Posted on: July 8, 2024 03:00h.
Last updated: July 7, 2024, 10:20.
Shares of the two biggest casino property owners, VICI Properties (NYSE: VICI) and Gaming and Leisure Properties (NASDAQ: GLPI), are down an average of 11.27% year to date while the S&P 500 is up 16.69%. But some analysts believe gaming real estate investment trusts (REITs) could see better performance in the near term.
Harrah's on the Las Vegas Strip, where owners VICI Properties and rival Gaming and Leisure Properties received praise from Truist Securities analyst Barry Jonas. (Image: Reno Gazette Journal)
In a recent client note, Truist Securities analyst Barry Jonas cited the familiar headwind of high interest rates as one of the main drags on VICI and GLPI price movement through the first half of 2024. Real estate is one of the sectors most inversely correlated to interest rates due to its capital-intensive nature, and with the Federal Reserve yet to lower borrowing costs, REITs of all kinds are taking a hit.
Year to date, 10-year Treasury yields have risen 11.17%, weighing on the real estate sector in the process, but yields have edged lower over the past 90 days, which could be a sign of stabilizing interest rates, which Jonas cited as a potential catalyst for casino REITs.
“[VICI]is well-positioned for the next wave of large-scale, non-gaming and/or international transactions,” Jonas wrote.
The analyst also had a positive view of Gaming and Leisure, noting that the company is smaller than its rivals and “doesn't have to push as hard to make a difference.”
High interest rates haven't slowed casino REIT activity
While the highest interest rates in the past 20 years are weighing on casino REIT stock prices, the companies are not sitting idly by. Instead, both GLPI and VICI are executing deals that could benefit long-term investors.
In February, GLPI announced it would purchase the real estate assets of Tioga Downs Casino Resort in Nichols, New York, for $175 million. The acquisition is consistent with GLPI's track record of adding casino real estate in less volatile markets and geographies where the properties it acquires encounter little nearby competition.
Jonas said the GLPI deal and other follow-on purchases “show that smaller deals are still happening despite the lack of rate cuts so far this year,” while the REIT and rival VICI “have demonstrated their ability to execute despite lingering interest rate uncertainty.”
Meanwhile, VICI has been praised by Wall Street for financing $1 billion in renovations of the Venetian and Palazzo on the Las Vegas Strip. As part of the financing agreement, VICI will increase Apollo's lease obligations at the Venetian. Under existing leases, rents will increase “at a rate of 7.25% on the first day of the quarter immediately following each capital raising.”
Focus on the possibility of selling pens
Both casino REITs may be worth keeping an eye on as Penn Entertainment (NASDAQ: PENN) is frequently rumored to be a takeover target, but such a deal would have a big impact for GLPI as the regional casino operator is the landlord's largest tenant.
Jonas, who isn't convinced Boyd Gaming (NYSE: BYD) would acquire Penn, noted that GLPI would have a say if such a deal were to come to fruition.
“For example, GLPI's master lease with PENN contains change of control clauses that set out various terms for any acquirer, and any sale or lease modification may require GLPI's approval,” the analysts concluded.