Two Of My All-Time Favorite Businesses Are Joining Forces

One of my all-time favorite stocks made a surprising move recently.

A couple of days ago, I wrote about how we added Realty Income (NYSE: O) to my premium portfolio back in 2013. Nearly a decade later, it remains a permanent fixture.

This powerful real estate empire is continually expanding its territory. It has acquired 1,080 new properties over the past year alone (3 per day) and now owns nearly 12,000 across the U.S. and Europe. These freestanding units are located in prime, high-traffic spots and leased out to mature businesses largely insulated from competitive e-commerce threats.

Think Walgreens, Home Depot, Taco Bell, Starbucks, and 7-Eleven. These tenants mail in steady rent checks each month. Management returns a fair chunk of those cash flows via dividends to stockholders, plowing the rest into new properties to keep growing the portfolio and deepening tomorrow’s income stream.

Rinse and repeat.

There have been some harsh commercial real estate downturns over the years, but Realty Income’s occupancy rates have never dipped below 96%. This was the only REIT in the S&P to increase both earnings and dividends during the pandemic. In fact, it has now raised its distributions for the past 100 consecutive quarters while delivering market-beating 15.1% annualized returns.

A fortress-like balance sheet and ready access to cheap capital have supported $3 billion in new property acquisitions over the past six months alone. But only one of its 236 deals last quarter really grabbed my attention…

Retail REITs Are Starting To Buy Casinos

Source: Realty Income Investor Presentation

Realty Income historically likes to work with gyms, dollar stores, pharmacies, and the like… businesses exhibiting some trait that shields against economic downturns. So I was shocked to see the company stake $1.7 billion earlier this year on the Boston Encore Harbor.

Wynn Resorts (Nasdaq: WYNN) sunk $2.6 billion into building this elite casino resort property, which wrapped up in 2019, just in time for Covid. The lush waterfront resort features 600+ luxury rooms and suites, five-star gourmet dining, upscale shopping and entertainment venues, and acres of gaming and meeting space.

The Boston Encore holds one of only two gaming licenses in the entire state of Massachusetts. The property took in $210 million in total revenues last quarter, a healthy increase of nearly 30% from a year ago.

Needless to say, this is well outside of Realty Income’s regular retail hunting grounds.

With few exceptions, this sector of the real estate world has been left to specialists like VICI (Nasdaq: VICI), another of my holdings over at High-Yield Investing. VICI owns dozens of casino properties, Caesar’s Palace and the Las Vegas Venetian. To clarify, it doesn’t run the casinos but simply leases the land and structures to experienced operators.

It would seem that Realty Income is now encroaching on this desirable turf. Could the Boston Encore deal be just a one-off transaction to diversify the portfolio? Possibly. But I think management sees this as an attractive and viable new channel.

And why not? You can’t argue with the returns. Realty Income will collect a base rent in the neighborhood of $100 million annually over the 30-year lease.

[See also: Why REITs Deserve A Place In Your Portfolio]

The Casino Business Is Back…

Gaming is back. Last month, approximately 3.5 million visitors poured into Las Vegas, including droves of business convention attendees. And as a group, they left behind an enormous pile of cash – $1.12 billion in Clark County. And that’s just the beginning…

Outside of Utah and a handful of other states, most of the country has legalized some type of commercial casino wagering. Thanks to more permissive attitudes (spurred partly by the prospect of much-needed tax revenues), state regulators have given the green light to numerous projects and expansions, including installing slot machines and table games at horseracing tracks, such as Arkansas’ Oaklawn Downs.

At last count, there were well over 1,000 casinos (both land-based and riverfront) nationwide. Thanks to the Supreme Court striking down the federal ban on sports wagering, many of these facilities are now getting a cut from the billions that used to be wagered underground on the Super Bowl and other big sporting events.

Keep in mind that many visitors spend even more freely outside the casino. Many come mainly to cavort in clubs with friends, relax in private poolside cabanas, shop at the most exclusive retail outlets, and dine in trendy restaurants. And with Covid restrictions easing, revenues from these leisure properties are once again on an uphill trajectory.

That’s welcome news for casino operators like Caesar’s Entertainment (NYSE: CZR) and Las Vegas Sands (NYSE: LVS). But there’s a good reason why these companies continue to shed their real estate holdings. Incidentally, it’s the same one that motivated Wynn to sell the Boston Encore.

You see, building a lavish casino mega-resort isn’t cheap. And Wynn is saddled with $11.9 billion in debt on the books. So selling off properties (and staying on as a tenant) is the surest and quickest way to de-leverage the stressed balance sheets across the industry.

Action To Take

Real estate groups now hold the keys to hundreds of casinos, large and small. VICI just acquired MGM Growth Properties, which ceded ownership of iconic Mandalay Bay and New York-New York. A real estate subsidiary of private equity group Blackstone has bought both the Bellagio and Cosmopolitan resorts in Las Vegas. EPR Properties (NYSE: EPR) has dipped its toes into these waters with a stake in the Resorts World Catskills casino outside of Manhattan.

But for the first time, a mainstream retail REIT is making a foray into this market. The timing sure appears to be fortuitous. U.S. casinos separated a whopping $53 billion from gamblers in 2021. And they are on track to smash that record this year, winning $29 billion in the first half of 2022.

This is a trend that’s still in the early stages — and I’ll be staying on top of it as it unfolds.

For investors looking for yield, any of the REIT names I mentioned earlier (O, VICI, EPR) are worthy candidates to consider.

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