I remember going to Las Vegas in May 2008 to attend a real estate conference.
I’d been going there for two decades by that point, and it was almost always a great experience. There were people to meet, seminars to attend, information to gather, and deals to get done.
Plus, I thrive in that kind of environment. I’m a people person, so I get energized by meeting, greeting, and interacting with others.
I’ll also admit that I enjoy my annual excuse to play blackjack and roulette. I’m not a big gambler; it’s a treat, not a habit.
But, man, is it fun when I do play, especially when I win.
As for when I lose, well, it’s never more than $500. After my first and very unsuccessful gambling experience in the 1980s, I understand my limits.
That’s why I didn’t bet anything at all in 2008: because I didn’t have money to waste. I was still clawing back my business and reputation after a partnership went south.
There was also a general air of anxiety over the event that year. Subprime mortgages were defaulting at an increasingly alarming rate, and most of us attendees recognized that the good times might not be so good going forward.
While few people – if any – had a clue about how bad it was going to get, we knew they weren’t great.
I’m going there again this year, and I don’t expect the same level of gloom and doom. However, I’m sure I won’t be the only attendee wondering whether we’re in for another recession.
Not a horrible one, as I’ve been saying: a garden-style downturn. But a downturn nonetheless.
In which case, now seems like the perfect time to double down on Las Vegas.
The Case for Gambling REITs
You might think that gambling during a recession is a risky idea. And you’d probably be right.
But investing in the gambling business can actually be smart.
For one thing, people don’t stop gambling during downturns. Consumers cut back on brand-name apparel, food, and drinks. They’ll stop going to the movies as much or amusement parks or taking lavish vacations.
Yet many aren’t nearly so quick to give up their gambling habits. And there are a few reasons why.
For one thing, as I already noted above, gambling is fun. It’s entertainment – and the kind that could actually make money if everything goes well.
You can’t say the same thing for the movies, amusement parks, or vacations.
Gambling can also be a social outing, especially when you’re playing poker or similar card games. Or it can be an exciting distraction from the drudgery… all compelling reasons to keep going regardless of the times, tough or not.
Put simply, gambling habits don’t decline nearly as much as you might think during a recession.
I wrote about this a year and a half ago, noting how:
Although it’s counterintuitive, gambling is a recession-resistant business.
As you can see, after the dot-com crash in 2000, gambling revenue dropped by just 7%.
And during the 2008 financial crisis, it fell by 15%.
That may hurt profits for the casino operator. But it’s more than enough to pay the rent.
During the pandemic, gaming revenue fell 23%. That’s despite lockdowns and travel restrictions.
More [importantly], casino operators continued paying 100% of their rent on time.
It’s that last point I really want you to focus on: how big casinos like MGM, Ceasars, Century, and Bally’s didn’t miss a beat during the shutdowns. They just kept paying their rental dues as promised.
And that’s why their real estate investment trust (“REIT”) landlords just kept paying their dividends as promised.
VICI Properties
When talking about gaming REITs, VICI Properties (VICI) is definitely the dominant force. Created in October 2017 as a spinoff of Caesars Entertainment (CZR), it went public on February 1, 2018.
Today, it owns 93 gaming, hospitality, wellness, entertainment, and leisure properties, including absolute icons like Caesars Palace and MGM Grand. It was also included in the S&P 500 in June 2022 – the shortest amount of time it’s ever taken between a company’s IPO and inclusion.
Gaming REITs in general stand out because of the regulatory environment they exist in. It’s very difficult for competitors to launch, much less take over, giving existing businesses an automatic wide moat.
Another reason they’re well-insulated is because it’s extremely inconvenient for their tenants to move locations. This has helped VICI maintain a 100% occupancy rate.
In addition, its contracts include lease escalations. So it boasts inflation protection as well.
It’s no surprise then that VICI has a strong balance with investment-grade ratings from Fitch, Moody’s, and S&P, giving it strong access to capital markets.
Since listing on the New York Stock Exchange, VICI has raised its dividend every year and maintained a 7% compound annual growth rate since 2018. Its dividend yield is 5.5%, and shares are trading at 13.9 times earnings compared to their normal multiple of 15.7 times.
Source: Wide Moat Research
Gaming and Leisure
Gaming and Leisure Properties (GLPI) was formed in November 2013 as a corporate spinoff from PENN Entertainment (PENN). This REIT is the oldest gaming REIT with the greatest recognized stability through economic cycles.
That’s because it owns 68 properties in 20 states. All told, it has the most geographically diversified set of gaming assets in the country.
One key differentiator for GLPI is the fact that casino gaming taxes are critical for the states where it operates. So those governments have a vested interest in the success of the properties.
Enough said, right?
And, similar to VICI, GLPI boasts a strong balance sheet with a long-standing investment-grade status. This has helped it close over $11 billion worth of transactions since inception, with an average yield of over 8%.
GLPI’s dividend yield is 6.1%, and shares are trading at 13.3 times compared to their normal multiple of 12.5 times.
Source: Wide Moat Research
It’s hard not to like what I see in these two gaming REITs, no matter what economic activity – or lack thereof – is coming our way. I don’t see tariffs shaking them, and a garden-style recession should be outright child’s play.
Putting money into them isn’t a gamble… under the right conditions. Always make sure that any investment fits properly into your portfolio to suit your stated goals.
This includes maintaining responsible diversification. As legendary investor Benjamin Graham explained:
Diversification is an established tenet of conservative investment. This point may be made more colorful by a reference to the arithmetic roulette wheel… the more numbers [a gambler] wagers on, the better chance of gain.
In other words, invest responsibly!
Regards,
Brad Thomas
Editor, Wide Moat Daily
P.S. Join me this week on my YouTube channel, The Wide Moat Show, where Nick Ward and I will be discussing Trump, tariffs, and a possible recession. Make sure to tune in on Thursday at 11:00 a.m. EST. And click here to subscribe!