Initially, the convergence between the casino industry and real estate investment trusts was viewed as a curiosity. Five years later, some analysts believe gaming REITs – which own the land and buildings and lease the operations to a management company – offer investors a golden opportunity.

“Our favorable view on the sector is predicated on long-term growth potential and relative valuation,” Union Gaming Group analyst John DeCree wrote in a research note last week. “The casino REITs also offer a safe and attractive place to find shelter during turbulent market conditions that have rattled much of the casino and gaming sector since second quarter earnings.”

Credit Suisse gaming analyst Cameron McKnight, in launching gaming industry coverage earlier this month, gave buy ratings to two of the three gaming industry REITs.

“We like the relatively stable nature of gaming REITs’ dividends, attractive relative valuations, and potential for acquisition-led growth,” McKnight said.

Casino REITs

Gaming and Leisure Properties became the casino industry’s first REIT in 2013 when it was spun off from Penn National Gaming, taking with it ownership of 21 of the company’s then-29 casinos and racetracks. The properties were leased back to Penn through a management contract.

GLPI steadily grew, acquiring additional Penn properties and leasing the operations back to the original owners. In 2015, GLPI acquired Pinnacle Entertainment’s regional casinos for $4.74 billion and leased the operations back to Pinnacle.

That same year, MGM Resorts International spun off 10 of its casino-resorts – including seven on the Las Vegas Strip – into MGM Growth Properties. The casino operator, which signed lease agreements to operate the facilities, has a 70 percent ownership stake in the REIT, but has plans to reduce the percentage.

Last year, VICI Properties became the gaming industry’s third REIT, spinning off from Caesars Entertainment as part of the casino giant’s bankruptcy reorganization. VICI, which went public in February, raising $1.2 billion in its IPO, currently owns 19 Caesars properties and has options to acquire three others.

Gaming REITs have gained additional interest this year as they have become part of the regional casino market’s consolidation efforts. Year-to-date, there have been $7 billion in announced casino acquisitions and mergers. According to DeCree, gaming REIT participation in the various deals covers roughly 60 percent, or approximately $4 billion.

“Regional casino operators remain focused on consolidation, which should continue to create opportunities for REITs going forward,” DeCree said.

REIT Expansion

The current merger environment includes casino operators that had not previously been involved with REIT transactions. Boyd Gaming Corp. will acquire the operations of four Pinnacle-owned casinos from GLPI as part of Penn National’s pending $2.8 billion purchase of Pinnacle. The deal with Boyd alleviates certain federal antitrust issues for Penn.

Eldorado Resorts and GLPI are jointly acquiring Tropicana Entertainment in a $1.85 billion deal. Reno-based Eldorado is buying the operations of seven Tropicana properties in six states, while GLPI is purchasing the casinos’ associated real estate.

On a smaller scale, VICI – in its first deal outside of Caesars – is buying Margaritaville Resort Casino in Bossier City, Louisiana, and will lease the casino operations to Penn National. The entire transaction is valued at $376 million.

McKnight is bullish on REIT involvement in the regional gaming market.

“Regional gaming growth is accelerating, revenues are more defensive than the street thinks, and supply growth is relatively modest,” he said.

The financial structure of REITs intrigues the investment community.

By law, REITs don’t pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute at least 90 percent of their taxable earnings to shareholders. Investors are taxed at their individual tax rate for the ordinary income portion of the dividend.

REITs are, however, not without critics.

Some investors have worried that the short-term gains — tax benefits, a boost in stock prices, and potentially lower debt — are overshadowed by long-term issues. Often, the interests of the operating company – capital expenditures needs for renovations and expansions – will collide with the interests of property owners.

The Future

DeCree doesn’t foresee a slowdown in REIT activity. He also doesn’t expect a fourth casino industry REIT to be created.

“We could see gaming companies continue to sell one or two assets at a time to a REIT or use the REITs as financing partners for larger acquisitions,” DeCree said in an email.

He also suggested a traditional REIT from outside the casino sector might jump into the game and purchase gaming real estate, potentially along the Las Vegas Strip.

“The Cosmopolitan Las Vegas and Wynn Las Vegas come to mind as high-quality casino assets that could attract the interest of non-casino real estate investors,” DeCree wrote in his note.

He also suggested a merger possibility at some point between two of the casino REITs. In January, VICI rejected a purchase offer of $5.9 billion from MGM Growth Properties.

“A deal this size would likely attract traditional real estate investor interest and potentially improve valuation more quickly,” DeCree wrote.

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.