Gaming real estate investment trusts (REITs) MGM Growth Properties (NYSE:MGP) and VICI Properties (NYSE:VICI) are preferred ideas among real estate equities with the net lease designation, according to a research firm.
In its recent “Finding Opportunities in REITs” webcast, Baird explored ideas across several real estate sub-sectors, including manufactured housing, net lease, and shopping centers. It came away with “outperform” rated ideas for the rest of the year. The pair of gaming REITs made the cut.
The term net lease refers to a contractual agreement where a lessee pays a portion or all of the taxes, insurance fees, and maintenance costs for a property, in addition to rent,” according to Investopedia.
This structure is common in commercial real estate, and the tenant, say MGM Resorts International (NYSE:MGM), pays for all the property maintenance as if it owned it outright.
There are three publicly traded gaming REITs in the US – Gaming and Leisure Properties, Inc. (NASDAQ:GLPI), MGM Growth, and VICI.
At the height of the coronavirus pandemic when domestic gaming venues were shuttered, these stocks came under significant duress amid concerns that operator tenants would struggle to meet lease obligations in a zero-revenue environment. Those fears proved inaccurate, as gaming companies were able raise cash, and the real estate companies collected nearly all rent, even during the darkest days of the health crisis.
Today, the likes of MGP and VICI are thriving. Over the past year, shares of the two gaming REITs are up an average of 46 percent. That’s well ahead of the 34.76 percent returned by the MSCI US Investable Market Real Estate 25/50 Index, a widely followed basket of real estate equities.
In the case of MGP, that real estate company is levered to recovery on the Las Vegas Strip, because it owns the bulk of MGM’s real estate there. Following the recent acquisition of MGM Springfield, MGP owns essentially all of the property on which MGM’s domestic casinos operate.
Baird favors gaming REITs among net lease names because there’s less competition and the product isn’t commoditized. The research firm also likes the duo as plays on rising inflation.
For example, Caesars Palace owner VICI has rent escalators in its tenant contracts which are tied to the Consumer Price Index (CPI). That gauge is on a torrid pace of late, soaring in April and May. Those escalators imply VICI and other REITs have pricing power, explaining why investors historically favor real estate as an inflation play.
Caesars Entertainment (NASDAQ:CZR) is VICI’s biggest client, but unlike MGP, it has other tenants.
While MGP currently lacks tenant diversity, Baird said the name offers upside possibilities by way of potential equity index inclusion and acquisitions. Additionally, MGM is expected to continue paring its stake in MGP. That move is broadly applauded by analysts, as it will help the real estate firm gain greater autonomy.