Up Over 50%, The Casino’s “Landlord” Is Still A “Buy”…
Back in the early 2000s, I used to write a column called “The Gaming Investor” for Casino Player magazine. In that role, I got a front seat to see how the casino business was changing.
And while that was a long time ago, I’ve always been fascinated by how profitable the casino business can be. I’ve recommended a few casino-related plays in my various premium services over the years – heck, I’ve even found some winning picks for the income-minded crowd over at my High-Yield Investing premium service.
In fact, back in May of 2019, I wrote a piece about how investors can effectively become the casino’s “landlord” – through a unique REIT that we’ve owned in the High-Yield Investing portfolio since May 2018.
A lot has changed since then – most notably, of course, Covid-19. And while the pandemic certainly weighed down the industry for a while, you might be surprised to learn that this pick recently touched a new 52-week high.
An Update On The Casino’s Landlord
The pick, VICI Properties (Nasdaq: VICI), was a fairly new real estate investment trust (REIT) at the time. And in its portfolio were about two dozen premium gaming destinations entrenched in a dozen markets across the country.
The thinking behind a REIT like this was simple. Many of the big casino operators decided to move toward an “asset-light” strategy. And part of that strategy included shedding real estate assets to focus purely on gaming activities. In turn, REITs like VICI would own the properties and simply collect rent from the operators.
Steady rent checks, provided by a tenant with a license to practically print money. What’s not to like? Of course, Covid had other plans. But as you can see in the chart below, we’ve still managed to make out pretty well…
With vaccine distribution ramping up across the country as well as easing restrictions on gatherings, this REIT deserves a fresh look for income-minded investors…
A New Crown Jewel
The crown jewel in the portfolio, as you might gather from the name, is Caesar’s Palace on the Las Vegas strip, one of the world’s most opulent resorts.
But it looks like VICI will soon have a new crown jewel. The company has just announced plans to purchase the glitzy Las Vegas Venetian for $4 billion.
The palatial Venetian has been a landmark on the north end of the strip since 1999. Built at a cost of $1.5 billion, no expense was spared on the lavish resort. Authentic Italian frescoes adorn the ceiling and Venice-style canals run through the interior. Combined with the attached Venezia and Palazzo towers, the property holds more than 7,100 luxurious rooms and suites – making it the world’s second-largest hotel. The cavernous casino has ample space for 225 tables, 1,500 slot machines, and a 10,000 square foot sportsbook. Of course, there are countless other attractions and amenities within the property, too.
Despite the pandemic’s crushing impact, the Las Vegas Venetian still generated $738 million in revenue last year (less than half the take from 2019). But current owner Las Vegas Sands (NYSE: LVS) has moved far beyond its roots in the Nevada desert. The company generates about 87% of its revenues in the bustling Macau and Singapore markets. Even before the recent passing of founder Sheldon Adelson, there was talk of cutting the Venetian loose and focusing on Asian markets.
Now, it’s official. VICI will purchase the real estate, while Apollo Global Management is separately paying $2.5 billion for the operating assets (including tables and slots) and will become the new day-to-day operator.
When the transaction closes, Apollo will sign a 30-year triple-net lease and become the new tenant. As landlord, VICI stands to receive hefty annual rental payments of $250 million. That works out to a solid cap rate rental income stream of 6.25% on the purchase price ($250m/$4.0b).
Action to Take
VICI was only created a few years ago, but now becomes one of the world’s largest net-lease REITs as measured by EBITDA. The attractive 6.25% cap rate on this transaction will be immediately accretive to the bottom line. And the lease calls for automatic 2% to 3% rate hikes each year.
Of course, visitation is still constrained right now due to the pandemic. But visitors will return in due course. In the meantime, former owner LVS has guaranteed to step in and provide lease support (if necessary) until 2023, an insurance clause for VICI.
It hasn’t always been a smooth ride with VICI, but the future looks bright. With a 4.6% yield backed by rental income from premium casino properties across the country, I think this REIT is still a “buy” after the recent run-up.
Income-minded investors looking for a “reopening” play with some upside left on the table should consider giving it a closer look.
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