We recently learned that massive gaming REIT VICI Properties (VICI 0.34%) is set to acquire MGM Growth Properties (MGP) in a $17.2 billion all-stock deal. In thisFool Live video clip,recorded on August 16, Fool.com contributor Matt Frankel, CFP, andIndustry Focushost Jason Moser discuss why VICI wants to become the undisputed leader in gaming real estate.
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Jason Moser: Well, we got a listener question here from @matt_invests on Twitter (NYSE: TWTR) and Matt asks, "We would love to hear your thoughts on the monster VICI Properties' acquisition of MGM Growth Properties. I like the merger, but VICI stock performance is different." Matt, you've taken a look at this deal. What did you see?
Matt Frankel: Well, first of all, one key concept for investors to know is that when one company acquires another, what happens nine times out of 10 is that acquisition happens at a premium, which we saw here. They're paying a premium for MGM Growth Properties. The target stock goes up, but the acquire rose stock tends to dip at least at first. There are exceptions like when Square (NYSE: SQ) announced it was acquiring Afterpay, Square went up. But generally the acquire goes down a little bit. Keep that in mind whenever you see an acquisition like this. I love this acquisition from a strategic standpoint. Essentially means that the VICI Properties is going to own the Las Vegas Strip. If you're not familiar, MGM Growth Properties spun out of MGM Resorts (MGM -1.02%) a few years ago for the purpose of owning a lot of their assets. They own the Mirage, MGM Grand, Mandalay Bay. They own a lot of their regional assets like the National Harbor that's near you. They own the Borgata in Atlantic City. That's an MGM Growth Properties. VICI was spun out of Caesars (CZR 1.05%) so it's essentially the same business just coming out of the other gaming leader. They spun out of Caesars in 2018, they own Caesars Palace in Vegas. They own the Harrah's on the Las Vegas Strip and they own a lot of regional assets. They are in the process of buying the Venetian, which was formerly owned by Las Vegas Sands (LVS 0.04%), which is also on the strip. The Las Vegas Strip is essentially made a three company casinos; MGM, Caesars, and Venetian. Now, VICI Properties is going to own a big portfolio of regional assets, the biggest landowner in history on the Las Vegas Strip. This is going to create the biggest experiential real estate investment trust ever, roughly $45 billion of real estate involved in this deal. There's scale advantages to be had of controlling that much land in one area. They see financing synergies. VICI has better credit than MGM Growth Properties, sees an opportunity to refinance its debt at a lower rate. Because it's acquiring it for $17.2 billion in about a third of that is debt. That's a big potential catalyst going forward. They're also getting MGM's properties, although they're paying a premium for based on the stock price, they're getting the properties for a discount to replacement costs, which is big benefit if you're in the development space. Just to name one example, MGM Growth Properties acquired MGM Springfield up in Massachusetts earlier this year for $400 million. That property costs almost $550 million to build.
Moser: Wow.
Frankel: They've got a big discount to that. VICI estimates that on the aggregate, they're getting a 30%-40% discount to replacement cost for all of MGM Growth Properties assets. There's a lot of strategic benefits to this deal. I'm a fan of both companies. Like I said, they're essentially the same businesses. One came from MGM and one came from Caesars. It makes sense. I can't name an acquisition that would have made more sense for either company.
Jason Moserowns shares of Square.Matthew Frankel, CFPowns shares of Square. The Motley Fool owns shares of and recommends Square. The Motley Fool recommends MGM Growth Properties (Class A). The Motley Fool has adisclosure policy.
FAQs
Real estate investment trusts (REITs) are usually popular investments for income investors. They purchase a lot of properties, rent them out, and split the rental income with their investors. They also need to pay out at least 90% of their taxable earnings as dividends to maintain a favorable tax rate.
What is the most profitable REITs to invest in? ›
9 of the Best REITs to Buy for 2024
| REIT Stock | Forward dividend yield* |
|---|
| Crown Castle Inc. (CCI) | 6.5% |
| Equity Residential Properties Trust (EQR) | 3.9% |
| Invitation Homes Inc. (INVH) | 3.1% |
| Ventas Inc. (VTR) | 3.5% |
5 more rowsJul 2, 2024
When investing only in REITs, individuals incur more risk than when they are part of a diversified portfolio. REITs can be sensitive to interest rates and may not be as tax-friendly as other investments.
What is the 90% rule for REITs? ›
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
What is the average return of a REIT? ›
The FTSE Nareit All REITs index, which tracks the performance of all publicly traded REITs in the U.S., had an average annual total return (dividends included) of 3.58% during the five-year period that ended in August 2023. For the 10-year period between 2013 and 2022, the index averaged 7.48% per year.
What are the cons of buying REITs? ›
Cons of REITs
- Dividend Taxes. REIT dividends can be a great source of passive income, but the money you receive is subject to your ordinary income tax rate, which will depend on your tax bracket. ...
- Interest Rate Risk. ...
- Market Volatility. ...
- You Have Little Control. ...
- Some Charge High Fees.
These properties are often rented out, producing income. REITs distribute at least 90% of their income to their investors in the form of dividends. REITs are an easy way to invest in real estate without having to own property yourself.
What REIT pays the highest monthly dividend? ›
Top 10 Highest-Yielding Monthly Dividend Stocks in 2022
- What dividends and REITs are.
- ARMOUR Residential REIT – 20.7%
- Orchid Island Capital – 17.8%
- AGNC Investment – 14.8%
- Oxford Square Capital – 13.7%
- Ellington Residential Mortgage REIT – 13.2%
- SLR Investment – 11.5%
- PennantPark Floating Rate Capital – 10%
Real estate mutual funds, depending on their investment strategy, can offer even broader diversification than REITs. This extensive diversification can significantly cut transaction costs for investors who prefer to put their funds in a few diversified investments.
Can REITs go broke? ›
REITs can offer a good way for retail investors to diversify their investment portfolios and access real estate markets without costly financial outlays or taking on the risk of owning property themselves. Cons: No investment is without risk, and REITs can and do go bankrupt – so it's important to do your own research.
REITs must prioritize short-term income for investors
In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.
Can a REIT lose money? ›
Can You Lose Money on a REIT? As with any investment, there is always a risk of loss. Publicly traded REITs have the particular risk of losing value as interest rates rise, which typically sends investment capital into bonds.
How long should I hold a REIT? ›
In many cases, this can take around 10 years to occur. And with publicly traded REITs that fluctuate with the stock market, Jhangiani recommends holding onto them for at least three years.
What is considered bad income for a REIT? ›
If the amount the REIT receives as rent depends on the net profits of a tenant or subtenant, or if the REIT receives interest income that depends on the net profits of the borrower (in both cases, gross rents are fine), all such rent or interest, as applicable, can fail to qualify as good income for purposes of the ...
What is the REIT 10 year rule? ›
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
Should I invest in a REIT right now? ›
There are three key reasons to invest in listed REITs right now, starting with the fact that REITs have outperformed stocks and bonds when yields and growth move lower. Demand is healthy while supply is constrained, and REIT valuations relative to the broader equity market are meaningfully below the historical median.
Is REIT a good investment in 2024? ›
There are some excellent values in individual REITs right now, but if you'd rather get broad exposure to the sector to hold for the long run, an ETF like the Vanguard Real Estate ETF could be a fantastic addition to your long-term portfolio right now.
Do billionaires invest in REITs? ›
Blackstone has been on a REIT buying spree. Its leaders are self-made billionaires, and they talk highly about REITs.
Do REITs perform better than stocks? ›
Over the long term, a basket of top dividend stocks can outperform a basket of REITs for three simple reasons: REITs dilute their own shares to raise more cash, they're designed to generate steady income instead of capital appreciation, and they're more sensitive to interest rates than more diversified companies.
