“Bellagio” seemed to be the buzzword during casino companies’ third-quarter earnings calls last week.
Last month MGM Resorts International announced it would split apart the Bellagio’s assets, selling off the real estate to The Blackstone Group for $4.2 billion while continuing to operate the hotel-casino. It wasn’t the first “sale-leaseback” deal of this sort for a Strip property, and it likely won’t be the last, according to analysts and executives.
Ninety casino properties across the U.S. have been involved in about $22 billion of real estate investment trust transactions over the last seven years, according to an October report from Macquarie Research.
“It’s definitely a trend in the market,” said Union Gaming analyst John DeCree. “As real estate investors are learning the casino industry, they’re realizing it’s a viable and stable real estate investment.”
The first casino operator to create a gaming-focused REIT was Pennsylvania-based Penn National Gaming in 2012, when it introduced Gaming &Leisure Properties. The REIT entered a master lease agreement with Penn for all but two of its properties, each working under a triple-net lease structure that put Penn in charge of operations, property taxes, insurance and capital expenditures.
“It was a unique financial engineering move that allowed Penn to capitalize” on the value of its real estate, DeCree said.
According to CBRE senior vice president Michael Parks, these deals allow casino operators to access capital at a much lower cost. In turn, the companies can strengthen their balance sheet, pay down debt and — in the case of MGM — focus on expansion opportunities in markets such as Japan.
“They’re able to monetize their real estate holdings,” Parks said. “It’s a way for these companies to achieve value for the underlying real estate that the markets aren’t giving them in their stock price.”
Over the last seven years, more companies have followed Gaming &Leisure Properties’ example. In 2016, MGM affiliate MGM Growth Properties became a public company. The REIT now owns the real estate for 13 MGM properties in Las Vegas and other markets, including Mandalay Bay and The Mirage.
In 2017, Caesars Entertainment Corp. spun off its own REIT, VICI, as part of its bankruptcy resolution. The company has since purchased the real estate of 24 gaming facilities across the country, including Caesars Palace, according to filings with the Securities and Exchange Commission.
In all, Macquarie Research expects the four REITs active in the gaming sector (Blackstone, Gaming &Leisure Properties, MGM Growth and VICI) to generate more than $3 billion in total revenue by next year.
And with operators continuing to show interest, it seems as though these transactions won’t be slowing down. Last week MGM chairman and CEO Jim Murren told investors his company would continue to look into selling off real estate, and he expected a sale-leaseback of the MGM Grand to be announced before year-end.
On Oct. 31, Penn’s chief operating officer, Jay Snowden, said his company had received “some unsolicited interest” in the land associated with the Tropicana.
“We’re continuing to engage in those conversations. We’ll see where they take us. We’re encouraged by some of those conversations, but nothing’s done until it’s done,” Snowden said during a call with investors.
Eldorado Resorts CEO Thomas Reeg said in a Wednesday call that his company would look at potential deals regarding its real estate after it closes its acquisition of Caesars Entertainment.
“Caesars has a lot of excess real estate both in and out of Las Vegas that could be used for future development, both for ourselves or in a partnership,” he said. “There’s lots and lots of entities that would like to get close to or on the Vegas Strip.”
While that growing popularity means more competition among gaming REITs — Murren said half a dozen real estate companies were interested in the Bellagio — MGM Growth CEO James Stewart remained optimistic about the way the trends are heading.
“I’m not at all surprised that we have brought in more competitors,” he said, since MGM Growth had believed for some time that the market would come to appreciate gaming real estate assets more. He welcomes “the added interest in this space, because we are sitting on more luxury integrated resort real estate, gaming resort real estate than any company arguably in the world. And we think it’s going to bode very well for us as time goes on.”
That’s not to say these deals come without risks.
Given a choice between a REIT and an operating company, the former would be “the more secure of the two,” DeCree said.
“REITs are quite recession resilient,” he said.
Meanwhile, a sale-leaseback means the operating company has to make its lease payment to the REIT, no matter the circumstances. An economic downturn — which some economists expect within the next few years — could deal a major blow to operators; if they don’t have the rent money on-hand, they could default, allowing a new operator to step in.
But Parks said it’s hard to know how these transactions will play out, given there were no gaming REITs the last time the country experienced a significant downturn.
“Hopefully, we never get to see that here in Las Vegas, but it’s a new business model in the casino industry. Everyone’s waiting to see how things shake out in a down cycle,” he said.
Jefferies analyst David Katz said that, while operating companies are able to take some variability out of their balance sheet, “time will tell how good a corporate strategy” these sale-leasebacks are and whether more companies follow suit.
“I doubt that it becomes an important aspect of the companies that have not done it so far,” Katz said. “They are more likely in positions where they don’t need the money. They don’t have a valid use of proceeds for selling their real estate.”
Spreading the wealth
The $4.2 billion sale-leaseback agreement announced last month seemed to positive news for not only MGM ResortsInternational and The Blackstone Group, but those outside the deal as well.
On a call with investors Wednesday, Eldorado Resorts CEO Thomas Reeg said the company was happy to see what MGM was able to do with the Bellagio real estate. “We’re even happier that there’s new capital in the real estate investment arena that’scoming into the space,” Reed said. “We think that that’s the tip of the iceberg.”
The sale agreement is thought by many to help increase the value of gaming real estate all across the Strip. The deal appearsto have broken the record as the most expensive sale of a Las Vegas resort, selling for 17 times the annual rent of the $245million. In comparison, MGM completed a sale-leaseback of Park MGM and NoMad Las Vegas with MGM Growth last year forjust under 13 times the property’s annual rent.
“We think that the value of Vegas real estate is going to continue to climb as you have more capital that becomes interested inmaking those types of investments,” Reeg said. “But both the Bellagio trade and the Circus Circus trade were spectaculartrades from our standpoint.”
By the numbers
■ $22 billion: Value of REIT transactions since gaming real estate investment trusts were created in 2012
■ 35 percent: Percentage of gross gaming revenue in the U.S. those deals account for, leaving room for more sale-leaseback deals.
■ 4: REITs operating in the gaming space: The Blackstone Group, MGM Growth Properties, VICI and Gaming & Leisure Properties
■ 90: Properties those four companies are set to have in their portfolios by next year
■ $3 billion: Revenue those companies are expected to generate by next year
Source: Macquarie Research report