Casino landlord MGM Growth Properties (NYSE:MGP) is among the travel and leisure-related stocks that are currently inexpensive.
That according to this week’s Barron’s cover article, which highlights several six travel equities sporting attractive valuations. MGP, the owner of the property assets of the Excalibur and the Mirage, among other Las Vegas Strip venues, is the only gaming name mentioned on the financial journal’s list.
Amid expectations of pent-up demand and increasing levels of coronavirus vaccinations, travel and leisure stocks were among the best-performing groups in the early stages of 2021. Due to the recent emergence of the delta variant of the virus and some states telling residents to stay away from Las Vegas, gaming stocks came under duress.
MGP is proving resistant to that trend. The shares are up 2.35 percent over the past month while MGM Resorts International (NYSE:MGM) — MGP’s lone tenant — is off 10.11 percent over the same period.
MGP: Sturdiness on the Cheap
A large part of the reason MGM Growth Properties is proving resilient against the delta variant backdrop is that the company isn’t a casino operator. Rather, it’s a gaming real estate investment trust (REIT), meaning it’s a property owner and rent collect.
MGP is structured as a triple-net lease REIT, meaning it doesn’t pay for property upkeep or other related expenditures. MGM foots those bills and it’s a structure analysts like and believe was validated during the pandemic.
The triple net lease structure was new to the gaming industry in the last couple of years, and it hadn’t been through a significant downturn,” said UBS analyst Robin Farley in an interview with Barron’s. “The pandemic has really proven that business model.”
At the height of the coronavirus pandemic when domestic gaming venues were shuttered, these casino REITs like MGP came under significant duress amid concerns that operator tenants would struggle to meet lease obligations in a zero-revenue environment. Today, the situation is significantly brighter, particularly as it pertains to MGP because MGM has one of the strongest balance sheets in the industry and ample cash, indicating the likelihood of it missing a rent payment is low.
Other Catalysts for MGP
Beyond gaming-related issues, the current environment is conducive to owning REITs. The asset class historically performs well when interest rates are low, as is the case today.
Additionally, as the Consumer Price Index (CPI), confirms, inflation is here. While market observers are debating if higher prices will be persistent or transitory, the fact remains that REITs usually rise in inflationary environments because of pricing power and rent escalators that usually built into tenant contracts.
Specific to MGM Growth, the Luxor owner yields 5.45 percent, its dividend is steadily growing and as MGM continues selling shares in the REIT — something the game operator said it will do — the real estate company gains more independence and could spread its wings beyond its MGM relationship.
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