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VICI Credit Rating Affirmed at BBB-, Outlook Stable

VICI Properties’ (NYSE: VICI) corporate credit grade was affirmed at “BBB-“ with a “stable” outlook in a new report by Fitch Ratings.

Caesars asset sale
Caesars Palace on the Las Vegas Strip. Owner VICI Properties maintained an investment-grade credit rating at Fitch. (Image: CNN)

That means the largest landlord on the Las Vegas Strip carries the lowest possible investment-grade credit rating. Fitch noted that an upgrade to that mark is possible if the real estate investment trust (REIT) can sustain a net debt/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio below 4.5x, if it diversifies its tenant base and if VICI and its rivals show the ability to easily tap capital markets if needed.

In terms of tenant diversification, VICI’s two biggest clients are MGM Resorts International (NYSE: MGM) and Caesars Entertainment (NASDAQ: CZR), providing the REIT with significant exposure to the Las Vegas Strip as well as a slew of regional casino markets.

VICI’s client roster also includes Apollo Global Management, Century Casinos and Hard Rock International, among others, confirming the gaming REIT is diverse across regions and casino sizes. However, Fitch notes MGM and Caesars combine for 76% of VICI’s adjusted revenue.

VICI Favorable Fundamentals

At a time of elevated stress in some corners of the commercial real estate market, namely office space, VICI stands tall in the broader real estate sector. Strong rent collections and an ability to thrive in inflationary environments are among the factors underpinning the REIT’s investment thesis.

Positively, the company has stable occupancy and rent collections with CPI-linked escalators, though overall gaming REITs have weaker contingent liquidity compared with more traditional CRE property types, which is a drag on the rating,” according to Fitch. “The ratings also contemplate Fitch’s expectation of deleveraging below 5.5x by YE 2024; if deleveraging is delayed as a result of operational issues or capital allocation, the ratings or Outlook may be revised.”

Due to a spate of deal-making over the past couple of years that significantly expanded the REIT’s client and property rosters, VICI’s leverage is running toward the higher end of the historical range. However, Fitch believes the company can drive that figure down to 5x to 5.5x by the end of 2024.

“Deleveraging will result from a combination of annual contractual increases in rental income (all fixed but includes potential upside from CPI-linked escalators) and whether retained cash flow post-merger is directed toward acquisitions,” added the ratings agency.

VICI Could Be Longer-Term Candidate for Better Ratings

Better credit ratings are imperative for any company because the higher an issuer’s grade is, the more it saves in interest payments when it sells corporate debt.

Ratings agencies, such as Fitch, typically don’t take corporate downgrades or upgrades lightly, but VICI is a credible candidate for a credit grade boost over the long haul. The ongoing desirability of Las Vegas and regional casino real estate is one reason why.

“Positively, non-traditional owners have increasingly been purchasing Las Vegas real estate (e.g. private equity), which has led to cap rate compression and is a longer term positive as it relates to the attractiveness of Las Vegas gaming real estate,” concluded Fitch. “Regional gaming outperformed many of the other hard-hit sectors during the pandemic, which should also be a longer-term positive as it relates to the attractiveness of regional gaming real estate.”

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Illinois Casino Outlook Steady as New Supply Comes to Market

Outside of Nevada, Illinois is one of the largest land-based casino markets in the US — heft that’s increasing with new venues coming online. A sell-side analyst sees vibrancy in the state’s gaming industry.

Illinois sports betting
Illinois’ casino market is evolving. An analyst believes that’s positive for operators.(Image: OZinOH/Flickr.com)

That’s relevant at a time when Danville, Rockford and Waukegan are homes to new casino hotels and as the debut of a temporary casino – a prelude to a permanent venue – nears in Chicago. Truist Securities gaming analyst Barry Jonas recently returned from visits to a broad swath of Illinois gaming properties, noting management teams are constructive on patrons’ spending patterns against the backdrop of a challenging macroeconomic outlook.

Property management teams noted the Great Recession was driven by excesses beyond players’ means (e.g., customers using equity from their overvalued homes). Trends today are more normal and steady, generally within players’ means,” noted the analyst.

On a year-over-year basis, Illinois gross gaming revenue (GGR) jumped 6.5% in the first three months of this year, but is trending lower in the current quarter as lower tier bettors scale back discretionary spending.

Illinois Casino Market Bracing for New Competitors

When accounting for venues that are either temporary or under construction, there are 16 casinos in Illinois.

Some of the temporary and newer venues come courtesy of tribal operators Hard Rock International (Rcokford) and Wind Creek (East Hazel Crest) as well as Full House Resorts (NASDAQ: FLL). That company The Temporary is already off to a stellar start and will eventually give way to the American Place, which is expected to be one of the operator’s biggest revenue drivers.

By number of venues, Penn Entertainment (NASDAQ: PENN) is the largest operator in Illinois with four casinos. The largest regional casino company is moving riverboat casinos in Aurora and Joliet ashore to what Jonas described as “materially improved locations.”

Among publicly traded gaming companies, Caesars Entertainment (NASDAQ: CZR) is next largest in Illinois with two properties, which Bally’s (NYSE: BALY) will tie with the debut of Chicago’s first gaming venue in 2026.

Speaking of Bally’s Chicago…

It’s possible that Rhode Island-based Bally’s could have its temporary Chicago casino in the River North open sooner-than-anticipated. Truist’s Jonas called it “the nicest temporary we’ve ever seen.”

The analyst added that the venue could exceed the operator’s forecasts of $50 million in year cash flow, which could prove pertinent as Bally’s looks for ways to finance the $1.7 billion permanent property.

The company “is exploring solutions to fund the project, which will likely include commitment of its own capital, some third-party aid, proceeds from a unique minority-equity plan, and possible real estate monetization elsewhere in the portfolio,” added Jonas. “Given a turbulent few years … management understands the importance of execution on what should turn out to be the flagship property in the company portfolio.”

Previously, Bally’s has engaged in sale-leaseback transactions, indicating it’s not shy about monetizing its real estate.

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Promising Outlook for Lone Star Casinos on the Ballot

promising_outlook_for_lone_star_casinos_on_the_ballotyim1Texas legislators are on the move to bring casino gambling to the Lone Star state. Before this year’s legislative session even started, state Sen. Carol Alvarado, D-Houston, filed a bill on casino legislation that was supported by Las Vegas Sands in 2021.

The tide has turned somewhat and a new strategy that would moot the Alvarado bill has been introduced by a highly influential Republican representative from the Dallas-Fort Worth area.

State Rep. Charlie Geren, R-Fort Worth, filed a proposal on Friday (House Joint Resolution 97). The current strategy seeks to amend the state constitution to allow voters to make the decision on expanded gambling in November. A total of seven destination casino resorts could be authorized if the bill passes and is signed by the governor. Public opinion is overwhelmingly in favor of allowing casinos in the state.

Jobs and Economic Shot in the Arm for North Texas

Political and business leaders have advocated for casino gambling in North Texas for several years in order to bring jobs, increase tourism, and to reap other economic benefits.

Las Vegas Sands and other gambling operators have employed hordes of lobbyists and have spent millions of dollars to promote the legalization of Las Vegas-style casino gambling. There are currently three Native American Tribes with gambling houses in the state using “video bingo” machines that look and act like regular random number generator-powered slots. The largest operation is near the Mexican border in Eagles Pass.

The Kickapoo Lucky Eagle Casino holds over 3,000 of the machines. Another small operation is located in Livingston, Naskila Entertainment. The third is the on-again-off-again Speaking Rock Entertainment Center in El Paso.

Geren said in a prepared statement: “Polling over the last year makes it clear that more than 85% of Texans want the right to vote on this issue, republicans and democrats alike.

“It is high time that the legislature listens to the voters and allow them to decide this issue. I, for one, am not in the business of denying the voters of Texas their voice when their preference is so clear.”

A stampede of legislation in other states legalizing online sports betting and casinos has left Texas in the dust, and neighboring states like Arkansas, Louisiana, and Oklahoma already allow some forms of gambling leaving Texans to travel out of state or to the southern border in order to gamble. The revenues are not captured by the state under current law.

Sports betting was once considered illegal in all states except Nevada as no other states “grandfathered” in their right to offer it. However, in 2018 the Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA) of 1991 opening the floodgates for legalized sports betting. There are currently 36 states that allow the activity with Oklahoma planning to join the pack this year.

Seven Destination Casinos Would be Allowed

The Geren bill would authorize two casinos in the Dallas-Ft. Worth, and two in the Houston area. One would be allowed in San Antonio, one in McAllen, and another in Corpus Christi. In the bill, it was stated that those locations promise the “greatest positive economic impact from destination resort development.”

Geren imagines the properties to become more than simply casinos, but “tourism amenities and facilities, including hotels, restaurants, meeting facilities, attractions, entertainment facilities, and shopping centers,” the bill said.

The bill would allow some of the Texas race tracks to use their current pari-mutuel licenses to open destination casinos.

While in the past, gambling proponents have advocated for casino gambling to increase state revenues, in 2023 lawmakers will be busy figuring out what to do with a more than $30b budget surplus.

The bill, as written would impose a 15% gross gambling tax on the casinos.

Just before Christmas, Dallas Mavericks owner Mark Cuban said he would be open to moving his team to the Dallas area when the current long-term lease expires in 8 years and a new casino with an arena for basketball and hockey should be part of a new casino resort. Cuban told The Dallas Morning News, “My goal, and we’d partner with Las Vegas Sands, is when we build a new arena, it’ll be in the middle of a resort and casino. That’s the mission.”

Source: Gambling proponents have a new plan to ask Texas voters to legalize casinos, San Antonio Current, February 3, 2023

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