VICI nixes $2B Centaur property options well before year-end deadline
Following a lengthy courtship process that appeared a bit awkward at times, VICI Properties formally reveals that it will not seek to exercise its real estate purchase option on Harrah’s Hoosier Park Racing & Casino nor Horseshoe Indianapolis. The real estate investment trust’s decision was made public just a few days after Caesars Entertainment, Inc. had reiterated its own decision not to exercise its option to sell in a deal that some analysts had pegged at as much as $2.5 billion in gross proceeds.
Recall that the put/call option dates back to the Caesars purchase of the two former Centaur Gaming racino properties. VICI would likely not have encountered any Indiana regulatory concerns if it had called its option, given that it already controls the land at a pair of Indiana casino properties.
During the Caesars second quarter earnings call with investment analysts, Caesars CEO Tom Reeg made it clear that “We have a put option that we will not exercise. We’ve been pretty clear on that since we had option come into existence.” At the time of that call, of course, VICI had yet to decline its call option, so Reeg ran through the math on the valuation. “The proceeds are formulaic, so 1.3 times coverage, 13 times EBITDA. The last I checked, that gets to like $2.2 billion, something like that. If we were to get those proceeds that – the bulk of those, you should expect would pay down debt. But, yeah, you should also expect that there would be some return of capital element as well” to shareholders if the deal were to have gone through.
For VICI, much of the company’s second quarter earnings call was consumed with outlining and then explaining the decision against purchasing the Central Indiana real estate.
CEO Ed Pitoniak asserted up front that “Our conviction that we can continue to identify and invest in experiential process that are accretive against multiple quality factors is a key reason that we have decided that we will not be exercising our call right to acquire Harrah’s Hoosier Park and Horseshoe Indianapolis. We can and are making this decision because of our confidence and conviction that we are actively identifying and pursuing investment opportunities that enable us to generate future AFFO growth and accretion, while furthering the strength and diversity of our portfolio and tenant roster. Adjusted Funds from Operations (AFFO) measures the financial performance of REITs such as VICI, particularly in terms of ability to support dividend payments to shareholders.
“At this time, we believe that we have the opportunity to create greater portfolio value by allocating VICI’s capital to other gaming and nongaming opportunities the team is actively pursuing,” Pitoniak continued, suggesting that there were better 2024 AFFO opportunities available.
President and COO John Payne reinforced Pitoniak’s belief that greater portfolio value could be achieved by deploying opportunity capital toward other gaming-sector and entertainment and experiential acquisitions. “It is important to understand that this was a strategic decision based on capital allocation at this time,” Payne emphasizes.
Pitoniak was pressed by analysts as to why the decision not to pursue the options came so far ahead of the year-end trigger and before the Indiana Horse Racing Commission even held its first public hearing on a possible VICI land purchase. Pitoniak made it clear that the relevant decision-making factors would not change over time, and that Caesars CEO Reeg had just firmly stated that his company had no intention of selling.
CFO Payne explained that “The way the contract reads … the assets could be put to us. But Tom Reeg at Caesars, I think, has been very vocal about this, at least over the past year, that they had no plans to put these two assets to us. But the contract does last until the end of the year,” Payne confirms.
CEO Pitoniak picks back up. “[T]he strategic factors that went into making our decision are of a nature that they were not going to change over the ensuing – whatever it is now left in the year – five months of the year. And so in fairness, obviously, to our partners at Caesars, but also recognizing our need to always be as ruthlessly efficient as we can be with return on management time, we decided – again, because the strategic decision factors will not change in the next five months – decided to announce it today, so that everyone can understand – our team can understand, Caesars can understand, you all can understand – that we will not be calling it, and none of us have to spend time ‘wondering if’ at the end of the year,” the VICI chief executive elaborates.
Pitoniak was asked if the cap rate wasn’t sufficiently attractive in the current rate environment and whether the addition of Bally’s Chicago to the market in the next five years could possibly impact casino operations throughout the Midwest.
The CEO maintains that “the cap rate was perfectly fine. As we look across our array of investment opportunities and as we contemplated potentially investing more than $2 billion of capital or close to five percent of our total capital, we, again, wanted to be relentless in our scrutiny as what would this be the highest and best use of our capital both on a cap rate basis and the associated accretion, but also on the key, if you will, nonfinancial accretion factors of tenant diversity, geographic diversity and those secondary factors. So the cap rate by itself was not the gating issue.”
Payne then told the geographically challenged investment community that he believes a downtown Chicago casino would not impact the pair of Indianapolis-area properties. Payne notes that “the Indianapolis market is considerably far away from downtown Chicago. In fact, there’s many other casinos between Indianapolis and Chicago that consumers can choose from as well. So that was not a factor in our decision to not call the two Indianapolis assets.”
Another analyst questioned whether “some overhang on the stock given the uncertainty of the Centaur assets” played a part in the August no-go announcement. Pitoniak disabused him of any such notion. “That was not a deciding factor by any means,” he firmly states. “Obviously, we are aware, we’re aware of the perception of overhang on the stock, and that was obviously — it felt like a more significant factor through much of Q2 and even into the first couple of weeks of Q3 given the general state of the REIT equity market. But no, that wasn’t a deciding factor in deciding to announce it now.” He continued, “Again, the real driving factor was just to make sure everybody understood we’ve made a decision. And we’re comfortable – very comfortable announcing the decision. Very comfortable that we have very compelling other opportunities to allocate capital. And again, I would just go back to the point of our desire – and we won’t achieve it every time, but our desired capital election and capital funding strategies are based on being sustained and sustainable.”
Pitoniak’s final word on the topic: “We obviously spent a good number of our early years doing very big deals that had very big funding requirements, that generally needed to happen all in one day. And as VICI matures and as we achieve a sustained and sustainable cadence in AFFO growth, we want that to be driven by a sustained and sustainable cadence in both capital allocation activity, i.e., acquisitions and funding.”