VICI Could Consider Lowering Rent on Caesars Regional Casinos, Says Analyst

• REIT could mull lowering rent on Caesars regional casinos
• Analyst says rent is probably a bit too high
• A potential deal could involve the sale of a casino or other real estate

Like the sword of Damocles, the regional master lease accord between Caesars Entertainment (NASDAQ: CZR) and VICI Properties (NYSE: VICI) hangs over both the casino operator and the landlord.

Resolution to the oft-discussed issue is desired by both companies and one sell-side analyst speculates it could involve a rent reduction. In a recent report to clients, J.P. Morgan analyst Daniel Politzer notes the Caesars regional casinos of which VICI owns the real estate generate $750 million in annual cash flow, but the yearly rent is $730 million. That coverage ratio is likely too tight for the operator’s and the owner’s comfort.

We do think a rent reduction and/or less onerous escalator is a possibility, but expect any transaction would likely have several moving parts,” observes the analyst.

The rent escalator he’s referring to is tethered to the Consumer Price Index (CPI) and is common in casino sale-leaseback agreements. As the CPI rises, the escalator does so, too, increasing by the same amount, putting some burden on the tenant if operating earnings at the venues in question don’t increase as well.

How Caesars, VICI Could Resolve Regional Casino Issue

The issue of the regional casino master lease has been a drag on shares of both Caesars and VICI, indicating both parties are likely motivated to find resolution.

Politzer, who says the rent is too high today, hypothesizes it could involve Caesars selling a land-based casino to VICI or the sale of undeveloped real estate. Another option would be the gaming company tacking on 10 years to lease agreement, extending it through 2045.

Either way, Caesars is going to have to give something to get something and that scenario could well involve a yet-to-be confirmed asset sale of some type.

Analysts Weighing In on VICI

To say Wall Street is keeping abreast of the master lease agreement goings on as it relates to VICI is an understatement. Earlier today, Evercore ISI analyst Steve Sakwa downgraded the REIT to “in-line” from “outperform” while trimming his price target to $32 from $36. That’s the fourth time in less than a month an analyst lowered their price forecast on VICI.

Not surprisingly, Sakwa cited the regional casino rent overhang as the reason downgrade and price target reduction. That’s been a common in analysts’ recent bearish commentary on VICI.