Checking In On The Casino’s High-Yield Landlord
Like chips on a poker table, many of the nation’s most iconic gaming properties continue to pass from one owner to another.
Just recently, Blackstone Group and a joint venture partner acquired the real estate assets of the MGM Grand Las Vegas. Same goes for the nearby Mandalay Bay. The price tag: $4.6 billion. This follows the sale of the revered Bellagio for $4.25 billion back in October. And the aging Circus Circus for $825 million…
MGM Resorts (NYSE: MGM) is shedding its valuable real estate holdings and collecting a much-needed cash infusion. Going forward, it will simply lease these properties from the new owners. We’re talking about some heavy rent checks – about $245 million a year for the Bellagio.
These sales are part of a broader “asset-light” strategy. The plan is to monetize brick and mortar assets (which can be capital intensive). Then, it will focus strictly on the operating side of the business. That includes a new emphasis on sporting events and other live entertainment.
This is the same path Caesar’s Entertainment (NYSE: CZR) followed years ago, which is how VICI (Nasdaq: VICI) – one of my favorite REITs – was created.
The Casino’s Landlord
For a brief refresher, I described VICI as “The Casino’s Landlord” back in May 2019:
VICI Properties (Nasdaq: VICI) is a stock we’ve owned in my High-Yield Investing premium newsletter since July 2018. It’s a fairly new real estate investment trust (REIT) that invests almost exclusively in gaming destinations. The company holds the keys to 22 gaming properties entrenched in a dozen markets across the country, from Harrah’s Lake Tahoe to Bally’s Atlantic City.
The crown jewel in the portfolio is Caesar’s Palace on the Las Vegas strip, one of the world’s most opulent resorts. The property features six towers that hold 3,960 rooms, suites and villas, along with acres of gaming space adorned with imported Italian marble columns and statues.
There is only one Caesar’s Palace. But VICI’s impressive collection includes nearly two dozen other high-grossing properties. Most belong to the Caesar’s corporate family, including Harrah’s-branded properties in Kansas City and New Orleans and Horseshoe resorts in Tunica, Mississippi and Bossier City, Louisiana.
Out With The Old, In With The New
As you can see, Caesars maintains a warm relationship with its offspring. And due to this, it’s become VICI’s largest tenant.
Which brings us to today. VICI just announced plans to sell the Harrah’s Reno resort for $50 million. The Harrah’s brand was born in Reno more than 80 years ago. But the downtown property is ripe with redevelopment opportunities.
You also may recall there is a deal on the table for Caesars to be acquired by Eldorado Resorts (Nasdaq: ERI). This merger will create the nation’s largest gaming empire, with a portfolio of 60 casino resorts across the country.
As part of that transaction, El Dorado has agreed to sell VICI three Harrah’s-branded resorts in New Orleans, Atlantic City, and Laughlin, Nevada. The technical terms are a bit complex. But the main takeaway is this: VICI is providing $3.2 billion in upfront cash. (El Dorado will use that as financing to pay for Caesars). In turn, it will gain the ownership deeds to three top-tier regional gaming resorts and receive $253 million in annual base rental income.
That equates to a cap rate yield of about 8%.
Overall, VICI maintains strong rent coverage among its tenants, which helps support a dividend yield near 5%. And while we’re already up by about 35% on VICI, it’s still a “Buy” for investors looking for a unique addition to their portfolio.
Note: VICI isn’t the only high-yield stock that’s also rewarded us with big-time capital gains. If want to know about my absolute favorite high-yield picks, then I invite you to check out my latest report right here.