Business context and reporting period
VICI Properties Inc. is a REIT focused on owning gaming, hospitality and entertainment real estate leased primarily under long-term triple-net leases, plus four golf courses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020; amounts below are in millions unless noted. At quarter-end VICI reported 28 properties. The Eldorado transaction closed on July 20, 2020, bringing the portfolio to 31 properties.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $257.9 | $220.7 | $512.9 | $434.7 |
| Operating income | $308.6 | $205.5 | $396.7 | $407.4 |
| Net income attributable to common stockholders | $229.4 | $152.0 | $205.4 | $302.9 |
| Diluted EPS | $0.47 | $0.37 | $0.43 | $0.74 |
| AFFO | $176.3 | $156.8 | $356.2 | $308.3 |
| AFFO per diluted share | $0.36 | $0.38 | $0.74 | $0.75 |
| Operating cash flow | Not separately stated | Not separately stated | $318.5 | $262.9 |
- Q2 revenue increased about 17%, primarily from acquisitions added since 2019 and the January 2020 JACK Cleveland/Thistledown acquisition. Six-month revenue increased about 18% on the same drivers.
- Q2 operating income and net income include a $65.5 million decrease in the credit-loss allowance, which reduced reported operating expenses. Six-month results instead include an $84.0 million increase in the allowance and a $39.1 million debt-extinguishment loss. Comparisons of reported earnings and margins are therefore materially affected by these items.
- Golf operations revenue fell $2.9 million in Q2 and $4.0 million for the six months, principally because of temporary COVID-19 closures. Six-month AFFO per diluted share was slightly lower year over year despite higher AFFO.
- At June 30, cash and cash equivalents were $1,680.5 million and restricted cash was $2,000.0 million. The restricted funds were escrowed for the Eldorado transaction and were released and used after quarter-end. The company reported $1,000 million of undrawn revolver capacity; its stated $4,680.5 million total liquidity included restricted cash and undrawn capacity.
- Debt had $6,850 million face value and $6,758.1 million carrying value at June 30, versus $4,848.5 million face value at December 31, 2019. No debt maturities were due within 12 months; the next scheduled principal payments were in 2022. VICI said it was compliant with debt covenants.
- Quarterly dividends were $0.2975 per share, up from $0.2875 in 2019. Common shares outstanding rose to approximately 533.7 million at June 30 from 461.0 million at year-end, including settlement of 65 million shares under the 2019 forward sale agreements.
Material changes, transactions and outlook
- VICI adopted the expected-credit-loss standard on January 1, 2020, recording a $309.4 million opening allowance, or 2.88% of the relevant lease investment balance, through opening retained earnings. At June 30, total allowance for credit losses was $393.4 million, or 3.38% of amortized cost. Management attributed the quarterly allowance decrease to improved outlook assumptions as most gaming operations reopened; all leases and the ROV loan were current at quarter-end.
- In February, VICI issued $2.5 billion of senior unsecured notes, placed $2.0 billion in escrow for the Eldorado transaction, and redeemed its $498.5 million of 8% second-lien notes for approximately $537.5 million. The redemption generated the $39.1 million extinguishment loss. The new notes carry coupons of 3.50% to 4.125%; the Term Loan B spread was reduced to LIBOR plus 1.75%.
- After quarter-end, VICI completed the Eldorado transaction, including acquiring Harrah’s New Orleans, Harrah’s Laughlin and Harrah’s Atlantic City for $1,823.5 million. The Regional Master Lease’s initial annual rent rose by $154.0 million to $621.7 million, and Caesars’ lease guarantees and lease terms were amended. The transaction also involved payments to amend the Las Vegas leases and additional annual rent associated with Caesars Palace Las Vegas and Harrah’s Las Vegas.
- COVID-19 temporarily closed tenants’ operations at all properties and VICI’s four golf courses. By July 29, substantially all properties had reopened under restrictions, but Greektown remained closed. VICI stated that all tenants had paid rent in full through July 2020, while cautioning that future rent payments cannot be assured. No formal earnings guidance is provided in the filing.
- Management expects more limited acquisition activity in the near term and says it will prioritize tenant relationships, existing assets, liquidity and financial strength, while remaining open to disciplined, opportunistic acquisitions. It stated that liquidity was sufficient to meet obligations for a significant period even if tenants could not make all contractual rent payments; this depends on uncertain pandemic and capital-market conditions.
- A proposed $400 million, five-year mortgage loan secured by the Caesars Forum Convention Center and a related purchase of about 23 acres of Las Vegas land were expected to close in Q3 2020, subject to due diligence and definitive agreements; VICI gave no assurance they would close on time, on the contemplated terms, or at all. The proposed loan’s initial rate was 7.7%, with annual payment escalation of 2%.
- VICI and JACK amended the JACK lease and loan after quarter-end: VICI agreed to fund an $18 million gaming patio, with rent increasing by $1.8 million from April 2022, and increased the ROV term loan to $70 million at 9% while adding a $25 million revolving facility. The filing also describes planned sales of Bally’s Atlantic City and Harrah’s Reno, both subject to closing conditions.
Risks and contingencies
- Tenant and guarantor credit risk is concentrated: Caesars-related leases represented 80% of Q2 2020 lease revenue, versus 95% in Q2 2019. COVID-related closures, reduced capacity, cancellations, possible renewed closures and recessionary effects could impair tenants’ liquidity, rent-paying ability and required property investment.
- The filing identifies uncertainty in the CECL estimates, which rely on default and loss assumptions and economic forecasts; further changes could materially affect earnings and lease investment carrying values.
- Debt totaled $6.85 billion face value. Approximately $2.1 billion was variable-rate debt, of which $2.0 billion was hedged; management estimated a 1% rate change on the unhedged balance would change annual cash interest by about $1 million.
- The proposed Forum Convention Center loan would be to a borrower whose payment obligations are not guaranteed by Caesars or its predecessors, and the facility had no operating history. The filing also describes risks if a Caesars bankruptcy led a court to recharacterize certain lease-related investments as financing transactions.
- The June 2020 forward sale agreement for 29.9 million shares had not settled at June 30. Physical settlement would dilute shareholders; cash or net-share settlement could create cash-payment or share-delivery obligations, and the filing notes uncertainty about the tax treatment of possible cash settlement proceeds for REIT qualification.
- VICI reported no litigation it believed could have a material adverse effect and no defaults under senior securities. Disclosure controls were assessed as effective at June 30, 2020.
Important facts for investors to verify
- Whether tenants continued paying rent after July 2020, particularly Caesars and the still-closed Greektown property, and how operating restrictions affected tenant liquidity and rent coverage.
- The subsequent-period credit-loss allowance, its assumptions and sensitivity, including the allowance recorded for the Eldorado-related investments.
- The final funding, accounting impact and lease economics of the July 2020 Eldorado transaction, including amended guarantees, escalators, rent and any fair-value gain or loss.
- Whether the proposed Forum Convention Center loan and Las Vegas land acquisition closed, and the borrower’s ability to service the loan.
- Forward-sale settlement and resulting dilution, and the status of the Bally’s Atlantic City and Harrah’s Reno dispositions.
- Liquidity after use of the $2.0 billion escrow, subsequent acquisitions and commitments, and compliance with debt covenants as pandemic conditions evolve.