Real estate investment trust (REIT) VICI Properties (NYSE: VICI) is increasing its bet on the Las Vegas market, as it's agreed to acquire the Venetian Resort’s real estate on the Vegas Strip.
This monumental deal is inked at a price of $4 billion, which will be paid in cash to the seller, Las Vegas Sands (NYSE: LVS). To put that into perspective, VICI spent just slightly more than that in 2020, collectively, on five casino and entertainment properties: Harrah’s New Orleans, Harrah’s Laughlin, Harrah’s Atlantic City, JACK Cleveland Casino, and JACK Thistledown Racino.
The deal includes the real estate for the Venetian Resort Las Vegas, the Sands Expo and Convention Center, and the land underneath the MSG Sphere that’s expected to open in 2023. Once the transaction is completed, VICI Properties will own the largest single hotel complex in America, with over 7,000 rooms, as well as the largest private sector convention and trade center in America, with 2.3 million square feet. Its Las Vegas portfolio will include a total of 99 acres, plus call rights on an adjoining 28 acres.
Currently, VICI Properties owns 28 casino properties and four golf courses throughout the United States.
Terms of the deal
This deal has a few moving parts to it, involving Apollo Global Management (NYSE: APO), which has agreed to purchase the Venetian Resort’s operating company from Las Vegas Sands for $2.25 billion and will sign a 30-year triple net lease on the property with VICI at an initial annual lease rate of $250 million. Las Vegas Sands has agreed to provide rent support to guarantee lease payments through 2023.
The $4 billion purchase price puts the deal at a 6.25% cap rate. This makes it an attractively priced deal for VICI, considering the joint venture between MGM Resorts International (NYSE: MGM) and Blackstone Real Estate Income Trust purchased the Bellagio at a 5.7% cap rate in October 2019.
VICI plans to fund the purchase with a combination of cash on hand, long-term debt, and a public offering of 60 million common shares, which was announced the same day as the Venetian Resort deal.
What this deal means for investors
This transaction should prove to be beneficial to investors, since the company expects the additional $250 million in annual revenue will be accretive to its AFFO per share immediately upon closing. This will definitely help improve the chances of investors seeing more dividend increases in the future.
According to the transaction presentation the company posted on its website after announcing the deal, this acquisition will make VICI Properties the largest triple net lease REIT by adjusted EBITDA.
The deal will also significantly reduce its exposure to its top tenant, Caesars Entertainment (NASDAQ: CZR). Currently, Caesars accounts for 83% of VICI’s rent. That amount will be reduced to roughly 70% with the Venetian added to the rent roll.
VICI’s betting on a strong Vegas recovery
It’s a bold move to make a purchase of this size immediately following the worst year Las Vegas has experienced in decades, so VICI is betting heavily on a fast, strong recovery for the area.
The COVID-19 pandemic forced casinos, hotels, and many other businesses to shut down in Las Vegas, which resulted in the area having the highest unemployment rate of the 50 largest cities in the United States in December 2020, according to the Bureau of Labor Statistics.
Las Vegas’ economy, and the success of resorts like the Venetian, depend heavily on travel and tourism, and some experts are saying travel won’t reach 2019 levels until at least 2023. Other experts, like the director of Nevada’s Office of Economic Development, however, feel the city will rebound much quicker and come out the other side stronger. During his presentation at the Las Vegas Global Economic Alliance’s annual State of Economic Development, the director compared the city’s future to that of the Roaring '20s following the pandemic of 1918.
There also seems to be a lot of optimism surrounding Las Vegas’ recovery from the casinos and hotels themselves, as they're already seeing an increase in visitors faster than expected. During Caesars Entertainment’s fourth-quarter 2020 earnings call, CEO Tom Reeg said “It’s almost like a switch was flipped” as he explained how it's seeing its highest level of bookings since reopening, and its bookings are up 20% month over month in the independent traveler and casino segment.
Even if the return to normal doesn’t happen as quickly as everyone hopes, the lease support agreement from Las Vegas Sands through 2023 means the $250 million in annual rent is guaranteed for VICI Properties through the recovery.
The Millionacres bottom line
Economic recovery and deal terms aside, the Venetian is one of America’s most iconic properties. Adding an asset like this to its portfolio will definitely be a major milestone for VICI Properties and a show of confidence in the Las Vegas and United States real estate market.