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Epidemic of Fear

The full story of the coronavirus has yet to be told, but lingering fear may blunt the eventual recovery

Epidemic of Fear

The evolution of the coronavirus is happening fast, and what’s happening as of this writing will certainly not be what’s happening as you read this.

Nonetheless, I’ll hazard a few thoughts on the subject.

The first thought is that nobody knows how this will play out.

No disrespect to equity analysts, who are in the difficult position of having to forecast based on what they know at the time, but nobody can make credible projections when the future of the epidemic is unknown.

It might seem reasonable to say that Macau revenues will be down 40 percent or 50 percent in the near term. But any forecast that says revenues will be down, say, 10 percent for the year, and rebounding to 30 percent growth next year, has little validity.

Even those near-term 40 percent and 50 percent decline forecasts became outdated within days and hours of being made, because the Macau government ordered casinos closed for 15 days. And, again, by the time you read this, the closings might have been further extended.

Moreover, pent-up demand sounds credible on the surface, but investors should be wary of betting the ranch on that prospect.

This is not a hurricane that wipes out a property, but everything else remains about the same. This is the human psyche we’re talking about, and, depending on how far and deep and long the epidemic becomes, people’s beliefs and morale can be affected for years. Just look at the generation that grew up in the Great Depression. Many from that era remained financially insecure and risk-averse for the remainder of their lives.

Even if business does rebound, the recovery might be more cautious than one of pent-up demand.

Hopefully, the coronavirus is arrested soon and disappears from consciousness as rapidly as SARS and the various flu scares.

Meanwhile, it might be wise to heed the advice of Robert Strauss, U.S. ambassador to the Soviet Union in 1991, when some investors were excited about the fall of communism and others were afraid: “If I was 40 years old and I had $100,000 and I wanted to run it into $10 million,” Strauss said, “I’d go to the Soviet Union. If I was worth $10 million, I would take that $10 million and I’d invest $100,000 of it in the Soviet Union…”

Meanwhile, A Domestic Boom?

Unless and until the epidemic reaches the United States, the U.S. gaming industry is riding the waves of a strong economy and confident consumers.

The first earnings releases from the December quarter were positive, with Penn National forecasting strong EBITDA growth this year, Mohegan CEO Mario Kontomerkos saying the new year began strongly, and Red Rock Resorts giving off positive vibes after a rough third quarter.

Investors responded in kind. Penn National stock immediately hit a new 52-week high. Boyd, both a Penn regional peer and a Red Rock Las Vegas locals market peer, also hit a new high.

And what’s good for regional gaming and Las Vegas is good for the gaming REITs, a premise held by investors who have repeatedly pushed Gaming & Leisure Properties and VICI Properties to new highs.

Generally, REITs are unexciting companies, as they hold real estate, collect rents, recycle properties and mostly make a life out of simple blocking and tackling.

But gaming REITs clearly have caught investors’ eyes. As analyst Jordan Bender of Macquarie pointed out, the stocks of the three gaming REITs advanced 36 percent last year, beating the S&P 500’s banner 31 percent leap, and the All Equity REIT Index’s 29 percent rocket ride.

That bullishness has continued into this year. As of this writing, Gaming & Leisure Properties is up 11.6 percent, VICI is up 6.7 percent and MGM Growth Properties has risen 8.2 percent.

The reasons for the gains have been discussed in this space before:

  • The REITs’ ability to create deal and rent structures that give higher valuations to properties in mergers and acquisitions has helped accelerate the number of acquisitions. By definition, that means their property portfolios, and by extension their rental revenues, grow. In a sense, gaming REITs are in a growth phase.
  • The recent sale and leaseback deals that MGM Resorts signed with Blackstone and its own REIT spin-off, MGM Growth Properties, have excited investors over Las Vegas Strip real estate values.
  • In a low-interest rate environment, their dividends give income-oriented investors high returns, both in relative and absolute bases, even as their stock prices rise. The dividends from Gaming & Leisure and MGM Growth Properties yield 5.9 percent, and VICI’s 4.4 percent.
  • The combination of secure rents and high dividends makes gaming REITs a safe haven, important always, but especially today, as many investors fear a recession may be looming. And there’s also that growth kicker, though by now, most of the big deals are in the past.

So, can the stocks continue their advance?

Bender thinks so, noting, among other things, that gaming REITs are still valued 30 percent below non-gaming peers.

Bender raised his target on Gaming & Leisure Properties to $50.

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