Many industries and investments are suffering from the repercussions Covid-19 virus.
Real estate investment trusts (REITs) are among them.
It was a great plan: buy casinos, or the land beneath them, and then lease the venues back to the casino operators.
Since gambling is an established business that seemingly would never die, the business model means guaranteed income for decades, if not centuries. The perfect investment!
Or so it seemed. Losses can happen to the best of them. Many casinos have been shut down and trusts are no longer foolproof.
The first casino-based REIT appeared in 2012 when Penn National Gaming created Gaming and Leisure Properties (GLP), the first of what would become known as REITs.
wo others have been created in the gambling sphere: MGM Growth Properties (MGP) and Vici Properties. No one envisioned the degree of recession we are experiencing today.
It is pertinent that lease agreements in these investment vehicles made it difficult for casinos to abandon their contractual obligations. To make matters worse, multiple properties are part of a single REIT.
According to the co-founder of the asset manager Fundamental Income, Alexi Panagiotakopoulos stated,
“They do have highly sophisticated lease structures, structured as cross-collateralized master leases…Since the gaming REITs tenants are public, the REIT has a highly transparent tenant, with large corporate guarantees on what the industry calls ‘mission critical real estate.’”
REITs were never completely safe and investors are looking at other profit alternatives now that casino stocks are down.
Las Vegas Sands avoided this route so LVS is down about 35%, while MGM Resorts, with several properties sold to REITs is down 72%.
What to do going forward? COVID-19 is going to pass, and things will return to normal.
Lower prices crate investment opportunities. Panagiotakopoulos explains that the three casinos REITs are trading at levels not seen by net lease REITs since the depths of 2009. As an investor today, you would be able to buy MGP, VICI and GLPI at an average equity cash flow multiple of 7.3x with an average dividend of 11.2%.
to put that in perspective, the US 10-year Treasury is trading at 0.885%.