VICI Properties (NYSE: VICI) is the largest domestic owner of casino real estate, but the company’s nongaming acquisitions could affect its corporate credit rating.
Caesars Palace on the Las Vegas Strip. Owner VICI Properties’ credit rating could be affected by a recent string of nongaming deals. (Image: Bloomberg)
The Caesars Palace owner is currently rated “BBB-“ by Fitch Ratings — the lowest investment grade — but that market could be affected in either direction by a recent flurry of nongaming deals executed by the real estate investment trust (REIT). Those include financing for experiential properties such as Canyon Ranch and Cabot, among others.
Central to VICI’s ratings is the push and pull between the company’s relatively high tenant and asset concentration with gaming operators with weaker, high-yield credit profiles, and the offsetting effect of structural strengths provided by casino properties, as well as VICI’s own lease structures,” according to Fitch Ratings.
Venturing away from casino properties diversifies VICI’s tenant base, which is largely comprised of Caesars Entertainment (NASDAQ: CZR) and MGM Resorts International (NYSE: MGM), as well as the REIT’s geographic footprint. However, there are potential pros and cons to the REIT venturing further into nongaming experiential properties.
VICI Properties Could See Nongaming Perks, Risks
One of the primary benefits of VICI’s emphasis on gaming real estate is that there are barriers to entry in the industry. Additionally, tenants are increasingly financially sound, confirming they are able to service lease obligations to landlords, and specific to Las Vegas, casino real estate is appreciating.
Over time, those traits may become applicable to other forms of experiential real estate, but there could be volatility along the way.
“VICI’s recent investments with Canyon Ranch, Bowlero, Kalahari, Chelsea Piers, and Cabot depart from this dynamic in terms of size, strategic importance, and regulatory barriers to entry,” added Fitch. “These operators may also see increased cyclicality compared to gaming operations, which is a key risk. However, VICI still maintains strong legal and structural protections in these deals, as evidenced by its master lease with Bowlero.”
On the other hand, those deals improve VICI’s tenant diversification while providing avenues for top-line and acquired funds from operations (AFFO) growth.
VICI Credit Implications Not Yet Clear
As noted above, VICI sports the lowest investment-grade credit rating and, at the moment, downgrade probability is low, but the REIT probably won’t see an imminent upgrade, either.
The bottom line is it will likely take time for nongaming acquisitions and investments to have a material impact on VICI’s revenue and profits and thus its credit rating. An improved credit grade could lower VICI’s financing costs, an obvious plus for a company with a knack for acquisitions.
“While individual deals have been relatively small so far, they may add up over time to a more material part of the company’s operations,” concluded Fitch. “Fitch believes VICI’s investments in non-gaming experiential properties has merit; however, despite historically had sound underwriting, risks remain. Fitch will continue to monitor the performance of non-gaming properties and VICI’s overall credit profile as it continues to invest in this space.”
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