Sands Could Call on Gaming REITs in Possible Disposal of Vegas Assets

Posted on: October 28, 2020, 01:01h. 

Last updated on: October 28, 2020, 01:22h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

One brokerage firm is speculating that Las Vegas Sands (NYSE:LVS) could ultimately partner with a gaming real estate investment trust (REIT) in disposing of its Nevada assets. That means the operator wouldn’t end up leaving its home city.

Sands Convention Center
Sands Convention Center in Las Vegas seen here. One brokerage firm believes LVS could partner with a gaming REIT rather than leave Sin City. (Image: MICE India)

Earlier this week, the Venetian operator confirmed it’s in early-stage talks to potentially sell that integrated resort, the Palazzo and Sands Convention Center, for $6 billion. That news was initially interpreted as a sign the company could abandon Sin City in favor of a headquarters in the Asia-Pacific region.

Some analysts believe that while a sale of those properties could materialize, it doesn’t mean LVS will eventually altogether drop its Southern Nevada operations.

Bernstein analysts believe Sands could engage a gaming REIT for a sale-leaseback transaction, a deal structure that’s becoming increasingly common in the industry.

The sale-leaseback structure has been commonplace for casinos in the United States for some time, with, for example, MGM Resorts International, Caesars Entertainment Corp., and Penn National Gaming Inc. having done such transactions,” according to the research firm.

Under a sale-leaseback, the current property owner sells real estate to a new landlord for an upfront sum. The seller retains operational rights and obligations, while the buyer adds steady rental income, typically with a long-term contract, and an asset that can appreciate in value.

Finding Buyers Easier Said Than Done

The three domestic gaming REITs are, in alphabetical order, Gaming & Leisure Properties (NASDAQ:GLPI), MGM Growth Properties (NYSE:MGP), and VICI Properties (NASDAQ:VICI).

Some analysts are already expressing doubt that LVS will be able to execute a sale of the aforementioned assets at $6 billion, because that price point limits the number of credible buyers. By market capitalization, MGP is the largest gaming REIT at $12.49 billion. But its Strip penetration is already substantial, as it owns all the MGM-operated properties there, aside from Bellagio.

GLP, the smallest of the trio of casino landlords, doesn’t appear interested in increasing its Las Vegas footprint.

“I think most of you know that we’ve made the case for years, that the real safety and stability is out in the hinterlands, not on the Strip. Love those assets. Terrific. But they’re much too volatile for our case,” said Chairman and CEO Peter Carlino on a Tuesday conference call with analysts and investors.

That leaves VICI, which is well-capitalized, but likely to add a Las Vegas venue or two via a transaction with former parent Caesars Entertainment.

Case for Full Divestment Is Strong

A sale-leaseback with a landlord would enable LVS to maintain a presence in the largest domestic gaming center. But math indicates it’s not necessary for the company to do that.

As Bernstein notes, the operator generated $5.387 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) last year, of which just $487 was derived from the Strip.

Other analysts believe full divestment of its Las Vegas assets would allow LVS to pursue opportunities in higher return markets, likely in the Asia-Pacific area, and perhaps restore its previously suspended cash dividend.