VICI Properties Fantastic Funds From Operations Guidance Met With Tepid Response

Posted on: August 1, 2019, 11:12h. 

Last updated on: March 29, 2023, 06:29h.

VICI Properties Inc. (NYSE:VICI), the gaming real estate investment trust (REIT), raised its full-year funds from operations (FFO) guidance in its second-quarter earnings report, but investors’ response to the news was weak as the stock traded slightly higher Thursday.

Caesars Palace Las Vegas, VICI’s marquee property. The company raised its 2019 funds from operations guidance. (Image: TripSavvy)

On an adjusted basis, VICI, the owner of 22 casinos across the US, including Caesars Palace in Las Vegas, forecast 2019 FFO of $635 million to $645 million. That’s well above prior full-year adjusted FFO guidance of $600 million to $615 million.

Investors’ lack of enthusiasm for VICI’s updated FFO estimates could be the result of slightly lower per share estimates. The company said it expects 2019 FFO to come in at $1.45 to $1.47 share, below an original call of $1.47 to $1.50.

The lower per share numbers are tied to VICI announcing in June a dilutive secondary offering aimed at raising capital so the company can buy the real estate of Harrah’s New Orleans, Harrah’s Laughlin, and Harrah’s Atlantic City from Eldorado Resorts, Inc. (NASDAQ:ERI).

Eldorado is selling those properties as part of its $17.3 billion takeover of Caesars Entertainment Corp. (NASDAQ:CZR), a deal that could potentially benefit VICI over the long-term thanks to rising Caesars Palace Las Vegas (CPLV), Harrah’s Las Vegas (HLV), non-CPLV, and non-HLV rents.

The rent under the CPLV Lease Agreement and the HLV Lease Agreement will increase by $83.5 million and $15.0 million, respectively, for implied capitalization rates of 7.0%,” said VICI.

VICI added that when the Harrah’s New Orleans, Harrah’s Laughlin, and Harrah’s Atlantic City deals close, rents there will increase by $154 million for a capitalization rate of 8.5 percent.

FFO: It Matters

REITs like VICI are not structured as traditional corporations. Rather, REITs’ earnings are not taxed by the federal government, but the trade-off for that favorable treatment is that the companies must payout at least 90 percent of those earnings in the form of dividends.

That requirement prompts investors to evaluate real estate companies based on how much cash is being generated, which FFO measures. The metric is arrived at by adding net income, amortization, and depreciation and subtracting property sales.

VICI’s improving FFO standing reflects the $1 billion purchase of the Greektown Casino-Hotel in Detroit, which was finalized in May. Penn National Gaming will operate that property.

However, the real estate company’s bullish cash guidance does not include other transactions announced in the second quarter, such as the aforementioned Harrah’s buys and the $278 million deal to acquire the real estate assets of the Mountaineer Casino Racetrack and Resort in West Virginia and Missouri’s Isle Casino Cape Girardeau and Lady Luck Casino, because those purchases haven’t closed.

More Deals?

VICI, which owns three casinos in the Reno/Lake Tahoe market and two in Atlantic City, did not speculate on whether it could be a buyer of other Caesars properties should those assets be sold.

The real estate company did, however, reiterate that at some point in the future it could opt to buy the property assets of Harrah’s Hoosier Park and Indiana Grand and that it has rights of first refusal for a sale-leaseback transaction on Harrah’s Baltimore.

As previously reported, VICI has an agreement with Eldorado where the former has first dibs on one of the following Strip casinos: Bally’s Las Vegas, Flamingo Las Vegas, Paris Las Vegas, and Planet Hollywood Resort & Casino. Should VICI acquire the real estate of one of those venues, it would retain first priority to buy one of the remainders from that group or the LINQ Hotel & Casino.