Casinos are merging: CRE investors are paying attention
M&A activity has increased the sale and leaseback of casino-owned real estate, as casino operators sell off parts of their enormous properties
Casino operators are increasingly turning to mergers and acquisitions (M&A) to compensate for slowed growth, forcing them to re-evaluate their real estate.
In the most recent example of consolidation, Eldorado Resorts agreed to pay US$17.3 billion to acquire larger rival Caesars Entertainment Corp. and create the largest U.S. casino operator by venue count.
As growth in the casino industry has slowed, more casino operators are turning to mergers and acquisitions (M&A) to re-accelerate earnings growth, says Christopher Shea, JLL Managing Director and an M&A specialist in New York City.
“Like so many industries, casinos and gaming establishments face increased competition for customers’ wallets and increasing costs on a number of fronts,” Shea says. “By acquiring a competitor, a casino operator could benefit from significant cost savings that can be invested into technology and other growth-oriented projects, allowing them to better service customers.”
The consolidation trend has also impacted real estate, says Shea, increasing the number of sale and leaseback of casino-owned real estate, as casino operators sell off parts of the properties on which their enormous entertainment complexes sit.
Stacking the deck with consolidation
In the past two years, nine consolidations have been announced or completed in the United States.
In 2018, Eldorado, in partnership with the Gaming and Leisure Properties REIT, acquired seven Tropicana Entertainment casinos for $1.85 billion. That same year, Penn National Gaming paid $2.8 billion for 12 Pinnacle Entertainment casinos, and Boyd Gaming Corp. took over the operations on 4 other Pinnacle properties for $575 million.
A merger results in increased size and scale that should benefit the operator’s bottom line. With this, the industry is seeing an increase in the sale leaseback (SLB), or sale and leaseback, of casino-owned land, as casino operators bifurcate and sell off the land their massive entertainment complexes occupy.
The SLB trend is fueled by the advantages afforded a casino owner for monetizing their assets by selling the land and signing a long-term ground lease, according to Mark West, Senior Managing Director and co-lead of JLL’s Capital Markets Corporate Finance and Net Lease practice. New casino developments in core markets are rare, West says, further driving investors’ interest.
“The casino owner/operator is attracted to the amount of added leverage — meaning their ratio of debt to equity — they can get by closing a sale-leaseback since, in this industry, leverage is limited because of the volatility of the casino business,” West says. “How this works is that a casino owner bifurcates, or separates, the land from both the physical building and the operating business, sells that land to an investor and then signs a long-term lease with the new landowner so that the casino operator continues to control that land.”
This allows the casino operator to get an influx of cash that comes in the form of up-front sale proceeds from the investor that gets a return on the investment from monthly rent payments without the additional fees and interest payments associated with a more traditional senior loan. West explains that, for the core real estate investor, purchasing the land provides a long-term, predictable cash flow in the form of those steady rent payments.
This is partly how Eldorado Resorts is financing its acquisition of Caesars. On the heels of the Caesars announcement, Eldorado reached two agreements involving VICI Properties Inc., a real estate investment trust that owns the real estate assets for 22 casinos under various Caesars brands. One is a sale leaseback where VICI will acquire the land and real estate associated with three Harrah’s resorts in Atlantic City, Laughlin and New Orleans for approximately $1.8 billion. Eldorado will operate the casinos. In the second agreement, Colorado Springs-based Century Casinos, in partnership with VICI, will purchase two casinos in Missouri and one in West Virginia from Eldorado for $107 million.
According to West, this means the casino operator will have more leverage, which helps boost equity returns to the operator while being able to control the land for a very long period.
“So, in other words, the house always wins,” he says.