VICI Properties Inc. — Q3 2017 Form 10-Q
Business context and reporting period. This report covers the quarter and nine months ended September 30, 2017. VICI had not commenced operations and reported no assets or liabilities at quarter-end. Its operating business began after CEOC emerged from bankruptcy on October 6, 2017, when VICI received real estate assets and four golf courses. Accordingly, VICI’s quarter-end financial statements are not representative of its post-emergence business; the golf-course results below are historical carve-out results for Caesars Entertainment Outdoor.
Key financial metrics
| Measure | Reported result |
|---|---|
| VICI assets and liabilities at September 30 | $0 |
| Real estate assets transferred after quarter-end | Pre-emergence book value approximately $4.8 billion; management-estimated fair value $8.2–$8.4 billion |
| Golf-course net revenue, Q3 / nine months | $4.1 million / $13.8 million, versus $4.3 million / $14.0 million in 2016 |
| Golf-course operating income, Q3 / nine months | $0 / $0; corresponding 2016 results were approximately $1,000 / $6,000 |
| Golf-course operating cash flow, nine months | $2.2 million, compared with $2.4 million in 2016 |
| Golf-course investing cash flow, nine months | $(1.9) million, primarily Rio Secco renovation spending; $(0.8) million in 2016 |
| Golf-course cash at September 30 | $84,000, versus $920,000 at December 31, 2016 |
| Debt issued at emergence | $4.917 billion; after $250 million of mandatory conversions, reported post-conversion debt was $4.667 billion |
Debt composition and liquidity. Emergence debt included $1.638 billion of variable-rate term loans, $312 million of floating-rate first-lien notes, $767 million of 8.00% second-lien notes, $1.550 billion of CPLV mortgage debt at 4.36%, and $650 million of CPLV mezzanine debt. The $250 million junior mezzanine tranche converted into common stock on November 6, 2017. After the mandatory conversions, $1.950 billion of debt was variable-rate; a one-percentage-point rate change would alter annual cash interest expense by approximately $19.5 million. Management estimated first-year annual debt service of approximately $248.3 million.
CEOC transferred $55.7 million of cash at emergence. The golf business’s historical cash flows are not VICI’s post-emergence liquidity profile. The filing does not provide a clear post-emergence consolidated cash balance or a complete post-emergence cash-flow statement.
Material changes versus the prior comparable period
- Golf-course revenue declined about 4% in Q3 and 1% for the nine months year over year. Management attributed the decline primarily to Rio Secco’s planned renovation closure from late May through early October 2017.
- Nine-month golf-course operating cash flow decreased by $0.2 million year over year, while capital spending increased to $1.9 million from $0.8 million, largely due to the Rio Secco project.
- VICI’s October 6 emergence created a new landlord business with three master leases and substantial debt; this is a fundamental change from the inactive entity shown in the September 30 balance sheet.
Outlook, management commentary, risks and unusual items
- Leases and rent. Three triple-net master leases have an initial 15-year term and four tenant-controlled five-year renewal options. Initial base rent is $165.0 million annually for CPLV, 80% of $39.625 million for Joliet, and $433.3 million for other properties. Rent escalators generally begin in year two for CPLV and year six for the other leases, at the greater of 2% or CPI. Disclosed future minimum rent totals $27.64 billion, including renewal periods and minimum escalators.
- Tenant concentration. Substantially all real estate is leased to New CEOC and affiliates, with CEC guaranteeing tenant payment obligations. VICI identifies its dependence on this tenant group and the gaming industry as major risks.
- Growth strategy. Management cited call rights over Harrah’s Atlantic City, Laughlin and New Orleans, a right of first refusal for certain domestic gaming facilities outside Greater Las Vegas, and approximately 55 acres of undeveloped land adjacent to the Las Vegas Strip. The filing provides no quantified earnings, dividend or acquisition guidance.
- REIT and distributions. VICI intended to elect REIT status for 2017 and generally must distribute at least 90% of REIT taxable income to qualify. Debt service, distribution requirements, and possible differences between taxable income and cash flow may constrain investment and liquidity.
- Fresh-start accounting. VICI expected to apply fresh-start accounting after emergence; year-end 2017 statements would reflect fair-value accounting and the restructuring, making comparisons with pre-emergence figures difficult.
- Other unusual items. Outdoor reported $249,000 of liabilities subject to compromise at September 30. At emergence, claims were settled for $125,000, with a reported $124,000 reorganization gain; approximately $5.1 million of disputed claims were transferred to New CEOC. The filing also notes a $10 million annual golf-course membership fee under the post-emergence use agreement.
- Additional risks. The filing highlights regulatory and licensing requirements, debt covenants and refinancing risk, potential foreclosure, REIT qualification, tax indemnification exposure, casualty and environmental risks, and the possibility that the tenant will not renew the leases. VICI’s common stock was thinly traded on OTC Markets, with no assurance of national-exchange listing.
Most important facts for investors to verify
- New CEOC’s and CEC’s capacity to meet rent and guarantee obligations, given VICI’s substantial single-tenant concentration.
- Final fresh-start fair values, lease-accounting treatment, debt balances and interest costs in VICI’s post-emergence audited financial statements.
- Actual rent collection, tenant coverage, cash available for debt service, and the sustainability and form of any distributions.
- Debt maturity, covenant and refinancing terms, including exposure to floating interest rates and collateral foreclosure provisions.
- REIT election and continuing qualification, including taxable-income and distribution requirements and any potential tax indemnity obligations.
- Progress on Rio Secco’s reopening and renovation, and the golf business’s results under the new use agreement.