Casino REITs Destination for Inflation Protection
Posted on: May 31, 2022, 08:46h.
Last updated on: May 31, 2022, 11:02h.
Confirming the notion that the real estate sector is a good place to be when inflation is high, as is the case today, Gaming and Leisure Properties (NASDAQ:GLPI) and VICI Properties (NYSE:VICI) are both sharply outperforming the S&P 500, as well as the MSCI US Investable Market Real Estate 25/50 Index this year.
Following VICI’s recently completed $17.2 billion purchase of MGM Growth Properties, the Caesars Palace owner the GLPI and VICI are the only two publicly traded casino real estate investment trusts (REITs) on the market today.
Casino REITs have been among the best-performing property sectors this year as the positive tailwinds from the leisure demand recovery – particularly in the critical Las Vegas market — have offset inflation headwinds and economic growth concerns,” according to a new report by Hoya Capital.
While the universe of dedicated casino REITs is small, more diversified property companies are entering this space. For example, Realty Income (NYSE:O) announced in February it’s acquiring the property assets of Encore Boston Harbor for $1.7 billion, marking its initial foray into gaming real estate.
Casino REITs: All About Fighting Inflation
GLPI and VICI are what’s known as triple-net REITs, meaning the lease terms they sign with clients are usually far longer than what’s seen in other commercial real estate segments.
As such, market participants tend to treat triple-net REITs on par with longer-dated bonds, meaning these stocks can be vulnerable to rising interest rates. This year, however, investors are focusing more on the inflation-fighting advantages offered by GLPI and VICI. The latter is positive on a year-to-date basis, while the former’s 2022 loss is modest relative to the broader market.
The key to GLPI’s and VICI’s success in inflationary environments is derived from pricing power and inflation-linked rent increases that are built into tenant contracts. Take the case of VICI’s contract with MGM, which is now one of the REIT’s largest tenants following the MGP acquisition.
The initial lease term with MGM, which started in late April, is 25 years, with three 10-year tenant renewal options and an initial total annual rent of $860 million. Under the terms of that agreement, rent can increase 2% a year for the first decade, and at a rate of 2% to 3% annually thereafter, indicating VICI investors are gaining more inflation protection.
More Casino REIT Consolidation
While VICI’s purchase of MGP qualifies as mammoth in the casino REIT space, Hoya Capital believes more purchases in the gaming real estate landscape are possible.
“The M&A environment remains fertile. VICI Properties closed on its $17.2 billion acquisition of MGM Properties, giving the company a dominant share of the Las Vegas strip,” notes the asset manager.
Since 2016, GLPI, MGP and VICI acquired nearly 30 gaming properties, and that doesn’t include VICI’s outright acquisition of MGM Growth.
With some operators still owning all or most of their real estate, it’s possible some look to part with a property or two to raise cash to finance other endeavors. That could open the door for GLPI and VICI to add to their portfolios.