Real Estate Investment Trusts and the Casino Industry

REITs -- Real Estate Investment Trusts -- have become an important part of how casinos are owned. These trusts are similar to mutual funds but instead of owning stocks, the investor develops a portfolio of residential and/or commercial properties or a portfolio of the mortgages for those online casino or brick-and-mortar properties.

Investors buy shares of a REIT in the same way that they would buy shares in a mutual fund or in a company. In the last decade, it’s become popular to invest in REITs because they offer higher returns on income-producing investments. In particular, it’s becoming more accepted to acquire a REIT to gain ownership in a casino property.

Advantages of REITs

Many savvy investors are turning to REITs because, they believe, such trusts offer great potentials which includes a steady income stream and the opportunity for solid long-term asset growth that reflects the real estate market.

By law, REITS are required to distribute 90% of their income to shareholders. Over the past 20 years, REITS have averaged an 11.8% annual return (as compared to 8.6% for the S&P 500 Index). This makes REIT investment particularly attractive when the subject involves the growing field of casino properties. 

When considering investment in a REIT, there are limitations and vulnerabilities that need to be considered.  The returns, which have traditionally been rewarding, reflect a risk that is inherent in investing in a narrow category. REITS have traditionally experienced ups, downs and outright collapses which follow a roughly 15-18 year cycle (REITS were launched in the 1960s). So, it’s important that a potential investor do a deep investigation before he invests in a REIT.

Two Types

There are two types of REITs – public REITs and non-traded REITs. Public REITs are traded on stock exchanges and are seen as the best choice for most investors due to their liquidity. If things don’t go well with a public REIT an investor can dump his shares easily and quickly.

That’s not always the case with non-traded trusts which require shareholders to buy and sell their shares from the company that operates the trust. For instance, during the 2008 recession, some real estate investment companies decided to freeze their REITs. When real estate values fell, REIT shareholders were left stuck with their investment.

Additionally, public REITs are seen as trusts that offer better long-term results, faster recovery from downturns and greater transparency. Many investors shy away from non-traded trusts because those REITs frequently demand upfront fees that range up to 12%-15%.

REIT and Casinos

A REIT owns a casino property or some other income-producing real estate. It leases that property to a company that then operates the property and pays the REIT rent or leasing fees. (for instance, a REIT would lease the property to a casino company such as MGM Resorts, Caesars Entertainment or Penn national).

Today, REITs own more than $3 trillion in assets across the United States. Already, many of the most valuable of those assets are gaming venues and owners of other gaming companies have started to turn to REITs rather than buying a piece of real estate outright. Gaming and Leisure Properties Inc is the first gaming company to turn to a REIT. 

Gaming and Leisure Properties Inc evolved from Penn National Gaming and it went on to acquire the majority of Penn National’s properties. After acquiring the real estate on which the casino stands, it leased management of those properties back to Penn. That strategy has since become the model for many casinos who acquire a casino that was formerly owned by another company. In this way, REITs have served as a major factor in the consolidation of the U.S. casino industry.

VICI and MGM Growth Properties are two additional gaming operators that have spun off from their parent companies (MGM Resorts International and Caesars Entertainment). In 2018 both added new properties and have been paying regular dividends to the REIT investors. These properties include the valuable VICI’s Margaritaville in Bossier City, Louisiana, which, until last year, had been managed independently.

Many casino industry leaders believe that 2019 will also be a strong year for REITs in the casino industry and that the REITs are going to be a fixture in the casino landscape for the foreseeable future.  

Want a REIT?

If you want to get involved in investing in a REIT, you will need to know the quality and composition of the REIT’s holdings. You’ll need to decide whether you want an Equity REIT or a Mortgage REIT.

Equity REITs acquire commercial properties including casinos, shopping centers, warehouses, apartment buildings, and even timberland. These REITS generate their income from tenant rent. Financial advisors suggest that you look for a REIT that operates top-notch space with long-term tenants.

A mortgage REIT traffics in mortgage-backed securities and real estate mortgages. They generally focus on a specific category such as retail (shopping centers and malls), healthcare (hospitals,  medical offices, assisted living centers) and residential properties (apartment buildings, manufactured housing, hotels).

If you’re considering a mortgage REIT you should evaluate the trust by considering the current state and future outlook for the sector. Residential-focused REIT’s typically limit their investments to specific markets such as to large cities. The prospects for such local economies should be considered when making an investment decision.

You should also look carefully at the experience and previous successes of a REIT’s management team. You want to make sure that the people managing the REIT are experts in the selection of asset properties and recruit quality tenants. If you’re going to see a good return on your investment the management team must be highly efficient in everything from maintenance to marketing. Look at the REIT’s track record and make sure that they maintain a steady payout across multiple markets.

Finally, keep an eye on the REIT’s debt.  When interest rates rise, trusts that use a significant amount of borrowed capital will be more vulnerable.  Equity Trusts aren’t generally as leveraged as Mortgage REITs. 

The REITs that have, over the last few years, been managing some of the biggest Vegas properties, have been making their investors happy and they are generally viewed as good investments.

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