VICI Properties: Caesars REIT, OTC Listing, Dividend Catalyst

One of my favorite investment themes are non-dividend paying REITs because they often trade at a discount as a result of being shunned by yield focused retail investors.  Pair that theme with an illiquid OTC listing, plus the REIT's only tenant being a company that I'm already long the equity and you have my attention.

VICI Properties (VICI) is technically a spinoff of Caesars Entertainment (CZR), however it wasn't distributed to common shareholders, instead as part of the bankruptcy reorganization, former creditors of Caesars Entertainment Operating Company (CEOC) received shares in VICI Properties.  Ownership in VICI Properties is essentially the same as being a senior (if not the most senior) creditor in the new Caesars Entertainment's capital structure.  VICI owns the Caesars Palace property in Las Vegas along with 18 other CZR casinos (non-Las Vegas regional ones) that are critical to the operation of the business, absent these casino properties Caesars would struggle to exist.

Without even looking at comparable gaming REITs (MGP, GLPI) -- would you lend Caesars Entertainment money at a 7.4% effective yield with critical real estate as collateral?  I would, again I'm bias because I own the equity too.

Portfolio/Asset Base/Valuation
VICI is starting off with 19 casinos, 32.5 million square feet, ~12k hotel rooms, 150 restaurants, 4 golf courses and 53 acres of undeveloped land near the Las Vegas strip.  Click on the below for a complete list of the properties.

All of the properties are triple net leases (they get reimbursed for property taxes and insurance) with Caesars Entertainment Operating Company (CEOC) as the tenant and the parent company fully guaranteeing the lease.  As part of the lease agreement, Caesars must dedicate a percentage of revenues towards capital expenditures to maintain and keep the properties competitive in their markets.  This is standard for most triple net lease agreements, but still a nice protection against normal wear and tear depreciation.  There are three leases:

• CPLV Lease Agreement: Covering just the Caesars Palace in Las Vegas, the company's flagship property, located in the center of the strip.  Las Vegas is benefiting from positive tailwinds, record visitation levels in 2016, and the opening of the expanded Las Vegas Convention Center.  The base rent is $165MM with an initial 15 year term and a 2% minimum escalator.
• Non-CPLV Lease Agreement: This is a master lease agreement covering all the non-CPLV casinos other than the Joliet property below and generally speaking, Caesars cannot vacate or remove a property from the master lease without triggering a default.  Most of these casinos are mature stabilized casinos, some in good markets, others not, but the master lease agreement helps insulate VICI from regional downturns or other individual location risks.  The base rent is $433MM with an initial 15 year term and a 2% minimum escalator.
• Joliet Lease Agreement: The Harrah's Joliet property (permanently docked riverboat casino) is 80% owned by VICI via a joint venture (other 20% is owned by John Hammons), thus it has a separately lease agreement with Caesars that functions similarly, just without the same master lease protections.  Being somewhat local, I'd consider it a lower end casino in the area, the base rent is $39.6MM with an initial 15 year term and a 2% minimum escalator.

There are additional casinos (Harrah's Atlantic City, Harrah's New Orleans, Harrah's Laughlin) in the queue to drop down to VICI , giving it some built in rent and dividend growth from the start.

VICI also has the right of first refusal on any new domestic property proposed to be owned or developed by Caesars outside of the greater Las Vegas area.  Caesars is itching to grow post emergence and has made it clear they intend to pursue M&A and other greenfield opportunities; partnering with VICI and its lower cost of capital on these efforts makes complete sense going forward.

MGM has its own REIT, MGM Growth Properties (MGP), that is similarly structured although MGM owns most of it as they chose to IPO a piece of it rather than a complete spinoff.  MGP trades at about a 6.25% cap rate, and it's a better credit than CZR, plus most of the value in MGP is Las Vegas versus regional casinos and MGM has better growth prospects internationally.  Gaming & Leisure Properties Inc (GLPI) is about the same size as MGP, but is entirely regional casinos, and is two major tenants are primarily regional operators in Pinnacle Entertainment (PNK, still own this one) and Penn National Gaming.  I would say both are lower credits than Caesars, they operate primarily outsides of Las Vegas, transferred substantially all of their real estate to GLPI (Caesars still owns their non-Caesars Palace Las Vegas real estate), and they don't have the scale or ambition to compete in international growth markets.  GLPI trades for about a 7.3% cap rate.  I'd argue that VICI should trade for only a slight discount to MGP at about a 6.5% cap rate.

VICI Properties

Shares outstanding: 246.2 million shares

Market cap (@$18.50/share): $4.56B

Net debt: $4.61B

Enterprise Value: $9.17B

NOI: $685MM = 7.4% cap rate

FFO: $435MM = 10.47x FFO

EBITDA: $640MM = 14.32x EV/EBITDA

Another way to think of it, annual interest costs are $247.5MM, removing that from NOI leaves $392.5MM for common shareholders or a 8.6% cash yield that should grow (slowly) over time.  Not an incredible deal, but I think investors will find it attractive in today's market?  Over the next year or so as the company joins the ranks of is peers in paying a dividend and up-listing to a normal exchange, it'll pull some of those gains forward.  Due to leverage, small differences in the assumed cap rate change the math pretty quickly, at a 6.5% cap rate, VICI shares could be worth ~$24.  An additional reference point, the Caesars recently issued senior notes at a coupon of 5.25%, others can speak better to the credit differences between the notes and the master lease, but it speaks to the improving credit quality of Caesars post emergence.

Why is it Cheap?

• VICI is essentially a bankruptcy reorg; its in the hands of former creditors (although highly sophisticated ones which explains why it's only marginally cheap) that are not natural long term holders of a REIT.
• The company currently trades over the counter, there's no bid/ask spread that I can see on my limited brokerage platform, its a bit tricky to get shares and liquidity is sporadic.
• It has yet to declare a dividend, there's no company website or investor presentation, nothing that would cater to the eventual retail REIT holder.
• VICI's only has one tenant in Caesars Entertainment, which just emerged from bankruptcy, one tenant REITs tend to initially trade at a discount until management has an opportunity to add to the tenant roster over time, although MGP trades at a premium, but its arguably a much better credit.

Each one of these items will dissipate over time as VICI lists on an exchange (no timetable set as of yet), declares a dividend (again, no timetable), and diversifies its tenant roster with M&A.

Risks

• Rising interest rates will hurt all REITs, especially ones that are essentially long term bonds like a triple net lease. VICI does have CPI linked escalators in their lease agreement with Caesars to help stem some of the blow, but quickly rising rates would hurt cap rates across the industry.
• VICI at the moment is all but in name a long term bond on Caesars Entertainment, that comes with its own risks, it just emerged from bankruptcy, more of a mid-market target demographic in Las Vegas and elsewhere compared to peers.
• Casinos aren't easily repurposed like other types of real estate, a distribution center or fast food outlet can be moved to another tenant fairly easily.  For example, there are several empty casinos in Atlantic City (including the massive Revel) that are boarded up and would take significant capital to repurpose if it can be done at all.

Here's the 10-12 as its a bit hard to find, and no company website yet: https://www.sec.gov/Archives/edgar/data/1705696/000119312517316387/d392523d1012ga.htm

Disclosure: I own shares of VICI and CZR