Vici Properties is entering a “challenging market environment with few catalysts” for merger-and-acquisition activity. That’s the verdict of Deutsche Bank analyst Carlo Santarelli in a research note published Thursday.

The bulk of Santarelli’s report deals with Vici’s anchor tenant, Caesars Entertainment. The casino giant is approaching the eighth year of its leases with Vici. Year Seven expires on October 24, when certain escalators come into play.

The variable-rent components of the Caesars lease comprise 30 percent of its regional leases and 20 percent of those on the Las Vegas Strip. “If we were using current 1Q24 annualized rent, which is $469 mm for the Las Vegas lease and $728 mm for the regional lease, the portions impacted for lease year 8 amount to ~$94 mm for the Las Vegas lease and $219 mm for the regional lease,” Santarelli explained.

Vici calculates the variable rent by measuring net revenue in the fifth, sixth, and seventh years of the lease against that in the first three. The rent is increased or decreased four percent, depending on whether Caesars’s revenues have improved or lessened in the past three years.

“Given CZR does not report property-level net revenue, thereby making it difficult to empirically calculate, from a high level, we believe the net effect of this reset will be modestly favorable for VICI, though largely unremarkable,” opined Santarelli. He felt the rent increase would be on the order of $5 million, given that gains in Las Vegas would be offset by regional reverses.

Fortunately for Caesars, the portion of the rent subject to the variability clause is largely shielded from escalators for the next three years. Santarelli calculated that, if one ignores the consumer price index (CPI) as a basis for rent hikes, Caesars’s annual rent will grow 1.4 percent regionally and 1.6 percent in Las Vegas.

He added, “When compared to the 1Q24 annualized rent across both leases, we estimate 2025 annual rent from CZR will grow by ~1.9%, thanks in part to the variable reset, with 2026/2027 growth approximating 1.5%. We note that these growth assumptions could prove conservative, should CPI outpace the 2.0% base rent escalator for future periods.”

Next year, Vici faces refinancing of $2.05 billion in unsecured notes with a four percent interest rate. Santarelli believed they would account for $43 million more in interest per year.

On May 9, Vici disclosed a $250 million loan to non-gaming Great Wolf Lodge, of which $80 million has already been repaid. As for the remaining $170 million, Deutsche Bank is of the opinion that interest on the loan was just north of 10 percent. Great Wolf has two years to repay it, with three one-year extensions possible. Santarelli projected $18 more in interest income from Great Wolf, an amount that would have been $11 million higher had it not been an all-cash transaction.

Santarelli stuck with a “Hold” rating on Vici stock and a $31 price target. Vici was trading at $28.20 per share at press time.

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