VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| (In thousands) | Lease Commitments | |||||||
| 2020 (remaining) | $ | 308 | ||||||
| 2021 | 616 | |||||||
| 2022 | 616 | |||||||
| 2023 | 616 | |||||||
| 2024 | 616 | |||||||
| 2025 | 616 | |||||||
| Thereafter | 18,653 | |||||||
| Total minimum lease commitments | $ | 22,041 | ||||||
| Discounting factor | 13,398 | |||||||
| Finance sub-lease liability | $ | 8,643 | ||||||
The discount rate for the ground and use leases was determined based on the yield of our current secured borrowings, adjusted to match borrowings of similar terms and are between 6% and 7%. The weighted average remaining lease term as of June 30, 2020 under our finance leases was 35.8 years.
Note 1112 — Stockholders' Equity
Stock
Authorized
We have the authority to issue 750,000,000 shares of stock, consisting of 700,000,000 shares of Common Stock, $0.01 par value per share and 50,000,000 shares of Preferred Stock, $0.01 par value per share.
On February 5, 2018, we completed an initial public offering of 69,575,000 shares of common stock at an offering price of $20.00 per share for an aggregate offering value of $1.4 billion, resulting in net proceeds of approximately $1.3 billion after commissions and expenses.
We expect to settle the June 2020 Forward Sale AgreementsAgreement entirely by the physical delivery by us of 29,900,000 shares of our common stock in exchange for cash proceeds, although we may elect cash settlement or net share settlement for all or a portion of our obligations under the June 2020 Forward Sale Agreements.Agreement. The physical settlement of the June 2020 Forward Sales AgreementsSale Agreement is calculated based on the initial forward sale price ($21.50)per share of $21.37 as adjusted for a floating interest rate factor and other fixed amounts based on the passage of time, as specified in the June 2020 Forward Sale Agreements.Agreement. As of SeptemberJune 30, 2019,2020, based on these adjustments, the forward share price was $20.22$21.07 and would result in us receiving $1.3 billionapproximately $630.1 million in cash proceeds if we were to physically settle the June 2020 Forward Sale Agreements.Agreement. Alternatively, if we were to net cash settle the June 2020 Forward Share Agreements,Sale Agreement, it would result in a cash outflowinflow of $157.7$26.4 million or, if we were to net share settle the June 2020 Forward Sale Agreements,Agreement, it would result in us issuing 6.9receiving approximately 1.3 million shares. As of SeptemberJune 30, 2019,2020, we have not settled any portion of the June 2020 Forward Sale Agreements.Agreement.
Further, the shares of common sharesstock issuable upon settlement of the June 2020 Forward Sale AgreementsAgreement will be reflected in our diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common sharesstock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of common sharesstock that would be issued upon full physical settlement of the June 2020 Forward Sale AgreementsAgreement over the number of shares of common sharesstock that could be purchased by us in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sales price at the end of the
43
VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
reporting period). If and when we physically or net share settle the June 2020 Forward Sale Agreements,Agreement, the delivery of shares of our common sharesstock will result in an increase in the number of shares of common sharesstock outstanding and dilution to our earnings per share. We used a portion of the net proceeds from the offering for the JACK Cincinnati Acquisition and intend to use the remaining net proceeds from the offering and the proceeds upon settlement of the June 2020 Forward Sales AgreementsSale Agreement to fund a portion ofthe Forum Convention Center Mortgage Loan and the purchase price forof the Eldorado Transaction, the Century Portfolio AcquisitionLas Vegas Land and for general businesscorporate purposes, which may include our other pending transactions, the acquisition and improvement of properties, capital expenditures, working capital and the repayment of indebtedness.
At-the-Market Offering Program
The following table details the issuance of outstanding shares of common stock, including restricted common stock:
| Six Months Ended June 30, | ||||||||||||||||||||
| Common Stock Outstanding | 2020 | 2019 | ||||||||||||||||||
Beginning Balance January 1, (1) | 461,004,742 | 404,729,616 | ||||||||||||||||||
| Issuance of common stock in primary follow-on offerings | — | 50,000,000 | ||||||||||||||||||
Issuance of common stock upon physical settlement of forward sale agreements (1) | 65,000,000 | — | ||||||||||||||||||
| Issuance of common stock under the at-the-market offering program | 7,500,000 | 6,107,633 | ||||||||||||||||||
Issuance of restricted and unrestricted common stock under the stock incentive program, net of forfeitures (2) | 163,013 | 167,297 | ||||||||||||||||||
| Ending Balance June 30, | 533,667,755 | 461,004,546 | ||||||||||||||||||
| Nine Months Ended September 30, | ||||||
| Common Stock Outstanding | 2019 | 2018 | ||||
Beginning Balance December 31 (1) | 404,729,616 | 300,278,938 | ||||
| Issuance of common stock in initial public offering | — | 69,575,000 | ||||
Issuance of common stock in primary follow-on offerings (2) | 50,000,000 | — | ||||
| Issuance of common stock under the at-the-market offering program | 6,107,633 | — | ||||
Issuance of restricted and unrestricted common stock under the stock incentive program, net of forfeitures (3) | 168,496 | 374,530 | ||||
| Ending Balance September 30 | 461,005,745 | 370,228,468 | ||||
44
| Nine Months Ended September 30, 2019 | ||||||||||
| Declaration Date | Record Date | Payment Date | Period | Dividend | ||||||
| March 14, 2019 | March 29, 2019 | April 11, 2019 | January 1, 2019 - March 31, 2019 | $ | 0.2875 | |||||
| June 13, 2019 | June 28, 2019 | July 12, 2019 | April 1, 2019 - June 30, 2019 | $ | 0.2875 | |||||
| September 12, 2019 | September 27, 2019 | October 10, 2019 | July 1, 2019 - September 30, 2019 | $ | 0.2975 | |||||
| Nine Months Ended September 30, 2018 | ||||||||||
| Declaration Date | Record Date | Payment Date | Period | Dividend | ||||||
March 15, 2018 (1) | March 29, 2018 | April 13, 2018 | February 5, 2018 - March 31, 2018 | $ | 0.16 | |||||
| June 14, 2018 | June 28, 2018 | July 13, 2018 | April 1, 2018 - June 30, 2018 | $ | 0.2625 | |||||
| September 17, 2018 | September 28, 2018 | October 11, 2018 | July 1, 2018 - September 30, 2018 | $ | 0.2875 | |||||
VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Dividends declared (on a per share basis) during the six months ended June 30, 2020 and 2019 were as follows:
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Declaration Date | Record Date | Payment Date | Period | Dividend | ||||||||||||||||||||||||||||||||||||||||||||||
| March 12, 2020 | March 31, 2020 | April 9, 2020 | January 1, 2020 - March 31, 2020 | $ | 0.2975 | |||||||||||||||||||||||||||||||||||||||||||||
| June 11, 2020 | June 30, 2020 | July 10, 2020 | April 1, 2020 - June 30, 2020 | $ | 0.2975 | |||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Declaration Date | Record Date | Payment Date | Period | Dividend | ||||||||||||||||||||||||||||||||||||||||||||||
| March 14, 2019 | March 29, 2019 | April 11, 2019 | January 1, 2019 - March 31, 2019 | $ | 0.2875 | |||||||||||||||||||||||||||||||||||||||||||||
| June 13, 2019 | June 28, 2019 | July 12, 2019 | April 1, 2019 - June 30, 2019 | $ | 0.2875 | |||||||||||||||||||||||||||||||||||||||||||||
Note 1213 — Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted-average number of shares of common sharesstock outstanding during the period, excluding net income attributable to participating securities (unvested restricted stock awards). Diluted earnings per share reflects the additional dilution for all potentially dilutive securities such as stock options, unvested restricted shares, unvested performance-based restricted shares and the shares to be issued by us upon settlement of the June 2020 Forward Sale Agreements.Agreement. The shares issuable upon settlement of the June 2020 Forward Sale Agreements,Agreement, as described in Note 11,12 - Stockholders' Equity, are reflected in the diluted earnings per share calculations using the treasury stock method. Under this method, the number of shares of our common sharesstock used in calculating diluted earnings per share is deemed to be increased by the excess, if any, of the number of shares of common sharesstock that would be issued upon full physical settlement of the June 2020 Forward Sale AgreementsAgreement over the number of shares of common sharesstock that could be purchased by us in the market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sales price at the end of the reporting period). If and when we physically or net share settle the June 2020 Forward Sale Agreements,Agreement, the delivery of shares of common sharesstock would result in an increase in the number of shares outstanding and dilution to earnings per share.
The following tables reconcile the weighted-average shares of common sharesstock outstanding used in the calculation of basic earnings per share to the weighted-average shares of common sharesstock outstanding used in the calculation of diluted earnings per share:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Determination of shares: | |||||||||||||||||||||||||||||||||||
| Weighted-average shares of common stock outstanding | 489,012 | 412,310 | 477,095 | 409,040 | |||||||||||||||||||||||||||||||
Assumed conversion of restricted stock (1) | 198 | 321 | 232 | 363 | |||||||||||||||||||||||||||||||
| Assumed settlement of forward sale agreements | 3 | 190 | 4,326 | 70 | |||||||||||||||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | 489,213 | 412,821 | 481,652 | 409,473 | |||||||||||||||||||||||||||||||
____________________
(1)For the three and six months ended June 30, 2020, certain unvested restricted shares and unvested performance-based restricted shares were excluded from the computation of diluted EPS because the effect of doing so was anti-dilutive.
45
VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| (In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||
| Determination of shares: | |||||||||||
| Weighted-average common shares outstanding | 460,666 | 369,935 | 426,438 | 360,997 | |||||||
| Assumed conversion of restricted stock | 370 | 192 | 263 | 45 | |||||||
| Assumed settlement of Forward Sale Agreements | 4,735 | — | 1,665 | — | |||||||
| Diluted weighted-average common shares outstanding | 465,772 | 370,127 | 428,366 | 361,042 | |||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 229,402 | $ | 152,049 | $ | 205,390 | $ | 302,898 | |||||||||||||||||||||||||||
| Weighted-average shares of common stock outstanding | 489,012 | 412,310 | 477,095 | 409,040 | |||||||||||||||||||||||||||||||
| Basic EPS | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | |||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 229,402 | $ | 152,049 | $ | 205,390 | $ | 302,898 | |||||||||||||||||||||||||||
| Diluted weighted-average shares of common stock outstanding | 489,213 | 412,821 | 481,652 | 409,473 | |||||||||||||||||||||||||||||||
| Diluted EPS | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | |||||||||||||||||||||||||||
| Basic and Diluted Earnings Per Share | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (In thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Basic: | |||||||||||||||
| Net income attributable to common stockholders | $ | 144,435 | $ | 129,912 | $ | 447,333 | $ | 381,078 | |||||||
| Weighted-average common shares outstanding | 460,666 | 369,935 | 426,438 | 360,997 | |||||||||||
| Basic EPS | $ | 0.31 | $ | 0.35 | $ | 1.05 | $ | 1.06 | |||||||
| Diluted: | |||||||||||||||
| Net income attributable to common stockholders | $ | 144,435 | $ | 129,912 | $ | 447,333 | $ | 381,078 | |||||||
| Diluted weighted-average common shares outstanding | 465,772 | 370,127 | 428,366 | 361,042 | |||||||||||
| Diluted EPS | $ | 0.31 | $ | 0.35 | $ | 1.04 | $ | 1.06 | |||||||
Note 1314 — Stock-Based Compensation
The 2017 Stock Incentive Plan (the “Plan”) is designed to provide long-term equity-based compensation to our directors and employees. It is administered by the Compensation Committee of the Board of Directors. Awards under the Plan may be granted with respect to an aggregate of 12,750,000 shares of common stock and may be issued in the form of: (a) incentive stock options, (b) non-qualified stock options, (c) stock appreciation rights, (d) dividend equivalent rights, (e) restricted stock, (f) restricted stock units or (g) unrestricted stock. In addition, the Plan limits the total number of shares of common stock with respect to which awards may be granted to any employee or director during any one calendar year. At SeptemberJune 30, 2019, 11,900,7692020, 11,478,446 shares of common stock remained available for issuance by us as equity awards under the Plan.
The following table details the stock-based compensation expense recorded as General and administrative expense in the Statement of Operations:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Stock-based compensation expense | $ | 1,404 | $ | 623 | $ | 3,821 | $ | 1,482 | |||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||
| Stock-based compensation expense | $ | 2,012 | $ | 1,366 | $ | 3,361 | $ | 2,417 | |||||||||||||||||||||||||||
The following table details the activity of our time-based restricted stock and performance-based restricted stock units:
| Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | ||||||||||||
(In thousands, except per share data) | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||
| Outstanding at beginning of period | 398 | $ | 19.60 | 124 | $ | 15.61 | |||||||
| Granted | 338 | 22.03 | 383 | 17.05 | |||||||||
| Vested | (94 | ) | 19.44 | (31 | ) | 20.01 | |||||||
| Forfeited | (12 | ) | 20.78 | (2 | ) | 20.03 | |||||||
| Canceled | — | — | — | — | |||||||||
| Outstanding at end of period | 630 | $ | 20.90 | 474 | $ | 16.47 | |||||||
| Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||
(In thousands, except per share data) | Shares | Weighted Average Grant Date Fair Value | Shares | Weighted Average Grant Date Fair Value | |||||||||||||||||||||||||||||||
| Outstanding at beginning of period | 601 | $ | 21.16 | 398 | $ | 19.60 | |||||||||||||||||||||||||||||
| Granted | 421 | 19.51 | 336 | 22.03 | |||||||||||||||||||||||||||||||
| Vested | (116) | 21.08 | (93) | 19.41 | |||||||||||||||||||||||||||||||
| Forfeited | (25) | 21.21 | (12) | 20.78 | |||||||||||||||||||||||||||||||
| Canceled | — | — | — | — | |||||||||||||||||||||||||||||||
| Outstanding at end of period | 881 | $ | 20.38 | 629 | $ | 20.90 | |||||||||||||||||||||||||||||
As of SeptemberJune 30, 2019,2020, there was $9.2$13.5 million of unrecognized compensation cost related to non-vested stock-based compensation arrangements under the Plan. This cost is expected to be recognized over a weighted average period of 1.92.0 years.
VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 1415 — Segment Information
Our real property business and our golf course business represent 2 reportable segments. The real property business segment consists of leased real property and represents the substantial majority of our business. The golf course business segment consists of 4 golf courses, with each being operating segments that are aggregated into one1 reportable segment.
The results of each reportable segment presented below are consistent with the way our management assesses these results and allocates resources, which is a consolidated view that adjusts for the impact ofresources. The following table presents certain transactions betweeninformation with respect to our reportable segments, as described below.segments:
| Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Real Property Business | Golf Course Business | VICI Consolidated | Real Property Business | Golf Course Business | VICI Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 252,567 | $ | 5,335 | $ | 257,902 | $ | 212,463 | $ | 8,283 | $ | 220,746 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 308,622 | 14 | 308,636 | 203,077 | 2,418 | 205,495 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (77,693) | — | (77,693) | (54,819) | — | (54,819) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 231,935 | 17 | 231,952 | 152,186 | 2,494 | 154,680 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | (257) | (52) | (309) | — | (553) | (553) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 231,678 | (35) | 231,643 | 152,186 | 1,941 | 154,127 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation | 31 | 1,182 | 1,213 | 2 | 1,016 | 1,018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 16,188,235 | $ | 89,399 | $ | 16,277,634 | $ | 12,423,049 | $ | 98,997 | $ | 12,522,046 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | 7,186,916 | $ | 16,307 | $ | 7,203,223 | $ | 4,434,057 | $ | 15,566 | $ | 4,449,623 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Real Property Business | Golf Course Business | VICI Consolidated | Real Property Business | Golf Course Business | VICI Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 501,268 | $ | 11,635 | $ | 512,903 | $ | 419,126 | $ | 15,622 | $ | 434,748 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | 395,555 | 1,102 | 396,657 | 402,623 | 4,738 | 407,361 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | (153,786) | — | (153,786) | (108,405) | — | (108,405) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | (39,059) | — | (39,059) | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 209,222 | 1,119 | 210,341 | 303,276 | 4,851 | 308,127 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense | (514) | (249) | (763) | — | (1,074) | (1,074) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 208,708 | 870 | 209,578 | 303,276 | 3,777 | 307,053 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation | 54 | 2,026 | 2,080 | 5 | 1,943 | 1,948 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 16,188,235 | $ | 89,399 | $ | 16,277,634 | $ | 12,423,049 | $ | 98,997 | $ | 12,522,046 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | 7,186,916 | $ | 16,307 | $ | 7,203,223 | $ | 4,434,057 | $ | 15,566 | $ | 4,449,623 | ||||||||||||||||||||||||||||||||||||||||||||||||||
47
VICI PROPERTIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | |||||||||||||||||||||||
| (In thousands) | Real Property Business | Golf Course Business | VICI Consolidated | Real Property Business | Golf Course Business | VICI Consolidated | ||||||||||||||||||
Revenues (1) | $ | 216,914 | $ | 5,599 | $ | 222,513 | $ | 227,294 | $ | 5,393 | $ | 232,687 | ||||||||||||
| Operating income | 209,202 | (822 | ) | 208,380 | 183,857 | 243 | 184,100 | |||||||||||||||||
| Interest expense | (68,531 | ) | — | (68,531 | ) | (54,051 | ) | — | (54,051 | ) | ||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | — | — | ||||||||||||||||||
| Income before income taxes | 147,275 | (736 | ) | 146,539 | 131,833 | 243 | 132,076 | |||||||||||||||||
| Income tax (expense) benefit | (187 | ) | 163 | (24 | ) | — | (52 | ) | (52 | ) | ||||||||||||||
| Net income | 147,088 | (573 | ) | 146,515 | 131,833 | 191 | 132,024 | |||||||||||||||||
| Depreciation | 3 | 997 | 1,000 | 3 | 926 | 929 | ||||||||||||||||||
| Total assets | $ | 12,481,892 | $ | 99,574 | $ | 12,581,466 | $ | 10,487,016 | $ | 81,485 | $ | 10,568,501 | ||||||||||||
| Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
| (In thousands) | Real Property Business | Golf Course Business | VICI Consolidated | Real Property Business | Golf Course Business | VICI Consolidated | ||||||||||||||||||
Revenues (1) | $ | 636,040 | $ | 21,221 | $ | 657,261 | $ | 652,242 | $ | 19,696 | $ | 671,938 | ||||||||||||
| Operating income | 611,824 | 3,917 | 615,741 | 558,160 | 4,112 | 562,272 | ||||||||||||||||||
| Interest expense | (176,936 | ) | — | (176,936 | ) | (158,365 | ) | — | (158,365 | ) | ||||||||||||||
| Loss on extinguishment of debt | — | — | — | (23,040 | ) | — | (23,040 | ) | ||||||||||||||||
| Income before income taxes | 450,552 | 4,114 | 454,666 | 384,259 | 4,112 | 388,371 | ||||||||||||||||||
| Income tax expense | (187 | ) | (911 | ) | (1,098 | ) | — | (884 | ) | (884 | ) | |||||||||||||
| Net income | 450,365 | 3,203 | 453,568 | 384,259 | 3,228 | 387,487 | ||||||||||||||||||
| Depreciation | 8 | 2,940 | 2,948 | 5 | 2,752 | 2,757 | ||||||||||||||||||
| Total assets | $ | 12,481,892 | $ | 99,574 | $ | 12,581,466 | $ | 10,487,016 | $ | 81,485 | $ | 10,568,501 | ||||||||||||
Note 1516 — Subsequent Events
We have evaluated subsequent events and, except for the payment of dividends on OctoberJuly 10, 20192020 (as described in Note 11)12 - Stockholders' Equity), the entry into the JACK Lease Agreement Amendment and the JACK Cleveland/Thistledown Acquisitionentry into the Amended and Restated ROV Loan on October 28, 2019July 16, 2020 (as described in Note 4)4 – Property Transactions) and the consummation of the Eldorado Transaction (as described in Note 4 –Property Transactions), there were no other events relative to the Financial Statements that require additional disclosure.
48
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial position and operating results of VICI Properties Inc. for the three and ninesix months ended SeptemberJune 30, 20192020 should be read in conjunction with the Consolidated Financial Statements and related notes thereto and other financial information contained elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes for the year ended December 31, 2018,2019, which were included in our Annual Report on Form 10-K for the year ended December 31, 20182019. All defined terms included herein have the same meaning as those set forth in the Notes to the Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including statements such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions, constitute “forward-looking statements” within the meaning of the federal securities law. Forward-looking statements are based on our current plans, expectations and projections about future events. We caution you therefore against relying on any of these forward-looking statements. They give our expectations about the future and are not guarantees. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed in or implied by such forward-looking statements.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the impact of the COVID-19 pandemic on the financial condition, results of operations, cash flows and performance of the Company and its tenants. The extent to which the COVID-19 pandemic impacts the Company, its tenants and its pending transactions, will largely depend on future developments that are highly uncertain and cannot be predicted with confidence, including the impact of the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures on our tenants, including various state governments and/or regulatory authorities issuing directives, mandates, orders or similar actions restricting freedom of movement and business operations, such as travel restrictions, border closures, business closures, limitations on public gatherings, quarantines and “shelter-at-home” orders that resulted in the temporary closure of our tenants’ operations at our properties, the ability of the Company’s tenants to successfully operate their businesses following reopening of their respective facilities, including the costs of complying with regulatory requirements necessary to keep the facilities open, including compliance with restrictions and reduced capacity requirements, the need to close any of the facilities after reopening as a result of the COVID-19 pandemic, and the effects of the negotiated capital expenditure reductions and other amendments to the Lease Agreements that the Company agreed to with certain of its tenants in response to the COVID-19 pandemic. Each of the foregoing could have a material adverse effect on our tenants’ ability to satisfy their obligations under their leases with us, including their continued ability to pay rent in a timely manner, or at all, and/or to fund capital expenditures or make other payments required under their leases. In addition, changes and instability in global, national and regional economic activity and financial markets as a result of the COVID-19 pandemic could negatively impact consumer discretionary spending and travel, which could have a material adverse effect on our tenants’ businesses. Investors are cautioned to interpret many of the risks identified under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance and achievements could differ materially from those set forth in the forward-looking statements and may be affected by a variety of risks and other factors, including, among others: the impact of changes in general economic conditions, including low consumer confidence, unemployment levels and depressed real estate prices resulting from the severity and duration of any downturn in the U.S. or global economy (including stemming from the COVID-19 pandemic and changes in economic conditions as a result of the COVID-19 pandemic); our dependence on subsidiaries of Caesars, Penn National and Hard Rock (and, following the completion of the Eldorado Transaction and our other pending transactions, subsidiaries of ERI, Penn National, Hard Rock, Century Casinos and JACK Entertainment respectively) as tenants of our properties and Caesars, Penn National, andSeminole Hard Rock, Century Casinos and Rock Ohio Ventures LLC or certain of their respective subsidiaries (and, following the completion of the Eldorado Transaction and our other pending transactions, subsidiaries of ERI, Penn National, Hard Rock, Century Casinos and JACK Entertainment or certain of their respective affiliates, respectively) as guarantors of the lease payments and the negative consequences any material adverse effect on their respective businesses could have on us; our dependence on the gaming industry; our ability to pursue our business and growth strategies may be limited by our substantial debt service requirements
49
and by the requirement that we distribute 90% of our REIT taxable income in order to qualify for taxation as a REIT and that we distribute 100% of our REIT taxable income in order to avoid current entity-level U.S. Federal income taxes; the impact of extensive regulation from gaming and other regulatory authorities; the ability of our tenants to obtain and maintain regulatory approvals in connection with the operation of our properties; the possibility that our tenants may choose not to renew the Lease Agreements following the initial or subsequent terms of the leases; restrictions on our ability to sell our properties subject to the Lease Agreements; Caesars’, Penn National’s, Eldorado’s,Hard Rock’s, Century Casino’s,Casinos’ and JACK Entertainment’s and Hard Rock’s historical results may not be a reliable indicator of their future results; our substantial amount of indebtedness and ability to service, refinance and refinanceotherwise fulfill our obligations under such indebtedness; limits on our operational and financial flexibility imposed by our debt agreements; our historical financial information may not be reliable indicators of our future results of operations, financial condition and cash flows; the ability to receive, or delays in obtaining, the governmental and regulatory approvals and consents required to consummate our pending acquisitions, including the Eldorado Transaction, the JACK Cleveland/Thistledown Acquisition and the Century Portfolio Acquisition, or other delays or impediments to completing our pending acquisitions including the Eldorado Transaction, the JACK Cleveland/Thistledown Acquisition and the Century Portfolio Acquisition; our ability to obtain the financing necessary to complete our pending acquisitions including the Eldorado Transaction, the JACK Cleveland/Thistledown Acquisition and the Century Portfolio Acquisition on the terms we currently expect or at all; the possibility that our pending acquisitions includingtransactions, specifically the Eldorado Transaction, the JACK Cleveland/ThistledownForum Convention Center Mortgage Loan and Las Vegas Land Acquisition and the Century Portfolio Acquisition(each as defined herein), may not be completed or that completion may be unduly delayed including, in the case of the MTA Properties, as a result of environmental, tax, legal or other issues that we identify during the 90-day due diligence period relating to the MTA Properties;delayed; the possibility that we identify significant environmental, tax, legal or other issues that materially and adversely impact the value of properties acquired (or other benefits we expect to receive) in the Eldorado Transaction or any of our other pending acquisitions;or recently completed transactions; the effects of our recently completed acquisitions and the pending acquisitions including the Eldorado Transaction, the JACK Cleveland/Thistledown Acquisition and the Century Portfolio Acquisitiontransactions on us, including the post-acquisitionfuture impact on our financial condition, financial and operating results, cash flows, strategy and plans; the possibility our separation from CEOC fails to qualify as a tax-free spin-off, which could subject us to significant tax liabilities; the impact of changes to the U.S. Federal income tax laws; the possibility of foreclosure on our properties if we are unable to meet required debt service payments; the impact of a rise in interest rates on us; our inability to successfully pursue investments in, and acquisitions of, additional properties; the impact of
natural disasters, war, political and public health conditions or terrorismuncertainty or civil unrest, violence or terrorist activities or threats on our properties;properties and changes in economic conditions or heightened travel security and health measures instituted in response to these events; the loss of the services of key personnel; the inability to attract, retain and motivate employees; the costs and liabilities associated with environmental compliance; failure to establish and maintain an effective system of integrated internal controls; the costs of operating as a public company; our inability to operate as a stand-alone company; our inability to maintain our qualification for taxation as a REIT; our reliance on distributions received from the Operating Partnership to make distributions to our stockholders; the potential impact on the amount of our cash distributions if we were to sell any of our properties in the future; our ability to continue to make distributions to holders of our common stock or maintain anticipated levels of distributions over time; competition for acquisition opportunities, including from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, lenders, gaming companies and other investors that may have greater resources and access to capital and a lower cost of capital or different investment parameters than us; and additional factors discussed herein and listed from time to time as “Risk Factors” in our filings with the SEC, including without limitation, in our reportsAnnual Report on Form 10-K, and Form 8-K and this Quarterly ReportReports on Form 10-Q.10-Q and Current Reports on Form 8-K.
Any of the assumptions underlying forward-looking statements could be inaccurate. Accordingly, youYou are cautioned not to place undue reliance on any forward-looking statements. All forward-looking statements which speak onlyare made as of the date of this Quarterly Report on which they are made.Form 10-Q and the risk that actual results, performance and achievements will differ materially from the expectations expressed herein will increase with the passage of time. Except as otherwise required by law,the Federal securities laws, we do not undertake anyno obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstancecircumstances or any other reason. In light of the significant uncertainties inherent in forward-looking statements, the inclusion of such forward-looking statements should not be regarded as a representation by us.
OVERVIEW
We are an owner and acquirer of experiential real estate assets across leading gaming, hospitality, entertainment and leisure destinations. Our national, geographically diverse portfolio currently consists of 2431 market leading properties, including Caesars Palace Las Vegas and Harrah’s Las Vegas, two of the most iconic entertainment facilities on the Las Vegas Strip. Our entertainment facilities are leased to leading brands that seek to drive consumer loyalty and value with guests through superior services, experiences, products and continuous innovation. Across over 4050 million square feet, our well-maintained properties are currentlycurrently located across urban, destination and drive-to markets in eleventwelve states, contain approximately 15,20020,200 hotel rooms and feature over 150200 restaurants, bars and nightclubs.
Our portfolio also includes approximately 34 acres of undeveloped or underdeveloped land on and adjacent to the Las Vegas Strip that is leased to Caesars, which we may look to monetize as appropriate. We also own and operate four championship golf courses located near certain of our properties, two of which are in close proximity to the Las Vegas Strip.
50
The following chart summarizes our current portfolio of properties, our pending acquisitions, our properties subject to the call option agreement with Caesarstransactions and our properties subject to the right of first refusal agreementagreements and put/call agreement with Caesars:
We lease our properties to subsidiaries of Caesars, Penn National, Hard Rock, Century Casinos and Hard Rock.JACK Entertainment. As described below, ERI has entered into a definitive agreement to acquire Caesars and, following the closing of the ERI/consummation of the Eldorado Transaction, Caesars Merger, ERI (which intends to retain the Caesars name subsequent to the ERI/Caesars Merger) will beis our largest tenant. The ERI/CEC Merger is subject to regulatory approvals and customary closing conditions. ERI has publicly disclosed that it expects the ERI/CEC Merger to be completed in the first half of 2020, although we can provide no assurances that the ERI/CEC Merger will close in the anticipated timeframe, on the contemplated terms or at all. We believe we have a mutually beneficial relationship with Caesars, Penn National, and Hard Rock, Century Casinos and JACK Entertainment, all of which are leading owners and operators of gaming, entertainment and leisure properties. Our long-term triple-net Lease Agreements with subsidiaries of Caesars, Penn National, and Hard Rock, Century Casinos and JACK Entertainment provide us with a highly predictable revenue stream with embedded growth potential. We believe our geographic diversification limits the effect of changes in any one market on our overall performance. We are focused on driving long-term total returns through managing experiential asset growth and allocating capital diligently, maintaining a highly productive tenant base, and optimizing our capital structure to support external growth. As a growth focused public real estate investment trust with long-term investments, we expect our relationship with our partners will position us for the acquisition of additional properties across leisure and hospitality.
Our portfolio is competitively positioned and well-maintained. Pursuant to the terms of the Lease Agreements, which generally require our tenants to invest in our properties (subject in certain cases to temporary relief we granted certain tenants on a portion of their capital expenditure obligations), and in line with our tenants’ commitment to build guest loyalty, we anticipate our tenants will continue to make strategic value-enhancing investments in our properties over time, helping to maintain their competitive position. In addition, given our scale and deep industry knowledge, we believe we are well-positioned to execute
51
highly complementary single-asset and portfolio acquisitions to augment growth.
We conduct our operations as a real estate investment trust (“REIT”)REIT for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We believe our election of REIT status combined with the income generation from the Lease Agreements will enhance our ability to make distributions to our stockholders, providing investors with current income as well as long-term growth.growth, subject to the current macroeconomic impact of the COVID-19 pandemic and market conditions more broadly. We conduct our real property business through our Operating Partnership and our golf course business through a taxable REIT subsidiary (a “TRS”),TRS, VICI Golf.
The financial information included in this Quarterly Report on Form 10-Q is our consolidated results (including the real property business and the golf course business) for the three and ninesix months ended SeptemberJune 30, 2019.2020.
Impact of the COVID-19 Pandemic on Our Business
On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency. Among the broader public health, societal and global impact, the COVID-19 pandemic resulted in state governments and/or regulatory authorities issuing various directives, mandates, orders or similar actions, resulting in the temporary closure of our tenants’ operations at all of our properties. Our golf course business has also been impacted, with all four courses temporarily ceasing operations in March 2020 as a result of the COVID-19 pandemic, although our golf courses were subsequently reopened in early to mid-May 2020 in compliance with applicable regulations and restrictions. As of July 29, 2020, the operations of substantially all of our properties have reopened, subject to operating limitations set forth by the state and local governments and/or regulatory authorities. One property, Greektown, remains closed as the local government and regulatory authority have yet to allow it to reopen. While most of our tenants’ facilities at our properties have reopened, they have reopened at reduced capacity and subject to additional operating restrictions, and we cannot predict how long they will be required to operate subject to such operating restrictions or whether they will be subject to additional restrictions or forced to close again in the future. The full extent to which the COVID-19 pandemic ultimately impacts us and our tenants continues to depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures on our tenants, including our tenants’ financial performance following reopening and the extent of operating limitations and reduced capacity requirements upon reopening. We continue to closely monitor the impact of the COVID-19 pandemic on us, our tenants and our pending transactions.
In addition to the closure and restriction of their operations, our tenants have experienced a substantial number of cancellations and reductions in future events and reservations in connection with the uncertain duration of the COVID-19 pandemic and business closures. Following the reopening of our tenants’ businesses, they may face additional challenges with respect to restoring operations and financial performance, in particular as a result of changes in customer engagement. The COVID-19 pandemic and the actions taken to contain the pandemic or mitigate its impact are generally expected to trigger a period of economic slowdown or a global economic recession, which may continue well beyond the lifting of governmental restrictions related to COVID-19 and the reopening of our tenants’ businesses and change consumer behavior, thereby negatively affecting an economic recovery in the gaming sector. Historically, economic indicators such as GDP growth, consumer confidence and employment are correlated with demand for gaming, entertainment and leisure properties, and economic recessions have led to a decrease in gaming revenue, although the impact of such recessions have generally been less volatile than the impact on retail revenue and S&P 500 sales.
All of our tenants have fulfilled their rent obligations through July 2020 and we continue to engage with our tenants in connection with the ongoing COVID-19 pandemic and its impact on operations, liquidity and financial performance. However, in connection with the ongoing COVID-19 pandemic and its impact on our tenants’ operations and financial performance, we have provided certain relief under the applicable Lease Agreements to some of our tenants. While the relief we have provided has not deferred or reduced rent obligations for any of our tenants, due to these factors and the continuing uncertainty of the ultimate impact of the COVID-19 pandemic, there can be no assurance that our tenants will continue to fulfill their rent obligations in full or that our tenants will make anticipated capital expenditures to maintain or improve our properties. Further, future or current economic conditions could impact our tenants’ ability to meet capital improvement requirements or other obligations required in our Lease Agreements that could result in a decrease in value of our properties. We continue to actively engage in dialogues with our tenants regarding how best to respond to the COVID-19 pandemic and the closure and restriction of their businesses, including with respect to its impact on their respective financial and operating situations, liquidity needs and contingency planning. Although all of our tenants have fulfilled their rent obligation in full through July 2020, we cannot
52
predict with confidence when our tenants’ operations at our properties will reopen or operate without restriction, or, once reopened, whether they will be forced to close again in the future, or if and when they will return to pre-pandemic performance levels, and as the duration of the pandemic and operational restrictions lengthens, our tenants’ liquidity positions may become more stressed and it may cause one or more of our tenants to be unwilling or unable to meet their obligations to us in full, or at all, or to otherwise seek modifications to such obligations. As a triple-net lessor, we believe we are generally in a strong creditor position and structurally insulated from operational and performance impacts of our tenants, both positive and negative. However, given the unprecedented nature of the COVID-19 pandemic, we understand that working with our tenants in the short term to ensure their long-term financial health and performance may become necessary and should provide meaningful benefits to us as well over the long-term.
Given the significant impact on global economic activity to date, including the debt and equity markets, we expect the COVID-19 pandemic may adversely impact our ability to pursue additional material acquisitions as well as acquisition and similar transactional activity in the gaming sector, for an undetermined period of time.
As described herein, the full extent to which the COVID-19 pandemic ultimately impacts us and our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures on our tenants, the length of time our tenants’ operations at our properties remain closed or restricted, or close again in the future, our tenants’ financial performance during the closure and following reopening and any operating limitations upon reopening. These uncertainties make it difficult to predict our operating results for the remainder of 2020. We will continue to closely monitor the impact of COVID-19 on us, our tenants and our pending transactions. For more information, refer to “Part II – Item 1A. Risk Factors” included elsewhere in this Quarterly Report on Form 10-Q.
SIGNIFICANT ACTIVITIES DURING 2019
Our significant activities in 2019,2020, in reverse chronological order, are as follows:
Eldorado Transaction
The Eldorado Transaction and the ERI/Caesars Merger are both subject to regulatory approvals and customary closing conditions. ERI has publicly disclosed that it expects the ERI/Caesars Merger to be completed in the first half of 2020. However, we can provide no assurances that the ERI/Caesars Merger or the Eldorado Transaction described herein will closeincludes the consummation of the transactions contemplated by the following agreements:
•Acquisition of the MTA Properties. We acquired all of the land and real estate assets associated with Harrah’s New Orleans, Harrah’s Laughlin and Harrah’s Atlantic City (collectively, the “MTA Properties”) for an aggregate purchase price of $1,823.5 million (the “MTA Properties Acquisitions”). The Regional Master Lease Agreement was amended to, among other things, include each such property, with initial aggregate total annual rent payable to us increased by $154.0 million to $621.7 million, and to extend the initial term to July 2035 and to adjust certain minimum capital expenditure requirements and other related terms and conditions as a result of the MTA Properties being included in the anticipated timeframe, on the contemplated terms or at all. We intend to fund the Eldorado Transaction with a combination of proceeds from our June equity offering,Regional Master Lease Agreement as further described in Note 11 - Stockholders’ Equity in“—Lease Amendments and Terminations” below. We completed the NotesMTA Properties Acquisitions pursuant to our Financial Statements, and with long-term debt financing.
53
formed entity that will acquireacquired the land and real property improvements associated with Harrah’s Laughlin Hotel & Casino in Laughlin, Nevada for a cash purchase price of $434.75$434.8 million. As noted above, the MTA Property Purchase Agreements were entered into in accordance with the terms of the Master Transaction Agreement, and the MTA Property Acquisitions are part of the broader set of transactions contemplated by such Master Transaction Agreement.
Each of our existing call options on the Harrah’s New Orleans, Harrah’s Laughlin and Harrah’s Atlantic City properties will terminateMTA Properties terminated upon the earlier to occur of the closing of the corresponding MTA Property Acquisition orProperties Acquisitions.
In connection with the completion of the purchase of Harrah’s New Orleans, the tenant’s leasehold interest in that certain Second Amended and Restated Lease Agreement (the “Ground Lease”) dated as of April 3, 2020, by and among Jazz Casino Company, L.L.C., a Louisiana limited liability company (“JCC”), New Orleans Building Corporation (“NOBC”) and the City of New Orleans was assigned by JCC to us. The Ground Lease sets forth the terms and conditions pursuant to which we lease from NOBC a portion of the land upon which Harrah’s New Orleans is located. Simultaneous with entering into the assignment of the Ground Lease, we subleased our obtaining specific performance or liquidated damagesinterest in the Ground Lease to Caesars in accordance with the terms and conditions of the Regional Master Lease Agreement.
Pursuant to the Regional Master Lease, Caesars is required to perform our obligations as tenant under the Ground Lease, which include the obligation to construct a new hotel intended to be located on the ground-leased premises and to expend at least $325.0 million in connection with the construction of such hotel. The Ground Lease contains certain rights in our favor should Caesars fail to perform our obligations thereunder, including providing us with additional cure periods. If we are unable to cure a Caesars default during any such additional cure period, then, subject to certain conditions more particularly set forth in the Ground Lease, we will have a further additional period (up to 12-24 months) to seek to terminate Caesars as tenant and enter into a replacement sublease with a new operator with respect to the relevant property. The closingsleased premises. If we fail to cure such default at the end of such additional cure period, NOBC would have the right to exercise remedies, including termination of the MTA Property Acquisitions are subjectGround Lease, in which case we would no longer have any right, title or interest to conditions in additionthe leased premises or the improvements located thereon.
•Creation of Las Vegas Master Lease. In consideration of a payment by us to (i) the tenant under the CPLV Lease Agreement of $1,189.9 million (the “CPLV Lease Amendment Payment”) and (ii) the tenant under the HLV Lease Agreement of $213.8 million (the “HLV Lease Amendment Payment”), upon the consummation of the ERI/Eldorado Transaction, (a) the CPLV Lease Agreement was amended to (A) combine the CPLV Lease Agreement and the HLV Lease Agreement into a single Las Vegas Master Lease Agreement, (B) increase the annual rent payable to us thereunder associated with Caesars Merger, including satisfactory due diligence reviewsPalace Las Vegas by $83.5 million (the “CPLV Additional Rent Acquisition”), (C) increase the annual rent previously payable to us with respect to the Harrah’s Las Vegas property by $15.0 million (the “HLV Additional Rent Acquisition”) under the Las Vegas Master Lease Agreement and are not cross-conditioned on each other (that(D) provide for the amended terms described below, and (b) the HLV Lease Agreement and the related lease guaranty were terminated. As a result of such amendments, the Harrah’s Las Vegas property is we are not requiredalso now subject to close on “all or none”the higher rent escalator under the Las Vegas Master Lease Agreement.
•Lease Amendments and Terminations. Each of the MTA Properties). In addition,Caesars Lease Agreements was amended to, among other things, (i) remove the closing ofrent coverage floors, which coverage floors served to reduce the other transactionsrent escalators under such leases in the event that comprise the Eldorado Transaction is not conditioned on“EBITDAR to Rent Ratio” (as defined in the completion of any or all of the MTA Property Acquisitions.
54
operating license with respect to Harrah’s New Orleans, including, without limitation, any such payments, costs and expenses required to be made to the City of New Orleans, the State of Louisiana or any other governmental body or agency.
In connection with entering into the amendments to the agreementCaesars Lease Agreements and is subjectthe Caesars Guaranties described above, we and Caesars terminated the Management and Lease Support Agreements, dated as of October 6, 2017 with respect to each of the Caesars Lease Agreements, pursuant to which, among other things, Pre-Merger Caesars previously guaranteed the tenants’ monetary obligations under the Caesars Lease Agreements and the Guaranty of Lease dated as of December 22, 2017 pursuant to which, among other things, a subsidiary of Pre-Merger Caesars guaranteed the tenant’s obligations under the HLV Lease Agreement.
•Centaur Properties Put-Call Agreement. Prior to the consummation of the ERI/Caesars Merger as well as customary closing conditions, including, among other things, that: (i) the absence of any law or order restraining, enjoining or otherwise preventing the transactions contemplated by the MasterEldorado Transaction, Agreement; (ii) the receipt of certain regulatory approvals, including gaming regulatory approvals; (iii) certain restructuring transaction shall have been consummated; (iv) the accuracy of the respective parties’ representations and warranties, subjectwe were party to customary qualifications; and (v) material compliance by the parties with their respective covenants and obligations. The Master Transaction Agreement contains certain termination rights, including that the Master Transaction Agreement shall automatically terminate upon the termination of the ERI/Caesars Merger Agreement and a right by usof first refusal agreement with affiliates of Pre-Merger Caesars with respect to terminatetwo gaming facilities in Indiana - Harrah’s Hoosier Park and Indiana Grand (together, the Master Transaction Agreement in“Centaur Properties”). Upon the event the closingconsummation of the transactions contemplated by the Master Transaction Agreement has not occurred by the date on which the ERI/Caesars Merger is required to close pursuant to the ERI/Caesars Merger Agreement, but in no event later than December 24, 2020.
•Amended and Restated Caesars Forum Convention Center Put-Call Agreement. Upon the consummation of the Eldorado Transaction, we entered into an Amended and Restated Put-Call Right Agreement (the “A&R Convention Center Put-Call Agreement”) with Caesars amending and restating that certain put-call agreement related to the approximately 28 acres of land upon which the Caesars Forum Convention Center is built and/or otherwise used in connection with or necessary for the operation of the Caesars Forum Convention Center (collectively, the “Caesars Forum Convention Center”). The A&R Convention Center Put-Call Agreement provides (i) a put right in favor of Caesars, which, if exercised, would result in the sale by Caesars to us and simultaneous leaseback by us to Caesars of the Caesars Forum Convention Center (the “Convention Center Put Right”). which may be exercised by Caesars between January 1, 2024 and December 31, 2024 at a price equal to 13.0x the initial annual rent for Caesars Forum Convention Center as proposed by Caesars (which shall be between $25.0 million and $35.0 million), (ii) if Caesars exercises the Convention Center Put Right and, among other things, the sale of the Caesars Forum Convention Center to us does not close for certain reasons more particularly described in the A&R Convention Center Put-Call Agreement, a repurchase right in favor of Caesars, which, if exercised, would result in the sale of Harrah’s Las Vegas by us to Caesars (the “HLV Repurchase Right”). which may be exercised by Caesars during a one-year period commencing on the date upon which the closing under the Convention Center Put Right transaction does not occur and ending on the day immediately preceding the one-year anniversary thereof for a price equal to 13.0x the rent of Harrah’s Las Vegas for the most recently ended annual period for which Caesars’ financial statements are available as of Caesars’ election to exercise the HLV Repurchase Right and (iii) a call right in our favor, which, if exercised, would result in the sale by Caesars to us and simultaneous leaseback by us to Caesars of the Caesars Forum
55
Convention Center (the “Convention Center Call Right”). which currently may be exercised by us between January 1, 2027 and December 31, 2027 at a price equal to 13.0x the initial annual rent for Caesars Forum Convention Center as proposed by Caesars (which shall be between $25.0 million and $35.0 million). In addition, in connection with the consummation of the Forum Convention Center Mortgage Loan described below, we will amend the A&R Convention Center Put-Call Agreement to, among other things, accelerate the exercise date of the Convention Center Call Right to begin on the scheduled maturity date of the Forum Convention Center Mortgage Loan, as described below in “—Caesars Forum Convention Center Mortgage Loan and Las Vegas Land Acquisition”.
•Las Vegas Strip Assets ROFR. Upon the consummation of the Eldorado Transaction, we entered into a right of first refusal agreement with Caesars (the “Las Vegas Strip ROFR Agreement”) pursuant to which we have the first right, with respect to the first two Las Vegas Strip assets described below that Caesars proposes to sell, whether pursuant to a sale leaseback or a WholeCo sale, to a third party, to acquire any such asset (it being understood that we will have the opportunity to find an operating company should Caesars elect to pursue a WholeCo sale). The Las Vegas Strip assets subject to the Las Vegas Strip ROFR Agreement are the land and real estate assets associated (i) with respect to the first such asset subject to the Las Vegas Strip ROFR Agreement, the Flamingo Las Vegas, Paris Las Vegas, Planet Hollywood and Bally’s Las Vegas gaming facilities, and (ii) with respect to the second asset subject to the Las Vegas Strip ROFR Agreement, the foregoing assets plus The LINQ gaming facility. If we enter into a sale leaseback transaction with Caesars on any of these facilities, the leaseback may be implemented through the addition of such properties to the Las Vegas Master Lease Agreement.
•Horseshoe Baltimore ROFR. Upon the consummation of the Eldorado Transaction, we entered into a right of first refusal agreement with Caesars pursuant to which we have the first right to enter into a sale leaseback transaction with respect to the land and real estate assets associated with the Horseshoe Baltimore gaming facility (subject to any consent required from Caesars’ joint venture partners with respect to this asset).
•CPLV CMBS Refinancing. We were obligated to cause the CPLV CMBS Debt to be repaid in full prior to the consummation of the Eldorado/Caesars Merger. In November 2019, we repaid the CPLV CMBS Debt in full resulting in a prepayment penalty of $110.8 million, of which $55.4 million was reimbursed by Caesars upon the consummation of the Eldorado Transaction in accordance with the MTA as follows: $31.0 million was paid to us in cash, $20.5 million was credited to us as a reduction in the CPLV Lease Amendment Payment and $3.9 million was credited to us as a reduction in the HLV Lease Amendment Payment.
•Eldorado Bridge Facilities. On June 24, 2019, in connection with the Eldorado Transaction, VICI PropCo entered into a commitment letter (the “Commitment Letter”) with Deutsche Bank Securities Inc. and Deutsche Bank AG Cayman Islands Branch (collectively, the “Bridge Lender”), pursuant to which and subject to the terms and conditions set forth therein, the Bridge Lender has agreed to provide (i) a 364-day first lien secured bridge facility of up to $3.3 billion in the aggregate (the “Eldorado Senior Bridge Facility”) and (ii) a 364-day second lien secured bridge facility of up to $1.5 billion in the aggregate (the “Eldorado Junior Bridge Facility,” and, together with the Eldorado Senior Bridge Facility, the “Bridge Facilities”), for the purpose of providing a portion of the financing necessary to fund the Eldorado Transaction. The commitments under the Bridge Facilities were fully terminated at our election in June 2020.
JACK Lease Agreement Amendment and Amended and Restated ROV Loan
Subsequent to June 30, 2020, on July 16, 2020, we and JACK Entertainment entered into an amendment to the JACK Cleveland/Thistledown Lease Agreement (the “JACK Lease Agreement Amendment”), pursuant to which, among other things, we agreed to fund $18.0 million for the construction of a new gaming patio amenity at JACK Thistledown Racino, which will be leased by JACK Entertainment pursuant to the JACK Lease Agreement Amendment. In connection with the construction of the gaming patio, commencing on April 1, 2022, rent under the JACK Cleveland/Thistledown Lease Agreement (as amended by the JACK Lease Agreement Amendment) will be increased by an incremental $1.8 million. The JACK Lease Agreement Amendment also provides for relief with respect to certain existing covenants through March 31, 2022, adds an additional five years to the initial lease term, with the tenant under the JACK Cleveland/Thistledown Lease Agreement having three (rather than four) five-year renewal options as a result of such extension of the initial lease term, and provides for rent escalation to begin in 2022 rather than 2021. The JACK Lease Agreement Amendment does not provide for a reduction or deferral of the tenant’s rent obligations. The tenant’s obligations under the JACK Lease Agreement Amendment are guaranteed by Rock Ohio Ventures LLC (“Rock Ohio Ventures”). Pursuant to the Jack Lease Agreement Amendment, the relief provided thereunder is conditioned upon (i) the tenant’s timely payment of rent obligations under the JACK Cleveland/Thistledown Lease Agreement and (ii) no tenant event of default occurring under the JACK Cleveland/Thistledown Lease Agreement during the compliance
56
period set forth in the JACK Lease Agreement Amendment.
Simultaneously with entry into the JACK Lease Agreement Amendment, we and affiliates of Rock Ohio Ventures entered into an amendment and restatement of our existing $50.0 million term loan agreement with such affiliates of Rock Ohio Ventures (the “Amended and Restated ROV Loan”), pursuant to which, among other things, we increased our existing term loan to $70.0 million, which bears interest at a rate of 9.0% per annum (which interest, at the option of JACK Entertainment, may be paid-in-kind through April 30, 2021 with any paid-in-kind interest required to be paid in cash in eleven equal monthly installments ending March 31, 2022), and added a $25.0 million revolving credit facility, which bears interest at a rate of LIBOR plus 2.75% per annum. A commitment fee of 0.50% per annum calculated on the unused portion of the revolving credit facility is payable quarterly. The Amended and Restated ROV Loan, which includes the term loan and revolving credit facility, matures in January 2025 which maturity date may be extended at the borrower’s election for up to two additional years if certain conditions are satisfied. In connection with the amendment and restatement, we received additional collateral, including an additional land parcel in proximity to JACK Cleveland, so that the loan is now secured by a first priority lien on substantially all gaming and non-gaming real and personal property of JACK Entertainment, including the furniture, fixtures and equipment associated with the properties. The amendment and restatement also provides the obligors with relief with respect to certain existing financial covenants through March 31, 2022.
Caesars Forum Convention Center Mortgage Loan and Las Vegas Land Acquisition
On June 15, 2020, we entered into a non-binding letter of intent with Eldorado (the “Mortgage and Land Acquisition Agreement”) pursuant to which we intend to (i) lend $400.0 million to a subsidiary of Caesars (the “Forum Convention Center Borrower”) for a term of five years, with such loan secured by, among other things, a first priority fee mortgage on the Caesars Forum Convention Center (the “Forum Convention Center Mortgage Loan”) and (ii) purchase approximately 23 acres of land in the vicinity of, or adjacent to, The LINQ Hotel & Casino, Bally’s Las Vegas, Paris Las Vegas and Planet Hollywood gaming facilities (the “Las Vegas Land”) for a purchase price of $4.5 million per acre (the “Las Vegas Land Acquisition”).
Each of the Forum Convention Center Mortgage Loan and the Las Vegas Land Acquisition is cross-conditioned on the consummation of the other. In addition, the Forum Convention Center Mortgage Loan and the Las Vegas Land Acquisition are each subject to, among other things, the completion of due diligence and negotiation of definitive documentation and is expected to close in the third quarter of 2020. However, we can provide no assurances that the Forum Convention Center Mortgage Loan or the Las Vegas Land Acquisition will close in the anticipated timeframe, on the contemplated terms or at all. We intend to fund the Forum Convention Center Mortgage Loan and the Las Vegas Land Acquisition with the proceeds from the expected physical settlement of the June 2020 Forward Sale Agreement.
Forum Convention Center Mortgage Loan
The Forum Convention Center Mortgage Loan will be in an amount of $400.0 million and will have a term of five years. The interest rate on the Forum Convention Center Mortgage Loan initially will be 7.7% per annum, with payments subject to 2.0% annual escalation, with interest paid monthly in cash in arrears. Except as provided below, no prepayments will be permitted during the first two years of the term of the Forum Convention Center Mortgage Loan. During the third and fourth years of the term of the Forum Convention Center Mortgage Loan, the Forum Convention Center Borrower may prepay the Forum Convention Center Mortgage Loan, in each case in full but not in part, at 102% of par in year three and 101% of par in year four. During the fifth year of the term of the Forum Convention Center Mortgage Loan, the Forum Convention Center Borrower may prepay the Forum Convention Center Mortgage Loan in full but not in part at par. However, the Forum Convention Center Mortgage Loan may be prepaid at any time at par, without penalty or make-whole, in connection with our acquisition of the land and real estate assets associated with the Caesars Forum Convention Center and an OpCo sale and conversion to an OpCo/PropCo structure, subject to our consent, which may be withheld in our sole discretion.
The Forum Convention Center Mortgage Loan will be secured by a first priority mortgage on the Caesars Forum Convention Center that is currently owned by Caesars, including, without limitation, the Caesars Forum Convention Center, as well as a first priority lien on the equity interests in the Forum Convention Center Borrower, a first priority security interest in all of the Forum Convention Center Borrower’s interest in furniture, fixtures and equipment used, owned or related to the operation of the Caesars Forum Convention Center, and a first priority assignment of the Forum Convention Center Borrower’s interest in leases and rents, including a collateral assignment of the Forum Convention Center Borrower’s interest in the lease on the Caesars Forum Convention Center pursuant to which the Forum Convention Center Borrower will lease the Caesars Forum Convention Center to a subsidiary of Caesars (the “Caesars Tenant”), which lease will be fully subordinate to the Forum Convention Center Mortgage Loan. In addition, if the Forum Convention Center Borrower defaults on the Forum Convention Center Mortgage Loan and we take possession of the Caesars Forum Convention Center, we may, at our option under certain
57
circumstances, assume the lease with the Caesars Tenant (which lease will be guaranteed by Caesars and have an initial annual rent of $33.9 million, subject to annual increases equal to the greater of 2% and the annual consumer price index increase).
In connection with the Forum Convention Center Mortgage Loan, we will amend the A&R Convention Center Put-Call Agreement to include the following terms:
•The Convention Center Call Right, which is currently exercisable for the one-year period beginning January 1, 2027, will instead be exercisable beginning on the scheduled maturity date of the Forum Convention Center Mortgage Loan until December 31, 2026; and
•If there is an event of default on the Forum Convention Center Mortgage Loan, (i) the Convention Center Put Right, which is currently exercisable for the one-year period commencing on January 1, 2024, will not be exercisable, and (ii) we, at our option, may accelerate the Convention Center Call Right so that it is exercisable from the date of such event of default until December 31, 2026 (in addition to any other remedies available to us in connection with such event of default).
Las Vegas Land Acquisition
We have agreed to purchase the Las Vegas Land for a purchase price of $4.5 million per acre. After we acquire the Las Vegas Land, we will grant subsidiaries of Caesars a revocable license to continue to use the property; provided, that the subsidiaries of Caesars will continue to pay real property taxes, insurance costs, security costs and other operating costs related to the Las Vegas Land (“Las Vegas Land Operating Costs”) (or such portion of the Las Vegas Land that subsidiaries of Caesars continue to occupy). These obligations will be guaranteed by Caesars. Upon six months’ prior written notice, we will have the right to require that the subsidiaries of Caesars vacate the Las Vegas Land (or any portion thereof). Upon six months’ prior written notice to us, the subsidiaries of Caesars may vacate the Las Vegas Land (or any portion thereof). In each case upon such vacancy, the subsidiaries of Caesars will no longer be responsible for Las Vegas Land Operating Costs with respect to the portion of the Las Vegas Land vacated.
Omnibus Lease Amendment
On June 1, 2020, we entered into an Omnibus Amendment to Leases (the “Omnibus Amendment”) with Pre-Merger Caesars. Pursuant to the Omnibus Amendment, Pre-Merger Caesars, and after the consummation of the Eldorado Transaction, Caesars, will be granted certain relief with respect to a portion of their capital expenditure obligations under the Caesars Lease Agreements conditioned upon (i) funding by Caesars of certain minimum capital expenditures in fiscal year 2020 (which represent a reduction of the minimum capital expenditure amounts currently set forth in the Caesars Lease Agreements), (ii) timely payment of Caesars’ rent obligations under the Caesars Lease Agreements during the compliance period set forth in the Omnibus Amendment and (iii) no tenant event of default occurring under any of the Caesars Lease Agreements during the compliance period set forth in the Omnibus Amendment. Caesars will receive credit for certain deemed capital expenditure amounts, which credit may be used to satisfy certain of their capital expenditure obligations in the 2020, 2021 and 2022 fiscal years, provided that the foregoing conditions are satisfied. If Caesars fails to satisfy any of the foregoing conditions, Caesars will be required to satisfy the capital expenditure obligations set forth in the Caesars Lease Agreements or, in certain cases, to deposit amounts in respect thereof into a capital expenditure reserve in accordance with the Omnibus Amendment.
Amendment to Century Portfolio Lease Agreement
In May 2020, we entered into an amendment to the Century Portfolio Lease Agreement with Century Casinos. The Century Portfolio Lease Agreement contains certain covenants, including minimum capital expenditures. The covenants under the Century Portfolio Lease Agreement began on January 1, 2020; however, as a result of the casino closures in connection with the COVID-19 pandemic, we agreed to waive Century Casinos’ capital expenditure requirements for 2020 and defer to not later than December 31, 2021 certain other expenditures contemplated in connection with the underwriting of the Century Portfolio. Pursuant to the amendment to the Century Portfolio Lease Agreement, the capital expenditure relief is conditioned upon (i) Century Casinos’ timely payment of rent obligations under the Century Portfolio Lease Agreement during the compliance period set forth in the amendment and (ii) no tenant event of default occurring under the Century Portfolio Lease Agreement during the compliance period set forth in the amendment. If Century Casinos fails to satisfy any of the foregoing conditions, Century Casinos will be required to satisfy the capital expenditure obligations set forth in the Century Portfolio Lease Agreement or, in certain cases, to deposit amounts in respect thereof into a capital expenditure reserve for expenditure in accordance with the amendment.
58
Sale of Bally’s Atlantic City
On April 24, 2020, we and Caesars entered into definitive agreements to sell the Bally’s Atlantic City Hotel & Casino for $25.0 million to a subsidiary of Twin River Worldwide Holdings, Inc. We are entitled to receive approximately $19.0 million of the proceeds from the sale and Caesars is entitled to approximately $6.0 million of the proceeds. The annual rent payments under the Regional Master Lease Agreement will remain unchanged following completion of the disposition, which we anticipate will close by the end of the year and remains subject to regulatory approval and customary closing conditions.
Unsecured February 2020 Senior Notes Offering and Redemption and Repayment of the Second Lien Notes
On February 5, 2020, the Issuers issued (i) $750.0 million in aggregate principal amount of 2025 Notes, (ii) $750.0 million in aggregate principal amount of 2027 Notes and (iii) $1.0 billion aggregate principal amount of 2030 Notes. We placed $2.0 billion of the net proceeds of the offering into escrow pending the consummation of the Eldorado Transaction (which was subsequently released from escrow and used to fund a portion of the purchase price of the Eldorado Transaction). On February 20, 2020 we used the remaining net proceeds from the 2025 Notes, together with cash on hand, to redeem in full the outstanding $498.5 million in aggregate principal amount of the Second Lien Notes plus the Second Lien Notes Applicable Premium, for a total redemption cost of approximately $537.5 million. The 2025 Notes will mature on February 15, 2025, the 2027 Notes will mature on February 15, 2027 and an affiliatethe 2030 Notes will mature on August 15, 2030. Interest on the 2025 Notes will accrue at a rate of Penn National acquired3.500% per annum, interest on the operating2027 Notes will accrue at a rate of 3.750% per annum and interest on the 2030 Notes will accrue at a rate of 4.125% per annum. Interest on the February 2020 Unsecured Notes will be payable semi-annually in cash in arrears on February 15 and August 15 of each year, commencing on August 15, 2020.
Closing of Purchase of JACK Cleveland/Thistledown
On January 24, 2020 we completed the previously announced transaction to acquire the casino-entitled land and real estate and related assets of GreektownJACK Cleveland, located in Cleveland, Ohio and JACK Thistledown located in North Randall, Ohio (the “JACK Cleveland/Thistledown Acquisition”) from JACK Entertainment, for $300.0 million in cash (together, the “Greektown Acquisition”).approximately $843.3 million. Simultaneous with the closing of the GreektownJACK Cleveland/Thistledown Acquisition, we entered into a master triple-net lease agreement for GreektownJACK Cleveland and JACK Thistledown with a subsidiary of Penn National.JACK Entertainment. The lease has an initial total annual rent of $55.6$65.9 million and an initial term of 15 years, with four five-year tenant renewal options. The tenant’s obligations under the lease are guaranteed by Penn National and certainRock Ohio Ventures. Additionally, we made a $50.0 million loan to affiliates of its subsidiaries.
Repricing of $1.0 billion and extend the maturity date to May 2024. Borrowings under the Revolving CreditTerm Loan B Facility will bear interest at a rate based on a leverage-based pricing grid with a range of 1.75% to 2.00% over LIBOR (London Interbank Offered Rate), or between 0.75% and 1.00% over the base rate, in each case depending on our total net debt to adjusted total assets ratio. The Revolving Credit Facility replaces our previous revolving credit facility, which had a total borrowing capacity of $400 million, a maturity date in December 2022, and under which borrowings bore interest at 200 basis points over LIBOR.
On January 3, 2019, we24, 2020, VICI PropCo entered into two additional interest rate swap agreements with third-party financial institutions having an aggregate notional amount of $500.0 million. These interest rate swap transactions each have an effective date of January 22, 2019Amendment No. 1 to the Amended and a termination date of January 22, 2021 and are intended to be cash flow hedges that effectively fix, for two years, the LIBOR component ofRestated Credit Agreement, which, among other things, reduced the interest rate on $500.0 million of the outstanding debt under the Term Loan B Facility at a blended ratefrom LIBOR plus 2.00% to LIBOR plus 1.75%.
PENDING TRANSACTIONS
Sale of 2.38%. Subsequent to the effectiveness and for the duration of the interest rate swap transactions, we are only subject to interest rate risk on $100.0 million of variable rate debt.
On January 2,December 31, 2019, we completed the previously announced transaction to acquire the land and real estate assets of Margaritaville, located in Bossier City, Louisiana, for $261.1 million. Penn National acquired the operating assets of Margaritaville for $114.9 million. Simultaneous with the closing of this transaction, weCaesars entered into a triple-net leasedefinitive agreement withto sell the Harrah’s Reno asset to a subsidiarythird party, and which agreement was amended on May 29, 2020. The purchase price for Harrah’s Reno is $41.5 million (which reflects a purchase price adjustment of Penn National.$8.5 million). We are entitled to receive 75% of the proceeds of the sale and Caesars is entitled to receive 25% of the proceeds. The lease has an initial annual rent of $23.2 million and an initial term of 15 years, with four five-year tenant renewal options. The tenant’s obligationspayments under the lease are guaranteedRegional Master Lease Agreement will remain unchanged following completion of the disposition, which we anticipate will close by Penn Nationalthe end of the year and certainremains subject to customary closing conditions.
59
RESULTS OF OPERATIONS
Segments
Our real property business and our golf course business represent our two reportable segments. The real property business segment consists of leased real property and represents the substantial majority of our business. The golf course business segment consists of four golf courses, with each being operating segments that are aggregated into one reportable segment. The results of each reportable segment presented below are consistent with the way our management assesses these results and allocates resources, which is a consolidated view that adjusts for the impact of certain transactions between our reportable segments.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||||||||||||||||||||||||
| Revenues | |||||||||||||||||||||||||||||||||||||||||||||||
| Income from direct financing and sales-type leases | $ | 223,895 | $ | 201,549 | $ | 22,346 | $ | 448,147 | $ | 397,299 | $ | 50,848 | |||||||||||||||||||||||||||||||||||
| Income from operating leases | 10,913 | 10,914 | (1) | 21,826 | 21,827 | (1) | |||||||||||||||||||||||||||||||||||||||||
| Income from lease financing receivables and loans | 17,026 | — | 17,026 | 29,869 | — | 29,869 | |||||||||||||||||||||||||||||||||||||||||
| Other income | 733 | — | 733 | 1,426 | — | 1,426 | |||||||||||||||||||||||||||||||||||||||||
| Golf operations | 5,335 | 8,283 | (2,948) | 11,635 | 15,622 | (3,987) | |||||||||||||||||||||||||||||||||||||||||
| Revenues | 257,902 | 220,746 | 37,156 | 512,903 | 434,748 | 78,155 | |||||||||||||||||||||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | 7,498 | 6,518 | 980 | 14,513 | 12,743 | 1,770 | |||||||||||||||||||||||||||||||||||||||||
| Depreciation | 1,213 | 1,018 | 195 | 2,080 | 1,948 | 132 | |||||||||||||||||||||||||||||||||||||||||
| Other expenses | 736 | — | 736 | 1,439 | — | 1,439 | |||||||||||||||||||||||||||||||||||||||||
| Golf operations | 4,139 | 4,848 | (709) | 8,509 | 8,940 | (431) | |||||||||||||||||||||||||||||||||||||||||
| Change in allowance for credit losses | (65,480) | — | (65,480) | 84,028 | — | 84,028 | |||||||||||||||||||||||||||||||||||||||||
| Transaction and acquisition expenses | 1,160 | 2,867 | (1,707) | 5,677 | 3,756 | 1,921 | |||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | (50,734) | 15,251 | (65,985) | 116,246 | 27,387 | 88,859 | |||||||||||||||||||||||||||||||||||||||||
| Operating income | 308,636 | 205,495 | 103,141 | 396,657 | 407,361 | (10,704) | |||||||||||||||||||||||||||||||||||||||||
| Interest expense | (77,693) | (54,819) | (22,874) | (153,786) | (108,405) | (45,381) | |||||||||||||||||||||||||||||||||||||||||
| Interest income | 1,009 | 4,004 | (2,995) | 6,529 | 9,171 | (2,642) | |||||||||||||||||||||||||||||||||||||||||
| Loss from extinguishment of debt | — | — | — | (39,059) | — | (39,059) | |||||||||||||||||||||||||||||||||||||||||
| Income before income taxes | 231,952 | 154,680 | 77,272 | 210,341 | 308,127 | (97,786) | |||||||||||||||||||||||||||||||||||||||||
| Income tax expense | (309) | (553) | 244 | (763) | (1,074) | 311 | |||||||||||||||||||||||||||||||||||||||||
| Net income | 231,643 | 154,127 | 77,516 | 209,578 | 307,053 | (97,475) | |||||||||||||||||||||||||||||||||||||||||
| Less: Net income attributable to non-controlling interest | (2,241) | (2,078) | (163) | (4,188) | (4,155) | (33) | |||||||||||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 229,402 | $ | 152,049 | $ | 77,353 | $ | 205,390 | $ | 302,898 | $ | (97,508) | |||||||||||||||||||||||||||||||||||
60
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (In thousands) | 2019 | 2018 | Variance | 2019 | 2018 | Variance | |||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Income from direct financing and sales-type leases | $ | 206,001 | $ | 189,938 | $ | 16,063 | $ | 603,300 | $ | 554,293 | $ | 49,007 | |||||||||||
| Income from operating leases | 10,913 | 12,209 | (1,296 | ) | 32,740 | 36,627 | (3,887 | ) | |||||||||||||||
| Tenant reimbursement of property taxes | — | 25,147 | (25,147 | ) | — | 61,322 | (61,322 | ) | |||||||||||||||
| Golf operations | 5,599 | 5,393 | 206 | 21,221 | 19,696 | 1,525 | |||||||||||||||||
| Revenues | 222,513 | 232,687 | (10,174 | ) | 657,261 | 671,938 | (14,677 | ) | |||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| General and administrative | 6,717 | 5,678 | 1,039 | 19,460 | 20,145 | (685 | ) | ||||||||||||||||
| Depreciation | 1,000 | 929 | 71 | 2,948 | 2,757 | 191 | |||||||||||||||||
| Property taxes | — | 25,423 | (25,423 | ) | — | 61,598 | (61,598 | ) | |||||||||||||||
| Golf operations | 5,423 | 4,223 | 1,200 | 14,363 | 12,832 | 1,531 | |||||||||||||||||
| Loss on impairment | — | 12,334 | (12,334 | ) | — | 12,334 | (12,334 | ) | |||||||||||||||
| Transaction and acquisition expenses | 993 | — | 993 | 4,749 | — | 4,749 | |||||||||||||||||
| Total operating expenses | 14,133 | 48,587 | (34,454 | ) | 41,520 | 109,666 | �� | (68,146 | ) | ||||||||||||||
| Operating income | 208,380 | 184,100 | 24,280 | 615,741 | 562,272 | 53,469 | |||||||||||||||||
| Interest expense | (68,531 | ) | (54,051 | ) | (14,480 | ) | (176,936 | ) | (158,365 | ) | (18,571 | ) | |||||||||||
| Interest income | 6,690 | 2,027 | 4,663 | 15,861 | 7,504 | 8,357 | |||||||||||||||||
| Loss from extinguishment of debt | — | — | — | — | (23,040 | ) | 23,040 | ||||||||||||||||
| Income before income taxes | 146,539 | 132,076 | 14,463 | 454,666 | 388,371 | 66,295 | |||||||||||||||||
| Income tax expense | (24 | ) | (52 | ) | 28 | (1,098 | ) | (884 | ) | (214 | ) | ||||||||||||
| Net income | 146,515 | 132,024 | 14,491 | 453,568 | 387,487 | 66,081 | |||||||||||||||||
| Less: Net income attributable to non-controlling interest | (2,080 | ) | (2,112 | ) | 32 | (6,235 | ) | (6,409 | ) | 174 | |||||||||||||
| Net income attributable to common stockholders | $ | 144,435 | $ | 129,912 | $ | 14,523 | $ | 447,333 | $ | 381,078 | $ | 66,255 | |||||||||||
Revenue
For the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, our revenue was comprised of the following items:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2019 | 2018 | Variance | 2019 | 2018 | Variance | (In thousands) | 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leasing revenue | $ | 216,914 | $ | 202,147 | $ | 14,767 | $ | 636,040 | $ | 590,920 | $ | 45,120 | Leasing revenue | $ | 250,732 | $ | 212,463 | $ | 38,269 | $ | 497,917 | $ | 419,126 | $ | 78,791 | |||||||||||||||||||||||||||||||||||||||||||||
| Tenant reimbursement of property taxes | — | 25,147 | (25,147 | ) | — | 61,322 | (61,322 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from loans | Income from loans | 1,102 | — | 1,102 | 1,925 | — | 1,925 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income | Other income | 733 | — | 733 | 1,426 | — | 1,426 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Golf operations | 5,599 | 5,393 | 206 | 21,221 | 19,696 | 1,525 | Golf operations | 5,335 | 8,283 | (2,948) | 11,635 | 15,622 | (3,987) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 222,513 | $ | 232,687 | $ | (10,174 | ) | $ | 657,261 | $ | 671,938 | $ | (14,677 | ) | Total revenue | $ | 257,902 | $ | 220,746 | $ | 37,156 | $ | 512,903 | $ | 434,748 | $ | 78,155 | |||||||||||||||||||||||||||||||||||||||||||
Leasing Revenue
The following table details the components of our income from direct financing, sales-type, operating and operatingfinancing receivables leases:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2019 | 2018 | Variance | 2019 | 2018 | Variance | (In thousands) | 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from direct financing and sales-type leases | $ | 206,001 | $ | 189,938 | $ | 16,063 | $ | 603,300 | $ | 554,293 | $ | 49,007 | Income from direct financing and sales-type leases | $ | 223,895 | $ | 201,549 | $ | 22,346 | $ | 448,147 | $ | 397,299 | $ | 50,848 | |||||||||||||||||||||||||||||||||||||||||||||
Income from operating leases (1) | 10,913 | 12,209 | (1,296 | ) | 32,740 | 36,627 | (3,887 | ) | Income from operating leases (1) | 10,913 | 10,914 | (1) | 21,826 | 21,827 | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total lease revenue | 216,914 | 202,147 | 14,767 | 636,040 | 590,920 | 45,120 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Direct financing and sales-type lease adjustment (2) | 2,494 | (13,007 | ) | 15,501 | (2,295 | ) | (39,117 | ) | 36,822 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total contractual lease revenue | $ | 219,408 | $ | 189,140 | $ | 30,268 | $ | 633,745 | $ | 551,803 | $ | 81,942 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income from lease financing receivables (2) | Income from lease financing receivables (2) | 15,924 | — | 15,924 | 27,944 | — | 27,944 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total leasing revenue | Total leasing revenue | 250,732 | 212,463 | 38,269 | 497,917 | 419,126 | 78,791 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash adjustment (3) | Non-cash adjustment (3) | 3,809 | (2,277) | 6,086 | 7,063 | (4,789) | 11,852 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total contractual leasing revenue | Total contractual leasing revenue | $ | 254,541 | $ | 210,186 | $ | 44,355 | $ | 504,980 | $ | 414,337 | $ | 90,643 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
____________________
(1) Represents portion of land separately classified and accounted for under the operating lease model associated with our investment in Caesars Palace Las Vegas and certain operating land parcels contained in the Non-CPLV Lease Agreement. Upon the consummation of the Eldorado Transaction on July 20, 2020, the land component of Caesars Palace Las Vegas and the certain operating land parcels were reassessed for lease classification and determined to be a sales-type lease. Accordingly, subsequent to July 20, 2020, such income will be recognized as Income from direct financing and sales-type leases.
(2) Represents income from the JACK Cleveland/Thistledown Lease Agreement which, in accordance with ASC 842, was determined to meet both the definition of a sale leaseback transaction and sales-type lease and, as a result, is accounted for as a financing under ASC 310.
(3) Amounts represent the non-cash adjustment to income from direct financing andleases, sales-type leases and lease financing receivables in order to recognize income on an effective interest basis at a constant rate of return over the term of the leases.
Leasing revenue is generated from rent from our Lease Agreements. Total leasing revenue increased $14.8$38.3 million and $45.1$78.8 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. Total contractual leasing revenue increased $30.3$44.4 million and $81.9$90.6 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The increase was primarily driven by the addition of Octavius Tower, Harrah’s Philadelphia, Margaritaville, Greektown, Hard Rock Cincinnati, the Century Portfolio and JACK CincinnatiCleveland/Thistledown to our real estate portfolio in July 2018, December 2018, January 2019, May 2019, and September 2019, December 2019 and January 2020, respectively.
For the three and six months ended June 30, 2019, Other income was included net in General and administrative expenses. During the three and ninesix months ended SeptemberJune 30, 2018,2020, we recorded $25.1 million and $61.3 million, respectively, ofhave re-classified Other income from tenant reimbursement of property taxes. Upon the adoption of ASC 842 on January 1, 2019, we ceased recording tenant reimbursement of property taxes as these taxes are paid directly by our tenants to the applicable government entity.be presented gross with an offsetting amount within Other expenses.
Golf Course Business Revenue
Revenues from golf operations increased $0.2decreased $2.9 million and $1.5$4.0 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The increasedecrease was primarily driven by an increase in the numberclosure of rounds played at our golf courses in mid-March through April 2020 as well asa result of the ongoing COVID-19 pandemic, partially offset by an increase in the contractual fees paid to us by Caesars for the use of our golf courses, pursuant to a golf course use agreement.
61
Operating Expenses
For the three and ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, our operating expenses were comprised of the following items:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | 2019 | 2018 | Variance | 2019 | 2018 | Variance | (In thousands) | 2020 | 2019 | Variance | 2020 | 2019 | Variance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 6,717 | $ | 5,678 | $ | 1,039 | $ | 19,460 | $ | 20,145 | $ | (685 | ) | General and administrative | $ | 7,498 | $ | 6,518 | $ | 980 | $ | 14,513 | $ | 12,743 | $ | 1,770 | ||||||||||||||||||||||||||||||||||||||||||||
| Depreciation | 1,000 | 929 | 71 | 2,948 | 2,757 | 191 | Depreciation | 1,213 | 1,018 | 195 | 2,080 | 1,948 | 132 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property taxes | — | 25,423 | (25,423 | ) | — | 61,598 | (61,598 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expenses | Other expenses | 736 | — | 736 | 1,439 | — | 1,439 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Golf operations | 5,423 | 4,223 | 1,200 | 14,363 | 12,832 | 1,531 | Golf operations | 4,139 | 4,848 | (709) | 8,509 | 8,940 | (431) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on impairment | — | 12,334 | (12,334 | ) | — | 12,334 | (12,334 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Change in allowance for credit losses | Change in allowance for credit losses | (65,480) | — | (65,480) | 84,028 | — | 84,028 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Transaction and acquisition expenses | 993 | — | 993 | 4,749 | — | 4,749 | Transaction and acquisition expenses | 1,160 | 2,867 | (1,707) | 5,677 | 3,756 | 1,921 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 14,133 | $ | 48,587 | $ | (34,454 | ) | $ | 41,520 | $ | 109,666 | $ | (68,146 | ) | Total operating expenses | $ | (50,734) | $ | 15,251 | $ | (65,985) | $ | 116,246 | $ | 27,387 | $ | 88,859 | |||||||||||||||||||||||||||||||||||||||||||
General and Administrative Expenses
General and administrative expenses increased $1.0 million and $1.8 million for the three and six months ended SeptemberJune 30, 20192020 as compared to the three and six months ended September 30, 2018 and decreased $0.7 million during the nine months ended SeptemberJune 30, 2019, compared to the nine months ended September 30, 2018.respectively. The increase during for three months ended September 30, 2019 was primarily driven by an increase in compensation, including stock-based compensation expense. The decrease forcompensation.
Other expenses
For the ninethree and six months ended SeptemberJune 30, 2019, was primarily driven by certain non-recurring costs incurred duringOther expenses were included net in General and administrative expenses. During the firstthree and six of the nine months ended SeptemberJune 30, 2018 as a result of being a newly publicly-traded company primarily following our initial public offering and the transition and relocation of our corporate headquarters from Las Vegas, NV2020, we have re-classified Other expenses to New York, NY, which decrease was partially offset by the previously described increases during the three months ended September 30, 2019.
Golf Course Business Expenses
Expenses from golf operations increased $1.2decreased $0.7 million and $1.5$0.4 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2018, respectively, due to an increase2019, respectively. The decrease was primarily driven by the closure of our golf courses in mid-March through April 2020 as a result of the number of rounds played andongoing COVID-19 pandemic, partially offset by an increase in the water usage charges at one of our golf courses. Additionally, even though our courses were closed from mid-March through April 2020 as a result of the ongoing COVID-19 pandemic, we continued to pay all of our golf course employees their full salaries and benefits for a period of time and, accordingly, the decrease in our golf course operating revenues was not proportionately offset by a decrease in golf course operating expenses.
On January 1, 2020, we adopted ASU No. 2016-13 - Financial Instruments-Credit Losses (Topic 326) which requires us to record an estimated credit loss for our (i) investments in leases - direct financing and sales-type, (ii) investments in leases - financing receivables and (iii) investments in loans. During the three and nine months ended SeptemberJune 30, 2018 the Company2020, we recognized a $12.3$65.5 million loss on impairmentdecrease in our allowance for credit losses. This decrease was primarily driven by a decrease in the R&S Period PD of our tenants and their parent guarantors as a result of an improvement in their economic outlook due to the reopening of a majority of their gaming operations. During the six months ended June 30, 2020, we recognized an $84.0 million increase in allowance for credit losses related to certain vacant, non-operating land parcels transferred by CEOC to us onour real estate portfolio as a result of (i) an increase in the Formation Date. All of the land parcels are located outside of Las Vegas and none of the land parcels are a component of the operationscredit risk of our regional property portfolio. We hadtenants given the uncertain economic conditions caused by the COVID-19 pandemic and the temporary closure of their operations at our properties and (ii) a $22.2 million allowance related to our initial investment in JACK Cleveland/Thistledown and the ROV Loan. This increase was partially offset by the decrease described above for the three months ended June 30, 2020. The credit loss standard does not require retrospective application and as such there is no such related impairment duringcorresponding charge for the three and ninesix months ended SeptemberJune 30, 2019. Refer to Note 6 - Allowance for Credit Losses for further details.
Transaction and Acquisition Costs
Transaction and acquisition costs increased $1.0 million and $4.7decreased $1.7 million during the three and nine months ended SeptemberJune 30, 20192020 as compared to the three and nine months ended SeptemberJune 30, 2018, respectively. The increase was primarily due2019 and increased $1.9 million during the six months ended June 30, 2020 compared to the adoptionsix months ended June 30, 2019. Changes in transaction and acquisition costs are related to fluctuations in (i) costs incurred for
62
investments during the period that are not capitalizable under GAAP and third-party(ii) costs associated with our leasesincurred for investments that were previously capitalized.we are no longer pursuing.
Interest Expense
Interest expense increased $14.5$22.9 million and $18.6$45.4 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, as compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The increase is primarily attributable to our interest rate swap agreements which we entered into in April 2018 and January 2019 and anthe increase in the amortizationdebt of our deferred financing fees as a result of the costs associated with our Revolving Credit Facility. With respect to the interest rate swap agreements, prior to entering into such agreements$4.75 billion in the comparative period, we were paying a lower variable rate as compared toaggregate from the fixed rate underFebruary 2020 Senior Unsecured Notes offering and the interest rate swap agreements. These amounts wereNovember 2019 Senior Unsecured Notes offering, partially offset by a reduction in interest rates due todebt of $2.05 billion as a result of the full redemption of the Second Lien Notes in February 2020 and full repayment of amounts outstanding underthe CPLV CMBS Debt in November 2019.
Additionally, the weighted average annualized interest rate of our Revolving Credit Facilitydebt decreased to 4.18% and 4.51% during the three and six months ended June 30, 2020, respectively, from 4.97% during the three and six months ended June 30, 2019 as a result of (i) the weighted average interest rate on the February 2020 Senior Unsecured Notes and the partial paydownNovember 2019 Senior Unsecured Notes being lower than the weighted average interest rate of the Second Lien Notes and CPLV CMBS Debt, (ii) a decrease in LIBOR on the $100.0 million portion of our variable rate debt that is not hedged and (iii) a reduction in the interest rate on the Term Loan B Facility and Second Lien Notes in February of 2018.from LIBOR plus 2.00% to LIBOR plus 1.75%.
Interest Income
Interest income increased $4.7decreased $3.0 million and $8.4$2.6 million during the three and ninesix months ended SeptemberJune 30, 20192020, respectively, compared to the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively. The increase isdecrease was primarily driven by a substantial decrease in the interest rates earned on our excess cash, which was partially offset by increased cash on hand from our primary follow-on equity offeringsFebruary 2020 Senior Unsecured Notes offering, $2.0 billion of which was held in November 2018escrow pending the consummation of the Eldorado Transaction (which was subsequently released from escrow and June 2019.used to fund a portion of the purchase price of the Eldorado Transaction on July 20, 2020).
Loss on Extinguishment of Debt
During the ninesix months ended SeptemberJune 30, 2018,2020, we recognized a loss on extinguishment of debt of $23.0$39.1 million resulting from the full redemption of $268.4 million in aggregate principal of our Second Lien Notes in February 2018 at a redemption price of 108%.2020. We had no such related extinguishment of debt during the three and ninesix months ended SeptemberJune 30, 2019 or the three months ended September 30, 2018.2019.
63
RECONCILIATION OF NON-GAAP MEASURES
We present Funds From Operations (“FFO”), FFO per share, Adjusted Funds From Operations (“AFFO”), AFFO per share, and Adjusted EBITDA, which are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). These are non-GAAP financial measures and should not be construed as alternatives to net income or as an indicator of operating performance (as determined in accordance with GAAP). We believe FFO, FFO per share, AFFO, AFFO per share and Adjusted EBITDA provide a meaningful perspective of the underlying operating performance of our business.
FFO is a non-GAAP financial measure that is considered a supplemental measure for the real estate industry and a supplement to GAAP measures. Consistent with the definition used by The National Association of Real Estate Investment Trusts (“NAREIT”)(NAREIT), we define FFO as net income (or loss) (computed in accordance with GAAP) excluding (i) gains (or losses) from sales of certain real estate assets, (ii) depreciation and amortization related to real estate, (iii) gains and losses from change in control and (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.
AFFO is a non-GAAP financial measure that we use as a supplemental operating measure to evaluate our performance. We calculate AFFO by adding or subtracting from FFO directnon-cash leasing and financing and sales-type lease adjustments attributable to common stockholders, non-cash change in allowance for credit losses attributable to common stockholders, transaction costs incurred in connection with the acquisition of real estate investments, non-cash stock-based compensation expense, amortization of debt issuance costs and original issue discount, other non-cash interest expense, non-real estate depreciation (which is comprised of the depreciation related to our golf course operations), capital expenditures (which are comprised of additions to property, plant and equipment related to our golf course operations), impairment charges related to non-depreciable real estate and gains (or losses) on debt extinguishment. The non-cash change in allowance for credit losses attributable to common stockholders consists of estimated credit loss for our investments in leases - direct financing and sales-type, investments in leases - financing receivables and investments in loans as a result of our adoption of ASU No. 2016-13 - Financial Instruments-Credit Losses (Topic 326). No similar adjustments are reflected in prior periods because the accounting standard was adopted effective January 1, 2020 and does not require retrospective application. Please see Note 6 - Allowance for Credit Losses for further information.
We calculate Adjusted EBITDA by adding or subtracting from AFFO contractual interest expense and interest income (collectively, interest expense, net) and income tax expense.
These non-GAAP financial measures: (i) do not represent cash flow from operations as defined by GAAP; (ii) should not be considered as an alternative to net income as a measure of operating performance or to cash flows from operating, investing and financing activities; and (iii) are not alternatives to cash flow as a measure of liquidity. In addition, these measures should not be viewed as measures of liquidity, nor do they measure our ability to fund all of our cash needs, including our ability to make cash distributions to our stockholders, to fund capital improvements, or to make interest payments on our indebtedness. Investors are also cautioned that FFO, FFO per share, AFFO, AFFO per share and Adjusted EBITDA, as presented, may not be comparable to similarly titled measures reported by other real estate companies, including REITs, due to the fact that not all real estate companies
use the same definitions. Our presentation of these measures does not replace the presentation of our financial results in accordance with GAAP.
64
Reconciliation of Net Income to FFO, FFO per Share, AFFO, AFFO per Share and Adjusted EBITDA
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||
| (In thousands, except share data and per share data) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||
| Net income attributable to common stockholders | $ | 229,402 | $ | 152,049 | $ | 205,390 | $ | 302,898 | ||||||||||||||||||||||||||||||||||||
| Real estate depreciation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| FFO | 229,402 | 152,049 | 205,390 | 302,898 | ||||||||||||||||||||||||||||||||||||||||
| Non-cash leasing and financing adjustments attributable to common stockholders | 3,869 | (2,210) | 7,179 | (4,656) | ||||||||||||||||||||||||||||||||||||||||
| Non-cash change in allowance for credit losses attributable to common stockholders | (65,323) | — | 84,049 | — | ||||||||||||||||||||||||||||||||||||||||
| Transaction and acquisition expenses | 1,160 | 2,867 | 5,677 | 3,756 | ||||||||||||||||||||||||||||||||||||||||
| Non-cash stock-based compensation | 2,012 | 1,366 | 3,362 | 2,417 | ||||||||||||||||||||||||||||||||||||||||
| Amortization of debt issuance costs and original issue discount | 4,837 | 1,899 | 11,136 | 3,364 | ||||||||||||||||||||||||||||||||||||||||
| Other depreciation | 1,183 | 1,016 | 2,026 | 1,943 | ||||||||||||||||||||||||||||||||||||||||
| Capital expenditures | (883) | (212) | (1,645) | (1,403) | ||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | 39,059 | — | ||||||||||||||||||||||||||||||||||||||||
| AFFO | 176,257 | 156,775 | 356,233 | 308,319 | ||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 71,847 | 48,916 | 136,121 | 95,870 | ||||||||||||||||||||||||||||||||||||||||
| Income tax expense | 309 | 553 | 763 | 1,074 | ||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 248,413 | $ | 206,244 | $ | 493,117 | $ | 405,263 | ||||||||||||||||||||||||||||||||||||
| Net income per common share | ||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | ||||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | ||||||||||||||||||||||||||||||||||||
| FFO per common share | ||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | ||||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.47 | $ | 0.37 | $ | 0.43 | $ | 0.74 | ||||||||||||||||||||||||||||||||||||
| AFFO per common share | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 0.36 | $ | 0.38 | $ | 0.75 | $ | 0.75 | ||||||||||||||||||||||||||||||||||||
| Diluted | $ | 0.36 | $ | 0.38 | $ | 0.74 | $ | 0.75 | ||||||||||||||||||||||||||||||||||||
| Weighted average number of shares of common stock outstanding | ||||||||||||||||||||||||||||||||||||||||||||
| Basic | 489,012,165 | 412,309,577 | 477,094,795 | 409,040,025 | ||||||||||||||||||||||||||||||||||||||||
| Diluted | 489,213,427 | 412,821,400 | 481,652,482 | 409,473,202 | ||||||||||||||||||||||||||||||||||||||||
65
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
| (In thousands, except share data and per share data) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Net income attributable to common stockholders | $ | 144,435 | $ | 129,912 | $ | 447,333 | $ | 381,078 | |||||||
| Real estate depreciation | — | — | — | — | |||||||||||
| FFO | 144,435 | 129,912 | 447,333 | 381,078 | |||||||||||
| Direct financing and sales-type lease adjustments attributable to common stockholders | 2,563 | (12,876 | ) | (2,093 | ) | (38,652 | ) | ||||||||
| Transaction and acquisition expenses | 993 | — | 4,749 | — | |||||||||||
| Non-cash stock-based compensation | 1,404 | 623 | 3,821 | 1,482 | |||||||||||
| Amortization of debt issuance costs and original issue discount | 14,816 | 1,495 | 18,180 | 4,477 | |||||||||||
| Other depreciation | 997 | 926 | 2,940 | 2,752 | |||||||||||
| Capital expenditures | (588 | ) | (187 | ) | (1,991 | ) | (744 | ) | |||||||
| Loss on impairment | — | 12,334 | — | 12,334 | |||||||||||
| Loss on extinguishment of debt | — | — | — | 23,040 | |||||||||||
| AFFO | 164,620 | 132,227 | 472,939 | 385,767 | |||||||||||
| Interest expense, net | 47,025 | 50,529 | 142,895 | 146,385 | |||||||||||
| Income tax expense | 24 | 52 | 1,098 | 884 | |||||||||||
| Adjusted EBITDA | $ | 211,669 | $ | 182,808 | $ | 616,932 | $ | 533,036 | |||||||
| Net income per common share | |||||||||||||||
| Basic | $ | 0.31 | $ | 0.35 | $ | 1.05 | $ | 1.06 | |||||||
| Diluted | $ | 0.31 | $ | 0.35 | $ | 1.04 | $ | 1.06 | |||||||
| FFO per common share | |||||||||||||||
| Basic | $ | 0.31 | $ | 0.35 | $ | 1.05 | $ | 1.06 | |||||||
| Diluted | $ | 0.31 | $ | 0.35 | $ | 1.04 | $ | 1.06 | |||||||
| AFFO per common share | |||||||||||||||
| Basic | $ | 0.36 | $ | 0.36 | $ | 1.11 | $ | 1.07 | |||||||
| Diluted | $ | 0.35 | $ | 0.36 | $ | 1.10 | $ | 1.07 | |||||||
| Weighted average number of common shares outstanding | |||||||||||||||
| Basic | 460,666,295 | 369,935,055 | 426,437,889 | 360,997,358 | |||||||||||
| Diluted | 465,771,668 | 370,127,185 | 428,366,146 | 361,042,203 | |||||||||||
LIQUIDITY AND CAPITAL RESOURCES
Overview
As of SeptemberJune 30, 2019,2020, our available cash balances, restricted cash balances, short-term investments and capacity under our Revolving Credit Facility were as follows:
| (In thousands) | September 30, 2019 | ||
| Cash and cash equivalents | $ | 431,423 | |
| Restricted cash | 32,087 | ||
| Short-term investments | 342,767 | ||
Capacity under Revolving Credit Facility (1) | 1,000,000 | ||
| Total | $ | 1,806,277 | |
| (In thousands) | June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,680,536 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted cash (1)
____________________ (1)Restricted cash is solely related to funds held in escrow from the February 2020 Senior Unsecured Notes offering which was subsequently released from escrow and used to fund a portion of the purchase price of the Eldorado Transaction on July 20, 2020. (2)Subject to compliance with the financial covenants and other applicable provisions of our Revolving Credit Facility. Our short-term obligations consist primarily of regular interest payments on our debt obligations, dividends to our common stockholders, normal recurring operating expenses, recurring expenditures for corporate and administrative needs, certain lease and other contractual commitments related to our golf operations and certain non-recurring expenditures. For a list of our material contractual commitments refer to Note Our long-term obligations consist primarily of principal payments on our outstanding debt obligations. We currently have 66 Information concerning our obligations and commitments to make future payments under contracts such as our indebtedness and future minimum lease commitments under operating leases is included in the
(1) The 2025 Notes, 2026 Notes, 2027 Notes, 2029 Notes and 2030 Notes will mature on February 15, 2025, December 1, 2026, February 15, 2027, December 1, 2029 and August 15, 2030, respectively. (2) The Term Loan B Facility is subject to amortization of 1.0% of principal per annum payable in equal quarterly installments on the (3) The Revolving Credit Facility will mature on May 15, 2024. (4) Estimated interest payments on variable interest loans are based on a LIBOR rate as of June 30, 2020. On July 20, 2020, we funded the consideration payable in We believe that we have sufficient liquidity to meet our liquidity and capital resource requirements primarily through currently available cash and cash equivalents, restricted cash, All of the Lease Agreements call for an initial term of fifteen years with four, five-year tenant renewal options and are designed to provide us with a reliable and predictable long-term revenue stream. However, the COVID-19 pandemic has adversely impacted our tenants and their financial condition as all of their properties were closed for a period of time, certain properties continue to remain closed and properties that have reopened are subject to operating restrictions and continuing uncertainty as to whether they will be forced to close again in the future. In the event our tenants are unable to make all of their contractual rent payments as provided by the Lease Agreements, we believe we have sufficient liquidity from the other sources discussed 67 above to meet all of our contractual obligations for a significant period of time. Additionally, we do not have any debt maturities until 2024. For more information, refer to the risk factors set forth in Part II. Item 1A. Risk Factors herein and in our Annual Report on Form 10-K for the year ended December 31, 2019. Our cash flows from operations and our ability to access capital resources could be adversely affected due to uncertain economic factors and volatility in the financial and credit markets, including the current conditions created by the COVID-19 pandemic which has severely and adversely impacted global, national and regional economic activity and has contributed to significant volatility and negative pressure in financial markets. In particular, in connection with the ongoing COVID-19 pandemic and its impact on our tenants’ operations and financial performance we have provided certain relief under the applicable Lease Agreements to some of our tenants as more fully described above in “—Significant Activities During 2020 — JACK Lease Agreement and Loan Modification” and “—Significant Activities During 2020 — Omnibus Lease Amendment” and, as a result, we can provide no assurances that our tenants will not default on their leases or fail to make full rental payments if their businesses become challenged due to, among other things, current or future adverse economic conditions. In addition, such tenant default or failure to make full rental payments could impact our operating performance and result in us not satisfying the financial covenants applicable to our outstanding indebtedness, which could result in us not being able to incur additional debt, including the available capacity under our Revolving Credit Facility, or result in a default. Further, future or current economic conditions could impact our tenants’ ability to meet capital improvement requirements or other obligations required in our Lease Agreements that could result in a decrease in the value of our properties. Our ability to raise funds through the issuance of debt and equity securities and access to other third-party sources of capital in the future will be dependent on, among other things, uncertainties related to COVID-19 and the impact of our response and our tenants’ responses to COVID-19, general economic conditions, general market conditions for REITs, market perceptions and the trading price of our stock. We will continue to analyze which sources of capital are most advantageous to us at any particular point in time, but the capital markets may not be consistently available on terms we deem attractive, or at all. In addition, volatility in the debt capital markets and potential liquidity challenges in the banking sector resulting from the COVID-19 pandemic may increase the risk related to the pricing and availability of debt financing. Cash Flow Analysis The table below summarizes our cash flows for the
Cash Flows from Operating Activities Net cash provided by operating activities increased Cash Flows from Investing Activities Net cash used in investing activities increased 68 months ended Cash Flows from Financing Activities Net cash provided by financing activities increased During the •Net proceeds from the sale of an aggregate of $1,476.7 million of our common stock pursuant to the full physical settlement of our June 2019 Forward Sale Agreements and our at-the-market program; •Gross proceeds from our February 2020 Senior Unsecured Notes offering of $2,500.0 million; •Full redemption of the $498.5 million outstanding aggregate principal amount of our Second Lien Notes, as well as the $39.0 million Second Lien Notes Applicable Premium plus fees; •Dividend payments of $276.5 million; •Debt issuance costs of $57.8 million; and •Distributions of $4.1 million to non-controlling interest During the six months ended June 30, 2019 the primary sources and uses of cash from financing activities included: •Net proceeds from the sale of an aggregate of •Dividend payments of •Debt issuance costs of
Distributions of Capital Expenditures As described in our leases, capital expenditures for properties under our Lease Agreements are the responsibility our tenants. Refer to Note 5 - Real Estate Portfolio in the Notes to our Financial Statements for further information of the obligations of our tenants under the Lease Agreements. Debt Activity During On On January 24, 2020, VICI PropCo entered into 69 Covenants Our debt obligations are subject to certain customary financial and protective covenants that restrict our ability to incur additional debt, sell certain asset and restrict certain payments, among other things. In addition, these covenants are subject to a number of important exceptions and qualifications, including, with respect to the restricted payments covenant, the ability to make unlimited restricted payments to maintain our REIT status. At The subsidiaries of the Operating Partnership that do not guarantee the Senior Unsecured Notes accounted for: (i) 6.1% of the Operating Partnership’s revenue (or 5.9% of our consolidated revenue) for the six months ended June 30, 2020 and (ii) 4.1% of the Operating Partnership’s total assets (or 4.1% of our consolidated total assets) as of June 30, 2020. Distribution Policy We intend to make regular quarterly distributions to holders of shares of our common stock. Dividends declared (on a per share basis) during the
Federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (with certain adjustments), determined without regard to the dividends paid deduction and excluding any net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains. In addition, a REIT will be required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. We intend to continue to make distributions to our stockholders to comply with the REIT requirements of Critical Accounting Policies and Estimates A complete discussion of our critical accounting policies and estimates is included in our Annual Report on Form 10-K for the Allowance for Credit Losses On January 1, 2020, we adopted ASC 326 - “Credit Losses” which requires that we measure and record current expected credit losses (“CECL”) for the majority of our investments, the scope of which includes our Investments in We 70 effective interest rate. We then record a CECL allowance equal to the Expected losses within our cash flows are determined by estimating the probability of default (“PD”) and To the extent we have contractual commitments to extend credit, such as those under revolving credit facilities, we are required to estimate a CECL allowance related to these future funding commitments. The Write-offs are deducted from Refer to Item 3. Quantitative and Qualitative Disclosures About Market Risk We face market risk exposure in the form of interest rate risk. This market risk arises from our debt obligations. Our primary market risk exposure is interest rate risk with respect to our indebtedness. At At Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the specified time periods, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management has evaluated, under the supervision and with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. 71 Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended 72 PART II. OTHER INFORMATION Item 1. Legal Proceedings In the ordinary course of business, from time to time, we may be subject to legal claims and administrative proceedings. As of Item 1A. Risk Factors A description of certain factors that may affect our future results and risk factors is set forth in our Annual Report on Form 10-K for the year ended December 31, Risks Relating to Us Following Completion of the Eldorado Transaction and Our Pending Transactions We are and will be significantly dependent on Caesars, Penn National, Hard Rock, JACK Entertainment and Century Casinos, and their respective subsidiaries unless or until we substantially diversify our portfolio, and an event that has a material adverse effect on any of their businesses, financial condition, liquidity, results of operations or prospects could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. We depend on our tenants to operate the properties that we own in a manner that generates revenues sufficient to allow the tenants to meet their obligations to us. Currently, substantially all of our revenue comes from our leases with subsidiaries of Caesars, Penn National, Hard Rock, JACK Entertainment and Century Casinos. Because the master leases are triple-net leases, in addition to the rent these significant tenants will owe us, we will depend on these significant tenants to pay substantially all insurance, taxes, utilities and maintenance and repair expenses in connection with these leased properties and to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their businesses. There can be no assurance that our tenants will have sufficient assets, income or access to financing to enable them to satisfy their payment and other obligations under their leases with us, or that the applicable guarantor will be able to satisfy its guarantee of the applicable tenant’s obligations. Our tenants rely on the properties they or their respective subsidiaries own and/or operate for income to satisfy their obligations, including their debt service requirements and lease and other payments due to us or others. In addition, Caesars will rely on our properties, the Caesars Forum Convention Center and their other operations to satisfy their payment obligations under the Forum Convention Center Mortgage Loan. As a result of the COVID-19 pandemic, state governments and/or regulatory authorities issued various directives, mandates, orders or similar actions resulting in the closure of non-essential businesses, which included substantially all of our tenants’ operations, including at our properties and the Caesars Forum Convention Center, although in all jurisdictions such measures have been lifted or modified, resulting in the resumption of certain of our tenants’ operations, including the reopening of most of our properties. If income at these properties were to decline for any reason, including as a result of the COVID-19 pandemic, or if a tenant’s debt service requirements were to increase for any reason or if their creditworthiness were to become impaired for other reasons, a tenant or the applicable guarantor may become unable or unwilling to satisfy its payment and other obligations under their leases or other agreements with us. The inability or unwillingness of a significant tenant to meet its payment or other obligations under a lease or other payment obligation with us could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects, including our ability to make distributions to our stockholders. In addition, following completion of the Eldorado Transaction, Caesars is our largest tenant. Caesars has publicly disclosed that it expects to achieve synergies following completion of the Eldorado/Caesars Merger. As a result of the COVID-19 pandemic or otherwise, Caesars may be unable to achieve such synergies during the time period that it expects to do so, or at all, and a failure to achieve these synergies may adversely affect Caesars, including its creditworthiness, and impair its ability to meet its obligations to us. Moreover, given Caesars’ significance to our business, a failure on the part of Caesars to realize expected synergies and any related improvement to its creditworthiness, or any deterioration of its creditworthiness, could materially and adversely affect us, even in the absence of a default under our agreements with Caesars. 73 Due to our dependence on rental and other payments from these significant tenants (and their respective subsidiaries) as our primary source of revenue, we may be limited in our ability to enforce our rights under the leases or other agreements with our tenants or to terminate the leases with respect to any particular property or other agreements. Failure by these significant tenants to comply with the terms of their respective leases or to comply with the gaming regulations to which the leased properties are subject could result in the termination of an applicable ground lease, requiring us to find another tenant for such property, to the extent possible, and there could be a decrease or cessation of rental payments by these significant tenants, as the case may be. In such event, we may lose our interest in a property subject to an applicable ground lease or be unable to locate a suitable, creditworthy tenant at similar rental rates or at all, which would have the effect of reducing our rental revenues and could have a material adverse effect on us. In addition, the Caesars Forum Convention Center has no operating history and will not initially generate sufficient operating cash flow to service the interest expense on the Forum Convention Center Mortgage Loan, and its operations may continue to be negatively impacted due to the COVID-19 pandemic or other factors. There can be no assurances that the Forum Convention Center Borrower will be able to fulfill its payment obligations under the Forum Convention Center Mortgage Loan, and such payment obligations are not guaranteed by Eldorado, Pre-Merger Caesars or Caesars. The failure of the Forum Convention Center Borrower to fulfill its payment obligations under the Forum Convention Center Mortgage Loan would have the effect of reducing our revenue and could have a material adverse effect on us. If Caesars declares bankruptcy and such action results in a lease being re-characterized as a disguised financing transaction in its bankruptcy proceeding, our business, results of operations, financial condition and cash flows could be materially and adversely affected. If Caesars declares bankruptcy, our business could be materially and adversely affected if a bankruptcy court re-characterizes the CPLV Additional Rent Acquisition or the HLV Additional Rent Acquisition as a disguised financing transaction. In the event of re-characterization, our claim under a lease agreement with respect to the additional rent acquired in the HLV Additional Rent Acquisition and CPLV Additional Rent Acquisition could either be secured or unsecured. Generally, the leases permit us to take steps to create and perfect a security interest in the leased property, but such attempts could be subject to challenge by the tenant or its creditors and, with respect to the CPLV Additional Rent Acquisition and the HLV Additional Rent Acquisition, there is no assurance that a court would find that portion of our claim to be secured. The bankrupt lessee and other affiliates of Caesars and their creditors under this scenario might have the ability to restructure the terms, including the amount owed to us under the lease with respect to the additional rent. If approved by the bankruptcy court, we could be bound by the new terms, and prevented from collecting such additional rent that we paid for in the CPLV Additional Rent Acquisition and HLV Additional Rent Acquisition, and our business, results of operations, financial condition and cash flows could be materially and adversely affected. Risks Related to Our Business and Operations The COVID-19 pandemic could have a material adverse impact on our business, financial condition, liquidity, results of operations and prospects, including by affecting our tenants’ operations and financial performance and global and U.S. economic activity and performance. Since being initially reported in December 2019, the outbreak of COVID-19 has spread globally and created considerable health risks in the United States and around the world, resulting in severely adversely impacted global, national and regional economic activity, and has contributed to significant volatility and negative pressure in financial markets. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. federal government declared a national emergency concerning the COVID-19 outbreak. Several countries, including the United States, have taken steps to restrict air travel, and many state and local governments have instituted additional measures, including quarantines, states of emergency, mandatory business and school closures, “shelter-at-home” and similar orders and other restrictions on travel and large gatherings, as well as initiatives such as “social distancing” guidelines. In connection with these actions, state governments and/or regulatory authorities issued various directives, mandates, orders or similar actions that resulted in the closure of non-essential businesses, which included substantially all of our tenants’ operations, including at our properties, as well as our golf courses. While such governmental and regulatory measures have in many jurisdictions been lifted or modified, resulting in the reopening of most of our tenants’ operations, at our properties, there can be no assurance that such restrictions will not be reinstated, new restrictions will not be imposed or closures required or other developments will not take place that would further limit our tenants’ operations, including at our properties. In addition, our tenants have experienced a substantial number of cancellations and reductions in future events and reservations in connection with the uncertain duration of the COVID-19 pandemic and business closures. Following the reopening of our tenants’ businesses, they may face additional challenges with respect to restoring operations and financial performance, in particular as a result of changes in customer engagement. We expect these closures and reduced business activity will adversely 74 affect our tenants’ financial performance, and such impact could be material to us depending on the ultimate duration of the pandemic and operational restrictions affecting our tenants’ ability to restore operations following the reopening of their businesses and our properties. These closures, operational restrictions and reduced business activity could also materially and adversely affect our tenants’ ability to meet their respective financial obligations going forward, including their obligations under our leases to pay us rent and make capital expenditures, which could have a material adverse effect on our business, results of operations and liquidity. Although we cannot predict with confidence future developments with respect to our tenants’ operations at our properties, including reopening timelines or the potential for further closures or restrictions, or if and when they will return to pre-pandemic performance levels, as the duration of the pandemic and operational restrictions lengthens, our tenants’ liquidity positions may become more stressed which may cause one or more of our tenants to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications to such obligations. Any such modifications to our tenants’ obligations to us under our leases may have an adverse effect on our business. Even if our tenants are able to fulfill their obligations to us, their inability to meet their financial obligations to their creditors or other counterparties could also have a material adverse effect on our business. The financial impact of the COVID-19 pandemic, including a failure of any of our tenants to make full rental payments, or any other default by our tenants, under our Lease Agreements, could also negatively impact our or our tenants’ future compliance with financial covenants of existing and any future credit facilities and indebtedness, and result in a default and potentially an acceleration event, which non-compliance could negatively impact our or our tenants’ ability to make additional borrowings, including borrowings under our Revolving Credit Facility, issue additional indebtedness and otherwise operate our respective businesses. In addition, the outbreak has triggered an economic recession in the United States and a material global economic slowdown, which many experts predict may continue well beyond the lifting of governmental restrictions related to COVID-19 and the reopening of our tenants’ businesses and change consumer behavior, thereby negatively affecting an economic recovery in the gaming sector. Any sustained economic slowdown or recession, or the impact thereof, such as through decreased rates of employment that extend after our tenants’ businesses are permitted to reopen or broader changes in consumer behavior, may further materially and adversely affect our tenants’ financial performance and ability to meet such obligations. We cannot predict with confidence when applicable government or regulatory orders, or travel and other restrictions, will end or whether and on what timeline our tenants’ performance will meaningfully improve or return to pre-pandemic levels. In addition, due to the current volatility in the debt and equity markets, we may be unable to obtain financing for future acquisitions on satisfactory terms, or at all. Continuing disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to debt and equity capital in order to fund business operations, if necessary, or address maturing liabilities on a timely basis as well as our tenants’ ability to fund their business operations, meet their obligations to us, and secure financing for any future or pending transactions. The full extent to which our business and results of operations will ultimately be affected by the COVID-19 pandemic and resulting economic slowdown or recession will largely depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures on our tenants, including the length of time our tenants’ operations at our properties remain closed or restricted, or close again in the future, and our tenants’ financial performance during the closure and following reopening. In addition, new information may continue to emerge concerning the severity of the COVID-19 pandemic, actions required to be undertaken to contain the COVID-19 pandemic or address its future impact, the response of the U.S. and global economies and the short- and long-term impact of the COVID-19 pandemic on our tenants’ operations at our properties, which could further materially and adversely impact our business and results and operations. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our business, financial condition, liquidity, results of operations, prospects and the value of our common stock. The immediate and long-term effects of the COVID-19 pandemic on the gaming industry could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects. The COVID-19 pandemic has had a severe and unprecedented impact on the gaming industry. Measures implemented to prevent its spread, including mandatory closure of non-essential businesses and government-imposed restrictions on social gatherings, have had a significant adverse effect on the gaming industry. As a result of these measures, gaming facilities throughout the United States, including all of our tenants’ facilities at our properties, were temporarily closed, although such measures have in many jurisdictions been lifted or modified, resulting in the resumption of most of our tenants’ operations at certain our properties. During this period, many gaming companies face additional financial uncertainty or are generating substantially reduced revenue and have sought or taken measures intended to maintain liquidity and solvency, including employee furloughs, reduced operating and capital expenditure budgets, and contractual relief or other accommodations with 75 creditors, lenders and other counterparties. There is no guarantee that existing government-imposed restrictions will be lifted in the near term, that additional government-imposed restrictions will not be implemented, or that previous restrictions, where lifted or modified, will not be reinstated. Moreover, the ultimate impact of the COVID-19 pandemic on the gaming industry, the timing and extent of government-imposed restrictions and the reopening and performance of gaming facilities is highly uncertain and cannot be predicted with confidence. Historically, economic indicators such as GDP growth, consumer confidence and employment are correlated with demand for gaming, entertainment and leisure properties, such as casinos and racetracks, and economic recessions or slowdowns have generally led to a decrease in discretionary spending on associated leisure activities. Long-term impacts of the COVID-19 pandemic, such as decreases in discretionary spending or changing consumer preferences brought about by instability in global, national and regional economic activity and financial markets as a result of the COVID-19 pandemic, could have a material adverse effect on leisure and business travel, discretionary spending and other areas of economic behavior that directly impact the gaming industry. Because we are dependent on the gaming industry, the immediate and long-term effects of the COVID-19 pandemic on the gaming industry could be material and adverse to our business, financial condition, liquidity, results of operations and prospects. Risks Related to the June 2020 Forward Sale Agreement Provisions contained in the June 2020 Forward Sale Agreement could result in substantial dilution to our earnings per share or result in substantial cash payment obligations. The forward purchaser under the June 2020 Forward Sale Agreement has the right to accelerate the June 2020 Forward Sale Agreement (with respect to all or, in certain cases, any portion of the transaction under the June 2020 Forward Sale Agreement that the forward purchaser determines is affected by an event described below) and require us to settle on a date specified by the forward purchaser if: •we declare any dividend, issue or distribution on our common stock payable in (x) cash in excess of specified amounts, (y) securities of another company that we acquire or own (directly or indirectly) as a result of a spin-off or similar transaction or (z) any other type of securities (other than our common stock), rights, warrants or other assets for payment at less than the prevailing market price; •certain ownership thresholds applicable to the forward purchaser and its affiliate are exceeded; •an event (x) is announced that, if consummated, would result in a specified extraordinary event (including certain mergers or tender offers, certain events involving our nationalization, or insolvency, or a delisting of our common shares) or (y) occurs that would constitute a delisting or change in law; or •certain other events of default or termination events occur, including, among others, any material misrepresentation made in connection with the June 2020 Forward Sale Agreement or our insolvency (each as more fully described in the June 2020 Forward Sale Agreement). The forward purchaser’s decision to exercise its right to accelerate the settlement of the June 2020 Forward Sale Agreement will be made irrespective of our interests, including our need for capital. In such cases, we could be required to issue and deliver shares of our common stock under the physical settlement provisions of the June 2020 Forward Sale Agreement, which would result in dilution to our earnings per share. We expect to physically settle the June 2020 Forward Sale Agreement and receive proceeds from the sale of those shares of our common stock upon one or more forward settlement dates no later than September 17, 2020. However, the June 2020 Forward Sale Agreement may be settled earlier in whole or in part at our option. Subject to certain conditions, we have the right to elect physical, cash or net share settlement under the June 2020 Forward Sale Agreement at any time and from time to time, in part or in full. The June 2020 Forward Sale Agreement will be physically settled by delivery of shares of our common stock, unless we elect to cash settle or net share settle the June 2020 Forward Sale Agreement. Delivery of shares of our common stock upon physical settlement (or, if we elect net share settlement, upon such settlement to the extent we are obligated to deliver shares of our common stock) will result in dilution to our earnings per share. If we elect cash settlement or net share settlement with respect to all or a portion of the shares of our common stock underlying the June 2020 Forward Sale Agreement, we expect the forward purchaser (or its affiliate) to purchase a number of shares of our common stock in secondary market transactions over an unwind period to: 76 •return shares of our common stock to securities lenders in order to unwind its hedge (after taking into consideration any shares of our common stock to be delivered by us to the forward purchaser, in the case of net share settlement); and •if applicable, in the case of net share settlement, deliver shares of our common stock to us to the extent required in settlement of the June 2020 Forward Sale Agreement. The purchase of shares of our common stock in connection with the forward purchaser or its affiliate unwinding its hedge position could cause the price of shares of our common stock to increase over such time (or reduce the amount of a decrease over such time), thereby increasing the amount of cash we would be required to pay to the forward purchaser (or decreasing the amount of cash that the forward purchaser would be required to pay us) upon a cash settlement of the June 2020 Forward Sale Agreement or increasing the number of shares of common stock we would be required to deliver to the forward purchaser (or decreasing the number of shares of common stock that the forward purchaser would be required to deliver to us) upon net share settlement of the June 2020 Forward Sale Agreement. The forward sale price that we expect to receive upon physical settlement of the June 2020 Forward Sale Agreement will be subject to adjustment on a daily basis based on a floating interest rate factor determined by reference to a specified daily rate less a spread and will be decreased by amounts related to expected dividends on our common stock during the term of the June 2020 Forward Sale Agreement. If the specified daily rate is less than the spread on any day, the interest rate factor will result in a reduction of the forward sale price for that day. As of June 16, 2020, the date of the prospectus supplement governing the offering of our common stock pursuant to the June 2020 Forward Sale Agreement, the specified daily rate was less than the spread, reducing the proceeds that we would receive upon settlement of the June 2020 Forward Sale Agreement. If the prevailing market price for our common stock during the unwind period under the June 2020 Forward Sale Agreement is above the forward sale price, in the case of cash settlement, we would pay the forward purchaser an amount per share in cash equal to the difference or, in the case of net share settlement, we would deliver to the forward purchaser a number of shares of common stock having a value equal to the difference. Thus, we could be responsible for a potentially substantial cash payment in the case of cash settlement. In case of our bankruptcy or insolvency, the June 2020 Forward Sale Agreement would automatically terminate, and we would not receive the expected proceeds from the sale of common stock under such agreement. If we institute, or a regulatory authority with jurisdiction over us institutes, or we consent to, a proceeding seeking a judgment in bankruptcy or insolvency or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or we or a regulatory authority with jurisdiction over us presents a petition for our winding-up or liquidation, or we consent to such a petition, the June 2020 Forward Sale Agreement will automatically terminate. If the June 2020 Forward Sale Agreement so terminates, we would not be obligated to deliver to the forward purchaser any shares of common stock not previously delivered, and the forward purchaser would be discharged from its obligation to pay the forward sale price per share in respect of any shares of common stock not previously settled. Therefore, to the extent that there are any shares of common stock with respect to which the June 2020 Forward Sale Agreement has not been settled at the time of the commencement of any such bankruptcy or insolvency proceedings, we would not receive the forward sale price per share in respect of those shares of common stock. The U.S. federal income tax treatment of the cash that we might receive from cash settlement of June 2020 Forward Sale Agreement is unclear and could jeopardize our ability to meet the REIT qualification requirements. In the event that we elect to settle the June 2020 Forward Sale Agreement for cash and the settlement price is below the forward sale price, we would be entitled to receive a cash payment from the forward purchaser. Under Section 1032 of the Code, generally, no gains and losses are recognized by a corporation in dealing in its own shares, including pursuant to a “securities futures contract,” as defined in the Code by reference to the Exchange Act. Although we believe that any amount received by us in exchange for our shares of common stock would qualify for the exemption under Section 1032 of the Code, because it is not entirely clear whether the June 2020 Forward Sale Agreement qualifies as a “securities futures contract,” the U.S. federal income tax treatment of any cash settlement payment we receive is uncertain. In the event that we recognize a significant gain from the cash settlement of the June 2020 Forward Sale Agreement, we might not be able to satisfy the gross income requirements applicable to REITs under the Code. If we were to fail to satisfy one or both of the gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we were entitled to relief under certain provisions of the Code. If these relief provisions were inapplicable, we would not qualify to be taxed as a REIT. Even if these relief provisions were to apply, a tax based on the amount of the relevant REIT’s non-qualifying income would be imposed. 77 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. (b) Use of Proceeds from Registered Securities Not applicable. (c) Issuer Purchases of Equity Securities During the three months ended Item 3.Defaults Upon Senior Securities None. Item 4.Mine Safety Disclosures Not applicable. Item 5.Other Information None. 78 Item 6.Exhibits
* Furnished herewith. 79 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||