Casinos that split their gambling operations from their real estate holdings made 100% of their rent payments to their spun-off property companies amid the worst economic challenges of COVID-19 in 2020 and early 2021, notes Fidelity’s Steve Buller.
“It’s a testament to the strength and success of the ‘opco-propco’ business model under which casinos prioritize running their gaming businesses, while real estate investment trusts (REITs) own and manage the physical properties,” says Buller, portfolio manager of Fidelity® Real Estate Investment Portfolio (FRESX).
“I’ve recently found what I think are some relatively resilient, high-quality investments on the property management side,” Buller adds.
The fund normally invests at least 80% of assets in common stocks of companies principally engaged in the real estate industry and other real estate-related investments.
Buller believes the economic challenges created by the surging delta variant of the coronavirus remain on the minds of many real estate investors. The pandemic isn’t over, and even without additional lockdowns, some portions of the population could again start to avoid crowds in malls, shopping centers, and even casinos. He acknowledges there’s a threat this could again undermine the ability of some businesses to stay current with rent payments in the future, to the detriment of REIT investors.
Owning propcos could be part of the formula in managing these risks, Buller contends. Because of the close relationships they maintain with operating companies, he believes many propcos could be less likely to miss rent payments if a spike in coronavirus cases again slows the growth of the economy.
The combination of long-term internal and external growth potential has led Buller to invest in casino REITs Gaming and Leisure Properties (GLPI) and VICI Properties (VICI), two sizable holdings as of September 30.
“I’ve kept the fund diversified among industrial, residential, health care, specialized, and other REIT categories, and the casino propco holdings represent one of the ways I’m thinking about risk in the fund,” Buller reiterates.
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