VICI PROPERTIES INC. annual report, FY2017

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VICI Properties Inc. — 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. VICI began operating as a standalone company on October 6, 2017, so its consolidated operating results cover only October 6–December 31, 2017; they are not a full-year comparison. The financial statements received an unqualified audit opinion.

Business context

VICI is a newly formed experiential real estate owner and acquirer, created through Caesars Entertainment Operating Company’s emergence from bankruptcy. At year-end, its portfolio included 20 gaming properties, four golf courses, and approximately 34 acres of undeveloped land near the Las Vegas Strip. Most properties are leased to Caesars subsidiaries under long-term triple-net leases. The filing describes 100% occupancy for leased properties and substantial reliance on Caesars as tenant and guarantor.

Financial results and position

  • Revenue: $187.6 million for the post-formation period: $181.3 million from real estate and $6.4 million from golf. Real estate revenue included $150.2 million of direct-financing-lease income, $11.5 million of operating-lease income, and $19.6 million in tenant property-tax reimbursements.
  • Profit: Operating income was $144.2 million; net income was $44.5 million, including a $38.5 million loss on extinguishment of debt and a $1.9 million income-tax benefit. Net income attributable to common shareholders was $42.7 million, or $0.19 per diluted share.
  • Supplemental measures: FFO was $42.7 million, AFFO $84.1 million, and Adjusted EBITDA $145.1 million. These are non-GAAP measures and should be considered alongside GAAP results.
  • Cash flow: Operating activities provided $129.4 million; investing activities used $1.136 billion, primarily for the Harrah’s Las Vegas acquisition; financing activities provided $1.148 billion. Cash rent received was $213.7 million, including $60.4 million for January 2018.
  • Year-end financial position: Total assets were $9.740 billion, cash and cash equivalents $183.6 million, restricted cash $13.8 million, debt at carrying value $4.786 billion (face value $4.817 billion), and shareholders’ equity $4.776 billion.
  • Debt and liquidity: Year-end debt included a $2.2 billion variable-rate term loan, $300 million drawn on a $400 million revolver, $1.55 billion of CPLV mortgage debt, and $766.9 million of 8% Second Lien Notes. Weighted-average interest rate was 4.64%; estimated 2018 debt service was $249.3 million. The company reported compliance with debt covenants and $100 million of undrawn revolver capacity.
  • Distributions: VICI had made no cash distributions by year-end. It intended to make regular quarterly distributions, subject to board discretion, cash availability, debt restrictions, and REIT requirements.

Material developments and comparison

  • VICI’s results are not directly comparable with a prior VICI year because the company was formed in October 2017. The separate predecessor golf business reported $14.1 million revenue and approximately break-even net income for January 1–October 5, 2017; its carve-out results are not a comparable measure of VICI’s consolidated performance.
  • At formation, VICI recorded approximately $8.4 billion of assets at fair value under fresh-start reporting and assumed approximately $4.9 billion of debt. In November, preferred shares and $250 million of junior mezzanine debt converted into common shares.
  • In December, VICI acquired Harrah’s Las Vegas for approximately $1.136 billion and entered into a lease with $87.4 million of annual base rent for the first seven years, subject to escalators and conditions. It also agreed to sell approximately 18.4 acres to Caesars for $73.6 million; because of a put-call arrangement, the sale was not recognized as completed for accounting purposes at year-end.
  • After year-end, VICI completed its IPO on February 5, 2018, selling 69.575 million shares at $20 each for approximately $1.307 billion in net proceeds. It used proceeds to repay $300 million on the revolver, redeem $268.4 million of Second Lien Notes at 108% of principal plus accrued interest, and repay $100 million of the term loan. The filing says these actions reduced the weighted-average rate to 4.39% and estimated 2018 debt service to $210.8 million.
  • VICI began NYSE trading on February 1, 2018. The filing states that it intended to elect REIT status for the 2017 tax year; qualification depends on continuing compliance with statutory tests.

Outlook, risks, and unusual items

Management expects growth from contractual rent escalators, acquisitions, rights of first refusal and call rights, and potential development opportunities. It gives no quantified operating or earnings guidance. The leases generally have 15-year initial terms and four five-year tenant renewal options. Fixed annual rent and golf-course fees were described as approximately $735.3 million for the first seven years, subject to escalators and adjustments.

  • Tenant concentration: Caesars subsidiaries lease all gaming properties; substantially all rental revenue depends on Caesars and its guarantors’ ability and willingness to pay. Caesars’ debt burden and operating performance could affect VICI’s cash flow.
  • Leverage and interest rates: Debt is substantial, much of it secured by properties; approximately $2.5 billion was variable-rate at year-end. A one-percentage-point rate change was estimated to alter annual cash interest expense by about $25 million.
  • Industry and geographic exposure: VICI is concentrated in gaming, with Las Vegas Strip properties generating approximately 27.8% of lease revenue for the post-formation period. Competition, regulation, economic weakness, travel disruption, disasters, and terrorism could affect tenants and rent payments.
  • REIT and tax matters: Failure to qualify as a REIT could create significant taxes and reduce distributions. The tax-free treatment of the separation depends on representations and conditions; VICI has potentially uncapped indemnification obligations for certain taxes under the Tax Matters Agreement.
  • Other considerations: Gaming approvals can constrain ownership, financing, securities offerings, and property transfers. Lease renewal, casualty termination provisions, environmental liabilities, acquisition financing, and the HLV put-call arrangements create additional risks. A November 2017 objection by Hammond municipal entities challenged assignment of certain Horseshoe Hammond-related agreements; the filing does not describe a final resolution.
  • Unusual presentation: Fresh-start accounting, lease classification estimates, and the short post-formation reporting period limit comparability. The company reported effective disclosure controls, but its 10-K did not include management’s assessment or auditor attestation on internal control over financial reporting under the newly public company transition relief.

Important facts for investors to verify

  1. Caesars’ and CRC’s financial capacity, debt maturities, and ability to meet lease and guaranty obligations; confirm lease coverage and tenant performance.
  2. Post-IPO debt balances, redemption premiums and remaining maturities, variable-rate exposure, covenant headroom, and actual interest savings.
  3. Cash available for distributions after debt service, REIT taxable income versus cash flow, and the board’s declared distribution policy.
  4. REIT qualification and the tax treatment of the separation, including any exposure under the Tax Matters Agreement.
  5. Status and potential economics of the Eastside convention-center put-call arrangements, the Hammond assignment dispute, and other acquisition rights.
  6. How reported GAAP lease income, cash rent collections, AFFO, and Adjusted EBITDA reconcile over full-year reporting periods; the filing’s brief operating history provides no full-year VICI comparison.