As the sun dips behind the gilded skyline of the Las Vegas Strip, the casino business reels from an unexpected twist in fiscal policy. At the onset of the year, hot predictions blazed like neon signs, forecasting the Federal Reserve to trim interest rates from their soaring 20-year apex. Such financial alchemy was poised to spark a flurry of mergers and acquisitions across the casino gaming landscape like a winning streak at the slots. Yet, as dice often do, the numbers came up unexpected.
The high-stakes game turned chill when the Consumer Price Index stubbornly gripped its lofty rungs, arresting any early notions of a rate cut windfall. Where the chatter once brimmed with the excitement of a three to six rate cut bonanza, the dialogue has since shifted to whispers of the Fed holding their ground, perhaps until the next year’s calendars are swapped.
This sobering shift in momentum alludes to a delay in the anticipated consolidation renaissance within the gaming industry. Barry Jonas, an oracle of the markets at Truist Securities, penned a fresh analysis for clientele, highlighting how this economic impasse could stifle the dance of buyouts, mergers, and strategic financial partnerships.
The economic script, as envisioned by enthusiasts, featured interest rate reductions playing the lead role in welcoming a surge of mergers and acquisitions. Deals would flourish where casino operators could turn their brick and mortar into liquid gold while still reigning over their kingdoms – a strategy known as sale-leaseback.
Yet, amid the Fed’s crusade against the inflation dragon, these ventures into financial matrimony lie in waiting, says Jonas. The year has borne witness to notable industry moves – most prominently, the behemoth $6.2 billion union of International Game Technology’s global gaming with Everi. But outside this headline grabber, the anticipated nuptials between casino magnates are noticeably absent.
The repercussions extend beyond mergers. Higher interest rates, the offspring of unyielding inflation, have beckoned gaming establishments to shave down and remodel their debts. Despite nods of approval from the analyst and investor galleries, this fiscal tightening is casting a pall over their stock market performance.
The troupe of gaming stocks – encompassing casino operators, gaming device wizards, and the landlords of the gaming temples – finds itself trailing behind the broader market’s pace. Jonas strikes a note of caution, suggesting that without the adrenaline of mergers and acquisitions or the steady drum of organic growth, his cadre of gaming stocks may remain mired in “value land.”
In a recent forecast shuffle, Jonas trimmed price estimates on several gaming mainstays like Caesars Entertainment, albeit with a sprinkling of hope, as he elevated the outlook for Bally’s and Red Rock Resorts.
One need not look further than the realty guardians of the gaming coliseums to observe the sensitivity to the mercurial nature of interest rates. Real Estate Investment Trusts, the bastions of gaming properties, have watched their fortunes wane in this climate, with the S&P Real Estate Select Sector Index yielding ground by 8.3%. This retreat stands in stark contrast to the S&P 500’s bullish 6.7% ascent.
Institutional stalwarts such as Gaming and Leisure Properties and VICI Properties, the empire behind the iconic Caesars Palace, haven’t been spared, their shares diminishing considerably as the year unfolds.
Despite current headwinds, Jonas suggests the seas may yet calm. A semblance of stability in interest rates and a clearer foresight into the Fed’s fiscal maneuverings could reignite the appetite for grand-scale dealings among gaming REITs.
But for now, as the roulette wheel spins, the industry holds its breath, awaiting the Federal Reserve’s next move in this high-stakes game of chance and finance.
