Casino REIT dominoes are falling

Last week MGM Resorts International announced they will carve out a REIT from their operations to be called MGM Growth Properties. This is the first major Las Vegas strip property owner to clearly give intentions on REIT creation. Caesars has a desire to convert to a REIT, but its still mired in a long bankruptcy battle with its creditors.  For MGM, 10 of their properties will be rolled into MGM Growth Properties including most of its Las Vegas strip properties with the Park development, but the REIT will exclude Bellagio and the MGM Grand.  The festival grounds on the corner of Sahara and the Strip as well as Circus Circus will also be excluded from the REIT. MGM Detroit and the gulf coast properties will be included, and MGM Springfield will likely be folded into the REIT once its operational.

The creation of an MGM REIT will have major impacts on the Las Vegas Strip, but at first, MGM Resorts International will retain a 70 percent stake in MGM Growth Properties. This means that MGM Resorts International will control the REIT and operate the two divisions with parallel business strategies.

SLS Las Vegas is Out of Touch

The SLS Las Vegas is poorly positioned to target Las Vegas locals.  If you’re coming from the west side of the highway, you have to take Sahara towards the strip, which is an unpleasant drive in major traffic. The neighborhood surrounding the SLS is filled with tourists or down-and-out beggars.

What can the SLS offer locals? Palace Station has a cheap buffet and better games, such as some full pay video poker.  The Boarding Pass at Station Casinsos offers players a better payback compared to SLS.  According to, the best game as SLS is 8/5 Bonus, whereas Palace Station offers FPDW, 9/6 Jacks, and 8/5 Bonus Progressive.  The player’s club at SLS pays back only 0.20%, and the Boarding Pass pays back 0.30%.

In the article below, SLS acknowledges the local Las Vegas player is more knowledgeable, so then SLS needs to offer things that can compete with other local offerings.

The SLS is also doomed by its location.  It needs the area to develop in order to draw more foot traffic. Without this tourist foot traffic, the SLS is not enough of a draw on its own.

Station Casinos Thinking about IPO

Gaming investors will be watching closely as Station Casinos controlling shareholders the Fertitta family consider ways to unlock value following bankrupcy re-orginizations a few years ago. The company is reportedly on solid financial footing since the time bondholders converted to equity in 2009. Stations owns a mix of casinos in Las Vegas catering to the suburban local that include integrated resorts such as Red Rock Resort and also tavern style locations such as Barley’s Brewery and the chain of Wildfire Casinos.

Investors should compare Station Casinos to its nearest competitor Boyd Gaming. Boyd’s shares are currently trading at multi-year highs, although they are worth about 1/5th of their value about 10 years ago. Casino companies are benefiting from steady increases in consumer spending, low interest rates, and REIT conversion speculation. On the whole, consumers are spending more on descretionary expenses such as casual dining and entertainment. Core customers such as baby boomers are also the wealthiest segment of society. Low interest rates are benefiting highly indebted casinos who are able to refinance debt at increasing lower rates. These refinancings have helped boost free cashflow and provided greater scope for expansion and re-investment in current properties. The potential to convert to REITs will further increase the balance sheet strength of companies such as Stations and Boyds.

A map of Station Casinos in Las Vegas is provided below.

Penn National to purchase Tropicana Las Vegas

Penn National will buy the Tropicana Las Vegas for $360 million, in a deal that will close in stages over a period of two years. This deal will give Penn a long sought presence on the Las Vegas strip, and another property to potentially roll into GLPI. Penn can also use Tropicana to built its new nation wide loyalty program. Tropicana is an under-performing resort in the south end of the strip, which could use the help of a more experienced operator. Tropicana has a lot of potential and a strategic operator will leverage its strengths and make a some capital light investments that will add value. Its being reported that Onex will receive about $50 million from this transaction.

MGM vs Land & Buildings

While public companies should welcome any input from shareholders, since it’s the shareholders who own the company, boards should be cognizant of balancing the interests of all shareholders in proportion to their ownership. In the case of the proposal made by Land & Buildings for MGM Resorts to convert to a REIT, Land & Buildings only owns 1 percent of outstanding shares, so the board should weigh the views of Land & Buildings in proportion to their ownership interest.

Regarding the slate of directors proposed by Land & Buildings, some of the directors would be valuable to have represented on the board. Although I think a good first step to improve governance at MGM should be to no longer have any executive of the company also serving as board member. A major responsibility of the board should be to hold management accountable, and it creates a conflict of interest to have management also serving on the board. Jim Murren should only serve as CEO of MGM.

The MGM REIT conversion is going to be a fun fight to watch, but I think Land & Buildings will need to recruit more shareholders to support their strategy, and ultimately, Kirk Kevorkian will need to provide an opinion.