VICI Properties Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. VICI owns gaming, hospitality and entertainment real estate, primarily leased on a long-term triple-net basis. Its portfolio comprised 20 properties, all leased to Caesars-affiliated tenants, plus four golf courses. The company elected REIT tax treatment beginning in 2017.
Financial performance and position
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $232.7 million | $671.9 million |
| Operating income | $184.1 million | $562.3 million |
| Net income | $132.0 million | $387.5 million |
| Net income attributable to common stockholders | $129.9 million | $381.1 million |
| Diluted EPS | $0.35 | $1.06 |
| Operating margin / net margin | 79.1% / 56.7% | 83.7% / 57.7% |
| Operating cash flow | Not separately presented | $328.5 million |
| FFO / AFFO (non-GAAP) | $129.9 million / $132.2 million | $381.1 million / $385.8 million |
| Diluted AFFO per share (non-GAAP) | $0.36 | $1.07 |
At September 30, 2018, total assets were $10.57 billion, total debt carrying value was $4.12 billion (face value $4.15 billion), and stockholders’ equity was $6.21 billion. Cash and cash equivalents were $145.2 million, restricted cash $0.1 million, and short-term investments $320.7 million; the $400 million revolving facility was undrawn. Management reported no debt principal maturities in the next 12 months and compliance with debt covenants.
Nine-month cash flows included $832.5 million used in investing activities and $451.8 million provided by financing activities. Cash, cash equivalents and restricted cash declined $52.1 million to $145.3 million. Financing included approximately $1.3 billion of net IPO proceeds, used in part for debt repayments, the Second Lien Notes redemption, dividends and the Octavius Tower acquisition. Dividends declared were $0.2875 per share for Q3; the October payment raised the targeted annualized dividend to $1.15 per share, a 9.5% increase from $1.05.
Changes, transactions and unusual items
- The IPO closed February 5, 2018, raising approximately $1.3 billion net. VICI repaid $300 million on its revolver, repaid $100 million of Term Loan B, and redeemed $268.4 million principal of Second Lien Notes at a premium, reducing debt overall from $4.79 billion at year-end 2017 to $4.12 billion carrying value.
- Octavius Tower was acquired in July for $507.5 million and leased to Caesars for $35 million annual rent. The proposed Harrah’s Philadelphia acquisition and lease modifications were expected to close in Q4 2018; the stated cash consideration was approximately $82.5 million after contemplated lease-modification adjustments.
- The proposed Margaritaville Resort Casino acquisition was expected to close in Q4 2018 for $261.1 million, with a Penn National subsidiary to lease the real estate at initial annual rent of $23.2 million. Both pending transactions remained subject to approvals and closing conditions.
- Q3 included a $12.3 million impairment charge on vacant, non-operating land parcels. Nine-month results also included a $23.0 million loss on debt extinguishment, primarily the premium paid to redeem Second Lien Notes.
- There is no like-for-like consolidated prior-year revenue or earnings comparison in the filing: VICI reports consolidated 2018 results, while the 2017 comparative financial statements presented are for its predecessor golf business. Golf revenue increased to $5.4 million from $4.1 million in Q3 and to $19.7 million from $13.8 million for nine months, primarily reflecting fees under the Caesars golf use agreement.
Outlook, risks and contingencies
Management said liquidity was sufficient for expected requirements and anticipated funding the pending acquisitions with cash, credit-facility borrowings, or both. The filing does not provide earnings guidance. Lease agreements generally have 15-year initial terms and four five-year renewal options, with rent escalators and other provisions described in the filing.
- Tenant concentration is a key risk: all real estate properties other than the golf business were leased to Caesars affiliates, and most revenue came from those leases. A tenant default or deterioration in Caesars’ business could materially affect cash flows.
- At quarter-end, about $600 million of debt remained exposed to variable rates after swaps hedged $1.5 billion of variable-rate debt. Management estimated a 1% rate move would change annual cash interest by about $6 million.
- Other cited risks include substantial debt and refinancing needs, gaming regulation, REIT distribution and qualification requirements, acquisition execution, capital-market access, and possible changes in economic conditions. Management reported no litigation believed likely to have a material adverse effect and no material change in previously disclosed risk factors.
- The company recognized $1.6 million of formation, transition and headquarters-relocation costs and $0.7 million of resale-registration legal fees in the first nine months. It also noted that REIT taxable income may exceed cash available for distributions.
Investor verification priorities
- Confirm the subsequent closing status and final economics of Harrah’s Philadelphia and Margaritaville, including approvals, financing, and lease terms.
- Assess Caesars’ capacity to meet rent and tenant obligations, given the portfolio’s concentration.
- Review debt covenants, maturities, refinancing exposure, and the remaining unhedged variable-rate balance.
- Reconcile GAAP earnings, cash flows, and the company’s non-GAAP FFO/AFFO measures; account for the lack of a comparable consolidated 2017 period.
- Verify dividend sustainability against REIT taxable income, cash flow after debt service, and acquisition funding needs.