09/07/2023 | by Sarah Borchersen-Keto
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After casino operators proved uniquely resilient to the worst economic impacts of the pandemic, gaming REITs continue to benefit from positive fundamentals and growing investor interest. They also now have their own sector within the FTSE Nareit U.S. Real Estate Index Series, which launched in June 2023 with two constituents, VICI Properties Inc. (NYSE: VICI) and Gaming and Leisure Properties, Inc. (Nasdaq: GLPI).

While some moderation from post-pandemic revenue highs is evident today, analysts are upbeat on the future of the sector and point to new market entrants as evidence of its continued runway for growth.

REIT.com asked sector analysts Chris Darling at Green Street, Barry Jonas at Truist Securities, and Ronald Kamdem at Morgan Stanley for their views of how gaming REITs are performing and where they go next.

How would you describe the state of fundamentals for gaming REITs today?

Chris Darling: Both regional and Las Vegas gaming operations remain healthy, having recovered incredibly quickly following the pandemic and, more recently, producing record results. However, recent robust operating trends are making for difficult year-over-year comparisons with the latest data revealing modest single digit gaming revenue declines in both segments. Still, gaming operator health is on solid footing and gaming REITs, which derive their cash flows via long-term, highly secure triple net leases, continue to enjoy steady NOI growth and favorable rent coverage ratios.

Barry Jonas: We generally see gaming REITs as among the safest earnings streams, while also holding significant growth pipelines. Fundamentals for tenants remain strong, with operators comfortably maintaining solid coverage ratios. While year-on-year comps are getting tougher as we get farther from COVID-related stimulus bumps, we don’t believe we’re seeing any signs of significant macro pressure yet on the gaming consumer. Any negative commentary on regional gaming that we’ve heard has been generally isolated to idiosyncratic events on specific markets, typically from increasing competitive supply or unfavorable weather.

Las Vegas operators have shown continued strong performance, with group/convention and international segments driving midweek growth, while indicating solid bookings for the near term. With Formula 1’s Las Vegas Grand Prix and the Superbowl supporting a strong event calendar into 2024, we expect to see material growth for Vegas operators.

The macro environment has presented some challenges to gaming REITs, as rising interest rates can be tough for long-dated triple net lease. That said, we’ve seen this somewhat offset for gaming REITs by multiple re-rating as investors have attributed more value to the safety and security of their battle-tested rent streams.

Ronald Kamdem: Revenues in the gaming industry had a robust recovery post COVID. Indeed, the Las Vegas Strip revenues this year are up +30% versus 2019 and the regional gaming market are up +10% versus 2019. However, this year we are finally starting to see the solid demand trends post COVID begin to moderate, particularly in the regional gaming markets.

A closer look at the year-on-year revenue growth on the Las Vegas Strip and regional gaming markets suggests growth is running at +7% and +1% respectively.  This environment remains very healthy for gaming REITs that are not only sitting on rents that are two times covered but are also watching the operators grow EBITDA and reduce leverage. 

What sort of an impact have volatile credit markets had on transactions in the gaming space, and do you see this changing?

Jonas: Overall, credit market volatility has made it more difficult to get large deals done over the last year. Valuations fell during this time frame, which made it difficult for significant deals to come to fruition, as sellers were not as quick to adjust to new market conditions. Greenfield developments in expanding markets were less impacted; and in some cases, REITs were seen as preferred long-term financing partners. Smaller scale sale-leasebacks were also more prevalent.

We saw incremental activity in the non-gaming space by VICI, which highlighted its focus on the experiential/wellness category. VICI management noted these properties had gaming-like characteristics, namely long-term, stable, and profitable assets. As interest rates stabilize, we think the M&A environment is opening and could see some larger deals come together as operators look to raise liquidity or pursue deleverage.

Commentary from GLPI’s last earnings call was particularly positive, with management noting that they were engaging on a greater number and variety of potential deals compared to recent quarters. We think gaming REITs continue to present an attractive long-term financing alternative to traditional credit markets, and this favorable spread could continue for the next few years assuming rates remain stable.

Kamdem: Transaction activity had significantly declined as access to financing has become more challenged. If you take a look at a few of the larger recent deals such as the Bellagio or the Mandalay Bay/MGM Grand deal, it’s interesting to note that those assets had very low-cost debt in place that could be assumed by the REIT buyers. We would expect to continue to see muted activity into 2024 as cap rates reset 150-200 basis points higher into the 7%-9% range, given financing cost above 6%. This is a potential competitive advantage for REITs and other buyers with access to capital.

Darling: The current capital markets backdrop, in which debt financing has grown more costly and/or scarce, has precipitated a slowdown in transaction volume across nearly all property sectors. The gaming space is no exception. Several transactions have still crossed the finish line this year, but the velocity of deal making has slowed materially. This dynamic is unlikely to change without greater perceived clarity regarding the macroeconomic backdrop and/or a capitulation among sellers to close a currently wide bid-ask spread.

Gaming REITs now have their own sector in the FTSE Nareit U.S. Real Estate Index Series. What does this signal about the sector overall?

Kamdem: Now that the business model has been proven, institutional capital has started to invest in the gaming asset class and there remains opportunity for REITs to accretively grow the asset base. The new sector suggests that the investor base is growing beyond REIT investors and you are starting to see more generalist investors interested.

Darling: Increasing institutional acceptance of gaming real estate as a viable asset class has been a boon for both owners of gaming assets and investors. Since initiating coverage of the gaming REIT sector several years ago, Green Street has consistently found the sector priced to deliver attractive long-term returns relative to most other commercial real estate property sectors.

Jonas: The gaming sector proved its unique resilience during COVID, with virtually 100% of rent obligations paid, despite lockdowns. The iconic Las Vegas Strip properties have economic significance to Nevada, which forms a protective backstop for the assets as the state likely wouldn’t allow them to go dark. We think the new subsector categorization showcases these uniquely favorable attributes and could provide the set-up for gaming REIT stocks to re-rate even higher, with broader premium REITs (beyond triple net lease-only comps) a potentially more appropriate comp set.

Do you see opportunities for new entrants into the institutionalized gaming real estate sector?

Jonas: As the desirable attributes of gaming assets becomes more visible, it makes sense that more REITs have been exploring entering the sector. We’ve seen REITs like Blackstone Real Estate Income Trust (BREIT) and Realty Income Corp. (NYSE: O) come into the space, generally more limited to the higher end of the gaming universe.

Still, aside from one-off transactions, we think newer entrants have some challenges to overcome. GLPI and VICI have a long history and strong relationships across gaming, which we think makes them then preferred partners for many operators. Tightening in the wider capital markets also potentially hinders sizable M&A for newer entrants. Additionally, regulatory aspects to gaming are complex, varying state by state, and we think they offer a significant barrier to entry.

Kamdem: Realty Income’s entry into the sector was notable with the $1.7 billion Wynn Resorts, Ltd. deal in 2022. Blackstone has already been an investor in the space. Outside of the public REITs VICI and GLPI, we do see the potential for new entrants as institutional capital looks at the resilience of the revenue base throughout the cycle and the performance during the pandemic.

Furthermore, given a more challenging funding environment, there may be new institutional sources that see opportunity, but they may have to compete with REITs that have a very competitive cost of, and access to, capital.

Darling: The gaming industry’s performance track record through the pandemic, growing acceptance among sophisticated investors, and a leading total returns profile within the REIT industry has and should continue to attract new entrants to the sector. Realty Income’s acquisition of the Encore Boston Harbor Resort and Casino in early 2022 is one recent example.

Given the sector’s attractive economic profile (at current pricing), it’s logical to assume that new entrants will seek to gain exposure over time, either directly or via the listed gaming REITs. That said, an important caveat to consider is the specialized nature of gaming operations, which likely creates meaningful relationship barriers for new entrants into the industry.

How has online gaming (iGaming) impacted the sector so far?

Kamdem: The combination of online gaming and sports betting is an important tailwind expanding the revenue opportunity for both the operators and the REITs. My colleague covering the gaming operators recently raised our online gaming revenue forecasts by $300-$700 million for 2023-2025 estimates to reflect stronger spending trends in key states such as New Jersey, Michigan, and Pennsylvania.

Darling: The proliferation of iGaming remains in the early innings, with a multitude of operators making significant investments to gain market share. A common, and intuitive, suspicion is that growth in iGaming will come at the expense of traditional casinos, thereby reducing the viability of brick and mortar operations over time. To date, this has yet to visibly occur.

On the other hand, it’s conceivable that iGaming lures new users into the gaming ecosystem. Further, to the extent that iGaming operations flourish over time, this may serve to bolster the creditworthiness of gaming REIT tenants. It’s also worth noting that many states require gaming operators to have land-based casino licenses to operate online, which places increased importance on physical locations. Overall, Green Street expects iGaming to be complimentary to existing casino operations.

Jonas: While iGaming is currently limited to just six states, those states have generally seen slower land-based casino revenue growth than states without iGaming. Still, it may be too soon to understand the full impact and in fact iGaming appears to be net additive for the many omni-channel operators offering both digital and land-based gaming. We see destination gaming as more resilient against iGaming cannibalization, as Las Vegas casinos provide a different level of experience than on a smart phone.

Are there other topics or trends connected to gaming real estate that you are watching?

Jonas: We are paying close attention to refinancing risks, as large tranches of debt are coming due through 2025. We think this could be a double-edged sword for gaming REITs, as they will need to refinance their own debt at unfavorable rates. However, we think this could also present an opportunity as operators might have more incentive to deleverage through sale-leasebacks as a cheaper alternative to traditional refinancing.

We’re also paying close to attention to further diversification trends into non-gaming, as the pool for high quality gaming assets shrinks, albeit slowly and with plenty of runway remaining. VICI’s Canyon Ranch deal, while small, could become more material over time, and could be a good model for other wellness/experiential companies to emulate.

Darling: Gaming REITs control a significant percentage of institutional-quality commercial casinos in the U.S. Hence, there is only sporadic opportunity to grow externally within this segment. As a result, gaming REITs have broadened their horizons to international destinations as well as non-gaming, “experiential” real estate.

At surface-level, these opportunities appear attractive, but come with a different set of risks. Ultimately, it will take several years to prove the financial and strategic merits of venturing outside the domestic gaming industry.

Kamdem: The three key trends are: REITs are interested in providing capital across the capital structure so you may see more construction financing or preferred investments; the focus on gaming is expanding beyond the U.S. and you may start to see more investment in international markets such as Canada and Europe; REITs are also evolving to evaluate other experiential assets beyond gaming such as wellness resorts and spas.