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Realty Income Makes a Bet on Gaming

REITs: Partners with Wynn in $1.7B Deal

For the first time in its history, San Diego-based Realty Income is poised to own a piece of the gaming industry. Earlier this year, Realty Income (NYSE: O) announced it had signed a definitive agreement to acquire the Encore Boston Harbor Resort and Casino for $1.7 billion under a long-term net lease agreement with Wynn Resorts, Limited (NASDAQ: WYNN).

The 671-room Everett, Massachusetts, resort opened in June 2019, built at a total cost of $2.6 billion.

The sale-leaseback deal with Wynn, which represents Realty Income’s first acquisition in the gaming industry, is expected to close later this year. In February, company officials said the groundbreaking transaction will be executed at a 5.9% initial cap rate and includes annual rent increases and consists of an initial lease term of 30 years – with an additional 30-year option to renew.

The deal reportedly has been undergoing regulatory review since it was first announced in February.

Earlier this year, Sumit Roy, Realty Income’s president and CEO, said the Encore transaction “demonstrates our ability to utilize our platform and scale to acquire prime real estate assets across a variety of industries in alignment with our investment criteria.”

Sumit Roy
CEO
Realty Income
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“Our investment philosophy centers around generating favorable risk-adjusted returns by investing in strategically important properties with partners who are leaders in their respective industries,” Roy added. “We are pleased to cultivate a new relationship with Wynn Resorts as we expand our universe of net lease investments.”

In September, Realty Income, a member of the SP 500’s prestigious ‘Dividend Aristocrats,’ declared its 627th consecutive monthly dividend. A perennial favorite with dividend-oriented investors, O has notched an impressive 15.1% compound annual return rate since being listed on the NYSE in 1994.

Realty Income’s portfolio is well-diversified, with Walgreens (NASDAQ: WBA) accounting  for about 4% of the trust’s annualized contractual rent. The pending Encore transaction is expected to generate “immediate earnings accretion, healthy contractual rent growth and long-term returns at favorable spreads to Realty Income’s cost of capital,” a February press release announcing the Encore deal stated.

Christie B. Kelly
Executive VP, CFO and Treasurer
Realty Income

On the company’s Q2 earnings call, Christie B. Kelly, Realty Income’s executive VP, CFO and treasurer said, “The growth engine of our company revolves around accretive acquisitions. Our investment goals are supported by our well-capitalized balance sheet and favorable cost of capital which remain competitive advantages for us in the net lease industry.”

Blue Chip Partnership

The partnership with Wynn Resorts, also an S&P 500 company and one of the preeminent developers and operators of integrated resorts worldwide, reflects Realty Income’s strategy of partnering with industry blue chips.

“Realty Income’s entry into the gaming industry illustrates the robust opportunities afforded to it through the global corporate sale-leaseback pipeline,” the company said earlier this year when the deal was first announced. “As real estate partner to another of the world’s leading companies, the transaction represents an external growth channel unconstrained by industry, property type or geography and in alignment with our investment criteria.”

Upon closing, the Wynn property is expected to represent less than 3.5% of Realty Income’s annualized contractual rent.

According to the most recent statistics, the existing Boston-area regional gaming market currently generates approximately $2.6 billion of gross gaming revenues annually.

Encore, with EBITDA still ramping given its relative youth as an operating asset, is expected to grow with the overall market by appealing to underserved premium regional customers.

Nationally, gaming revenues have recovered to pre-COVID levels and the two-year growth rate of gross gaming revenue in Massachusetts was double that of the overall industry in 4Q21.

Property Overview

Encore is a LEED Platinum certified, premium super-regional resort and casino providing five-star dining, gaming, shopping and entertainment. Located along the Mystic River less than five miles from downtown Boston. 5.6 million gaming age residents live within a 90-minute drive of the property.

The property comprises more than 3.1 million total square feet of luxury amenities including slot machines, gaming tables, poker tables, 671 luxury hotel rooms and suites as well as a broad array of food and beverage outlets and large group meeting spaces.

The property is uniquely positioned as the only integrated resort and casino located in the Boston metropolitan area. Additionally, Encore holds one of only two Class I gaming licenses that have been granted in Massachusetts.

Realty Income

FOUNDED: 1969
CEO: Sumit Roy
EMPLOYEES: 385
REVENUE: $2.08 billion (2021)
STOCK: O (NYSE)
BUSINESS: Real estate investment trust
HEADQUARTERS: San Diego
WEBSITE: realtyincome.com
NOTABLE: Bill and Joan Clark founded the company after buying a Northridge, California, Taco Bell property directly from Taco Bell founder Glen Bell in 1969.

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