What are the odds of making money in Las Vegas?
That depends on a whole list of factors, including what games you plan to play. As Showbiz CheatSheet acknowledges, “the house always has an edge.” But it’s going to be greater or lesser depending on what your poisonous pick may be.
That’s why, “Savvy gamblers are going to cluster around the blackjack tables, where the casino’s edge is usually between 0.5% to 1%...” And they’re going to avoid keno or wheel of fortune altogether, since fortune doesn’t favor the foolish in either case.
You could argue though that the keyword there is really “savvy.” Does the gambler know what they’re doing? What they’re spending and not spending? Where to go and how to go about it?
There’s a whole lot of money to be made in Vegas, it’s true. But there’s also a whole lot of money to lose – for everyone involved.
For proof of that, look no further than last October. That was when MGM Resorts International (MGM) announced the sale of its iconic Bellagio property to Blackstone Group (BX).
The price tag: $4.25 billion. The cost: an annual rent of $245 million.
It appears that MGM just couldn’t see the benefits of outright owning the land. It was too pricey for its purposes, hence the sale/leaseback tact it took.
Blackstone, however, believes it can make its money back and then some. And not just with the Bellagio. It’s got a much bigger strategy it’s working with to clean out the casinos.
Only the Best Bets for Blackstone
As I wrote right after that deal was disclosed, Blackstone isn’t an unhinged addict in Vegas. It’s taking its turn at the tables, sure, but it also knows how to bide its time for just the right setups.
For proof of that, “It acquired the Cosmopolitan in 2014 from Deutsche Bank for $1.73 billion… after the previous owner defaulted on its loan in 2008.” Admittedly, it’s now looking to sell that property. But that doesn’t change the overall focus I noted at the time:
“In addition, Blackstone appears to be ramping up its quest to become a dominant ‘iconic resorts’ landlord. The private equity firm recently acquired Turtle Bay Resort in Oahu for $330 million. And, a few weeks ago, it announced the acquisition of a 65% interest in Grey Wolf Resorts for $2.9 billion. (Centerbridge, a private investment management firm, will retain a 35% interest.)”
Today, it’s at it again – this time with a joint venture to purchase both the MGM Grand and Mandalay Bay Vegas-based real estate assets. The buy-in is $4.6 billion.
Admittedly, the terms of this deal have MGM Growth Properties (MGP) taking 50.1% ownership. Blackstone’s Blackstone Real Estate Income Trust will own the non-controlling remainder.
Yahoo! Finance says that Blackstone Group’s president and chief operating officer, Jon Gray, called the deal one that “reflects our continuing strong conviction in Las Vegas.” And Tyler Henritze, head of U.S. acquisitions for Blackstone Real Estate, added:
Similar to the Bellagio, owning these two premier Las Vegas assets under a long-term lease with MGM provides stable cash flow and excellent downside protection for our BREIT investors.”
They clearly see at least parts of Vegas as winners… and we’re more than curious to see how well these bets turn out.
Veni, Vidi, Vici
For “Average Joe” and “Average Jane”, who may not have billions in cash sitting around like Blackstone does, we like the odds of owning shares in Vici Properties (VICI), a New York-based REIT.
The company listed shares in February 2018 by forming properties from Caesars Entertainment Operating Co., a subsidiary of gaming giant Caesars Entertainment Corp. (CZR) (that emerged from Chapter 11 bankruptcy protection in October 2017).
Vici chose the name as a way of communicating the company’s Caesarean heritage, given the fame around the saying—attributed to Julius Caesar—of “Veni, Vidi, Vici.”
Since going public, Vici has done an excellent job of growing the portfolio, utilizing a disciplined capital structure. As of Q3-19 the company had $1.8 billion in liquidity and maintains a powerful investment spreads that drives earnings growth. In the latest quarter (Q3-19) Vici generated 24.5% AFFO growth and analysts forecast that 2020 will be another exceptional year (analysts estimate 21% AFFO growth in 2021).
The latest Blackstone news validates the gaming investment strategy, as casinos have become much more acceptable and rewarding. This competition should intensify as other REITs (MGM Growth, Gaming and Leisure, and EPR Properties) seek other assets.
One of the reasons we favor Vici is because of the substantial pipeline of deals in the pipeline, that includes new opportunities and right of first refusal deals (called ROFR’s). In addition, Caesars’s is set to merge soon (Q1-20) in an $8.58 billion cash-and-stick deal with Eldorado Resorts (ERI) that would create the biggest casino operator in the U.S.
This provides Vici with improved asset quality because Caesars/Eldorado will have lower cost of capital and scale, that will most likely provide the combined companies with a meaningful credit upgrade. In addition, Vici’s ROFR’s include some high-profile assets including the brand-new CAESARS FORUM brand that opens March 18th (will house the 2020 NFL Draft in late April 2020).
Vici shares are trading at $25.98 with a P/FFO of 15.3x and dividend yield of 4.6%. We consider shares a Buy, recognizing the 2020 and 2021 growth prospects, validated by the latest Blackstone news.
I own shares in BX and VICI.
