Gaming REITs Thrive Despite High Interest Rate Environment, Analysts Say

June 13, 2023
Despite higher interest rates, the opportunities for real-estate investment trusts (REITs) to acquire casino properties remains healthy within the U.S. gaming industry, albeit at a more moderate deal volume, according to gaming industry analysts.


Despite higher interest rates, the opportunities for real-estate investment trusts (REITs) to acquire casino properties remains healthy within the U.S. gaming industry, albeit at a more moderate deal volume, according to gaming industry analysts.

“Casino M&A has been fairly healthy, particularly for single-assets transactions,” said John DeCree, director of global gaming and head of research at CBRE Securities in Las Vegas.

“Given the uncertain macroeconomic environment, casino operators have been a little more defensive and not aggressively pursuing growth via M&A, so deal volume has been more moderate,” DeCree said. “We are also still digesting a significant wave of M&A activity from the early days of the pandemic.”

REITs such as VICI Properties and Gaming & Leisure Properties own the real estate of casinos across the U.S., including many well-known properties on the Las Vegas Strip. Both firms are exempt from corporate income taxes and distribute most of their earnings to shareholders.

VICI was spun off of Caesars Entertainment, while GLPI started with the real-estate assets of Penn Entertainment.

GLPI and VICI have both been active in the market in recent months, with VICI recently acquiring the real-estate assets of four Century Casinos properties in Canada for $164.4m. Century Casinos will lease back the casinos from VICI.

VICI also acquired the real estate associated with four PURE Gaming casinos in the province of Alberta for $200.8m.

VICI and Century have done business before. Last August, the two companies partnered to acquire the Rocky Gap Casino in Maryland from Golden Entertainment, while VICI previously lent Century $51.9m to refurbish two casinos in Missouri.

Meanwhile, Nevada lawmakers on Monday (June 12) headed back into a special session to discuss the $395m in public funds to bring Major League Baseball’s Oakland Athletics to Las Vegas.

Tropicana Las Vegas operator Bally’s Corp. and GLPI have an agreement for the Oakland A’s to build a 30,000-seat stadium with a retractable roof on nine acres of the resort’s property, contingent on state lawmakers approving public financing.

“We believe [the Oakland A's stadium] could ultimately benefit GLPI by improving the value of the Tropicana Las Vegas’ underlying real estate,” Barry Jonas, an analyst with Truist Securities, wrote in a research note.

Jonas said VICI CEO Ed Pitoniak and Matt Demchyk, senior vice president and CIO of GLPI, were among the half-dozen executives from both companies he met with last week at the NAREIT conference in New York.

He also noted that GLPI did not necessarily see many large-scale transactions in the current M&A environment, but “there were certainly opportunities for singles and doubles, which could cumulatively amount to material accretion.”

“While we don’t believe REIT penetration of gaming assets in the U.S. will ever hit 100 percent, VICI management believes that the current penetration rate is in the low 40 percent range,” Jonas added. “This suggests further runway for sizable transactions even before factoring remaining greenfield opportunities.”

VICI has been looking closely at the Australia and New Zealand gaming markets, with Europe, Japan and Singapore highlighted as potential markets down the road, he said.

“Despite the attractiveness of gaming assets, both VICI and GLPI noted that they didn’t see sizable risks in the current environment from other REIT entrants to successfully compete in the gaming space.”

DeCree agreed, telling VIXIO GamblingCompliance that there is still plenty of opportunity for growth via M&A for REITs in the casino space.

Some REITs have started looking outside casinos to other leisure categories, he said.

“However, I think this shift is more of a business/diversification and economic decision rather than a lack of opportunities in the casino M&A landscape.”

Interest Rate Hikes Impact On REITs

The U.S. Federal Reserve’s Open Market Committee (FOMC) meets Tuesday (June 13) and will end its latest meeting on Wednesday (June 14) with a policy statement, in which officials are expected to keep interest rates unchanged at 5 percent to 5.25 percent.

The FOMC has raised the short-term federal funds rate ten consecutive times, but even with the higher rates, DeCree said gaming REIT equity prices and values are near all-time highs.

“Both VICI and GLPI obtained investment grade credit ratings, which has helped keep borrowing costs low,” DeCree said. “Coupled with strong equity valuations, the total cost of capital for gaming REITs has remained low, making them compelling financing partners.”

He stressed that casino companies are for the most part well capitalized today, and are generating earnings at record levels, so there has not been a huge push to engage sale-leaseback structures for refinancing.

“However, some companies have found sale-leaseback as a solid alternative, particularly for growth M&A where traditional high yield markets may have been expensive or unavailable over the past 12 to 18 months,” Decree said.

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