Gaming Blog

Realty Income’s foray into gaming demonstrates the value of VICI (NYSE:O)

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Real estate income (O) has moved further and further away from its fundamental triple net retail strength. A while ago they moved to Europe and now they’re diving into casinos with the $1.7 billion purchase of the Encore Boston Harbor.

This purchase is significant, not just for Realty Income, but for the entire triple net industry. As such, we’ve taken the time to dig into the details of the deal to see how it stacks up against the ground.

In short, the transaction reinforces our optimism on VICI Properties (VICI) as O’s stamp of approval is a major step towards higher valuation for the entire gaming sector. To date, VICI is trading at a massive discount to O and is, in my opinion, the superior investment.

Our thought process is below.

The deal Again

With triple net purchases, valuation and cash flow reliability are at the forefront. To get an idea of ​​those, here are the vital stats.

  1. Capitalization rate of 5.9%
  2. 2.1X EBITDAR coverage of rents
  3. The $1.7 billion purchase price is $2.53 million per key
  4. $548 per square foot

That seems rather expensive for a gaming asset both on a cap rate basis and on a NAV basis. Here is a list of MGM Growth Properties acquisitions and cap rates ranged from 6.3% to 8.5%.

Net investing activity


To be fair, gaming cap rates are trending lower with the recent acquisition of The Venetian by VICI Properties for a cap rate of 6.25%.

The price per key also seems quite high at $2.53 million per room. The Venetian and the entire MGP portfolio were acquired for $0.6 million per room.

Venetian Resort and MGP Las Vegas Portfolio


Note that MGP’s price per key was much cheaper if you include non-Vegas properties

The 2.1X EBITDAR rent coverage on the Encore is roughly in line with its peers, although I would consider Wynn Resorts (WYNN) to be a significantly weaker tenant than Caesars (CZR) or MGM Resorts (MGM) which are major tenants of VICI and MGP, respectively.

Financial SNL

SNL Financial

Macau has been problematic causing WYNN to drop significantly and create fundamental risk. The Encore itself is in Boston, so it’s not directly sensitive to Macau fundamentals, aside from the impact on the parent company’s ability to pay rent.

Intangible aspects of transactions

Game licenses are quite limited in Massachusetts, making The Encore the only game in town other than MGM Springfield (owned by MGP and soon to be VICI).

This provides an excellent ratio of the total number of trips to the region to the number of casinos and bodes well for the growth of each of these casinos.

Wynn Resorts plans to expand with a Phase 1 proximal development slated to open in 2024.

Wynn Resorts phase 1


It’s both good and bad for O.

If successful, it will be another accretive acquisition for O at a pre-negotiated capitalization rate of 7%, but the challenge here is that the sale to O is at Wynn’s discretion. Thus, it can be taxed to O if it fails or can choose not to sell it to O if it is a resounding success.

That said, I think the most likely outcome is that all goes well and O gets the property given the value of the land in that area and Wynn’s capital needs. I think the relationship between O and WYNN is mutually beneficial because Wynn needs capital and O needs acquisitions while having access to vast amounts of capital.

Structure of the lease

The Encore comes with a 30-year lease with escalations of 1.75% for the first 10 years, followed by a CPI-based floor and cap of 1.75% to 2.5% for the remainder of the term.

I find this a bit difficult in the short term given that inflation is well above 1.75% and the 2.5% cap in the coming years means that even CPI indexing does not protect really against inflation. However, O has the ability to fund this with locked in fixed rate debt, so assuming there is no default on the lease, they can make it accretive regardless of how the l ‘inflation.

Global transaction support

While O overpaid for the asset compared to what MGP and VICI paid for their casinos, that does not mean that O overpaid. I think it’s much more likely that MGP and VICI have significantly underpaid their assets.

It all comes down to where you think the cap rate should be. I have long believed that gaming asset cap rates were way too high. It almost seems absurd that they are trading generic triple net single tenant retail assets.

If you look in any other real estate industry, trophy properties command a higher valuation (lower cap rate).

  • Trophy office trades up to 300 basis points lower cap rate than class B offices.
  • Trophy hotels trade at lower cap rates than regular high-end hotels
  • High-end industrial properties target cap rates within 3

So why does a Dollar General go for a 5% cap rate while magnificent and epic real estate like casinos that are world famous trades at 6%-9%?

I think casinos have been significantly undervalued due to their appearance in the institutional investment space. Cash flow looks pretty secure, with the sector even paying rent via COVID when it wasn’t even allowed to open.

So, although O gets a lower deal than MGP and VICI, it still seems like a good deal. It will be solidly accretive for FFO/O share and a good diversifier.

Impact of the agreement on other REITs

O is widely known as a company that doesn’t take a lot of risk. As such, their willingness to support a massive gaming asset at a cap rate of 5.9% resets the industry-wide cap rate to a now lower level.

I think cap rates were heading down anyway, but the imprimatur of O probably accelerated the revaluation. In light of this, pure-play gaming REITs look very attractive.


VICI is trading at a discount of 3.3 turns to O.


Price at FFO 2022 is

Price at FFO 2023 is

Real estate income






This translates to a 7.4% FFO return on VICI versus a 5.9% FFO return on O.

I will take the trophy assets at a 7.4% cap rate on my investment versus the Dollar Generals at a 5.9% cap rate any day of the week.

Given the fall in market prices, I move into neutral on O from my previous bearish position. It now trades roughly at fair value. However, given how much the rest of the market has also fallen, I don’t really want to invest at fair value. There are currently great trading opportunities well below fair value and VICI is one of them.

VICI has spent the last few years buying back assets that are now shown to be worth far more than VICI paid for. This is where I want to be. I currently own VICI through MGP as there is still a slight arbitrage upside in cheaper MGP stocks pending the merger’s close.