VICI Properties Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. VICI owns gaming, hospitality and entertainment real estate, principally leased on a long-term triple-net basis, and operates four golf courses. Its 23-property portfolio was primarily leased to Caesars affiliates, with Margaritaville and Greektown leased to Penn National.
Financial performance
Amounts below are in millions, except per-share data.
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $220.7 | $221.0 | $434.7 | $439.3 |
| Operating income | $205.5 | $189.4 | $407.4 | $378.2 |
| Net income attributable to common stockholders | $152.0 | $139.0 | $302.9 | $251.2 |
| Diluted EPS | $0.37 | $0.38 | $0.74 | $0.70 |
| Adjusted EBITDA (non-GAAP) | $206.2 | $175.4 | $405.3 | $350.2 |
| AFFO (non-GAAP) | $156.8 | $128.8 | $308.3 | $253.5 |
- Contractual lease revenue increased $28.9 million in Q2 and $51.7 million in H1, principally reflecting Octavius Tower, Harrah’s Philadelphia, Margaritaville and Greektown additions. Q2 total revenue was nearly flat; H1 revenue declined $4.5 million.
- Comparisons of reported revenue and expenses are affected by adoption of ASC 842 on January 1, 2019: property taxes paid directly by tenants are no longer recorded as both reimbursement revenue and expense. Prior periods were not recast. Thus, reported revenue trends do not fully represent growth in contractual lease revenue.
- Q2 diluted EPS decreased despite higher net income, alongside materially higher weighted-average shares (412.8 million versus 370.0 million). H1 EPS increased. H1 2018 also included a $23.0 million debt-extinguishment loss; none was recorded in 2019.
- Operating cash flow for H1 was $262.9 million, versus $246.7 million. Investing cash outflow was $549.0 million, largely reflecting $970.8 million of lease investments, partly offset by maturities of short-term investments. Financing cash inflow was $921.2 million, including equity proceeds, offset by $234.4 million of dividends paid.
Balance sheet, debt and liquidity
- At June 30, 2019, total assets were $12.52 billion, total equity $8.07 billion, and debt carrying value $4.12 billion ($4.15 billion face value), compared with $4.12 billion carrying value at December 31, 2018.
- Cash and cash equivalents were $1.21 billion, restricted cash $28.2 million and short-term investments $97.6 million. The undrawn revolving facility was $1.0 billion; the filing presents aggregate available resources of $2.33 billion, subject to facility terms and covenants.
- No debt maturities were due in the next 12 months. Principal maturities were $1.56 billion in 2022, $520.5 million in 2023 and $2.07 billion in 2024. The revolving facility was upsized from $400 million to $1.0 billion and extended to May 2024. VICI reported compliance with its debt covenants.
- Approximately $2.0 billion of the $2.1 billion variable-rate Term Loan B was hedged with swaps; about $100 million remained unhedged. A 1 percentage-point rate change on that unhedged amount would change annual cash interest by about $1.0 million. Swap fair-value losses contributed to accumulated other comprehensive loss, which reached $70.0 million.
- Quarterly dividend declared was $0.2875 per share, unchanged from Q1 2019. H1 dividends declared totaled $0.575 per share.
Material changes, transactions and outlook
- VICI completed the $700 million Greektown real-estate acquisition in May and the $261.1 million Margaritaville acquisition in January; both were leased to Penn National under triple-net leases. Initial annual rent was $55.6 million and $23.2 million, respectively.
- Pending acquisitions included JACK Cincinnati, for approximately $558.3 million of real estate, expected by year-end 2019, and the Century Portfolio, for approximately $277.8 million, expected in early 2020. Each is subject to approvals and closing conditions.
- The June 24 Eldorado transaction agreement is conditioned on the ERI-Caesars merger and other approvals. It includes proposed acquisitions of Harrah’s New Orleans, Laughlin and Atlantic City real estate for $1.81 billion, plus substantial payments to acquire additional rent under the Las Vegas leases. Management cited expected merger completion in the first half of 2020; VICI stated there is no assurance the merger or related transactions will close as anticipated, on the stated terms, or at all.
- To support the Eldorado transaction, VICI arranged 364-day bridge commitments of up to $3.3 billion senior and $1.5 billion junior, but said it intended to seek long-term financing and did not then expect to draw the bridge facilities. Refinancing, if needed, may not be available on satisfactory terms.
- June equity financing included a 50-million-share follow-on offering generating approximately $1.0 billion net and forward sale agreements covering 65 million shares. The forward sales had not been settled at quarter-end; physical settlement was expected by September 26, 2020. At June 30, physical settlement was estimated to provide $1.3 billion, while alternative settlement could create cash outflow or share dilution.
- No formal earnings or AFFO guidance is provided. Management said available cash, lease receipts and access to debt and equity markets were expected to meet funding needs, while acknowledging capital-market and tenant-payment uncertainty.
Risks, contingencies and unusual items
- Revenue is concentrated: most properties were leased to Caesars affiliates, and Las Vegas Strip properties generated approximately 34% of lease revenue in both Q2 and H1. VICI depends on tenant financial health, gaming regulation and lease guarantees.
- Pending deals face regulatory, lender-consent, diligence and financing risks. Eldorado-related termination payments could reach $75 million in specified circumstances; separate potential liquidated damages are up to $22.3 million for JACK Cincinnati and $13.5 million for the Century Portfolio.
- VICI expects to incur approximately $2.0 billion of additional debt for the Eldorado transaction and approximately $700 million for the JACK Cincinnati and Century acquisitions, subject to transaction completion and funding choices. Failure to receive expected forward-sale proceeds could require additional borrowing.
- Management disclosed potential forward-sale dilution and settlement cash exposure, as well as uncertainty about the tax treatment of cash settlement that could affect REIT qualification.
- VICI reported no litigation believed likely to have a material adverse effect and no material changes to previously disclosed risk factors other than risks associated with pending transactions and forward sales.
Key investor verification points
- Track closing conditions, regulatory approvals, lender consent and financing for the Eldorado merger and each pending acquisition; compare actual transaction terms and timing with disclosed expectations.
- Assess tenant credit quality and lease coverage, particularly Caesars/ERI exposure and the effect of tenant concentration on rent collection.
- Reconcile GAAP revenue with contractual lease revenue and cash rent, accounting for the ASC 842 presentation change and noncash lease-income adjustments.
- Monitor debt raised, financing costs, covenant headroom and refinancing plans, including any use of bridge facilities and the CPLV CMBS debt resolution.
- Verify forward-sale settlement proceeds, settlement method, share dilution or cash obligations, and related REIT tax implications.