Visitors walking the Las Vegas strip outside of The Strat, Las Vegas, NV. Thursday May 13, 2021.
Photograph by Jesse Rieser
Investing in Las Vegas, like the city itself, continues to evolve.
Starting last year, investors bid up Las Vegas–related stock prices and valuations, in part in anticipation of a strong economic recovery helped by pent-up demand, and in part because they look favorably on the recent rush of casino operators into the promising early days of digital gambling and sports betting.
Yet at the same time, some casino operators are looking to cut their direct exposure to the city. Las Vegas Sands (ticker: LVS), a longtime citizen of the city, is pulling out, having agreed in March to sell its Strip properties, including the iconic Venetian Resort, to VICI Properties (VICI), a real estate investment trust. REITs, in fact, represent a more recent trend in the long history of public investing in Las Vegas that began in the 1960s, when much less restrictive corporate ownership was first allowed. That eventually ushered in publicly traded stocks, a lot more investment capital, and much bigger casino/resort properties.
As Las Vegas evolves, investors can consider three ways to play that market: REITs, casino and resort operators on the Strip, and those whose focus is off the Strip.
REITs
Several of the big casino operators, including MGM Resorts International (MGM) and Caesars Entertainment (CZR), “effectively spun out most of their gaming real estate,” says Cedrik Lachance, director of REIT research at Green Street.
As a result, MGM Growth Properties (MGP) and VICI are more direct plays on Las Vegas properties. They offer attractive yields above 4%. “The gaming REITs, to us, are cheap, period,” says Lachance.
An advantage for these companies is their structure. They are triple-net lease REITs, which means the operators, not the owners, are typically responsible for “all costs of maintaining and operating the property,” says Lachance.
These “REITs are essentially just landlords,” says Chad Beynon, an analyst at Macquarie Capital. “So as long as your tenant is generating money, you get that revenue.”
Beynon especially likes VICI, whose shares have returned about 26% this year, ahead of the S&P 500 index’s 13% result. “As gaming improves, they will get more deals done,” says Beynon. The stock was recently yielding about 4.2%, above its five-year average of around 3.4%, according to FactSet.
MGM Growth Properties was created by MGM Resorts International in a 2016 initial public offering. Its real estate portfolio includes signature Strip properties such as Luxor Las Vegas and New York-New York Las Vegas Hotel & Casino, as well as various regional holdings in Detroit, Atlantic City, N.J., and elsewhere.
“MGP is probably the safest way to play MGM Resorts International” and its capital structure, says Barry Jonas, an analyst at Truist Securities, pointing to “very secure rent payments” and a safe dividend.
In April, the company paid out a quarterly dividend of 49.5 cents a share, up from the 48.75 cents it offered through much of 2020. As business continues to improve in Las Vegas, the dividend should have plenty of support. The stock’s recent yield was about 5.5%, versus its five-year average of 4.9%.
Las Vegas Strip Players
The two big publicly traded players are MGM Resorts International, which operates the most hotel rooms on the Strip, and Caesars Entertainment.
Beynon narrowly prefers Caesars, which last year merged with regional operator Eldorado Resorts—mainly because it has less exposure to the Strip.
Caesars Entertainment, whose stock has gained about 48% in 2021, has iconic Strip properties such as Caesars Palace Las Vegas and Paris Las Vegas, as well as a big portfolio of regional facilities in Ohio, Mississippi, and Louisiana, among other states.
It recently closed on its acquisition of United Kingdom–based William Hill to strengthen its digital-gaming and sports-betting franchise. David Katz, an analyst at Jefferies, expects the company to articulate its digital strategy in the near future, calling it “the next catalyst we’re looking for.”
Another plus for Caesars: It now has Caesars Forum, a large meeting, conference, and convention facility on the Strip. The 550,000-square-foot facility opened last year just as the pandemic was hitting, but it should help the company as trade shows, conventions, and business meetings resume and pick up. Caesars owns several nearby hotels on the Strip, including the Flamingo, Bally’s, and LINQ—all of which should benefit eventually from more midweek travelers attending events at Caesars Forum.
“It is another reason why they hypothetically should generate more earnings in the future than they did in pre-Covid levels,” says Thomas Allen, a Morgan Stanley analyst who has an Overweight rating on the stock.
For stock investors, MGM Resorts International is the most direct play on the Strip and its impending recovery—although, like Caesars, the company does operate regional casinos. MGM has about 36,600 hotel rooms in the city, versus about 23,000 for Caesars, according to Macquarie.
“It is about being operators who understand the business, day in and day out. We are focused on that,” MGM Resorts International CEO Bill Hornbuckle told Barron’s during a recent interview in his office at the Bellagio on the Strip.
When Hornbuckle was named CEO of the company last July, he earned some plaudits from Wall Street analysts who cited his long career in Las Vegas dating to the late 1970s—much of it focused on casino resort operations.
The company’s digital-gambling and sports-betting platform, BetMGM, has helped diversify its revenue and could attract new customers to its traditional casinos. The stock is up about 37% in 2021, trailing Caesars by about 10 percentage points.
In a recent research note, Joe Greff of J.P. Morgan upgraded the stock to Overweight from Neutral. Greff cited, in part, “momentum at its domestic casinos, particularly in Las Vegas,” as well as “continued digital market-share momentum with strong iCasino and sport-betting share via its joint venture, BetMGM.”
The company trades at about 15 times enterprise value (essentially market capitalization plus net debt) to estimated 2022 earnings before interest, taxes, depreciation, and amortization, or Ebitda, versus its five-year average of about 11.3 times.
Caesars’ 2022 enterprise value to Ebitda is about 11 times, compared with its five-year average of 8.7 times.
Las Vegas Locals
Arguably the hottest trend in Las Vegas–themed stocks—and one that investors need to assess carefully—has been companies that operate off the Strip and cater to the Las Vegas locals market, as it’s known.
Shares of Boyd Gaming (BYD) and Red Rock Resorts (RRR) have gained nearly 50% and about 80% this year alone, respectively.
Since Jan. 31, 2020, shortly before the pandemic took hold, Boyd’s stock has gained more than 100%, and Red Rock Resorts’ stock is up about 85%—well ahead of MGM’s 40% gain and a little ahead of Caesars’ 80% rise.
Boyd’s enterprise value recently was about 11 times its estimated 2022 Ebitda, versus a five-year average of 9.4, according to FactSet. Red Rock, which is much smaller than Boyd in terms of sales, was at 12 times versus its five-year average of 8.4.
The regional casinos had several big advantages over their Las Vegas Strip counterparts during the pandemic. Unlike the Strip operators, about half of whose guests fly to Las Vegas, Boyd and Red Rock rely more on drive-to visitors, including construction workers, in Vegas and elsewhere. When their properties reopened last June, they did much better than the Strip facilities, which struggled as air travel plunged.
Another difference: Boyd and Red Rock are less reliant on entertainment revenue, whether it’s shopping, restaurants, or concerts, than the Strip operators are.
David Baron of Baron Asset Management said the firm holds Boyd and Red Rock on the strength of the Las Vegas economy, pointing to steady population growth and rising housing prices. “People have been locked up, and they want to go out and spend money,” he says.
Write to Lawrence C. Strauss at [email protected]
