Posted on: July 8, 2024, 03:00h.
Last updated on: July 7, 2024, 10:20h.
Shares of VICI Properties (NYSE: VICI) and Gaming and Leisure Properties (NASDAQ: GLPI) — the two largest casino landlords — are off an average of 11.27% year-to-date while the S&P 500 is higher by 16.69%. But some analysts believe gaming real estate investment trusts (REITs) could soon deliver better performances.
In a recent note to clients, Truist Securities analyst Barry Jonas cited the familiar headwind of elevated interest rates as one of the primary drags on VICI’s and GLPI’s price action through the first half of 2024. Due to its capital-intensive nature, real estate is one of the sectors most negatively correlated to interest rates and with the Federal Reserve yet to lower borrowing costs, REITs of all stripes have been pinched.
Year-to-date, 10-year Treasury yields are higher by 11.17%, weighing on the real estate sector in the process, but those yields slightly declined over the past 90 days. That could be a sign of the rate stability Jonas mentioned as a possible catalyst for the casino REITs.
(VICI is) well positioned for the next wave of large scale, non-gaming, and/or international transactions,” wrote Jonas.
The analyst is also constructive on Gaming and Leisure, which is smaller than its rival and needs “less to move the needle,” he observed.
High Rates Not Slowing Casino REIT Activity
While the highest interest rates in two decades are weighing on shares of casino REITs, the companies aren’t sitting idly by. Rather, both GLPI and VICI are executing transactions that could be accretive to long-term investors.
In February, GLPI said it’s paying $175 million for the property assets of Tioga Downs Casino Resort in Nichols, N.Y. The acquisition jibes with GLPI’s track record of adding casino real estate in less volatile markets and areas where the acquired venue faces little nearby competition.
Jonas said that transaction and other bolt-on buys by GLPI are “indicative of smaller deals that are still getting done despite the lack of rate cuts so far this year” while that REIT and rival VICI are “demonstrating execution ability despite the lingering interest-rate uncertainty.”
For its part, VICI has been lauded by Wall Street for its involvement in financing $1 billion in upgrades at the Venetian and Palazzo on the Las Vegas Strip. As part of the financing accord, VICI will increase Apollo’s lease obligations at Venetian. Under the existing rental agreement, rent will rise “on the first day of the quarter immediately following each capital funding at a 7.25% yield.”
Eye on Potential Penn Sale
Amid frequent though unconfirmed scuttlebutt that Penn Entertainment (NASDAQ: PENN) is a takeover target, both casino REITs could be worth monitoring, but such a deal would be impactful for GLPI because the regional casino operator is the landlord’s biggest tenant.
Jonas, who isn’t convinced Boyd Gaming (NYSE: BYD) will make a play for Penn, observed GLPI will have a say in any such transaction should it materialize.
“For example, GLPI’s master lease with PENN has change-of-control provisions that set various conditions for an acquirer and could require GLPI’s approval for any divestitures/lease modifications,” concluded the analyst.
