A slowdown in transactions across commercial real estate as a result of rising interest rates is unlikely to change dramatically in the near term as value issues continue to plague buyers, sellers and lenders. Facilities housing business operators have proven to be an exception.
Not only did they pay rent when casino tenants closed during lockdown, but gaming traffic recovered quickly upon reopening and continues to grow. increased by nearly 5% to about 3.3 million. Along the Strip, revenue per available room (RevPAR) surged 27% to over $167 over the same period. Las Vegas Convention and Visitors Authority.
Against this backdrop, gaming real estate’s two most prominent net lease investors, Gaming & Leisure Properties and VICI Properties, both REITs, maintained a steady pace of acquisitions throughout 2022. This activity was part of a trend for gambling operators to carry out sales. – Leaseback to raise growth capital. In fact, an analyst at Gaming REIT argues that volatile credit markets have made his REIT an attractive financing vehicle, fueling a consolidation of casino real estate that began a decade ago.
Since being spun out of PENN National Gaming (now PENN Entertainment) in 2013, GLP has amassed 57 primarily regional casino properties in 17 states. A spin-out from Caesars Entertainment in 2017, VICI Properties has built a portfolio of 45 gaming destinations across 15 states, with a particular focus on Las Vegas. These metrics are also attractive to newcomers. In February 2022, Realty Income executed his leaseback of his $1.7 billion sale of Wynn Resorts and Encore Boston Harbor.
“Throughout the pandemic, we have seen many significant deals between gaming REITs and operators,” said John Decree, Director of Global Gaming at CBRE. For the first time in its lifetime, we are in a unique position to offer operators very favorable funding terms and a more attractive cost of capital than the bond market.”
In fact, due to rising interest rates, debt issued a year ago by some casino operators is now trading at discounts as high as 5.9% of the original coupon, closer to 11%. As a result, if these companies sought similar debt financing today, their cost of capital would be about 11%, said Ed Pitoniak, CEO of his New York-based VICI Properties. By comparison, wealthy gaming property REITs can buy properties at hundreds of basis points lower capitalization rates and still capture a healthy spread of capital costs.
“As we move into 2022, it becomes clear that credit markets have changed dramatically and the trading value of existing debt has fallen significantly,” Pitniak said. “If someone wanted debt, it was very difficult to get.”
Among other transactions in 2022, VICI Properties completed the $17.2 billion purchase of MGM Growth Properties, eight regional gaming assets, including 50.1% interests in Park MGM, Mandalay Bay and MGM Grand, and seven Las Vegas properties. Got a resort. In December, the REIT announced it would acquire the outstanding balances of MGM Grand and Mandalay Bay from liquidity-challenged Blackstone Real Estate Income Trust for approximately $1.3 billion in cash and debt assumptions. In January, Vici announced the purchase of four of his casino properties in Alberta, Canada.
Anthony Paolon, Executive Director and REIT Analyst at JP Morgan, said: “REITs are very attractive real estate investments and they also make it work for operators gaining access to capital through highly efficient transactions.”
build a bridge
In addition to receiving healthy rental income and escalation, the sale-leaseback transaction creates a relationship between the REIT and the casino operator that could lead to future investments, he added. For example, in August he purchased the Rocky Gap Casino Resort in western Maryland in partnership with Century Casinos by VICI Properties. The REIT paid his $204 million for real estate and Century Casinos bought the business for his $56 million.
However, VICI Properties is accelerating an opportunistic real estate financing strategy that not only pursues sale/leasebacks but also finances non-gaming and non-casino entertainment operators alike. The goal is to build bridges to ownership or extract more attractive yields than possible through acquisitions.
The REIT’s non-casino financing activities include a $266 million mezzanine financing to Great Wolf Lodge and most recently $200 million to the Canyon Ranch Spa brand to develop a resort in Austin. , also includes contracts that give the right to purchase assets at a later time. VICI Properties also pledged up to $300 million in mezzanine financing to complete the construction of Fontainebleau Las Vegas, a casino resort development that spanned nearly 17 years after being stalled by the financial crisis.
“If you have to borrow money now, you’re pretty cool about market conditions and saying, ‘If that’s the cost of capital, that’s what I have to pay,'” explained Pitoniak. Did. “But if you’re a seller, you may still be fixated on what your property was worth a year ago. You don’t want to waste a lot of time negotiating in these cases because that’s not the reality of 2023.” is not.”
GLP is also busy. The REIT recently paid $635 million for the real estate assets of Bally’s Tiverton Casino & Hotel in Rhode Island and Bally’s Hard Rock & Casino in Biloxi, Mississippi. Also, up to $775 million to PENN Entertainment to finance the relocation of his two Riverboat Casinos in Illinois and the potential construction of new casino hotel rooms in Columbus, Ohio and Henderson, Nevada. announced that it will provide dollars.
At GLP’s third-quarter earnings call in late October, management said a slowdown in the construction financing environment was starting to bring in greenfield development proposals. Overall, GLP chief investment officer Matthew Demchyk said institutionalization of his gaming properties is only halfway through.
Moreover, according to experts, investment opportunities continue to expand. The legalization of sports betting outside of Las Vegas is bringing new customers to casinos and new casino developments are taking place across the country. can occur in downstate New York, including New York City, which grants Among the companies competing for these licenses are SL Green and Caesars Entertainment, which worked together to propose Caesars Palace Times Square, and Wynn Resorts, an affiliate adding a casino to Hudson Yards.
GLP’s Demchyk told analysts, “We’ve seen economic and structural headwinds significantly impact many types of real estate that have long been viewed as blue-chip stocks.” “At £1 per £1, gaming properties in the region continue to be incredibly attractive compared to other investments across the real estate spectrum.”
Read the February 2023 issue of CPE.