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Are there too many casinos in Las Vegas?

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Las Vegas casinos expect capacity constraints to be relaxed on March 15, which will allow them to operate at 50% capacity against the current 35% cap.

Yet, with more people allowed in, will the stations even be able to reach those limits? Did they even come up against the lower limitations? Until demand returns, which could be a very long time away, there may be too many casinos in Las Vegas.

Image source: Getty Images.

A crowded market

There are about 30 casinos on the Las Vegas Strip, about two dozen more nearby (like on Fremont Street), and dozens more elsewhere. Yet with so many gambling halls available and so few people to fill them, casino operators could delay their takeover by continuing to operate them all. Maybe the new standard for Vegas should be fewer casinos.

Sands of Las Vegas (NYSE: LVS) certainly thinks that having just one in Vegas is too much: he just agreed to sell all its properties in the city. The Venetian, the Palazzo and the Sands Expo and Convention Center were sold to Global management of Apollo and VICI Properties (NYSE: VICI) for $ 6.25 billion as Sands moved all-in on Asia.

MGM Resorts International (NYSE: MGM) and Caesars Entertainment (NASDAQ: CZR) are the two largest operators on the Strip with nine and eight casinos respectively. They may decide that channeling customers to a narrower selection of venues is the most effective and optimal game.

And while the likelihood of closing a Las Vegas casino seems low, it all depends on how quickly and strongly business bounces. At the moment, things are not going so fast.

Vegas is a ghost town

The Las Vegas Convention and Visitors Authority released data for January showing the volume of visitors to the city plunged 64% from a year ago, although it is slightly up from December. Convention attendance also remains virtually nil, causing hotel occupancy rates to drop 54% year-over-year, although, again, it is gradually increasing from the end of the year. the year.

With hotels operate on shortened work weeks and low-capacity casinos, operators are looking towards the end of the year for business to pick up, or maybe even later in 2022.

A concrete industry convention this summer is seen as the first real test of whether Las Vegas can come back soon. This is the first big event since the many convention centers closed a year ago, and although there have been a number of small-scale meetings (MGM has reportedly hosted hundreds of them since it was launched. allowed to reopen last June), it remains to be seen whether people are ready to gather in large crowds.

The problem for many casino operators is that they no longer own their casinos; they just rent them out, and the leases tend to be long-term and non-cancellable.

Outsourcing risk

As of 2016, MGM Resorts transformed approximately two-thirds of its properties into a Real Estate Investment Trust (REIT), MGM Growth Properties (NYSE: MGP), which owns all the assets, while MGM Resorts manages the activities of the casinos, outlets and hotels.

Today, the REIT owns seven of MGM’s Strip properties as well as seven properties in other regional markets, including the Borgata in Atlantic City, New Jersey. Under the head lease agreement, MGM pays not only the rent to the REIT, but also the insurance, maintenance and property taxes for each property – what is called a triple net lease. The main lease has an initial term of 10 years and cannot be canceled.

It’s a similar situation with Caesars, which created VICI in 2017 and included 19 properties. She currently owns 28 properties which are leased to Caesars, Casinos of the Century, Hard Rock, Jack Entertainment and Penn National Gaming (NASDAQ: PENN), and will now also own the Sands properties, owned by Apollo.

Its leases are also long-term and non-cancellable, although VICI admits that the uncertainty of the pandemic could create difficulties for its tenants to meet their rent obligations, which could lead to a series of cascading events, including compliance issues with financial covenants, their credit facilities, and indebtedness.

Not all REITs are the same

While REITs like MGM Growth Properties, VICI Properties or Games and leisure properties (NASDAQ: GLPI) all have similar business models, there are some important differences between them.

MGM Growth relies almost entirely on the Strip, although it has properties in other markets. VICI also has exposure to the Strip, but much less than MGM, with only 30% of its pre-Sands rental income coming from The Strip casinos. Yet 84% of his income is tied to Caesars.

Gaming and Leisure Properties, on the other hand, which set the stage for casino REITs to follow with its Penn National spin-off in 2013, is also the largest with 48 properties, but nearly all of them are found. in regional gaming markets (he is currently trying to sell the Tropicana Las Vegas).

Because these REIT have outsourced most of the costs associated with casinos to their tenants, they tend to have fairly stable revenue streams even in times of crisis. And while MGM, Caesars, and Penn are pretty big and financially strong gaming companies, a failure of casino games to bounce back enough could put all players to the test.

The coronavirus epidemic has tested casinos like never before, and because they are stuck in their rental agreements, they may find the odds against them even steeper if Las Vegas does not recover soon.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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