For VICI, Caesars-Eldorado Deal Is Ace in the Hole

Real estate investment trust VICI Properties played a key role in the Caesars-Eldorado mega-merger, including the ownership of flagship Caesars Palace (l.), making VICI a major industry landlord that could shape the future of the Vegas Strip.

One day, the Las Vegas Strip will recover. When it does, VICI Properties could play a key role in shaping its growth.

The real estate investment trust (REIT) began life as a spinoff when Caesars Entertainment emerged from Chapter 11 back in the fall of 2017—a liquidity vehicle designed to help fund the company’s recapitalization by acquiring ownership of a big chunk of the Las Vegas gaming giant’s massive portfolio of landed assets.

A lot has changed since then. The $17.3 billion acquisition that merged Caesars with regional casino giant Eldorado Resorts, which created the largest gaming operator in the world by number of assets, has also made VICI a major industry landlord.

VICI was a factor from the start, paying $1.8 billion to acquire three Harrah’s casinos in Atlantic City, New Orleans and Laughlin, Nevada, which it leases back to Caesars for $154 million in annual rent. At that point, VICI already owned the land and buildings of two Strip mainstays, Caesars Palace and Harrah’s Las Vegas.

Ahead of the merger’s official close last month, VICI provided the newly combined company with $400 million through a five-year mortgage loan on the Caesars Forum Conference Center, one of the largest facilities of its kind in the world, with 300,000 square feet of flexible MICE space situated just east of the Strip behind Caesars’ Linq Promenade and High Roller Observation Wheel, a short walk from more than 8,000 hotel rooms.

VICI also has purchased 23 prime developable acres from Caesars adjacent to the venue, running along the Las Vegas Monorail. Added to VICI’s existing holdings behind Bally’s Las Vegas, Paris Las Vegas and Planet Hollywood, it amounts to 50 acres uniquely positioned for eventual development.

CEO Ed Pitoniak, who recently described the land as “the only large-scale opportunity to deepen the Las Vegas Strip at its center,” said its best use may still be five or 10 years out, but when it happens it will be one of the keys to the city’s “long-term growth.”

“We see that land as giving us a chance to participate, not only in the growth of Las Vegas tourism, but in the growth of Las Vegas as a place where people choose to work and live as well as to play,” he said.

Union Gaming Group’s John DeCree agrees. “Although some analysts have taken issue with no direct income being associated with the (23-acre) Strip land purchase, we see immediate value creation due to the purchase price ($103.5 million) that was below normalized market value and the long-term optionality it provides for future growth in Las Vegas.”

To date, VICI owns the real estate of 31 gaming properties in nine states as part of lease agreements with Caesars, Hard Rock International, Jack Entertainment, Century Casinos and Penn National Gaming as operators.

In the last quarter, total revenues were up almost 17 percent to $257.9 million. That’s more than $1 billion a year.

It’s not likely the company is done buying either, especially as more operators look to shed real estate to raise cash and reduce costs while they dig out from the pandemic.

VICI management “expects to remain active in mergers and acquisitions and believes sale-leaseback may be a more attractive capital source for operators,” Jefferies gaming analyst David Katz said in a recent client note.

The Eldorado management team that’s now in charge of Caesars has indicated they’d like to sell a Strip resort. They’ve also been ordered by Indiana regulators to part with three of Caesars’ five properties in the state.

“These are all opportunities for VICI to execute on a potential right of first refusal and/or expand its tenant roster, which historically has led to future deals with new tenants,” DeCree said. “While deal volume has inevitably slowed, we do believe VICI can find unique transaction opportunities.”