The second quarter turned out better than many had anticipated.
Casino companies have learned to operate at limited capacity. Gamblers have showed up to play. And the outlooks given by CEOs have been sober, but confident.
The current state of gaming business and outlook look something like this:
- Online gambling companies prospered while their brick-and-mortar cousins were closed. The question becomes, how much of this windfall will stick once casinos fully reopen and customers become comfortable traveling?
- Sports betting companies have seen their businesses suffer, but are bouncing back as eager gamblers jump all over major sports leagues resuming play. Looking into next year, sports will fully return, and U.S. states will continue to legalize betting. So this is a growth industry, as clearly as riverboats were in the 1990s.
- Regional and locals casinos are living up to expectations that their business is recovering sooner and to a greater extent than destination markets. More importantly, cost reductions have considerably offset the effects of lower revenues, and it appears executives are committed to permanently reducing money-losing or marginal amenities. Bye-bye, buffets.
- Destination markets, also as expected, are in difficulty. They likely will stay that way as long as Singapore air travel is restricted, Macau feeder markets essentially shut down travel, air traffic into Las Vegas remains minimal, and conventions continue to cancel.
- Liquidity is no longer an urgent issue. Gaming companies largely have done an excellent job of cutting expenses and arranging to have cash, or access to it. They are not facing imminent crises.
There are other encouraging signs. Airline passenger traffic at Las Vegas, McCarran International Airport nearly tripled from May to June, and was almost seven times that of April, showing that airlines will provide capacity if consumers provide demand.
The overall economy continues to outperform expectations, and the Fed and Congress are intent on providing whatever aid is needed to keep it going.
There are longer-term concerns. What happens when the inevitable flattening or decline of economic activity occurs and as more jobs and businesses disappear? Then there is the eventual impact on inflation from all the debt piling up. However, the near-term avoidance of economic catastrophe gives some reason for optimism that those waters can be navigated safely.
Financial crises are times of opportunity as well as difficulty. For every old-line brick-and-mortar business that files bankruptcy, new companies like Zoom arise to capitalize on the changed environment.
Covid-19 has presented investors with what some call the stay-at-home plays, like Netflix prospering as theaters remain dark, Peloton inspiring at-home exercise while gyms struggle, or Grubhub delivering restaurant-made meals while the restaurants themselves suffer. And it accelerated the digitalization of the economy, including Amazon’s ever greater dominance.
Gaming has its own set of stay-at-home winners in the iGaming stocks and those brick-and-mortar companies that are seen as adapting to the new business models, such as Penn National, with its stake in BarStool sports media company. PENN stock is now 10 times its mid-March low. Hard to argue with a 1,000 percent appreciation in four months.
Let’s Get Together
The Penn National purchase is indicative of another trend—convergence. The gaming company of the past either ran a casino or sold slot machines and equipment to casinos.
The gaming company of the future will be an amalgam of businesses. On the supplier side, look at Scientific Games and IGT. They have lotteries, slot machines, casino management systems, social and iGaming and sports betting platforms. Aristocrat is as much a social gamer as a slot supplier.
Casinos still have slots, table games and hotel rooms, but they also have retail, convention space, iGaming operations and sports betting.
That convergence will continue.
The REIT Irony
But brick-and-mortar opportunities remain.
Perhaps the best examples of this are the gaming REITs: Gaming and Leisure Properties, MGM Growth Properties and VICI Properties.
Just a few months ago, many REIT investors avoided gaming REITs because their tenant bases are not diverse. They’re only casinos. Further, their tenant bases are concentrated. Each REIT has one primary tenant, the company from which it was spun off: Penn National, MGM Resorts and Caesars Entertainment.
Today, while non-gaming REIT stocks have been hammered as tenants such as restaurants and shopping malls stopped paying rent, gaming REITs are happily collecting full rents from their casino tenants.
At some point, gaming REITs will diversify. Diversification obviously is wise in almost every economic environment. But the point is that investors can still benefit from old-fashioned investments.
And in today’s low-interest rate world, with dividend yields ranging from over 5 percent to more than 7 percent, gaming REITs are the kinds of stalwart investments that can benefit even the trendiest stay-at-home and techy portfolio.