Gaming and Leisure Properties, Inc. (NASDAQ:GLPI), MGM Growth Properties (NYSE:MGP) and Vici Properties (NYSE:VICI) – the three gaming real estate investment trusts (REITs) – are facing the specter of operator tenants potentially struggling to make rent on some properties if gaming venues remain shuttered longer than expected.
From the East Coast to the Midwest to the South to Las Vegas – the largest US gaming market – the coronavirus outbreak is forcing temporary closures of casinos, presenting operators with a zero revenue scenario in which fixed costs, such as labor and leases, are not being reduced.
A prolonged economic downturn coupled with the potential for closures to last longer than previously thought would represent the first major challenge for gaming REITs, a corner of the real estate market that wasn’t born until 2012 when Penn National Gaming (NASDAQ:PENN) announced the spin off of GLP. That means the industry hasn’t yet been tested by a recession.
Alexi Panagiotakopoulos, co-founder of Fundamental Income, a Phoenix-based asset manager, notes gaming REITs have some avenues for averting doom and gloom economic scenarios.
They do have highly sophisticated lease structures, structured as cross-collateralized master leases (meaning all properties are under one lease, as opposed to multiple individual leases, essentially protecting the REIT from the tenant picking and choosing to close bad assets),” he said in remarks provided to Casino.org. “Since the gaming REITs tenants are public, the REIT has a highly transparent tenant, with large corporate guarantees on what the industry calls ‘mission critical real estate.’”
Said another way, even in a severe downturn, an operator can’t simply say to a landlord that it’s abandoning a lease.
Battered and Bruised, but Resilient, Too
In the current climate, investors are displaying some preference for gaming companies that own their real estate. For example, Las Vegas Sands (NYSE:LVS), which owns the property associated with the Palazzo and Venetian on the Strip, is off 35.78 percent this month while MGM Resorts International (NYSE: MGM) – a company that recently generated $8.2 billion by selling four Sin City properties – is lower by almost 72 percent since March 1.
While shares of gaming REITs are following operators to the downside, analysts view tenant credit quality and portfolio diversity as essential in weathering the storm. GLP and Vici derive the bulk of their revenue from Penn National and Caesars Entertainment (NASDAQ:CZR), respectively, but their client rosters are growing. Conversely, MGP’s sole tenant is MGM.
Panagiotakopoulos, whose firm manages the Fundamental Income Net Lease Real Estate ETF (NYSE:NETL) – a fund that holds shares of all three gaming REITs – believes these companies are enduring too much punishment.
“Amidst the coronavirus drawdown, and forced closing of nearly all businesses and real estate, the REIT sector as a whole was hit extremely hard, including gaming REITs, which were essentially thrown out in a ‘baby with the bathwater’ sell off of all hotels/lodging, hospitality and experiential type operations and real estate,” he said. “However, the selloff was too and far too fast. Once we get this virus under control, Las Vegas will reopen and I have to believe we return to the American way of life which includes consumption and discretionary spending in places like casinos, restaurants and destination experiences.”
Good Coverage, Depressed Valuations
Rent coverage, or the ability of the tenant to tend to lease obligations, is robust in the gaming industry compared to other net lease segments. Gaming rent coverage is 3.9x, meaning tenants have nearly $4 in cash for each $1 in rent they pay.
That compares with 2.7x for the broader net lease space and ratios of just 1.1x and 1.7x, respectively, for the senior housing and skilled nursing industries, according to Fundamental Income data.
Plus, the recent market bludgeoning is depressing gaming REIT valuations.
“The 3 casinos REITs are trading at levels not seen by net lease REITs since the depths of 2009. As an investor today you would be able to buy MGP, VICI and GLPI at an average equity cash flow multiple of 7.3x with an average dividend of 11.2%…to put that in perspective, the US 10-yr Treasury is trading at 0.885%,” said Panagiotakopoulos.