A Wall Street analyst believes plenty of buyers will line up to acquire the real estate under Bellagio casino in Las Vegas and that its sale should send a signal to equity investors that the Strip resort corridor is undervalued.
Bloomberg reported last month that Blackstone, the New York-based investment firm, is interested in selling half of its interest in Bellagio’s real estate. Blackstone purchased the property in 2019 for $4.25 billion from MGM Resorts International, which kept 5% ownership and agreed to pay $245 million in annual rent to start.
Blackstone is considering cashing out of some of its real estate holdings, including Bellagio, one of the best- performing properties on the Strip.
John DeCree, an analyst with CBRE Equity Research, recently sent out a note to investors that the “Bellagio sale could be positive for valuation signal. Given the iconic nature of Bellagio, we suspect any real estate investor with the financial means would likely be at the table, even for a minority stake in the asset,” DeCree said. “In fact, a partial sale could appeal to a broader set of interested buyers, considering the potential price tag.”
In 2019 when Blackstone paid $4.25 billion for the property, it implied a 5.8% cap rate based on initial annual rent of $245 million, according to DeCree. With built-in escalators over the past three years, CBRE estimates that a 6.1% cap today would yield a comparable valuation to the 2019 transaction.
“In spite of tight credit markets and higher rates, casino real estate cap rates have held up very well,” DeCree said. “We wouldn’t be surprised if Bellagio commanded a similar cap rate to 2019, given the strong fundamental backdrop in Las Vegas and the solid performance at Bellagio specifically, the significant replacement value of Strip resorts, and the scarcity of assets of this nature.”
DeCree went on to say that a favorable exit cap rate for Blackstone on all or part of the Bellagio investment “should be a solid signal to public markets, particularly for companies with significant real estate exposure on the Las Vegas Strip,” including Caesars Entertainment, Wynn Resorts and fellow Strip gaming REIT VICI Properties, whether VICI is involved in the acquisition or not.
In an interview Friday with CDC Gaming Reports, DeCree said it’s clear “that the Las Vegas assets are performing well” and in terms of the Blackstone portfolio, a Bellagio sale is “a great way to raise a lot of money” to handle investor redemptions.
“That’s several billion dollars in revenue and the [Bloomberg] article says they would sell part of it, which makes sense,” DeCree said. “It’s a quick way to raise money. There are probably a lot of interested parties, but only a handful of buyers that are equipped to get that done quickly for Blackstone. VICI comes to mind, since they transacted with Blackstone not that long ago on the MGM Grand and Mandalay Bay. They seem like a logical counterpart to this trade, but we’ve had a flurry of Las Vegas Strip real estate transactions over the last couple of years, probably because of the REITs and what they’ve done for the space.”
DeCree said the public markets “are struggling to value casino and gaming stocks” and mergers and acquisitions have helped prop up that bid in the past. He cited a “pretty big disconnect between public markets and private markets.”
In 2022, Golden Entertainment announced the sale of its Rocky Gap Casino Resort in Maryland for $260 million. Century Casinos acquired the casino operations for $56.1 million, while VICI acquired the real estate for $203.9 million. That was done at ten times multiples, but these stocks are trading at seven times multiples, DeCree said.
“That’s a big disconnect. I think that if Bellagio traded, that would be a big enough M&A – a multiple that would remind people what Las Vegas Strip casinos could be worth. It’s probably short lived, given the turbulent market conditions we’re in, but M&A is always a good reminder to public markets what a strategic or financial buyer would be willing to pay and what the real value of some of these assets is.”
DeCree believes a partial sale works best for Blackstone. A complete exit would require a sale of about $5 billion and even those most capitalized may not want to invest that much at this time.
“It could happen, but I think it will be easier and more palatable to buy a piece of it,” DeCree said. “You have a greater buyer pool for a piece of it. Bellagio is iconic real estate. If you were going to sell 20% or 50%, it’s a quantum that’s more approachable for a larger number of buyers. Given where credit markets are, it might be a bit easier and quicker to sell a portion of it at this time and the rest in the future.”
DeCree said he imagines Blackstone will entertain various prices at various ownership levels and there could be more than one buyer.
In 2014, Blackstone acquired the Cosmopolitan for $1.73 billion and in 2022 completed the sale for $5.65 billion, at which point MGM acquired the operations for $1.6 billion. MGM signed a long-term lease starting at $200 million a year with a partnership between Stonepeak, Cherng Family Trust (the owners of Panda Express), and Blackstone.
Those two Blackstone partners are “contenders” to acquire a stake in the Bellagio real estate, DeCree said.
“It could be a consortium that each buys 5% or 10%. There’s a lot of ways you can slice this cake.”
Blackstone also owns the real estate of the Aria resort and Vdara condo-hotel at CityCenter.
Other potential buyers besides the Blackstone partners and VICI Properties include Realty Income that bought the assets of Encore Boston Harbor from Wynn Resorts for $1.7 billion.
“Realty Income is quite well capitalized, so we can see them dip their toes in gaming again, or someone like that,” DeCree said. “Sovereign wealth funds come to mind. Iconic real estate has been a go-to for those types of investment funds. I would look at Dubai World’s investment in CityCenter as a 50-50 joint venture with MGM that they’ve since exited. That type of sovereign wealth fund could be interesting.
“As for private equity, unless it’s real estate dedicated, I think their investment strategy is a little different. This type of investment seems like it’s a longer holding period. You want to own Bellagio for a long time.”
Gaming & Leisure Properties (GLPI) is another potential bidder, DeCree said. Pension funds could be in the mix as well.
“A 15% to 20% interest is a good place to park hard money in real estate,” DeCree said.
Brendan Bussmann, managing partner for B Global, said there will be plenty of interested buyers for one of “the most iconic properties on the Strip” and one of the few that would command such a high price.“It shows the continued star power of Las Vegas from a real estate perspective. As the Sports and Entertainment Capital of the World, you want to see a continued boost in multiples, whether it’s a full or partial sale.”
Bussmann cited private equity funds and VICI as potential buyers.
As for his outlook on gaming REITs, DeCree said CBRE has a buy rating for both VICI and GLPI. He called it a new era for the gaming REITs that are “still very young,” going back five to 10 years of their formation, respectively.
“They were very resilient when things were closed and even in the last two years, when we’ve seen mergers and acquisition volume subdued and credit markets tight, these guys still get deals done,” DeCree said. “And they’re still competitive. They’ve found growth via M&A, but it seems other pockets of commercial real estate have seized up or experienced valuation declines and VICI and GLPI keep trucking along. It’s probably capital and balance-sheet management on their part, but also a bit of the look-through. Casinos have done so well since reopening from the pandemic and continue to do so, especially Las Vegas with operating margins. Their assets are performing very well and investors are willing to reward them for that.”