Real estate investment trust VICI Properties Inc.'s purchase and lease back of Harrah’s Philadelphia, a 2 million-square-foot casino in Chester, Pennsylvania, from Caesars Entertainment Corp. gives it 21 hotel and gaming properties leased to Caesars, marking a bet the value of such properties will outperform other specialty real estate.
New York City-based VICI paid almost $242 million for a deal that included the property at 777 Harrah's Blvd. in Chester as well as lease modifications valued at almost $160 million. The sale is part of a larger transaction between the companies in July to buy and lease back the 23-story, 1.2 million-square-foot Octavius Tower at Caesars Palace Las Vegas for almost $508 million in a complex deal that both firms described as a win-win.
Caesars agreed to cut the price allocated to the Philadelphia Harrah's property by $159 million to $82.5 million cash to account for the value of a master lease agreement that will increase rent payments to VICI in the early years of the leases of the properties in Las Vegas, Joliet, Illinois, and Chester, Pennsylvania, while decreasing Caesar's payments in the later years of the leases.
"The completion of this transaction with VICI provides Caesars with financial flexibility and reduces the volatility of our future rent payments, demonstrating our commitment to creating value for our shareholders while maintaining financial discipline," Caesars Chief Executive Mark Frissora said in a statement. Caesars has previously stated that the transactions "unlock more than $500 million in value from Caesars' real estate assets."
Companies frequently use sale-leasebacks, in which a business sells the property it owns and occupies but stays on as a tenant under the new owner, to extract value from their real estate assets. It often provides an immediate infusion of cash to a company to use elsewhere in its business.
In November, Caesars Entertainment signed a 15-year agreement to be a partner on the $1.8 billion Las Vegas football stadium, planned as the future home of the National Football League's Raiders team. The company plans to brand one of the entrances to the stadium.
Caesars agreed to pay $21 million in rent for the first year for Harrah’s Philadelphia property, with future rent increases included in the lease contract. The casino was built in 2006 and upgraded in 2017 and now includes 2,450 slot machines, 110 table games, several bars and restaurants and parking garages.
Caesars also agreed to pay $35 million a year in rent for a separate ground lease at the Octavius Tower in Las Vegas.
The purchase and lease agreements increase VICI's gaming real estate holdings and presence in the growing Mid-Atlantic casino market while changing leases to improve future rent growth to protect against future income volatility, VICI Chief Executive Edward Pitoniak said in a statement.
Most importantly, Pitoniak said, the deal provides an incentive for Caesars to "invest capital into the real estate to grow and strengthen their own business."
VICI Properties was spun-off in late 2017 as the owner of a number of Caesars gaming facilities stemming from the bankruptcy reorganization of Caesars Entertainment Corp. VICI and Penn National Gaming announced in November they're teaming up to purchase the Greektown Casino-Hotel in downtown Detroit from billionaire Dan Gilbert's Jack Entertainment for $1 billion in a sale expected to close in mid-2019.
Investor demand has placed gaming and leisure-focused real estate investment trusts among a select group of specialty property sectors whose shares are trading at a higher prices than their net asset values this year. Other specialty REITs trading at high prices compared with their asset values include self-storage and manufactured housing companies.
Penn National Gaming started the casino industry's first REIT, Gaming and Leisure Properties Inc., in 2013. Gaming and Leisure acquired most of Penn National’s properties and leased back to Penn in what has been a model for gaming ownership and management.
MGM Growth Properties and VICI Properties were spun off recently from MGM Resorts International and Caesars Entertainment, respectively. Both companies' shares have performed well in 2018.
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