Bigtime REIT Signals Confidence in The Strip With $800 Million CityCenter Stake
There’s almost no possibility you’re going to find this news interesting, even if we’re writing it, and we can make just about anything interesting, except Criss Angel. Fair warning. It’s inside baseball. That’s probably a better analogy for things even we can’t make interesting. Do-over: We can make just about anything interesting, except baseball. Given we found a better example, that jab at Criss Angel seems unnecessarily mean-spirited. We would like to retract it. We would like to, but we aren’t going to, mostly because teasing is our love language.
Anyway, Realty Income Corp. is making an $800 million investment in CityCenter, home to Aria and Vdara. The owner, Blackstone Real Estate, keeps 100% of the ownership. Realty Income just gets a sweet check every month, to the tune of 7.4% on its investment annually.
Don’t freak out. We’re going to explain this in English. Probably. Bonus: Pictures!
Let’s say CityCenter is a big, beautiful coin-operated slot machine. Big slot machines are always named Big Bertha. Nobody knows why.
Blackstone owns the slot machine, MGM Resorts operates it, ensuring it is profitable by charging a fee for, among other things, use of the slot chair.
Don’t laugh.
That’s right, “ensuring” is spelled with an “e.” That’s why people who claim “TIP” stands for “to insure promptness” are dim-witted and should be forced to wear heavily-padded safety helmets wherever they go.
We are going to great lengths to distract from the fact our slot machine analogy is imperfect. Just move along.
Realty Income saunters up and says, “We think this machine is going to kick out a steady stream of coins for years to come, but we don’t want to mess with jammed buttons or get our hands grimy. We just want a piece of the action.”
Granted, there are very few coin-operated slot machines in Las Vegas, but we are not going to spend time addressing your constant quibbling with our metaphor because we are very important and busy playing video poker and mansplaining complex financial transactions to laypersons.
So, Realty Income gives Blackstone $800 million like it’s pocket change and gets a special chute fashioned from fine Corinthian leather on the old-timey slot machine that delivers a modest but reliable supply of coins into the REIT’s ample coffers.
That’s sort of the whole thing.
Basically, Realty Income is saying it thinks the recent dip in visitation to Las Vegas is a blip.
REITs have it pretty good, because rents go up whether hotel-casino revenue does or not.
Are there risks? Yes.
CityCenter could underperform, in which case preferred equity returns could get delayed or reduced. That’s what Realty Income’s investment is called, by the way, “preferred equity.” Preferred equity is an investment that sits below lenders but above regular owners, giving investors priority payouts, but not the control or legal guarantees of a traditional loan. Blackstone’s equity is “common” equity.
Anyway, preferred equity isn’t debt. If cash flow tightens, the return can be paused. You can’t foreclose or seize the property the way a lender could.
There’s also liquidity risk. Realty Income can’t easily sell its stake if things go sideways. It’s not a stock you can just dump on Tuesday if Vegas has a slow weekend.
If Strip real estate values drop, the stake is worth less. A lot of bad things would need to happen for Realty Income to lose its investment, but anything is possible.
What else would you like to know?
Will this deal affect you in any way? No, unless you are a lawyer or accountant. Lots of people get a little extra something in their paycheck when such deals happen. In this case: “J.P. Morgan, Citi, Deutsche Bank, Goldman Sachs and Evercore are acting as financial advisors to Blackstone. Simpson Thacher & Bartlett LLP is acting as legal counsel to Blackstone. Latham & Watkins LLP is acting as legal counsel to Realty Income.”
Another nugget from the deal: “The property is subject to an existing triple net lease with annual rent escalators and approximately 26 years of remaining initial term, plus three 10-year extension options. In-place rent is significantly well-covered through existing property cash flows.”
Translation: CityCenter already has a long-term lease where the tenant pays almost all the expenses, and the rent automatically goes up each year. There are about 26 years left on the lease, with the option to extend it for up to 30 more. The money the property brings in covers the rent that’s owed.
It turns out REITs are gamblers, just like the rest of us.
REIT money is a lot like casino money, you know, chips or TITO vouchers. Casino money doesn’t feel real, especially when you’re sloshed.
When it’s not “real money,” you can just ignore the red flags and forge ahead. It’s no fun to think about things like economic uncertainty or commoditization (the fact Las Vegas no longer had a monopoly on legal gambling) or the growing perception Las Vegas has priced out a big swath of its middle-market (value-seeking) customers.
It’s not like coin-operated slot machines could ever fall out of favor or something.
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