Back in the early 2000s, I used to write a column called "The Gaming Investor" for Casino Player magazine. As a result, I had a front-row seat to the gradual transformation that's taken place in the casino business over the years.
The days of cheap drinks and 99-cent shrimp cocktails are sadly gone for the most part. Once considered loss-leaders just to lure in gamblers, property owners have invested heavily to renovate and update their lounges, showrooms and buffets. These ancillary areas of operation now take in more cash than the casinos. As a result, Las Vegas isn't the Vegas Frank Sinatra knew -- or even the one that I marveled at for the first time in the late 1990s. Alongside high-rollers at the baccarat tables are affluent partygoers at swanky clubs who aren't shy about forking over $10,000 for a private VIP table. This diversification of the revenue stream means more ways to separate visitors from their dollars -- and less reliance on Lady Luck (although we know the house always wins).
And the Las Vegas desert isn't the only place where players are handing over their chips. From Gulf Coast towns like Biloxi, Mississippi, to the Chicago suburb of Joliet, Illinois, there are thriving gaming markets scattered all across the country. Roughly half of the country allows gaming in one form or another, and with the Supreme Court recently striking down the federal ban on sports wagering, many of these facilities could soon be taking their cut from the billions that used to be bet underground on the Super Bowl and other big sporting events. Americans are also spending a greater proportion of their disposable income on leisure and entertainment, just as casino resorts reinvent themselves with expanded activities that go far beyond just a roll of the dice or a few hands of cards.
In other words, companies like Caesar's Entertainment (NYSE: CZR) sit at the intersection of some powerful macro trends. But operating these massive resorts requires equally massive daily expenses and capital expenditures, which is one reason why CZR doesn't pay a dividend.
But its landlord, on the other hand... Well, that's a whole different story.
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Meet The Casino's Landlord
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.
Source: Wikimedia Commons
The Roman-inspired pools, baths and spa allow guests to luxuriate in style. And the attached Colosseum (which seats nearly 4,500 spectators) showcases top-notch performers when it's not hosting world-class sporting events. The endless array of dining options features celebrity chefs such as Gordon Ramsay, Bobby Flay and Wolfgang Puck.
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.
One recent addition is the tropical Margaritaville Bossier, the Jimmy-Buffet inspired resort which sits on the banks of the Red River. The property generates the second-highest revenues in the local market, trailing only Horseshoe (which VICI also owns).
That gives the company the No. 1 and No. 2 properties in north Louisiana, which draws heavily from nearby Dallas and hauls in $680 million in annual gaming wins.
VICI bought the real estate and surrounding land for $261 million. But it won't be handling the day-to-day operations. Remember, it's strictly a landlord. The tenant is Penn National Gaming (Nasdaq: PENN), an experienced casino operator, which signed a 15-year lease with an annual rent of $23.2 million.
This arrangement shelters VICI from the occasional downturns that coincide with economic slumps. Even when the tables are slow, it still collects base rental income (which automatically adjusts upward each year). But there is a variable component linked to resort revenues, allowing the owner a piece of the action when conditions are good.
VICI also just announced plans to purchase the JACK Casino in Cincinnati for $558 million. This purchase applies only to the real estate (land and buildings), while Hard Rock International will take control of the table games, slot machines and other operating assets.
The JACK originally opened as a Horseshoe Casino in 2013, before being sold to a local businessman and rebranded. Soon, it will undergo a makeover and re-emerge under the Hard Rock banner. The 22-acre property features 100,000 square feet of gaming space, along with six restaurants and other amenities. It is one of only four casinos permitted in the state of Ohio.
This is the third such transaction that VICI has orchestrated in recent months. Before this, the company teamed up with Penn National (Nasdaq: PENN) to acquire the Greektown Casino in Detroit for $1 billion.
Similar to the deal with Penn National, Hard Rock has signed a triple-net lease for an initial term of 15 years. The base rent will be $43 million per year, for a yield of 7.7% on the purchase price. In a press release, VICI noted that the Jack casino has a rental coverage rate of 174%. That's a bit below the 190% for the Margaritaville, but still a comfortable cushion. That would imply the property generates approximately $75 million in annual cash flows.
Action to Take
VICI's portfolio of regional casino properties continues to expand. But it doesn't roll the dice on the operating side. It simply acts as landlord, renting the properties to tenants such as Penn National and Caesar's. Hard Rock will make for a nice addition to the roster.
The total portfolio spans four golf courses, 20 pools, 43 nightclubs, 50 retail outlets, 120 restaurants, 1,600 ticketed show options, and 14,000 hotel rooms. The company also owns 34 acres of idle Las Vegas strip land that are ripe for development opportunities. But the biggest growth driver, in my opinion, will be sale/leaseback opportunities with Caesar's, which still has substantial real estate holdings, including the Paris, Bally's and Rio resorts in Las Vegas. There's a strong chance it could choose to monetize and sell these resorts to VICI, and then lease them back.
VICI shares have had a nice run this year, gaining 20% thus far. But this 5.2% yielder remains a "Buy" in our High-Yield Investing portfolio.
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