Gaming real estate investment trusts (REITs) have been one of the most resilient sectors in the wake of the coronavirus pandemic, thanks to their triple-net lease structures, cost-cutting measures and pent-up consumer demand. The U.S. gaming sector recovered quickly from the initial shock and outperformed the broader market in 2020 and 2021. Analysts expect the sector to continue growing, as more states legalize sports betting and online gaming, and as casino operators benefit from higher occupancy rates and margins.
What are Gaming REITs?
Gaming REITs are companies that own and operate casino properties or lease them to casino operators. Unlike traditional REITs that focus on office, retail or industrial properties, gaming REITs specialize in gaming-related assets, such as hotels, resorts, convention centers and entertainment venues. Gaming REITs typically have long-term leases with their tenants, which means they receive stable and predictable rental income regardless of market conditions.
Gaming REITs also have tax advantages over other types of real estate investments. They are exempt from federal income tax on their dividends, which makes them attractive to income-seeking investors. They also qualify for preferential tax treatment under Section 1031 of the Internal Revenue Code, which allows them to defer capital gains taxes when they sell or exchange one property for another of equal or greater value.
How did Gaming REITs perform during the pandemic?
The U.S. gaming sector was hit hard by the pandemic in the first two quarters of 2020, as lockdowns and social distancing measures forced many casinos to close or operate at reduced capacity. However, the sector made a swift recovery in the second half of 2020 and throughout most of 2021, as more states lifted restrictions and consumers resumed their leisure spending.
According to S&P Global Market Intelligence, gaming REITs outperformed the Dow Jones Equity All REIT Index by a wide margin in 2020 and 2021. The three largest U.S. public gaming REITs — VICI Properties Inc., MGM Growth Properties LLC and Gaming & Leisure Properties Inc. — increased their share prices by more than 100% each year.
Gaming REITs also benefited from their ability to cut costs and improve efficiency during the pandemic. Casino operators reduced their labor expenses by laying off workers or offering voluntary buyouts. They also trimmed their marketing budgets by shifting to digital channels or postponing promotional campaigns. These actions helped them preserve cash flow and maintain profitability.
What are the growth prospects for Gaming REITs?
Analysts expect gaming REITs to continue growing in the post-pandemic era, as more states legalize sports betting and online gaming, which could boost casino revenues and attract new customers. According to a report by Morgan Stanley, legalizing sports betting could add $15 billion to $20 billion per year to U.S. casino revenues by 2030.
Another driver of growth for gaming REITs is the expansion of online gaming platforms, which could increase competition among operators and offer more choices for consumers. Online gaming is already legal in several states, such as New Jersey, Pennsylvania and Michigan, but it is expected to become more widespread as technology advances and consumer preferences evolve.
Gaming REITs could also benefit from consolidation within the industry, as larger operators seek to acquire smaller ones or partner with them to gain scale or diversify their assets. For example, VICI Properties announced plans in August 2021 to acquire MGM Growth Properties for $17.2 billion, making it the largest owner of gaming real estate assets on the Las Vegas strip.
Gaming REITs have proven themselves to be resilient players in the post-pandemic era, thanks to their triple-net lease structures, cost-cutting measures and pent-up consumer demand. The sector is well-positioned for more growth opportunities in 2022 and beyond, as more states legalize sports betting and online gaming, which could increase casino revenues and attract new customers.
