Question of the Day - 26 February 2021

[Editor's Note: This QoD is written by David McKee.]

With respect to Suncoast specifically, Boyd Gaming spokesman David Strow says, “Yes, the Suncoast sits on leased land. Note that this is different than what people are used to seeing with [real estate investment trusts or REITs], as we still own the building and the rest of the physical property … just not the land itself. This was an ownership structure that pre-dated Boyd Gaming, as the Suncoast was already sitting on leased land when we acquired it in 2004.

“It certainly isn’t unheard of. I believe land-leases are fairly common in downtown Las Vegas, as many of the parcels in the Fremont Street area are leased from third parties,” Strow adds.

Indeed, when Binion’s Gambling Hall was sold to Harrah’s Entertainment in 2004, its reopening as a Harrah’s property was complicated by the fact that slices of the underlying land were leased from third parties. Until Harrah’s came to terms with them, parts of the casino floor had to be cordoned off, lest gamblers “trespass.”

“As far as ‘what happens after the lease,’ these types of leases are very long-lived,” Strow continues. “In the Suncoast’s case, I believe it has nearly 35 years remaining. You also have the option of buying out the landowner at some point in the lease.”

If the rumored sale of Texas Station actually becomes fact, it will be complicated by the ownership of the ground upon which Texas Station sits by the mother of Station Casinos CEO Frank Fertitta III, which has been an issue in the past.

The current trend in the casino industry is to sell the land and physical assets of a resort to a third party, either a REIT or a private-equity fund, then lease them back. Penn National Gaming, which pioneered this trend, recently sold the Tropicana at a loss to REIT Gaming & Leisure Properties, in return for free rent at the depths of the Great Shutdown.

Companies in less desperate straits than Penn was have also gone the sale-leaseback route. All but four of Caesars Entertainment’s Las Vegas Strip casinos have been sold to a Caesars-formed REIT, Vici Properties, which keeps them within arms length of Caesars. (Unlike casino companies, REITs pass on the bulk of their profits directly to investors.) MGM Resorts International has shed itself of its Strip real estate in an “asset-light” strategy intended to raise cash. Most went to MRI's own REIT, MGM Growth Properties. Bellagio is an exception; it was sold to Blackstone, owners of the Cosmopolitan. Mandalay Bay and MGM Grand went to a joint venture between MGM Growth Properties and Blackstone.

Gaming analyst Frank Fantini generously explained the appeal of the sale-leaseback phenomenon. “Not long ago, if you stepped into a casino, you knew that the property was owned by the casino company whose name appeared on the door,” he writes. “That isn’t necessarily true today. A recent trend is for a company to sell the real estate and the buildings that sit on it, then turn around and lease it back. This is called the asset-light model, for the obvious reason that the casino operator is now light the ownership of its real estate assets.

“The intention is simple: Get money from selling the property to reinvest in growth, perhaps in a new casino or in expanding the size of the property. The rationale is that real estate, while an asset, is just ground. It doesn’t generate profits. Slot machines, blackjack tables, hotel rooms, restaurants, and shows generate profits” [at least they did before COVID).

“Companies can look at selling real estate as a preferred way to raise money to fund growth,” Fantini continues. “Borrowing creates interest expense and financial risks. Selling stock can dilute the ownership of current shareholders. A sale-leaseback allows you to expand by, in effect, using other people’s money.

“One of the most aggressive practitioners of the asset-light model has been MGM Resorts. Over the past two years, MGM has sold Bellagio, MGM Grand, Mandalay Bay, and Circus Circus to a variety of companies, including a joint venture in which it is a part owner. Including the outright sale of Circus Circus to casino entrepreneur Phil Ruffin, MGM has netted $8.2 billion from property sales. MGM intends to use that money to invest elsewhere, perhaps in developing a Japanese casino, in reducing interest expense by paying down debt, and in rewarding shareholders through dividends and share buybacks. All the while, it continues operating Bellagio, MGM Grand and Mandalay Bay, and the customer doesn’t notice the difference.

“The asset-light model also can be used by companies that want to expand their operations at a fairly low cost. For example, when Penn National bought Pinnacle Entertainment a couple of years ago, it helped finance the transaction by selling the properties to a real estate investment trust, Gaming & Leisure Properties. In turn, GLPI sold the operating rights of three of those [non-Vegas] casinos to Boyd. Thus Boyd was able to expand its casino network at far lower cost than if it had to buy the real estate, too.

“The sale and leaseback of properties does have its tradeoff. MGM has gone from being an owner to being a tenant. It now pays $537 million in annual rent on Bellagio, MGM Grand, and Mandalay Bay. Thus, it has an expense it never had before.”

Indeed, this has proven to be an issue during the Great Shutdown, as casino companies have had to negotiate forbearances and interest reductions with their REITs.

“Further,” Fantini concludes, “MGM no longer owns an appreciating asset of land and buildings. And, of course, once sold, the land is gone and can’t be sold again. Finally, the lease will someday expire and MGM will have to negotiate new terms with its landlord. In the end, it is a calculation that the benefits of money given to you to fuel growth will offset the added expense of rent and the inherent value of land ownership.”

That calculation is one the casino industry continues to make (speculation has Las Vegas Sands going the REIT route with the Venetian and Palazzo), with no end in sight. So leased real estate will become the norm, if ever it was the exception.