The Baron Real Estate Income Fund, one of the best-performing actively managed real estate funds, added shares of Las Vegas Sands (NYSE:LVS) in the first quarter and remains constructive on several other casino stocks in its portfolio.
In the first three months of 2022, the fund purchased 3.2 million shares of Sands, making the gaming name one of five additions to the portfolio and joining other well-known professional investors in adding shares of the downtrodden gaming equity in the March quarter.
We believe Las Vegas Sands’ market-leading resorts in Macau and Singapore position the company for strong growth when travel and tourism spending rebound. Las Vegas Sands maintains a liquid and investment grade balance sheet and is currently valued at a significant discount to our assessment of replacement cost,” writes portfolio manager Jeffrey Kolitch in a letter to investors.
This isn’t the fund’s first encounter with the casino stock. LVS currently doesn’t own any domestic integrated resorts, but Baron Real Estate has the flexibility to add companies that aren’t dedicated real estate equities. Sands, like other gaming names, is classified as a consumer discretionary company.
Baron Bullish on Other Las Vegas Casino Stocks
The Baron Real Estate Income Fund owns several other gaming names and has exposure to “cyclical REIT and other real estate income-producing stocks such as travel and hospitality-related real estate stocks that had declined sharply from 2021 share price highs but possess the potential to appreciate significantly over the new few years,” adds Kolitch.
Examples include Boyd Gaming (NYSE:BYD) — a top 10 holding in the fund — and MGM Resorts International (NYSE:MGM). While MGM leases all of the properties on which its gaming venues reside, Boyd owns essentially all of its real estate. That includes an extensive portfolio of downtown and off-Strip properties in Las Vegas. Some analysts argue Boyd’s real estate holdings aren’t adequately reflected in the share price, indicating the stock is arguably undervalued.
“Business conditions remain strong, yet the shares are valued at only 7.0 times 2022 estimated cash flow and a double-digit free cash flow yield relative to its long-term average of more than 9 times cash flow,” Kolitch said in reference to the Orleans operator.
Regarding MGM, the portfolio manager estimates that stock is worth $60 on a sum-of-the-parts basis, which implies significant appreciation potential from the $33 area at which the shares currently reside.
Baron Likes Red Rock, Too
Red Rock Resorts (NASDAQ:RRR) is another one of the casinos stocks on the Baron Real Estate roster and it’s one Kolitch views as undervalued.
“Private equity firms continue to acquire casino gaming real estate assets in Las Vegas and are paying 16 to 20 times cash flow, yet the Fund’s holdings in Red Rock Resorts and MGM Resorts (both with significant Las Vegas exposure) are currently valued at only 7.5 to 10 times cash flow,” says the portfolio manager.
Red Rock’s Las Vegas portfolio includes 10 large-scale gaming venues and 10 smaller casinos, which are within five-mile commutes of 90% of the city’s population. Like rival Boyd, Red Rock owns essentially all of its real estate. It also controls “seven highly desirable gaming-entitled development sites consisting of approximately 428 acres in Las Vegas and Reno,” according to the operator’s investor relations web site.
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