High Interest Rates Stall Consolidation in the Casino Gaming Sector

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The year broke with broad anticipation that the Federal Reserve would slash interest rates from their towering two-decade peaks. This prospective move welcomed abundant excitement. Experts projected a subsequent surge of consolidation activities in the commercial casino gaming sector, as mergers and acquisitions often ebb and flow with monetary policy changes. Alas, these expectations have sputtered and stalled, much like a roulette wheel at rest.

In the heart of Nevada, the Las Vegas Strip hums with energy. Here, the gaming industry ebbs and flows under the unseen pressure of invisible economic forces. Yet, high interest rates remain a punishing weight, slowing the pace of mergers and acquisitions in the gaming sector, asserts Truist Securities analyst, Barry Jonas.

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The drumbeat of 2024 began with a series of obstinate readings of the Consumer Price Index (CPI), checked with unyielding stubbornness. Previous expectations that the Federal Reserve might wield its influential baton and lower rates between three to six times, have languished. Market spectators, now, look ahead. They whisper of a future possibility. The central bank may not lower borrowing costs until next year. This delay could impose a distinct drag on gaming industry consolidation.

Low rates could be the catalyst sparking increased activity in mergers and acquisitions. Additionally, there’s the prospect of more sale-leaseback activity. Such transactions allow casino operators to liquify their real estate investments while retaining operational jurisdiction over their properties. “This thesis is likely delayed as the Fed rallies against ingrained inflation,” Jonas communicates in a fresh report issued to clientele.

This year ushered in some consolidation within the gaming industry, with the striking $6.2 billion merger between International Game Technology’s global gaming and PlayDigital units with Everi. This transaction ranks as one of the notable deals to take the stage so far. Yet, there’s a distinct silence when it comes to casino operator weddings or company transfers of individual properties.

While the stubbornly high interest rates, fueled by persistent inflation, have driven gaming firms to reduce and refinance their debts, this strategy has cast a shadow over share prices. The realms of gaming equities, gaming device companies, and the real estate investment trusts (REITs) housing gaming properties have seen their stocks collectively stumble against the broader market this year.

Tuesday beheld Jonas lowering price targets on four gaming stocks, including Caesars Entertainment. In exchange, he bumped up the price projections on Bally’s and Red Rock Resorts. Without mergers and predictable organic growth, many stocks are seen idling in what Jonas characterizes as, “value land.”

The real estate sector is particularly tethered to fluctuations in interest rates — a fact demonstrated by the 8.3% slide by the S&P Real Estate Select Sector Index year-to-date. Meanwhile, the broader view gauged by the S&P 500 has seen a rise of 6.7%.

The current notion that the Federal Reserve will allow rates to ride on the wave of “higher for longer” has placed shares of casino landlords in jeopardy. The market shows Gaming and Leisure Properties stumbling with a year-to-date loss of 12%, with Caesars Palace owner VICI Properties taking a 10.82% hit.

In his characteristic analytical tone, Jonas notes that the present environment could deter gaming REITs from carrying out significant transactions. However, the outlook might change as interest rates stabilize, and clarity emerges on the Federal Reserve’s intent to trim borrowing costs.