Analyst: Plenty of investor potential through gaming REIT VICI Properties

December 10, 2018 5:05 AM
  • Howard Stutz, CDC Gaming Reports
December 10, 2018 5:05 AM
  • Howard Stutz, CDC Gaming Reports

When it comes to future casino deals, don’t bet on a multi-billion-dollar acquisition from real estate investment trust VICI Properties.

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Deutsche Bank gaming analyst Carlo Santarelli, following an investors meeting with the company’s senior management, believes VICI is more focused on “single asset/smaller portfolio deals rather than large scale land grabs.”

The company, formed out of last year’s bankruptcy reorganization of Caesars Entertainment, may continue to acquire the land and buildings of several Caesars-owned resorts. One deal is still pending, and VICI has the right of first refusal and call options on several other Caesars developments.

However, VICI executives told Deutsche Bank there are roughly three dozen gaming properties currently owned by non-Caesars companies that could become acquisition targets.

REITs – both gaming and non-gaming – own land and buildings and lease the associated properties back to operators. REITs don’t pay income taxes but distribute 90 percent of their earnings in the form of dividends to shareholders.

VICI is one of three gaming industry REITs, along with Gaming and Leisure Properties and MGM Growth Properties.

Santarelli said the gaming REITs have “held up relatively well against a battered gaming complex” and rising interest rates in the last year. But he is concerned the stock performances are “somewhat disappointing” despite the meaningful transaction activity.

“(VICI) management noted that despite the multiple compression experienced by gaming operators, the cadence of deal discussions has been more or less steady,” Santarelli wrote in a research report to investors. The meeting included VICI CEO Ed Pitoniak, President John Payne, and CFO David Kieske.

Gaming REITS have announced deals totaling $4.3 billion in 2018 and VICI is involved in $1.7 billion of the transactions.

“While VICI’s healthy transaction activity, tenant expansion, and balance sheet improvement in the year to date have helped it outperform peers, we believe healthy upside potential remain,” Santarelli said.

VICI currently owns 20 resorts under the Caesars, Harrah’s and Horseshoe brands in eight states, all leased to Caesars Entertainment. The REIT is in the process of acquiring Harrah’s Philadelphia, for $241.5 million, which would give company its ninth state.

In June, VICI teamed up with Penn National Gaming to acquire Margaritaville Resort Casino in Bossier City, Louisiana for a total purchase price of $376 million. In November, the companies got together again on the $1 billion purchase of Greektown Casino-Resort in Detroit.

Margaritaville is expected to close this month with the Detroit deal on track to close next year.

VICI could end up owning the land and buildings of three other Caesars properties in the next couple of years – the two Indiana racetrack casinos acquired in June for $1.7 billion and the $375 million Caesars Forum Conference Center, which is under construction on the Las Vegas Strip and will add 550,000 square feet to the market’s convention space in 2020.

Santarelli said VICI is also in “a potentially advantaged position” should Caesars decide to sell any of its seven Las Vegas Strip resorts not currently owned by the REIT.

“While Las Vegas cash flows tend to be considerably more volatile relative to regional performance, across a business cycle, we see VICI’s rent coverage as a distinct positive relative to both gaming and broader triple net REITs,” Santarelli said.

The analyst told investors he expects VICI to focus on other deals outside Caesars in the coming year.

“Management does not believe seller expectations are unreasonable in the current environment,” Santarelli said.

Shares of VICI, traded on the New York Stock Exchange, closed at $21.53 on Friday. Santarelli attached a price target of $24 to the company with a “Buy” recommendation.

Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.