in 2016 by MGM Resorts (MGP) owned 15 destination casinos including Mandalay Bay and the MGM Grand Las Vegas.

VICI properties tenants

Hoya Capital

GLPI - which was spun out from Penn National Gaming (PENN) in 2013 - has also been an active and successful consolidator of regional casino assets, growing its market capitalization by nearly 4x since 2016. GLPI was also a bidder for MGP, but commented that the valuation "did not pencil for us" conceding that "it's a better deal for [VICI] than it would have been for us." GLPI did score a win in late 2021 with a major $1.8B acquisition of the Live! casinos in Maryland, Philadelphia, and Pittsburgh from Cordish Companies. Acquired at a 6.9% cap rate, the acquisition is GLIP's largest since 2016 and helps to further diversify its tenant base. GLPI now owns 57 properties across 18 U.S. states - primarily focused on regional casinos, which rely more heavily on gaming revenues compared to their Las Vegas peers which see a higher share of revenues from non-gaming hospitality and convention activity.

GLPI

Hoya Capital

Despite their ultra-long term triple net lease structures, casino REITs are better protected from inflation than many initially presumed. As discussed in our Net Lease report earlier this week, 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. Among traditional net lease REITs, only a handful include explicit CPI linkages in their rent escalators including Store Capital (STOR), but just one net lease REIT - WP Carey (WPC) - employs a significant percentage of "uncapped" CPI escalators. WPC expects same-store growth to accelerate to "closer to 4% in early 2023 resulting from these escalators - which will be more than double the same-store growth of the average net lease REIT.

casino REITs

Hoya Capital

Like WPC, VICI Properties boasts inflation-linked escalators on 96% of its leases - and importantly - 47% of its leases (primarily its Caesar's master lease) use uncapped CPI for the annual escalation formula. Based on commentary and conversations with management, VICI applies the escalator in November using the July, August, and September CPI figures - during which CPI averaged 8.5% - and VICI's current 2022 FFO guidance excludes any CPI impact. We expect VICI to report same-store NOI growth of at least 3% in 2023 - up significantly from the 1.8% rate reported so far in 2022. Gaming & Leisure's inflation protection, by comparison, is less direct with few explicit CPI linkages - but most of its leases do include a percentage rent component - roughly 10-15% of its cash rental income - along with the 1.5%-2.0% escalator that is generally tied to rent coverage ratio thresholds - which together result in a pro-cyclical dimension to its cash flow stream.

CPI protection vici

Hoya Capital

Deeper Dive into Casino REIT Sector

Emerging in the mid-2010s, casino REITs had seemingly been flying under the radar over the past several years despite delivering steady and consistent outperformance and high-single-digit FFO growth fueled by a continued wave of accretive acquisitions and industry consolidation. Much like their retail-focused net lease REIT peers, external growth through acquisitions is the modus operandi of the casino REIT sector and while casino REITs now own more than a third of the total "investment-grade" casinos in the United States, recent deals and management commentary indicate that the acquisition environment remains active and should continue to provide a steady source of FFO growth for the foreseeable future given these REITs' relatively favorable cost of capital and unique competitive positioning.

casino REIT acquisitions 2022

Hoya Capital

Including the VICI-MGP merger, these three Casino REITs have acquired roughly $50 billion in assets since the start of 2016 including VICI's acquisition of the real estate assets of The Venetian from Las Vegas Sands for $4 billion in cash - the largest REIT-involved deal since GLPI purchased the Pinnacle real estate portfolio in 2016. As we bid farewell to one REIT, another player emerged onto the casino scene this year with Realty Income (O) - the largest net lease REIT - acquiring Encore Boston Harbor from Wynn Resorts for $1.70 billion and indicating that will be an active player in the casino business, commenting that it is "very hopeful that we can continue to grow this area."

casino REIT statistics

Hoya Capital

While not a publicly-traded REIT, Blackstone (BX) has been nearly as active in the casino space as VICI and GLPI over the past five years. Blackstone acquired and then sold a majority stake in The Cosmopolitan of Las Vegas to its non-traded REIT platform Blackstone Real Estate Income Trust ("BREIT"). BREIT also owns JV interests alongside VICI in the MGM Grand and Mandalay Bay, which it partnered with MGP to acquire in 2020. In addition to the aforementioned operators, other major casino operators include Las Vegas Sands (LVS), Wynn Resorts (WYNN), Churchill Downs (CHDN), Boyd Gaming (BYD), Bally's (BALY), and Century Casinos (CNTY). Other major players in the online gambling industry include DraftKings (DKNG), FanDuel/Flutter Entertainment (OTCPK:PDYPY).

casino operators

Hoya Capital

Blending some of the better attributes from each of the net lease, hotel, and healthcare REIT sectors, casino REITs emerged in a fashion similar to many lodging REITs as "spinoffs" designed to separate the capital-intensive real estate business from the operationally-intensive property management business. 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. Like their net lease peers, casino REITs are some of the most operationally efficient property sectors, operating with Adjusted NOI margins of nearly 90%, leaving most of the financial risk and capital expenditure responsibilities to their tenants.

casino REITs 2020 capex

Hoya Capital

"Headquartered" in Las Vegas, gambling is one of the most highly regulated industries in the United States. Until the 1980s, commercial casinos were prohibited outside of "The Strip," leaving the lucrative gaming business to Native American tribes, who were largely exempt from state prohibitions. The last forty years have seen a wave of legalization of commercial casinos as states increasingly realized the "tax goldmine" they were sitting on. Tax revenue from gaming, for instance, represents nearly a quarter of state tax revenues collected by Pennsylvania. Twenty-five states now permit commercial casinos and these three REITs own properties in nineteen of these states.

casino gaming in united states

Hoya Capital

Casino REIT Earnings & Fundamentals

As discussed in our REIT Earnings Recap, second-quarter results were roughly in-line with estimates with no major surprises. VICI Properties (VICI) maintained its full-year outlook calling for FFO growth of 4.7% while Gaming and Leisure Properties (GLPI) reinstated guidance targeting 2.3% FFO growth for the year. Of note, with REITs now owning a significant share of casino real estate properties in the U.S., VICI reiterated that it is looking at non-gaming asset classes for future growth opportunities, hiring a new Chief Investment Officer to "focus on non-gaming." Of note, despite the substantial COVID-related issues across the hospitality industry, casino REITs reported spotless rent collection throughout the pandemic and were two of less than a dozen REITs to report positive FFO growth in 2020.

casino REITs

Hoya Capital

Las Vegas has been a relative outperformer among domestic travel destinations throughout the pandemic and is on the cusp of a full return to pre-pandemic levels. The Las Vegas Visitors Authority reported that Las Vegas welcomed nearly 3.5 million visitors in July, its highest monthly visitation since the pandemic began. That visitor total was up 5.7% from last July and just 5.3% below the July 2019-level. Hotel occupancy (with 151,352 rooms online) surpassed 83% in July, four percentage points better than July 2021 but still down more than seven percentage points from July 2019. Weekend occupancy, meanwhile, exceeded 91% - down six percentage points from the record-levels seen in July 2019. Midweek occupancy, a reflection of convention attendance, reached 79%, up 4.5 percentage points from the same month last year but 9.6 percentage points below where it was in July 2019.

TSA checkpoint data

Hoya Capital

Casino REITs were slammed during the early onset of the outbreak amid the stifling economic lockdown that forced the majority of properties across the country to temporarily close. Casino REITs plunged roughly 60% between late February and early March 2020 on fears that their tenant base was destined for significant financial hardship, but mounted a furious comeback in the back half of 2020 and ended the year as one of the best-performing REIT sectors and continued that strong performance into 2021. Casino REITs are again among the best-performing property sectors this year, higher by 7.4% this year compared to the 20.7% declines from the broad-based Vanguard Real Estate ETF (VNQ) and the 16.9% decline from the S&P 500 (SPY).

casino REITs

Hoya Capital

As we've projected for the past several years, casino REITs have indeed benefited from an upward "re-rating" from investors as the sector has matured and as the business model - and economic "moat" around these REITs - has become better understood. As noted above, Casino REITs are now trading at multiples that are actually slightly above their similarly-sized net lease REIT peers with a Price/FFO multiple of roughly 17x. Critically, unlike their hotel REIT peers which have been among the worst-performing REIT sectors since the start of the pandemic, casino REITs' ultra long-term (15-50 year) triple-net master lease structure leaves most of the financial and operational risk - both on the upside and the downside - to their tenants. As a result, casino REITs have delivered some of the strongest 5-year returns in the REIT sector.

casino REIT performance

Hoya Capital

Casino REIT Dividend Yields & Valuations

Casino REITs pay an average yield of 5.0%, well above the REIT market-cap-weighted average of 3.5%. Unlike some other higher-yielding property sectors, the long-term secular outlook for casino gaming appears relatively stronger, underscored by the above-average 5-year dividend growth rate of roughly 5% achieved by these casino REITs. In contrast to their hotel REIT peers, perfect rent collection allowed casino REITs to maintain dividends at-or-near previous levels last year, and all three REITs boosted their dividends in 2021.

casino REITs dividend yield

Hoya Capital

At the company level, GLPI pays the highest dividend yield at 5.80% after raising its payouts twice so far in 2022. After having reduced its dividend in 2020, the most recent increase to $0.7050/share brought its dividend rate back above its pre-pandemic peak of $0.70/share. VICI, meanwhile, pays a yield of 4.70% after boosting its quarterly dividend last week by 8% to $0.39/share, as it has in every year since its IPO.

casino REIT dividends

Hoya Capital

Takeaway: Taking Some Chips Off The Table

The lone property sector in positive-territory this year, Casino REITs have defied macro headwinds much like their traditional net lease peers, benefiting from an upward valuation re-rating and institutional acceptance. Casino REITs have become a favorite for investors seeking inflation-hedged assets as VICI boasts inflation-linked escalators on 96% of its leases while GLPI benefits from indirect inflation hedges linked to tenant performance. Still, tenant operators aren't immune from the risks of a potentially prolonged recession and net leases are only as good as the tenant's ability to pay. While the solid degree of inflation protection is certainly compelling given the uncertain macro environment - the historical outperformance of net lease REITs during Fed rate hike cycles - with Casino REITs trading at 20-25% premiums to their historical P/FFO, we're looking for a pull-back to re-enter the sector.

casino REITS 101

Hoya Capital

For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

high dividend yield index

Hoya Capital

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Read The Full Report on Hoya Capital Income Builder

Amid the historic market volatility - and persistent inflation - our focus at Income Builder is on real income-producing asset classes that offer the opportunity for reliable income, diversification, and inflation hedging. Get started today with a Free Two-Week Trial and you can take a look at our top ideas - including our new Landowner Portfolio - and see what we're investing in to help build sustainable portfolio income.

Subscribers gain complete access to our investment research and our suite of trackers and income-focused portfolios targeting premium dividend yields up to 10% across real income-producing asset classes. 

This article was written by

Hoya Capital profile picture
31.08K Followers
Build sustainable portfolio income with premium dividend yields up to 10%.

Real EstateHigh Yield Dividend Growth.

 Visit www.HoyaCapital.com for more information and important disclosures. Hoya Capital Research is an affiliate of Hoya Capital Real Estate ("Hoya Capital"), a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. 

Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. 

Collaborating with ETF Monkey, Retired Investor, Gen Alpha, Alex MansourThe Sunday Investor, and Philip Eric Jones for Marketplace service - Hoya Capital Income Builder. 

Hoya Capital Real Estate ("Hoya Capital") is a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations is an affiliate that provides non-advisory services including research and index administration focused on publicly traded securities in the real estate industry.

This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.

Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

Hoya Capital has no business relationship with any company discussed or mentioned and never receives compensation from any company discussed or mentioned. Hoya Capital, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and additional important disclosures is available at www.HoyaCapital.com.

Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, GLPI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.

This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.

The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.

Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes.

Hoya Capital Real Estate and Hoya Capital Research & Index Innovations have no business relationship with any company discussed or mentioned and never receives compensation from any company discussed or mentioned. Hoya Capital Real Estate, its affiliates, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and additional important disclosures is available at www.HoyaCapital.com.

Recommended For You

Comments (7)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.