Over the years, MGM has sold off almost all of its real estate holdings on the Strip and now is the leaseholder for its casinos. What's the long-term forecast for this type of arrangement?
For MGM, that's difficult to predict. For Vici, it's an easy call.
As a mere tenant in its own MGM-branded casinos, the long-term prognosis, it seems to us, depends on the competence of management. For the landlord, Vici Properties, however, it’s a pretty sweet arrangement. As we've written in the past about commercial real estate, the triple-net lease is always a great deal for the property owner.
In this case, casinos are a growth industry and regardless of the name on the marquee, Vici gets to sit on its portfolio and collect rent, while the tenant continually maintains and improves Vici's property. Even if MGM cuts and runs, Vici is assured of new tenants. A good example happened recently: MGM Northfield Park. Leo the Lion apparently had had enough of this slots-only racino in Ohio. It put its management contract up for sale and Canadian private-equity firm Clairvest snapped it up. Vici won’t miss a rent payment, as Clairvest soon assumes the $53-million-a-year obligation.
The only worry on the horizon for Vici is the future of MGM Empire City in Yonkers, New York. MGM, on the verge of a 15-year Class III casino license, decided to stay Class II. This portends a somewhat dim future for Empire City, in our view. It will be trying to compete with Class III slots and Vegas-style table games at other New York City casinos (when they open sometime in the future). And what does Empire City have? Video lottery terminals. Not a very compelling arsenal.
With Empire City seemingly doomed to obsolescence, Vici’s exit strategy is unclear. The door has closed on New York City casino applications, so flipping the property isn't much of an option, nor are VLTs an exciting prospect for potential buyers. MGM may have to stick with it until Empire City (almost inevitably) goes out of business, leaving Vici with a horse track and not much else.
This is a clear instance, as we said in the beginning, of the landlord being at the mercy of the tenant’s competence. Fortunately, the vast majority of Vici’s portfolio is far more viable. So it may chalk up the dead-end situation in Yonkers as part of the cost of doing business with MGM, which is mostly rich.
In any event, Vici isn’t talking about that these days. Is it whistling past the graveyard? Time will tell.
