Market Commentary | February 27, 2024

What was Old is New Again

No one would describe me as a rabid football fan and I’ve never gambled in a casino, but I somehow could not avoid getting swept up in all the hoopla leading up to Super Bowl LVIII in Las Vegas earlier this month. It brought to mind our only Vegas-centric investment; Vici Properties (VICI) 2021 acquisition of MGM Growth Properties (MGP), so I thought VICI might be worth revisiting.

M&A Arbitrage

We didn’t feel that the gaming REITs presented a compelling opportunity, but when the merger was announced we did have a small exposure to MGP. Under the terms of the deal, MGP shareholders would receive 1.366 shares of VICI for each share of MGP. In the time between announcement of and completion of the merger the companies’ shares traded independently, and a visible arbitrage appeared that allowed attentive traders to acquire MGP shares at prices that could net upside of 6% to 15% on completion of the merger.

Upon conversion, an investor would have owned shares in VICI, a much larger gaming REIT with an investment grade credit rating.  The VICI shares were also fully valued, so we lost interest and pursued other opportunities.

VICI Today

In July 2022, after the merger was completed, VICI was trading at about 15x FFO (earnings). Since that time, VICI has increased its earnings by more than 30%, raised its dividend twice, and is now trading at prices about 10% below that of the time of merger.

On February 22nd, VICI released 4Q and Full Year 2023 earnings and on the conference call they couldn’t have been more ebullient.  They grew AFFO/share by 8.8% Y-O-Y and implied that the strength of their unique leasing contracts will continue to support similar growth going forward. At its reduced market price, we find VICI compelling, but the real discovery here is the evolution of Las Vegas.

Las Vegas Today

We ceaselessly study macroeconomic and demographic trends with an eye on locating demand growth that might be outpacing supply. On a pure population metric, over the last 25 years Las Vegas has experienced more growth than any other metro in the country.  From 2020-2024, Las Vegas MSA’s population climbed 4.55% to almost 2.4 million. During that time (inclusive of the 138,000 pandemic job losses) a net 98,000 jobs were created. All of this from the gaming industry. The future growth of Las Vegas will come from its ambitions to be a world sports mecca.

2024 was the first time the NFL Super Bowl was hosted in Las Vegas, but it is just the start of the city’s pursuit of world sports supremacy. With the arrival of Formula 1 racing, an NHL Team, an NFL team, and the WNBA Aces, the city is actively in preparation for the relocation of MLB’s Oakland As and a promised NBA expansion team. With all this new sports business will come more jobs and more visitors.

If You Build it, They Will Come

With all of that athletic performance added to Vegas’ entertainment offerings, the city will attract more visitors. To facilitate the visitor influx, Brightline West will break ground on an express, light-rail service that will ferry passengers from Los Angeles to Las Vegas in half the time it takes to drive. The rail system will create 1,000 permanent jobs and will facilitate the delivery of more visitors. More visitors mean more Vegas service jobs and that reasonably snowballs into more demand for all things real estate.

Following the Demand

Taylor Swift has left Allegiant Stadium, but we are going to stick around to try and identify opportunities in this growing market.  We already know how to invest in the casinos; we want to identify and potentially buy the apartments, grocery stores, logistics facilities, and data centers that serve all the new workers.

Applied macroeconomic and demographic analysis is part of our ongoing process.

Please visit our website to see what we’re working on.

Notes and Disclosure

Articles are provided for informational purposes only. They are not recommendations to buy or sell any security and are strictly the opinion of the writer. The information contained in these articles is impersonal and not tailored to the investment needs of any particular person. It does not constitute a recommendation that any particular security or strategy is suitable for a specific person.

Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. The reader must determine whether any investment is suitable and accepts responsibility for their investment decisions.

Commentary may contain forward-looking statements that are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCAC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article.

Past performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Although the statements of fact and data in this report have been obtained from sources believed to be reliable, 2MCAC does not guarantee their accuracy and assumes no liability or responsibility for any omissions/errors.

We routinely own and trade the same securities purchased or sold for advisory clients of 2MCAC. This circumstance is communicated to clients on an ongoing basis. As fiduciaries, we prioritize our clients’ interests above those of our corporate and personal accounts to avoid conflict and adverse selection in trading these commonly held interests.

Merger Arbitrage Risk:  Merger arbitrage is an investment strategy used during takeover deals that enables an investor to profit from the difference in the trading price of the target’s stock and the acquirer’s valuation of that stock.  After the acquiring company announces its intention to buy the target company, the acquirer’s stock price typically declines, while the target company’s stock price generally rises.  The major risk to the investor in this strategy is that the merger is called off or rejected by regulators. The deal may be called off for other reasons, such as financial instability of either company or a tax situation that the acquiring company deems unfavorable. If the deal does not happen for whatever reason, the usual result would be a drop—potentially sharp—in the stock price of the target and a rise in the stock price of the would-be acquirer, causing the investor to suffer losses.

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