Will the Casino Industry Gamble on REITs?
After two quarters of weak earnings, many gaming companies are considering starting REITs in order improve profits. Big names like MGM, Wynn Resorts and Boyd Gaming have all said they're considering it. How will the REITs and the main gaming companies operate with each other? Trepp researcher Susan Persin spoke to Bisnow about her recent report on the subject.
Susan tells us the only gaming REIT around at the moment, launched in 2014, is Penn National Gaming’s Gaming and Leisure Properties (GLPI), which announced last month the acquisition of Pinnacle Entertainment's $4.7B real estate portfolio. The properties will be leased back to the Pinnacle after the transaction is finalized in early 2016. Gaming and Leisure now owns 35 casino-hotels in 14 states, Trepp reports.
China’s anti-corruption initiatives are one of the root causes for the decline in casino earnings, since very wealthy Chinese are betting less at the tables in Macau and Las Vegas. Susan doubts, however, that these initiatives will have a significant effect on their larger US real estate investments. Considering the number of acquisitions of famous properties by Chinese companies over the last few years, she tell us she's confident the legitimate money will find its way overseas if there is interest. The devaluation of the yuan and the recent stock market crash, however, may play a greater factor, as Chinese elite will have weaker amounts of capital to invest when they come abroad.
“America is always seen as a safe haven because of its relatively stable currency,” Persin tells Bisnow, “but the current situation makes these Chinese investments in US real estate a little bit less certain.”
If these REITs are formed, however, there's the potential that the REIT and the gaming industry could have different aims and eventually compete for resources as they look out for their respective investors.
To have cohesion, these companies will need to set agreements with every new REIT and property, clearly delineating who will pay for what.
Another danger that both REIT and casino operator face is the risk when the lease expires, since either party can decide not to renew the lease. These risks cause higher lease rates, which would be good for the REIT, but not for the operator.
So is going REIT the best course of action for the gaming industry? Susan warns that while REITs are an attractive avenue right now, casino companies need to be forward-thinking before making a huge decision.
