VICI Properties Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. VICI owns gaming, hospitality and entertainment real estate leased primarily to Caesars subsidiaries, and operates four golf courses. Its portfolio comprised 20 properties across nine states. VICI completed its IPO in February 2018; this is an early reporting period for the company, so the filing does not provide a comparable prior-year consolidated VICI income statement. The separate 2017 predecessor results cover only the golf business and are not directly comparable.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 |
|---|---|
| Net revenue | $218.3 million: $211.5 million real property and $6.8 million golf |
| Operating income | $188.7 million |
| Net income | $114.1 million; $112.1 million attributable to common shareholders |
| EPS and dividend | Basic and diluted EPS: $0.33; declared dividend: $0.16 per share for the post-IPO stub period |
| Cash flow | $122.5 million operating cash flow; $(0.3) million investing cash flow; $612.5 million financing cash flow |
| Cash and liquidity | $918.2 million cash and equivalents, $13.8 million restricted cash, and $400.0 million available on the revolving facility |
| Debt | $4.15 billion face value ($4.12 billion book value); weighted average contractual rate 4.54% at quarter-end |
Operating income was approximately 86% of revenue and net income approximately 52% (calculated from reported figures). Real-property revenue included $182.0 million earned income from direct financing leases, $12.2 million operating-lease rent and $17.2 million tenant property-tax reimbursements. Operating cash flow included $174.1 million of lease cash receipts, of which $53.2 million was for April rent; $60.4 million of January rent had been received at year-end 2017. Cash interest paid was $47.1 million.
Material changes and unusual items
- The February IPO sold 69.575 million shares at $20 per share, generating $1.307 billion net proceeds. VICI used proceeds to repay $300 million on its revolver, $100 million of Term Loan B, and $268.4 million principal of Second Lien Notes.
- The Second Lien Notes redemption at 108% of principal contributed to a $23.0 million debt-extinguishment loss, including a $21.5 million premium cited in the cash-flow discussion. The IPO also reduced reported 2018 debt-service requirements from $249.3 million to $220.1 million and lowered the credit-facility spread from LIBOR plus 2.25% to LIBOR plus 2.00%.
- General and administrative expense was $7.3 million, including $0.5 million of severance and non-recurring costs related to the planned headquarters move from Las Vegas to New York, as well as professional fees and executive recruiting costs.
- Golf revenue increased from $4.6 million in the predecessor period to $6.8 million, largely reflecting $2.5 million of Caesars membership-fee revenue under the golf-use agreement. Predecessor Q1 2017 golf operations reported $4.6 million revenue and zero net income.
- After quarter-end, VICI entered into interest-rate swaps with $1.5 billion aggregate notional, effective May 22, 2018, intended to fix the LIBOR component on that amount of Term Loan B at 2.8297% through April 2023.
Outlook, risks and contingencies
Management stated that available cash, lease receipts, borrowing capacity and potential debt or equity issuance should provide sufficient liquidity. It intends to make regular quarterly distributions and qualify as a REIT; REIT rules generally require distribution of at least 90% of REIT taxable income. No specific earnings or revenue guidance was provided. Management described growth through acquisitions and expected Caesars investment in leased properties, but these are expectations, not guidance.
- Substantially all real estate holdings outside the golf business are leased to Caesars subsidiaries, creating significant single-tenant credit concentration. VICI’s ability to collect rent therefore depends heavily on Caesars’ financial and operating condition.
- Approximately $2.1 billion of debt had variable rates; a one-percentage-point rate change would alter annual cash interest expense by approximately $21 million before considering hedges.
- Gaming regulation, lease renewals, leverage and refinancing, REIT qualification and required distributions, acquisition competition, and the ability to operate independently are identified risks. VICI reported compliance with debt covenants and no material change to previously disclosed risk factors.
- No material litigation was outstanding at filing. The Eastside Property transaction remained unrecognized as a completed sale because of put/call rights; VICI and Caesars share remediation costs up to $12 million, with costs above that amount assigned to Caesars.
Facts investors should verify
- Caesars’ capacity to meet lease obligations and the concentration of rent in Caesars-related tenants.
- Debt balances, variable-rate exposure, maturities, covenant terms and the effect of the post-quarter interest-rate swaps.
- Cash available for dividends after debt service, REIT tax requirements and any acquisition spending; the declared $0.16 dividend covered only the post-IPO stub period.
- The use and net cost of IPO proceeds, including the premium paid to redeem Second Lien Notes.
- Progress on the headquarters relocation, Eastside Property remediation and VICI’s REIT qualification.