On Thursday, MGM Resorts announced that the casino company will form a real estate investment trust. And according to one strategist, the move could be signaling a rush into REITs within the gaming industry.
Larry McDonald, head of U.S. strategy at Societe Generale, said as revenue has declined, companies are looking for ways to increase returns. If MGM is planning to create a REIT, industry peers could soon follow suit, he said.
"Companies are under pressure to do something," McDonald said Thursday on CNBC's "Power Lunch." "Once they see a company go, the other companies typically follow. That's the way we've seen inversions work over the last three or four years from sector to sector."
REITs, which act as an investment vehicle in real estate with special tax considerations and generally high dividend yields, have picked up speed in the last few years. According to an Ernst & Young report, REIT IPOs accounted for 72 percent of real estate IPOs in 2014, tripling in activity since 2006.
MGM's REIT, named MGM Growth Properties, will include ten properties and assume $4 billion of debt. The company said it expects to complete the initial public offering in the first quarter of 2016.
Analysts responded positively to the news on Thursday, as well as simultaneous reports that MGM beat on third-quarter earnings. MGM shares gained almost 5 percent on Thursday, with competitors like Las Vegas Sands and Wynn Resorts also seeing a boost.
However, Harry Curtis, senior gaming analyst at Nomura, said the day's gains for other casino companies may have been misguided.
"One of the reasons why some of the other stocks were up was because of the mistake that some investors made believing that this is an appropriate structure for those companies, and it's not," Curtis said.
For MGM, Curtis said, the REIT will act as a yield vehicle for investors, while the company sheds debt and focuses on growth. Gaming companies Penn National, Pinnacle, Boyd, and Caesars have also either spun off REITs or have explored plans to do so.
But Curtis said that MGM is a "different animal," in that the majority of its revenue comes from domestic rather than international operations, unlike other large competitors such as Las Vegas Sands and Wynn.
And he said it doesn't seem like a likely option for other domestic companies either."There has been some debate on other regionals that may go the REIT route," he said, but aside from Boyd, "other regionals are just too small."
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