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Caesars Palace Las Vegas, one of Vici’s marquee venues. Morgan Stanley upgraded the real estate firm today. (Image: Play Nevada)
Vici has traded lower since the June 24 announcement that Eldorado Resorts, Inc. (NASDAQ:ERI) is acquiring Caesars Entertainment Corp. (NASDAQ:CZR) for $17.3 billion, a deal in which Vici is heavily involved. Investors have grown concerned about the REIT’s tenant credit quality, among other factors, but Allen believes those qualms are overstated.
Caesars is Vici’s primary tenant, and Allen notes that the combined Eldorado/Caesars will generate robust free cash flow (FCF), something Caesars was unlikely to do on its own. That higher level of cash flow will be helpful to the real estate company in the event of a recession.
The deal actually makes CZR’s rent better covered by FCF, given ERI’s higher regional mix and low cost debt and equity financing the acquisition,” said the Morgan Stanley analyst. “In fact, based on our recession analysis, the combined CZR-ERI would generate excess FCF after lease payments, while standalone CZR would not have.”
Prior to news of the offer for Caesars, Vici partnered with Century Manaslot88 Casinos to buy three Eldorado properties for $385 million. The day Eldorado’s move on Caesars was revealed, Vici agreed to acquire the real estate of Harrah’s New Orleans, Harrah’s Laughlin, and Harrah’s Atlantic City from the regional gaming company for $3.2 billion.
More Deals Coming?
Amid a flurry of consolidation in the gaming industry, both confirmed and rumored, it is widely believed REITs such as Vici will remain acquisitive, as operators look to monetize real estate assets. Of the last 11 announced gaming real estate deals, Vici was involved in nine, and the Caesars Palace owner could be involved in more.
As part of an agreement with Eldorado, Vici could acquire the Horseshoe Baltimore, as well as two Caesars Las Vegas Strip properties. The real estate company has first dibs on one of the Flamingo Las Vegas, Bally’s Las Vegas, Paris Las Vegas, and Planet Hollywood Resort & Manaslot88 Casino. If a deal for one of those venues is struck, Vici would then have rights of first refusal for one of the remainders from that group and the LINQ Hotel & Manaslot88 Casino.
While Vici is positioned to scoop up casinos that may be put on the market, Allen is enthusiastic about the company’s non-gaming acquisition prospects. In an investor presentation released earlier this month, Vici highlighted potential opportunities in experiential sub-groups, such as concert venues, movie theaters, spas and sports arenas, among others.
“Our current deep dive into these opportunities suggests that non-gaming assets could expand VICI’s acquisition opportunity 3x,” said Allen.
The Morgan Stanley analyst sees Vici as having advantages over gaming REIT rivals Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) and MGM Growth Properties (NYSE:MGP), including no conflicts of interest among management, a lower cost of capital than Gaming and Leisure, and a willingness to do transactions beyond traditional master leases.
Allen also raised his price target on Vici stock to $26 from $25, implying upside of more than 20 percent from where the shares traded at this writing.