Question of the Day - 06 April 2020

Actually, quite the opposite. The casinos’ selloff to real estate investment trusts (REITs) has put them in quite a pickle now that their revenue streams have dried up.

After all, they have to make those monthly rental payments to the REITs, a fixed cost they didn’t have until recently and one that can occupy a substantial chunk of the balance sheet.

"REITmania" hasn’t been so good for the REITs, either, because Gaming & Leisure Properties Inc. (GLPI), Vici Properties, and MGM Growth Properties (MGP) all made the right noises about diversification, but ended up being extremely gaming-centric. Being exposed to one high-risk sector of the economy isn't paying off, at least not in this coronavirus bear market.

As Fitch Ratings prophesied before the casino industry shut down, “Properties with longer-term leases to tenants that may face outsized coronavirus-related operating stress are subject to risk over the medium term.”

The casinos, meanwhile, are reduced to having to ask for rent deferments and/or reductions from their new landlords. It’s almost like a business model that was designed to backfire in bad times.

The selloffs, as you mentioned, are the silver lining to this dark cloud, although more so for MGM than for Caesars. The former has enough cash on hand now (plus lines of credit) that it can stay operational for well over a year. Caesars, however has only enough money to sustain it for 239 days and a whale-sized amount of near-term debt ($8.5 billion) that could force it into its second bankruptcy in a decade. On top of that, Caesars and Eldorado Resorts are trying to borrow $17.5 billion in order to merge. 

Were the corporate upper echelons betting on a recession in the offing? We think not. It's very hard to see bad times coming in the midst of good times, especially one that went on for more than 10 years. Memories are short and highly selective. And no one wanted to see happen even a fraction of what's going on now.