The 2010s could be defined as an era when every last stream of cash flow was transformed into a debt security. The 2020s may be about desperately unwinding those relationships.
Casinos have been a highly lucrative business for centuries. But in recent years, the land they sit on in Las Vegas and across the US has turned into an even better activity. There are now three listed gaming real estate investment trusts.
These Reits thrived simply by acting as tax-advantaged landlords which collect rent from the likes of Caesars Palace in Las Vegas or The Borgata in Atlantic City. The shutdown of casinos and most physical spaces in America has demonstrated that not even the seemingly steadiest payment flow packaged into debt can be considered risk-free.
Gaming and Leisure Properties, Vici Properties, and MGM Properties had a collective enterprise value in mid-February greater than $50bn. Today their share prices are down between 30 and 45 per cent. Their tenants will have short-term revenue approaching zero. The Reits are highly leveraged with total debt-to-ebitda ratios above 4 times.
Still, gaming companies have plenty of near-term liquidity now to meet fixed costs. Moreover, lease payments owed to gaming Reits are senior obligations.
Landlords and their casino tenants have some tough decisions ahead. On Thursday, restaurant chain Cheesecake Factory said it would defer paying its April rent, in what could be a trend among retail companies trying to preserve liquidity. Analysts at Nomura Instinet speculate that gaming Reits could relax collections of rent in exchange for equity in gaming companies.
In an extreme scenario, the gaming operator and gaming Reit could simply merge, so operators would no longer have to pay rent. That arrangement was the norm for the decades when casinos just owned the land underneath card tables and slot machines.
Advocates of Reits and other financially-engineered structures will argue that their inventions have led to incremental capital flowing into deserving sectors. While that may be true, it is equally true that the massive leverage they created through the financial sector was unnecessary.
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