The coronavirus has the ability to alter entire economic ecosystems, as it has already proven. When one segment of a market suffers, so do the rest. As casinos around the world have been forced into hibernation as the spread of COVID-19 is being contained, many of those businesses have found themselves short of cash. This has led to massive numbers of layoffs of various workforces and the inability to cover other expenses, such as rent, which has, in turn, led to a previously highly stable segment now to be precariously on edge. The real estate investment trust (REIT) segment has seen a reduction in its revenue and one of the largest, Vici Properties, has been forced to pull its revenue forecast for the year as it takes a closer look at the numbers.
REITs like Vici have an incredibly lucrative business model. In terms of the gambling industry, they purchase certain physical assets owned by casinos, such as the underlying land and/or the buildings, and then lease the real estate back to that original owner. They get to turn a profit through lease payments while the operators continue to do all the work. That may be a simplified version of their structure, but it basically sums things up. However, the coronavirus has caused the model to rattle a little, as more casino operators are finding it difficult to cover their costs. This has led to the REITs to begin to experience tension with their numbers.
Vici, which is traded on the New York Stock Exchange (NYSE), provided a notice yesterday that it has been forced to pull its guidance for the year and that it will now begin to analyze its revenue streams to determine how things are going to play out. It added, “All of our tenants fulfilled their rent obligations in full for the month of April. As of April 16, 2020, we are actively engaged in discussions with our five tenants regarding how best to respond to the COVID-19 pandemic as it specifically impacts each tenant’s financial and operating situation.”
For now, the company will hold off on providing any update as it works through the numbers and comes up with as accurate a picture as would be feasible since it “cannot predict the length of time our tenants’ operations will remain closed.” However, Vici isn’t prepared to kick its tenants out the door, and indicates that it is also working with its renters to determine if any type of modification might be warranted. Were that to become necessary, the company explains that it is prepared to help its tenants “during the short term in ways that we believe will benefit the Company over the long term.”
The good news is that the current situation won’t impact the ongoing merger between Eldorado Resorts and Caesars Entertainment. Vici, which began as a part of Caesars before it was released to stand on its own legs, is expected to purchase the real estate assets of three casinos, Harrah’s Atlantic City, Harrah’s Laughlin and Harrah’s New Orleans. It is going to pay $3.2 billion for those assets, and the company indicates that it already has $2 billion sitting in an escrow account to be used when the deal is ready to be finalized.
There’s still enough liquidity on top of that to help Vici’s operations for a while longer. It added, “As of April 16, 2020, we have approximately $310 million in unrestricted cash and cash equivalents and $1.0 billion of availability under our undrawn revolving credit facility,” said the company. “In addition, we have access to approximately $1.3 billion in proceeds from [the] settlement of the 65,000,000 shares that are subject to the forward sale agreements entered into in June 2019.”
