VICI Properties Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. VICI is a REIT owning gaming, hospitality and entertainment real estate, primarily leased under long-term triple-net agreements. Its portfolio comprised 29 properties and four golf courses. Caesars was its largest tenant.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $339.7 million | $222.5 million | $852.6 million | $657.3 million |
| Operating income | $139.7 million | $208.4 million | $536.3 million | $615.7 million |
| Net income attributable to common stockholders | $398.3 million | $144.4 million | $603.7 million | $447.3 million |
| Diluted EPS | $0.74 | $0.31 | $1.21 | $1.04 |
| AFFO | $227.9 million | $164.6 million | $584.1 million | $472.9 million |
| Diluted AFFO per share | $0.43 | $0.35 | $1.17 | $1.10 |
Revenue growth reflected acquisitions and higher rent associated with the Eldorado transaction. Reported net income included a $333.4 million non-cash gain on lease modification. Operating expenses also included a $177.1 million Q3 increase in the allowance for credit losses. Accordingly, reported GAAP earnings and operating margin are materially affected by unusual and non-cash items; the filing does not present a directly comparable normalized GAAP margin.
Cash flow: For the first nine months, operating cash flow was $539.5 million, investing cash outflow was $4.56 billion, and financing cash inflow was $3.06 billion. Cash and cash equivalents were $144.1 million at September 30, down from $1.10 billion at year-end 2019. The investing outflow largely reflected acquisitions and lending activity.
Balance sheet and liquidity: Total assets were $16.85 billion and total liabilities $7.48 billion. Debt had a $6.85 billion face value and $6.76 billion carrying value. VICI reported $1.72 billion of available liquidity, including cash, short-term investments, $1.0 billion of undrawn revolver capacity and approximately $557 million expected from physical settlement of remaining forward-sale shares. No debt maturities were due in the following 12 months; scheduled principal payments begin in 2022, with substantial maturities thereafter. The company was in compliance with its debt covenants.
Dividends: The Q3 dividend declared was $0.33 per share, compared with $0.2975 in Q3 2019.
Material changes and transactions
- In July, VICI completed the Eldorado transaction alongside the Eldorado-Caesars merger. It acquired Harrah’s New Orleans, Harrah’s Atlantic City and Harrah’s Laughlin for $1.82 billion. Annual rent under the Regional Master Lease increased by $154 million to $621.7 million, and Caesars lease terms and structures were amended.
- VICI paid for additional rent under the Las Vegas master lease, increasing annual rent by $83.5 million for Caesars Palace Las Vegas and $15.0 million for Harrah’s Las Vegas. The Caesars leases were reclassified and remeasured, producing the $333.4 million gain.
- VICI acquired JACK Cleveland/Thistledown in January for approximately $843 million and made additional mortgage loans, including a $400 million Caesars Forum Convention Center loan at an initial 7.7% rate and a $65 million initial Chelsea Piers loan at 7.0%.
- VICI issued $2.5 billion of senior notes in February and redeemed its remaining $498.5 million face-value second-lien notes, recognizing a $39.1 million extinguishment loss. Total debt increased year over year, although the refinancing lowered the weighted-average interest rate reported for 2020.
- Harrah’s Reno was sold on September 30 for $41.5 million; VICI received $31.1 million and reported no gain or loss. The Louisiana Downs sale was pending regulatory approval, with closing anticipated by early 2021. Rent under the Regional Master Lease was to remain unchanged after these dispositions.
Outlook, risks and contingencies
- All tenant properties had reopened by September 30, but at reduced capacity and subject to restrictions. All tenants had paid rent in full through October 2020; management cautioned that future rent payments, operating conditions and tenant performance remain uncertain, including the possibility of renewed closures.
- Management anticipated more limited acquisition and investment activity in the near term, prioritizing tenant relationships, existing assets, financial strength and liquidity, while retaining the option to pursue opportunistic investments. No quantitative earnings or revenue guidance was provided.
- VICI adopted the CECL credit-loss standard on January 1, recording a $309.4 million opening cumulative adjustment. The allowance for credit losses was $570.4 million at September 30; the company attributed period charges mainly to portfolio growth, Caesars-related assumptions and credit-rating changes. The allowance is an estimate, not a statement that amounts were delinquent or written off. The filing said all lease and loan investments were current and none were on non-accrual status.
- Credit concentration is significant: Caesars agreements generated 85% of Q3 lease revenue. COVID-19 impacts on gaming demand, tenant liquidity and capital spending could affect rent collections, asset values and VICI’s access to financing. Other risks include leverage, interest rates, gaming regulation and tenant reliance.
- Caesars and certain other tenants received conditional relief from portions of capital expenditure requirements; the filing states this did not reduce or defer rent. VICI also had $58 million of future funding commitments reported as of September 30. Management reported no litigation believed likely to have a material adverse effect.
Key facts for investors to verify
- Whether gaming operations and tenant rent performance remain resilient under capacity limits or any renewed restrictions, particularly at Caesars.
- The assumptions behind the $570.4 million CECL allowance and the potential for further credit-loss charges.
- How much of the $1.72 billion liquidity figure depends on settling the remaining forward-sale shares, and the resulting dilution and proceeds.
- Post-transaction rent, tenant credit metrics, capital expenditure compliance and the effects of the amended lease and put-call arrangements.
- Debt service, refinancing access and covenant headroom as the portfolio and debt expanded.