Valuations of casino (or gaming) REITs are likely to benefit from industry developments.

Daniel Adams, an analyst at Nomura Instinet, thinks gaming REITs may be re-rated higher by investors.

Valuations in the three-player sector could notch higher based on property sales, and deal-making feels the analyst.

Gaming REITs 101

As the name says, a gaming REIT (real estate investment trust) invests in casino and gaming resort properties.

The sector is quite the new kid on the block — the first player, Gaming and Leisure Properties (GLPI), went public as recently as in 2013. MGM Growth Properties (MGP) became public in 2016. The third REIT in the sector was VICI Properties (VICI), which came public last year in 2018.

Typically, the operators of the casinos (the tenants) pay lease rents to the REIT – the landlord of the property. Under a commonly followed structure, gaming REITs buy out the property from the operators and then lease it back to them.

Sometimes the tenants also pay the property expenses, insurance, taxes, and cap-ex. In this case, the arrangement is called a “triple-net lease” or “NNN lease.” These leases are usually a feature of the retail and healthcare industries.

Gaming REITs are attractive to investors for their assured cash flow, a mature industry, and highly valued properties. However, because of their novelty and “perceived” risk, they usually trade at a discount to NNN REITs.

Why gaming REITs could soon be on a hot streak

According to Adams, valuations in the gaming REITs sector will be driven higher by “potential incremental ‘validation’ catalysts.’ An example is the Bellagio sale and leaseback, which had attracted as many as six bidders.

Bellagio is a hotel-casino resort owned by MGM Resorts (MGM). It sold last month to The Blackstone Group in a $4.2 billion deal. MGM leased it back for an annual rent of $245 million. MGM Resorts will continue to operate the Bellagio, Blackstone said. It will also“be responsible for all aspects of the property on a day-to-day basis,” including capital expenditures.

The deal “unlocks a tremendous amount of undervalued real estate in our portfolio,” MGM Chairman and CEO Jim Murren said in a phone interview.

According to Adams, MGM will likely follow with a similar transaction regarding its MGM Grand property.

Other similar transactions in the pipeline could be properties owned by Eldorado Resorts (ERI) and Caesar’s Entertainment (CZR). Tropicana Las Vegas owned by Penn National Gaming (PENN), is also a possible candidate.

High-roller price targets bumped up

Adams listed new price targets as follows:

GLPI – $45 from $42

MGP – $43 from $40

VICI – S35 from $32

Over the longer term, the analyst expects gaming REIT valuations to close the gap (discount) with higher-valued, non-gaming, retail, triple-net REITs.

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