UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 18, 2022
VICI Properties Inc.
(Exact Name of Registrant as Specified in its Charter)
| Maryland | 001-38372 | 81-4177147 | ||
| (State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
535 Madison Avenue, 20th Floor
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (646) 949-4631
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading |
Name of each exchange | ||
| Common stock, $0.01 par value | VICI | New York Stock Exchange |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
| Item 2.02. | Results of Operations and Financial Condition. |
Rent Collections Update
As of April 18, 2022, all of the tenants of VICI Properties Inc., a Maryland corporation (the “Company”), have fulfilled their rent obligations in full for the months of January, February, March and April 2022.
The Company’s Balance Sheet Information as of March 31, 2022
The following table sets forth management’s preliminary estimates of certain balance sheet information of the Company, as of March 31, 2022:
| ($ in thousands) |
As of March 31, 2022 (Preliminary and Unaudited) |
|||
| Total assets |
$ | 21,741,321 | ||
| Total liabilities |
$ | 6,257,535 | ||
| Total stockholders’ equity |
$ | 15,483,786 | ||
The Company’s management has prepared the above preliminary estimates of certain balance sheet information as of March 31, 2022 in good faith based upon the most recent information available to management from the Company’s internal reporting procedures as of the date of this Current Report. The estimated amounts set forth herein are preliminary, unaudited and subject to further completion, reflect the Company’s current good faith estimates, are subject to additional financial closing procedures and may be revised as a result of management’s further review of the Company’s financial condition. The Company and its auditors have not completed their normal quarterly review for the three months ended March 31, 2022, and there can be no assurance that the Company’s balance sheet information will not differ from these estimates. Any such changes could be material. During the course of the preparation of the Company’s consolidated financial statements and related notes as of and for the three months ended March 31, 2022, the Company may identify items that would require it to make material adjustments to the preliminary information presented above.
The Company expects to publicly report its final consolidated financial statements and related notes as of and for the three months ended March 31, 2022 in May 2022. Actual reported balance sheet information may differ materially from the estimates above. Accordingly, investors should not place undue reliance on these preliminary estimates. These estimates should not be viewed as a substitute for full interim financial statements prepared in accordance with GAAP.
The information included in this Item 2.02 is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof and regardless of any general incorporation language in such filings, except to the extent expressly set forth by specific reference in such a filing.
| Item 8.01. | Other Events. |
Expected Closing Date of MGP Transactions
As previously disclosed, on August 4, 2021, the Company, MGM Growth Properties LLC, a Delaware limited liability company (“MGP”), MGM Growth Properties Operating Partnership LP, a Delaware limited partnership (“MGP OP”), VICI Properties L.P., a Delaware limited partnership (“VICI LP”), Venus Sub LLC, a Delaware limited liability company and a wholly owned subsidiary of VICI LP (“REIT Merger Sub”), VICI Properties OP LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of the Company (“VICI OP”), and MGM Resorts International, a Delaware corporation (“MGM”), entered into a definitive Master Transaction Agreement (the “Master Transaction Agreement”). Upon the terms and subject to the conditions set forth in the Master Transaction Agreement, prior to or on the closing date under the Master Transaction Agreement, the Company will contribute its interest in VICI LP to VICI OP, which will serve as a new operating company for the Company. Following the contribution transaction, MGP will merge with and into REIT Merger Sub, with REIT Merger Sub surviving the merger (the “REIT Merger”). Immediately following consummation of the REIT Merger, REIT Merger Sub will distribute the interests of the general partner of MGP OP to VICI LP and, immediately following such distribution, REIT Merger Sub will merge with and into MGP OP, with MGP OP surviving the merger (together with the REIT Merger, the “Mergers”).
As of April 15, 2022, all conditions to closing of the Company’s pending acquisition of MGP and the other transactions pursuant to the Master Transaction Agreement have been satisfied or waived (other than those that by their nature or terms are to be satisfied at the closing or, with respect to the condition related to the performance of covenants, if the failure of such condition is as a result of an event, circumstance, effect or development occurring on or after April 15, 2022), and the Company currently expects the MGP Transactions to close on or about April 29, 2022, or otherwise within the marketing period pursuant to the Master Transaction Agreement and no later than May 31, 2022.
Financial Information of MGP and MGP OP
The Company is filing this Current Report on Form 8-K, among other things, to provide certain financial information with respect to the proposed Mergers. Specifically, this Current Report on Form 8-K provides: (1) the audited consolidated financial statements of MGP and MGP OP as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019, attached hereto as Exhibit 99.1 and incorporated herein by reference, and (2) the Company’s unaudited pro forma condensed combined financial statements as of and for the year ended December 31, 2021, relating to the proposed Mergers, the other transactions contemplated by the Master Transaction Agreement and certain other pending or recently closed transactions, attached hereto as Exhibit 99.2 and incorporated herein by reference. Such unaudited pro forma condensed combined financial statements have been prepared on the basis of certain assumptions and estimates and are subject to other uncertainties and do not purport to reflect what the actual results of operations or financial condition of the combined company would have been had the Mergers been consummated on the dates assumed for purposes of such pro forma financial statements or to be indicative of the financial condition or results of operations of the combined company as of or for any future date or period. For further information, see Exhibit 99.2. The information in Exhibit 99.1 was provided by MGP and MGP OP.
Financial Information of VICI LP
VICI LP is disclosing certain financial and related information. VICI LP is a wholly owned subsidiary of the Company. Specifically, this Current Report on Form 8-K provides: (1) the audited consolidated financial statements of VICI LP as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019, attached hereto as Exhibit 99.3 and incorporated herein by reference, and (2) management’s discussion and analysis of financial condition and results of operations of VICI LP as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019, attached hereto as Exhibit 99.4 and incorporated herein by reference.
Forward Looking Statements
This Current Report on Form 8-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act with respect to the proposed transaction described herein,
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including statements regarding the anticipated benefits of the transaction and the anticipated closing date of the transaction. These forward-looking statements generally are identified by the words “anticipates,” “assumes,” “believes,” “estimates,” “expects,” “guidance,” “intends,” “plans,” “projects,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would” and similar expressions. Forward-looking statements are predictions, projections and other statements about future events that are based on our current plans, expectations and assumptions and, as a result, are subject to risks and uncertainties.
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 Company’s, MGP’s and each company’s respective tenants’ financial condition, results of operations, cash flows and performance. The extent to which the COVID-19 pandemic continues to adversely affect each company’s tenants, and ultimately impacts each company’s business, financial condition, results of operations, cash flows and performance depends on future developments which cannot be predicted with confidence. Many additional factors could cause actual future events and results to differ materially from the forward-looking statements, including but not limited to: (i) the possibility that conditions to the closing of the proposed transaction are not satisfied or waived at all or on the anticipated timeline, (ii) failure to realize the anticipated benefits of the proposed transaction, including as a result of delay in completing the proposed transaction, (iii) the risk that MGP’s business will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected, (iv) unexpected costs or liabilities relating to the proposed transaction, (v) litigation relating to the proposed transaction that has and could in the future be instituted against the Company or MGP or their respective directors or officers and the resulting expense or delay, (vi) the risk that disruptions caused by or relating to the proposed transaction will harm the Company’s or MGP’s business, including current plans and operations, (vii) the ability of the Company or MGP to retain and hire key personnel, (viii) potential adverse reactions by tenants or other business partners or changes to business relationships, including joint ventures, resulting from the announcement or completion of the proposed transaction, (ix) risks relating to the market value of the Company’s common stock to be issued in the proposed transaction, (x) risks associated with third-party contracts containing consent and/or other provisions that may be triggered by the proposed transaction, (xi) risks related to debt securities or other long-term debt incurred in connection with the closing of the proposed transaction, including increases in interest rates from expectations, (xii) the impact of public health crises, such as pandemics (including the COVID-19 pandemic) and epidemics and any related company or government policies and actions intended to protect the health and safety of individuals or government policies or actions intended to maintain the functioning of national or global economies and markets, (xiii) general economic and market developments and 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, (xiv) restrictions during the pendency of the proposed transaction or thereafter that may impact the Company’s or MGP’s ability to pursue certain business opportunities or strategic transactions, (xv) either company’s ability to maintain its status as a real estate investment trust for U.S. federal income tax purposes, and (xvi) the occurrence of any event, change or other circumstances that could give rise to the termination of the Master Transaction Agreement relating to the proposed transaction. The foregoing list of factors is not exhaustive. 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. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the businesses of the Company described in the “Risk Factors” section of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents filed from time to time with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. Investors are cautioned to interpret many of the risks identified in the “Risk Factors” section of these filings as being heightened as a result of
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the ongoing and numerous adverse impacts of the COVID-19 pandemic. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and the Company assumes no obligation and does not intend to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. The Company gives no assurance that it will achieve its expectations.
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial Statements of Businesses to be Acquired |
The audited consolidated financial statements of MGP and MGP OP as of December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 are filed herewith as Exhibit 99.1 and incorporated in this Item 9.01(a) by reference.
| (b) | Pro Forma Financial Information |
The unaudited pro forma condensed combined financial statements of the Company as of and for the year ended December 31, 2021, giving effect to the Mergers, the other transactions contemplated by the Master Transaction Agreement and certain other pending or recently closed transactions, are filed herewith as Exhibit 99.2 and incorporated in this Item 9.01(b) by reference.
| (d) | Exhibits |
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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 hereunto duly authorized.
| VICI PROPERTIES INC. | ||||||||
| Date: April 18, 2022 | By: | /s/ Samantha S. Gallagher |
||||||
| Samantha S. Gallagher | ||||||||
| Executive Vice President, General Counsel and Secretary | ||||||||
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-261180 on Form S-3 and Registration Statement No. 333-220949 on Form S-8 of VICI Properties Inc. of our reports dated February 16, 2022, relating to the financial statements of MGM Growth Properties LLC and the effectiveness of MGM Growth Properties LLC’s internal control over financial reporting appearing in this Current Report on Form 8-K dated April 18, 2022.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
April 18, 2022
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-261180 on Form S-3 and Registration Statement No. 333-220949 on Form S-8 of VICI Properties Inc. of our report dated February 16, 2022, relating to the financial statements of MGM Growth Properties Operating Partnership LP appearing in this Current Report on Form 8-K dated April 18, 2022.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
April 18, 2022
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-261180 on Form S-3 and Registration Statement No. 333-220949 on Form S-8 of our report dated April 18, 2022, relating to the financial statements of VICI Properties L.P. appearing in this Current Report on Form 8-K dated April 18, 2022.
/s/ DELOITTE & TOUCHE LLP
New York, New York
April 18, 2022
Exhibit 99.1
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| Financial Statements. |
||||
| Reports of Independent Registered Public Accounting Firm on MGM Growth Properties LLC (PCAOB ID: 34) |
2 | |||
| 5 | ||||
| MGM Growth Properties LLC: |
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| 7 | ||||
| Years Ended December 31, 2021, 2020, and 2019 |
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| 8 | ||||
| 9 | ||||
| 10 | ||||
| 11 | ||||
| MGM Growth Properties Operating Partnership LP: |
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| 12 | ||||
| Years Ended December 31, 2021, 2020, and 2019 |
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| 13 | ||||
| 14 | ||||
| 15 | ||||
| 16 | ||||
| 17 | ||||
| Financial Statement Schedule. |
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| MGM Growth Properties LLC and MGM Growth Properties Operating Partnership LP: |
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| Schedule III - Real Estate and Accumulated Depreciation - December 31, 2021 |
38 | |||
The financial information in the financial statement schedule should be read in conjunction with the consolidated financial statements. We have omitted schedules other than the one listed above because they are not required or are not applicable, or the required information is shown in the financial statements or notes to the financial statements.
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of MGM Growth Properties LLC
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of MGM Growth Properties LLC and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2021, of the Company and our report dated February 16, 2022 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting for the Company. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 16, 2022
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of MGM Growth Properties LLC
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MGM Growth Properties LLC and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, cash flows, and shareholders’ equity for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 16, 2022 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
“MGM Springfield Transaction - Lease Classification”- Refer to Notes 1, 3 and 6 of the financial statements.
Critical Audit Matter Description
During the year ended December 31, 2021, the Company acquired the real estate assets of MGM Springfield from MGM for $400 million of cash consideration and amended the existing MGM-MGP Master Lease to include MGM Springfield. As a result of this amendment, the Company was required to perform a lease classification analysis under ASC 842 as a lessor. The Company assessed the lease classification, which included assessing the residual value used in the determination of the implicit rate and concluded that the lease will be accounted for as an operating lease.
We identified the assessment of the lease classification of the MGM-MGP Master Lease amendment under ASC 842 as a critical audit matter because the assessment required management to make significant accounting estimates and assumptions related to the residual value of the assets at the end of the lease term. Specifically, determination of the residual value of the leased assets used in the determination of the implicit rate requires significant estimates as to whether the tenant is reasonably certain to exercise each renewal option and estimates of the value of the assets at the end of the lease term. Given these significant estimates and judgments, performing audit procedures to evaluate the reasonableness of management’s determination of the implicit rate and management’s assumption that it is reasonably certain to exercise some, but not all, of the renewal options in the MGM-MGP Master Lease, required a high degree of auditor judgment including the need to involve our fair value specialists.
3
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of the implicit rate and the assumption that the tenant is reasonably certain to exercise some, but not all, of the renewal options included the following, among others:
| • | We tested the effectiveness of the control over management’s assessment of the proper lease classification in connection with the MGM Springfield Transaction, including controls related to management’s determination of the implicit rate and management’s assumption that tenant is reasonably certain to exercise some, but not all, of the renewal options. |
| • | We evaluated the classification of the MGM-MGP Master Lease amendment under ASC 842, including recalculating the implicit rate of the lease. |
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the implicit rate, including the determination of the residual value. |
| • | We evaluated the significant judgments made by management in concluding that it is reasonable that the tenant is reasonably certain to exercise some, but not all of the lease renewal options such that the lease term for MGM Springfield is consistent with the remainder of the MGM-MGP Master Lease, including obtaining lease agreements to examine material lease provisions considered by management in their analysis. |
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 16, 2022
We have served as the Company’s auditor since 2014.
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of MGM Growth Properties Operating Partnership LP
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MGM Growth Properties Operating Partnership LP and subsidiaries (the “Operating Partnership”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, cash flows, and partners’ capital, for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed at Item 15(a)(2) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Operating Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Operating Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
“MGM Springfield Transaction - Lease Classification” - Refer to Notes 1, 3 and 6 of the financial statements.
Critical Audit Matter Description
During the year ended December 31, 2021, the Company acquired the real estate assets of MGM Springfield from MGM for $400 million of cash consideration and amended the existing MGM-MGP Master Lease to include MGM Springfield. As a result of this amendment, the Company was required to perform a lease classification analysis under ASC 842 as a lessor. The Company assessed the lease classification, which included assessing the residual value used in the determination of the implicit rate and concluded that the lease will be accounted for as an operating lease.
We identified the assessment of the lease classification of the MGM-MGP Master Lease amendment under ASC 842 as a critical audit matter because the assessment required management to make significant accounting estimates and assumptions related to the residual value of the assets at the end of the lease term. Specifically, determination of the residual value of the leased assets used in the determination of the implicit rate requires significant estimates as to whether the tenant is reasonably certain to exercise each renewal option and estimates of the value of the assets at the end of the lease term. Given these significant estimates and judgments, performing audit procedures to evaluate the reasonableness of management’s determination of the implicit rate and management’s assumption that it is reasonably certain to exercise some, but not all, of the renewal options in the MGM-MGP Master Lease, required a high degree of auditor judgment including the need to involve our fair value specialists.
5
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of the implicit rate and the assumption that the tenant is reasonably certain to exercise some, but not all, of the renewal options included the following, among others:
| • | We tested the effectiveness of the control over management’s assessment of the proper lease classification in connection with the MGM Springfield Transaction, including controls related to management’s determination of the implicit rate and management’s assumption that tenant is reasonably certain to exercise some, but not all, of the renewal options. |
| • | We evaluated the classification of the MGM-MGP Master Lease amendment under ASC 842, including recalculating the implicit rate of the lease. |
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the implicit rate, including the determination of the residual value. |
| • | We evaluated the significant judgments made by management in concluding that it is reasonable that the tenant is reasonably certain to exercise some, but not all of the lease renewal options such that the lease term for MGM Springfield is consistent with the remainder of the MGM-MGP Master Lease, including obtaining lease agreements to examine material lease provisions considered by management in their analysis. |
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
February 16, 2022
We have served as the Operating Partnership’s auditor since 2015.
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CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Revenues |
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| Rental revenue |
$ | 757,941 | $ | 768,442 | $ | 856,421 | ||||||
| Ground lease and other |
24,122 | 24,155 | 24,657 | |||||||||
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| Total Revenues |
782,063 | 792,597 | 881,078 | |||||||||
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| Expenses |
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| Depreciation |
235,485 | 236,853 | 294,705 | |||||||||
| Property transactions, net |
1,710 | 195,182 | 10,844 | |||||||||
| Ground lease expense |
23,648 | 23,681 | 23,681 | |||||||||
| Acquisition-related expenses |
7,500 | 980 | 10,165 | |||||||||
| General and administrative |
18,055 | 16,076 | 16,516 | |||||||||
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|||||||
| Total Expenses |
286,398 | 472,772 | 355,911 | |||||||||
|
|
|
|
|
|
|
|||||||
| Other income (expense) |
||||||||||||
| Income from unconsolidated affiliate |
100,824 | 89,056 | — | |||||||||
| Interest income |
593 | 4,345 | 3,219 | |||||||||
| Interest expense |
(265,942 | ) | (228,786 | ) | (249,944 | ) | ||||||
| Gain (loss) on unhedged interest rate swaps, net |
39,071 | 4,664 | (3,880 | ) | ||||||||
| Other |
(1,643 | ) | (18,999 | ) | (7,615 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (127,097 | ) | (149,720 | ) | (258,220 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations before income taxes |
368,568 | 170,105 | 266,947 | |||||||||
| Provision for income taxes |
(9,328 | ) | (9,734 | ) | (7,598 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations, net of tax |
359,240 | 160,371 | 259,349 | |||||||||
| Income from discontinued operations, net of tax |
— | — | 16,216 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
359,240 | 160,371 | 275,565 | |||||||||
| Less: Net income attributable to noncontrolling interest |
(153,737 | ) | (84,242 | ) | (185,305 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net income attributable to Class A shareholders |
$ | 205,503 | $ | 76,129 | $ | 90,260 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted average Class A shares outstanding: |
||||||||||||
| Basic |
151,000 | 129,491 | 93,047 | |||||||||
| Diluted |
151,194 | 129,653 | 93,299 | |||||||||
| Earnings per Class A share |
||||||||||||
| Income from continuing operations per Class A share (basic) |
$ | 1.36 | $ | 0.59 | $ | 0.92 | ||||||
| Income from discontinued operations per Class A share (basic) |
— | — | 0.05 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings per Class A share (basic) |
$ | 1.36 | $ | 0.59 | $ | 0.97 | ||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations per Class A share (diluted) |
$ | 1.36 | $ | 0.59 | $ | 0.92 | ||||||
| Income from discontinued operations per Class A share (diluted) |
— | — | 0.05 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings per Class A share (diluted) |
$ | 1.36 | $ | 0.59 | $ | 0.97 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Net income |
$ | 359,240 | $ | 160,371 | $ | 275,565 | ||||||
| Unrealized gain (loss) on cash flow hedges |
38,578 | (89,624 | ) | (35,198 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income |
397,818 | 70,747 | 240,367 | |||||||||
| Less: Comprehensive income attributable to noncontrolling interests |
(171,250 | ) | (29,455 | ) | (159,639 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income attributable to Class A shareholders |
$ | 226,568 | $ | 41,292 | $ | 80,728 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
10
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except per share amounts)
| Class A Shares | ||||||||||||||||||||||||||||||||
| Shares | Par Value |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income (Loss) |
Total Class A Shareholders’ Equity |
Noncontrolling Interest |
Total Shareholders’ Equity |
|||||||||||||||||||||||||
| Balance at December 31, 2018 |
70,911 | $ | — | $ | 1,712,671 | $ | (150,908 | ) | $ | 4,208 | $ | 1,565,971 | $ | 4,279,535 | $ | 5,845,506 | ||||||||||||||||
| Net income |
— | — | — | 90,260 | — | 90,260 | 185,305 | 275,565 | ||||||||||||||||||||||||
| Issuance of Class A shares |
42,819 | — | 1,051,094 | — | (1,512 | ) | 1,049,582 | 200,424 | 1,250,006 | |||||||||||||||||||||||
| Empire City Transaction |
— | — | 23,940 | — | (195 | ) | 23,745 | 355,305 | 379,050 | |||||||||||||||||||||||
| Park MGM Transaction |
— | — | 2,512 | — | (16 | ) | 2,496 | 29,379 | 31,875 | |||||||||||||||||||||||
| Northfield OpCo Transaction |
— | — | (27,441 | ) | — | 2 | (27,439 | ) | (271,518 | ) | (298,957 | ) | ||||||||||||||||||||
| Cash flow hedges |
— | — | — | — | (9,532 | ) | (9,532 | ) | (25,666 | ) | (35,198 | ) | ||||||||||||||||||||
| Share-based compensation |
— | — | 728 | — | — | 728 | 1,549 | 2,277 | ||||||||||||||||||||||||
| Deemed contribution - tax sharing agreement |
— | — | — | — | — | — | 7,008 | 7,008 | ||||||||||||||||||||||||
| Dividends and distributions declared ($1.8725 per share) |
— | — | — | (183,733 | ) | — | (183,733 | ) | (378,296 | ) | (562,029 | ) | ||||||||||||||||||||
| Other |
77 | — | 2,821 | — | — | 2,821 | 88 | 2,909 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2019 |
113,807 | — | 2,766,325 | (244,381 | ) | (7,045 | ) | 2,514,899 | 4,383,113 | 6,898,012 | ||||||||||||||||||||||
| Net income* |
— | — | — | 76,129 | — | 76,129 | 72,163 | 148,292 | ||||||||||||||||||||||||
| Issuance of Class A shares* |
17,524 | — | 443,363 | — | (646 | ) | 442,717 | 63,481 | 506,198 | |||||||||||||||||||||||
| MGP BREIT Venture Transaction* |
— | — | 8,228 | — | 59 | 8,287 | 55,617 | 63,904 | ||||||||||||||||||||||||
| Redemption of temporary equity* |
— | — | (106,151 | ) | — | (8,773 | ) | (114,924 | ) | 107,392 | (7,532 | ) | ||||||||||||||||||||
| Reclassification and remeasurements of temporary equity* |
— | — | — | — | — | — | (1,405,058 | ) | (1,405,058 | ) | ||||||||||||||||||||||
| Cash flow hedges* |
— | — | — | — | (34,837 | ) | (34,837 | ) | (41,792 | ) | (76,629 | ) | ||||||||||||||||||||
| Share-based compensation* |
— | — | 1,200 | — | — | 1,200 | 1,362 | 2,562 | ||||||||||||||||||||||||
| Deemed contribution - tax sharing agreement* |
— | — | — | — | — | — | 5,125 | 5,125 | ||||||||||||||||||||||||
| Dividends and distributions declared ($1.9375 per share)* |
— | — | — | (254,645 | ) | — | (254,645 | ) | (289,321 | ) | (543,966 | ) | ||||||||||||||||||||
| Other* |
129 | — | 1,366 | — | 45 | 1,411 | (1,577 | ) | (166 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2020 |
131,460 | — | 3,114,331 | (422,897 | ) | (51,197 | ) | 2,640,237 | 2,950,505 | 5,590,742 | ||||||||||||||||||||||
| Net income |
— | — | — | 205,503 | — | 205,503 | 153,737 | 359,240 | ||||||||||||||||||||||||
| Issuance of Class A shares |
25,102 | — | 660,533 | — | (4,172 | ) | 656,361 | 136,491 | 792,852 | |||||||||||||||||||||||
| Redemption of Operating Partnership units |
— | — | (220,627 | ) | — | (6,860 | ) | (227,487 | ) | (953,789 | ) | (1,181,276 | ) | |||||||||||||||||||
| MGM Springfield Transaction |
— | — | 172,749 | — | — | 172,749 | 122,811 | 295,560 | ||||||||||||||||||||||||
| Cash flow hedges |
— | — | — | — | 21,065 | 21,065 | 17,513 | 38,578 | ||||||||||||||||||||||||
| Share-based compensation |
— | — | 2,752 | — | — | 2,752 | 2,075 | 4,827 | ||||||||||||||||||||||||
| Deemed contribution - tax sharing agreement |
— | — | — | — | — | — | 1,134 | 1,134 | ||||||||||||||||||||||||
| Dividends and distributions declared ($2.0550 per share) |
— | — | — | (320,321 | ) | — | (320,321 | ) | (228,873 | ) | (549,194 | ) | ||||||||||||||||||||
| Other |
188 | — | 5,989 | — | (25 | ) | 5,964 | 1,418 | 7,382 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2021 |
156,750 | $ | — | $ | 3,735,727 | $ | (537,715 | ) | $ | (41,189 | ) | $ | 3,156,823 | $ | 2,203,022 | $ | 5,359,845 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (*) | Excludes amounts attributable to redeemable noncontrolling interest. See Note 2. |
The accompanying notes are an integral part of these consolidated financial statements.
11
MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS |
| |||||||
| Real estate investments, net |
$ | 8,780,521 | $ | 8,310,737 | ||||
| Lease incentive asset |
487,141 | 507,161 | ||||||
| Investment in unconsolidated affiliate |
816,756 | 810,066 | ||||||
| Cash and cash equivalents |
8,056 | 626,385 | ||||||
| Prepaid expenses and other assets |
22,237 | 25,525 | ||||||
| Above market lease, asset |
38,293 | 39,867 | ||||||
| Operating lease right-of-use assets |
278,102 | 280,565 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 10,431,106 | $ | 10,600,306 | ||||
|
|
|
|
|
|||||
| LIABILITIES AND PARTNERS’ CAPITAL |
| |||||||
| Liabilities |
||||||||
| Debt, net |
$ | 4,216,877 | $ | 4,168,959 | ||||
| Due to MGM Resorts International and affiliates |
172 | 316 | ||||||
| Accounts payable, accrued expenses and other liabilities |
57,543 | 124,109 | ||||||
| Accrued interest |
55,685 | 48,505 | ||||||
| Distribution payable |
140,765 | 136,484 | ||||||
| Deferred revenue |
221,542 | 156,760 | ||||||
| Deferred income taxes, net |
41,217 | 33,298 | ||||||
| Operating lease liabilities |
337,460 | 341,133 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
5,071,261 | 5,009,564 | ||||||
| Commitments and contingencies (Note 13) |
||||||||
| Partners’ capital |
||||||||
| General partner |
— | — | ||||||
| Limited partners: 268,123,082 and 279,966,531 Operating Partnership units issued and outstanding as of December 31, 2021 and December 31, 2020, respectively. |
5,359,845 | 5,590,742 | ||||||
|
|
|
|
|
|||||
| Total partners’ capital |
5,359,845 | 5,590,742 | ||||||
|
|
|
|
|
|||||
| Total liabilities and partners’ capital |
$ | 10,431,106 | $ | 10,600,306 | ||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of these consolidated financial statements.
12
MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Revenues |
||||||||||||
| Rental revenue |
$ | 757,941 | $ | 768,442 | $ | 856,421 | ||||||
| Ground lease and other |
24,122 | 24,155 | 24,657 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Revenues |
782,063 | 792,597 | 881,078 | |||||||||
|
|
|
|
|
|
|
|||||||
| Expenses |
||||||||||||
| Depreciation |
235,485 | 236,853 | 294,705 | |||||||||
| Property transactions, net |
1,710 | 195,182 | 10,844 | |||||||||
| Ground lease expense |
23,648 | 23,681 | 23,681 | |||||||||
| Acquisition-related expenses |
7,500 | 980 | 10,165 | |||||||||
| General and administrative |
18,055 | 16,076 | 16,516 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total Expenses |
286,398 | 472,772 | 355,911 | |||||||||
|
|
|
|
|
|
|
|||||||
| Other income (expense) |
||||||||||||
| Income from unconsolidated affiliate |
100,824 | 89,056 | — | |||||||||
| Interest income |
593 | 4,345 | 3,219 | |||||||||
| Interest expense |
(265,942 | ) | (228,786 | ) | (249,944 | ) | ||||||
| Gain (loss) on unhedged interest rate swaps, net |
39,071 | 4,664 | (3,880 | ) | ||||||||
| Other |
(1,643 | ) | (18,999 | ) | (7,615 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| (127,097 | ) | (149,720 | ) | (258,220 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations before income taxes |
368,568 | 170,105 | 266,947 | |||||||||
| Provision for income taxes |
(9,328 | ) | (9,734 | ) | (7,598 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations, net of tax |
359,240 | 160,371 | 259,349 | |||||||||
| Income from discontinued operations, net of tax |
— | — | 16,216 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income |
$ | 359,240 | $ | 160,371 | $ | 275,565 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted average units outstanding: |
||||||||||||
| Basic |
269,674 | 310,688 | 293,885 | |||||||||
| Diluted |
269,868 | 310,850 | 294,137 | |||||||||
| Earnings per unit |
||||||||||||
| Income from continuing operations per unit (basic) |
$ | 1.33 | $ | 0.52 | $ | 0.88 | ||||||
| Income from discontinued operations per unit (basic) |
— | — | 0.06 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings per unit (basic) |
$ | 1.33 | $ | 0.52 | $ | 0.94 | ||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations per unit (diluted) |
$ | 1.33 | $ | 0.52 | $ | 0.88 | ||||||
| Income from discontinued operations per unit (diluted) |
— | — | 0.06 | |||||||||
|
|
|
|
|
|
|
|||||||
| Earnings per unit (diluted) |
$ | 1.33 | $ | 0.52 | $ | 0.94 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
13
MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Net income |
$ | 359,240 | $ | 160,371 | $ | 275,565 | ||||||
| Unrealized gain (loss) on cash flow hedges |
38,578 | (89,624 | ) | (35,198 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income |
$ | 397,818 | $ | 70,747 | $ | 240,367 | ||||||
|
|
|
|
|
|
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
14
MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
15
MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except per unit amounts)
| General Partner | Limited Partners | Total Partners’ Capital |
||||||||||
| Balance at December 31, 2018 |
$ | — | $ | 5,845,506 | $ | 5,845,506 | ||||||
| Net income |
— | 275,565 | 275,565 | |||||||||
| Proceeds from issuance of Class A shares by MGP |
— | 1,250,006 | 1,250,006 | |||||||||
| Empire City Transaction |
— | 379,050 | 379,050 | |||||||||
| Park MGM Transaction |
— | 31,875 | 31,875 | |||||||||
| Northfield OpCo Transaction |
— | (298,957 | ) | (298,957 | ) | |||||||
| Cash flow hedges |
— | (35,198 | ) | (35,198 | ) | |||||||
| Share-based compensation |
— | 2,277 | 2,277 | |||||||||
| Deemed contribution - tax sharing agreement |
— | 7,008 | 7,008 | |||||||||
| Distributions declared ($1.8725 per unit) |
— | (562,029 | ) | (562,029 | ) | |||||||
| Other |
— | 2,909 | 2,909 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2019 |
— | 6,898,012 | 6,898,012 | |||||||||
| Net income* |
— | 148,292 | 148,292 | |||||||||
| Proceeds from issuance of Class A shares by MGP* |
— | 506,198 | 506,198 | |||||||||
| MGP BREIT Venture Transaction* |
— | 63,904 | 63,904 | |||||||||
| Redemption of temporary equity* |
— | (7,532 | ) | (7,532 | ) | |||||||
| Reclassification and remeasurements of temporary equity* |
— | (1,405,058 | ) | (1,405,058 | ) | |||||||
| Cash flow hedges* |
— | (76,629 | ) | (76,629 | ) | |||||||
| Share-based compensation* |
— | 2,562 | 2,562 | |||||||||
| Deemed contribution - tax sharing agreement* |
— | 5,125 | 5,125 | |||||||||
| Distributions declared ($1.9375 per unit)* |
— | (543,966 | ) | (543,966 | ) | |||||||
| Other* |
— | (166 | ) | (166 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2020 |
— | 5,590,742 | 5,590,742 | |||||||||
| Net income |
— | 359,240 | 359,240 | |||||||||
| Proceeds from issuance of Class A shares by MGP |
— | 792,852 | 792,852 | |||||||||
| Redemption of Operating Partnership units |
— | (1,181,276 | ) | (1,181,276 | ) | |||||||
| MGM Springfield Transaction |
— | 295,560 | 295,560 | |||||||||
| Cash flow hedges |
— | 38,578 | 38,578 | |||||||||
| Share-based compensation |
— | 4,827 | 4,827 | |||||||||
| Deemed contribution - tax sharing agreement |
— | 1,134 | 1,134 | |||||||||
| Distributions declared ($2.0550 per unit) |
— | (549,194 | ) | (549,194 | ) | |||||||
| Other |
— | 7,382 | 7,382 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2021 |
$ | — | $ | 5,359,845 | $ | 5,359,845 | ||||||
|
|
|
|
|
|
|
|||||||
| (*) | Excludes amounts attributable to redeemable noncontrolling interest. See Note 2. |
The accompanying notes are an integral part of these consolidated financial statements.
16
MGM GROWTH PROPERTIES LLC AND MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS
Organization. MGM Growth Properties LLC (“MGP” or the “Company”) is a limited liability company that was organized in Delaware in October 2015. MGP conducts its operations through MGM Growth Properties Operating Partnership LP (the “Operating Partnership”), a Delaware limited partnership that was formed in January 2016 and became a subsidiary of MGP in April 2016. The Company elected to be taxed as a real estate investment trust (“REIT”) commencing with its taxable year ended December 31, 2016.
MGP is organized in an umbrella partnership REIT (commonly referred to as an “UPREIT”) structure in which substantially all of its assets are owned by and substantially all of its business is conducted through the Operating Partnership, which is owned by MGP, MGM Resorts International (“MGM”), and subsidiaries of MGM, and whose sole general partner is one of MGP’s subsidiaries. MGP has two classes of authorized and outstanding voting common shares (collectively, the “shares”): Class A shares and a single Class B share. The Class B share is a non-economic interest in MGP which does not provide its holder any rights to profits or losses or any rights to receive distributions from the operations of MGP or upon liquidation or winding up of MGP but which represents a majority of the voting power of MGP’s shares. MGM holds a controlling interest in MGP through its ownership of MGP’s Class B share, but does not hold any of MGP’s Class A shares. The Class B share structure was put in place to align MGM’s voting rights in MGP with its economic interest in the Operating Partnership. MGM will no longer be entitled to the voting rights provided by the Class B share if MGM and its controlled affiliates’ (excluding MGP and its subsidiaries) aggregate beneficial ownership of the combined economic interests in MGP and the Operating Partnership falls below 30%. The operating agreement provides that MGM may only transfer the Class B share (other than transfers to us and MGM’s controlled affiliates) if and to the extent that such transfer is approved by an independent conflicts committee, not to be unreasonably withheld. No par value is attributed to MGP’s Class A and Class B shares.
As of December 31, 2021, there were approximately 268.1 million Operating Partnership units outstanding in the Operating Partnership of which MGM owned approximately 111.4 million, or 41.5%, and MGP owned the remaining 58.5%. MGM’s Operating Partnership units are exchangeable into Class A shares of MGP on a one-to-one basis, or cash at the Fair Market Value of a Class A share (as defined in the Operating Partnership’s partnership agreement). The determination of settlement method is at the option of MGP’s independent conflicts committee. MGM’s indirect ownership of these Operating Partnership units is recognized as a noncontrolling interest in MGP’s financial statements. A wholly owned subsidiary of MGP is the general partner of the Operating Partnership and operates and controls all of its business affairs. As a result, MGP consolidates the Operating Partnership and its subsidiaries.
MGP is a publicly traded REIT engaged through its investment in the Operating Partnership in the acquisition, ownership and leasing of large-scale destination entertainment and leisure resorts, whose tenants generally offer diverse amenities including casino gaming, hotel, convention, dining, entertainment and retail offerings. A wholly owned subsidiary of the Operating Partnership leases its real estate properties back to a wholly owned subsidiary of MGM under a master lease agreement (the “MGM-MGP Master Lease”) and as further discussed below, an unconsolidated affiliate of the Operating Partnership leases its real properties back to a wholly owned subsidiary of MGM under a master lease agreement.
Empire City Transaction
On January 29, 2019, the Company acquired the developed real property associated with Empire City Casino (“Empire City”) from MGM upon its acquisition of Empire City (“Empire City Transaction”) and Empire City was added to the MGM-MGP Master Lease. Refer to Note 3 for additional details on the Empire City Transaction and Note 6 for further discussion on the MGM-MGP Master Lease.
Park MGM Transaction
On March 7, 2019, the Company entered into an amendment to the MGM-MGP Master Lease with respect to improvements made by MGM relating to the rebranding of the Park MGM and NoMad Las Vegas property (the “Park MGM Transaction”). Refer to Note 6 for further discussion on the MGM-MGP Master Lease and the Park MGM Transaction.
Northfield OpCo Transaction
On April 1, 2019, the Company transferred the membership interests of Northfield Park Associates, LLC (“Northfield”), the entity that formerly owned the real estate assets and operations of the Hard Rock Rocksino Northfield Park in Northfield, Ohio, to a subsidiary of MGM, and the Company retained the real estate assets. The Company’s taxable REIT subsidiary (“TRS”) that owned Northfield liquidated immediately prior to the transfer. Subsequently, MGM rebranded the operations it acquired (“Northfield OpCo”)to MGM Northfield Park, which was added to the MGM-MGP Master Lease (the collective transactions, the “Northfield OpCo Transaction”). Refer to Note 3 for additional details on the Northfield OpCo Transaction and Note 6 for further discussion on the MGM-MGP Master Lease.
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MGP BREIT Venture Transaction
On February 14, 2020, the Operating Partnership and MGM completed a series of transactions (collectively the “MGP BREIT Venture Transaction”) pursuant to which MGM transferred the real estate assets of MGM Grand Las Vegas to the Operating Partnership and, together with real estate assets of Mandalay Bay (including Mandalay Place), were contributed to a newly formed entity (“MGP BREIT Venture”), which, following the transactions, is owned 50.1% by the Operating Partnership and 49.9% by a subsidiary of Blackstone Real Estate Income Trust, Inc. (“BREIT”). In exchange for the contribution of the Mandalay Bay real estate assets, the Operating Partnership received consideration of $2.1 billion, which was comprised of $1.3 billion of the Operating Partnership’s secured indebtedness assumed by MGM BREIT Venture, the Operating Partnership’s 50.1% equity interest in the MGP BREIT Venture, and the remainder in cash. In addition, MGM received approximately $2.4 billion of cash distributed from the MGP BREIT Venture as consideration for its contribution of the MGM Grand Las Vegas real estate assets, and, additionally, the Operating Partnership issued 2.6 million Operating Partnership units to MGM representing 5% of the equity value of the MGP BREIT Venture. MGM provides a shortfall guarantee of the principal amount of indebtedness of the MGP BREIT Venture (and any interest accrued and unpaid thereto). On the closing date, BREIT also purchased 4.9 million Class A common shares of MGP for $150 million. Refer to Note 5 for additional details on the MGP BREIT Venture.
In connection with the transactions, MGP BREIT Venture entered into a lease with a subsidiary of MGM for the real estate assets of Mandalay Bay and MGM Grand Las Vegas. The lease (the “MGP BREIT Venture Lease”) provides for a term of 30 years with two ten-year renewal options and has an initial annual base rent of $292 million, escalating annually at a rate of 2% per annum for the first fifteen years and thereafter equal to the greater of 2% and the consumer price index increase during the prior year subject to a cap of 3%. In addition, the lease obligates the tenant to spend a specified percentage of net revenues at the properties on capital expenditures and that the tenant and MGM to comply with certain financial covenants, which, if not met, would require the tenant to maintain cash security or provide one or more letters of credit in favor of the landlord in an amount equal to the rent for the succeeding one-year period. MGM provides a guarantee of the tenant’s obligations under the lease.
In connection with the MGP BREIT Venture Transaction, the MGM-MGP Master Lease was modified to remove the Mandalay Bay property and the annual cash rent under the MGM-MGP Master Lease was reduced by $133 million. Refer to Note 6 for additional details on the modification to the MGM-MGP Master Lease.
Also, on January 14, 2020, the Operating Partnership, MGP, and MGM entered into an agreement for the Operating Partnership to waive its right to issue MGP Class A shares, in lieu of cash, to MGM in connection with MGM exercising its right to require the Operating Partnership to redeem Operating Partnership units it holds. The waiver provided that the units would be purchased at a price per unit equal to a 3% discount to the applicable cash amount as calculated in accordance with the operating agreement. The waiver was effective upon closing of the transaction on February 14, 2020 and scheduled to terminate on the earlier of February 14, 2022 or MGM receiving cash proceeds of $1.4 billion as consideration for the redemption of its Operating Partnership units. On May 18, 2020, the Operating Partnership redeemed 30.3 million of Operating Partnership units held by MGM for $700 million, or $23.10 per unit, and on December 2, 2020, the Operating Partnership redeemed 23.5 million of Operating Partnership units held by MGM for the remaining $700 million, or $29.78 per unit. As a result, the waiver has terminated in accordance with its terms. Refer to Note 2 for further discussion of redeemable equity.
Operating Partnership Unit Redemption - 2021
On March 4, 2021, certain subsidiaries of MGM delivered a notice of redemption to the Company covering approximately 37.1 million Operating Partnership units that they held which was satisfied with aggregate cash proceeds of approximately $1.2 billion, using cash on hand together with the proceeds from the issuance of Class A shares. Refer to Note 10 for further discussion.
VICI Transaction
On August 4, 2021, the Company and the Operating Partnership entered into an agreement with VICI Properties, Inc. (“VICI”) and MGM whereby VICI will acquire the Company in a stock-for-stock transaction (such transaction, the “VICI Transaction”). Pursuant to the agreement, MGP Class A shareholders will have the right to receive 1.366 shares of newly issued VICI stock in exchange for each MGP Class A share outstanding and MGM will have the right to receive 1.366 units of the new VICI operating partnership (“VICI OP”) in exchange for each Operating Partnership unit to be received by MGM. The fixed exchange ratio represents an agreed upon price of $43 per share of MGP Class A share to the five-day volume weighted average price of VICI stock as of the close of business on July 30, 2021. In connection with the exchange, VICI OP will redeem the majority of MGM’s VICI OP units for cash
18
consideration of $4.4 billion, with MGM retaining approximately 12.2 million VICI OP units. MGP’s Class B share that is held by MGM will be cancelled. The transaction is expected to close in the first half of 2022, subject to customary closing conditions, regulatory approvals, and approval by VICI stockholders (which was received on October 29, 2021).
MGM Springfield Transaction
On October 29, 2021, the Company acquired the real estate assets of MGM Springfield from MGM for $400 million of cash consideration (such transaction, the “MGM Springfield Transaction”). MGM Springfield was added to the MGM-MGP Master Lease between the Company and MGM. Following the closing of the transaction, the annual rent payment under the MGM-MGP Master Lease increased by $30 million, $27.0 million of which is fixed and contractually grows at 2% per year with escalators subject to the tenant and, without duplication, the MGM operating subsidiary sublessees of the tenant, collectively meeting an adjusted net revenue to rent ratio. Final regulatory approvals, which were not necessary for the transaction to close, are expected to be received within nine to twelve months following the close of the transaction. Until final regulatory approvals are obtained, the parties will be subject to a trust agreement, which will provide for the property to be placed into a trust (or, at MGM’s option, be returned to MGM) during the interim period in the event that the regulator finds reasonable cause to believe that the Company may not be found suitable. The property will then remain in trust until a final determination regarding the Company’s suitability is made. Refer to Note 3 for further discussion.
The Mirage Transaction
On December 13, 2021, MGM entered into an agreement to sell the operations of The Mirage to an affiliate of Seminole Hard Rock Entertainment, Inc (“Hard Rock”). Upon closing, the MGM-MGP Master Lease (or MGM’s master lease with VICI in the event that the VICI Transaction is consummated prior to closing) will be amended and restated to reflect a $90 million reduction in annual cash rent and a new lease will be entered into with Hard Rock to reflect an initial $90 million annual cash rent. The transaction is expected to close during the second half of 2022, subject to certain closing conditions, including, but not limited to, the consummation or termination of the VICI Transaction.
NOTE 2 — BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
The accompanying consolidated financial statements of MGP and the Operating Partnership represent the results of operations, financial positions and cash flows of MGP and the Operating Partnership, including their respective subsidiaries.
Principles of consolidation. The Company identifies entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIE”). A VIE is an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is its primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis. The consolidated financial statements of MGP include the accounts of the Operating Partnership, a VIE of which the Company is the primary beneficiary, as well as its wholly owned and majority-owned subsidiaries, which represents all of MGP’s assets and liabilities. As MGP holds what is deemed a majority voting interest in the Operating Partnership through its ownership of the Operating Partnership’s sole general partner, it qualifies for the exemption from providing certain of the required disclosures associated with investments in VIEs. The consolidated financial statements of the Operating Partnership include the accounts of its wholly owned subsidiary, MGP Lessor LLC, which is the MGM-MGP Master Lease landlord, a VIE of which the Operating Partnership is the primary beneficiary. As of December 31, 2021, on a consolidated basis, MGP Lessor, LLC had total assets of $8.9 billion primarily related to its real estate investments and total liabilities of $599.9 million primarily related to its deferred revenue and operating lease liabilities.
For entities determined not to be VIEs, the Company consolidates such entities in which the Company owns 100% of the equity. For entities in which the Company owns less than 100% of the equity interest, the Company consolidates the entity under the voting interest model if it has controlling financial interest based upon the terms of the respective entities’ ownership agreements. If the entity
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does not qualify for consolidation under the voting interest model and the Company has significant influence over the operating and financial decisions of the entity, the Company accounts for the entity under the equity method, such as the Company’s MGP BREIT Venture, which does not qualify for consolidation as the Company has joint control, given the entity is structured with substantive participating rights whereby both owners participate in the decision making process which prevents the Company from exerting a controlling financial interest, as defined in ASC 810.
Noncontrolling interest. MGP presents noncontrolling interest and classifies such interest as a component of consolidated shareholders’ equity, separate from the Company’s Class A shareholders’ equity. Noncontrolling interest in MGP represents Operating Partnership units currently held by subsidiaries of MGM. Comprehensive income or loss of the Operating Partnership is allocated to its noncontrolling interest based on the noncontrolling interest’s ownership percentage in the Operating Partnership except for income tax expenses as discussed in Note 9. Ownership percentage is calculated by dividing the number of Operating Partnership units held by the noncontrolling interest by the total Operating Partnership units held by the noncontrolling interest and the Company. Issuance of additional Class A shares and Operating Partnership units changes the ownership interests of both the noncontrolling interest and the Company. Such transactions and the related proceeds are treated as capital transactions.
MGM may tender its Operating Partnership units for redemption by the Operating Partnership in exchange for cash equal to the market price of MGP’s Class A shares at the time of redemption or for unregistered Class A shares on a one-for-one basis. Such election to pay cash or issue Class A shares to satisfy an Operating Partnership unitholder’s redemption request is solely within the control of MGP’s independent conflicts committee. Refer to Note 1 above and to “Redeemable noncontrolling interest and redeemable capital” below for discussion of a waiver agreement relating to MGM’s cash redemption of Operating Partnership units.
Use of estimates. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. These principles require the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Redeemable noncontrolling interest and redeemable capital. As discussed in Note 1, on January 14, 2020 the Operating Partnership agreed to waive its right following the closing of the MGP BREIT Venture Transaction to issue MGP Class A shares, in lieu of cash, to settle redemptions of Operating Partnership units held by MGM up to a maximum cash redemption amount of $1.4 billion. In connection with the waiver, the Operating Partnership and the Company reclassified, from permanent equity to temporary equity, the carrying value of Operating Partnership units that could require cash redemption and remeasured the units to their redemption value. The Operating Partnership units that comprised the $1.4 billion redemption amount were determined based on a 3% discount to the ten-day average closing price prior to the date of determination.
At each subsequent reporting period, the carrying value of temporary equity was remeasured to the greater of: (1) the carrying value of the number of units then considered redeemable, inclusive of the comprehensive income and losses attributed based on a per unit or share basis in accordance with ASC 810 or (2) the redemption value of the number of units that are then redeemable based on the remaining aggregate cash redemption amount and the per share redemption value, except that decreases in the per unit or share redemption were limited to the amount of previous increases, with the differences between the carrying value and the remeasured value being recorded as an adjustment in additional paid-in capital (in lieu of retained earnings) or limited partners’ capital.
The $1.4 billion maximum cash redemption amount was completed by the $700 million redeemed on May 18, 2020 and the $700 million redeemed on December 2, 2020.
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The components of equity that related to the Company’s redeemable noncontrolling interest and the Operating Partnership’s redeemable capital were as follows:
| (in thousands) | ||||
| As of January 14, 2020 |
$ | — | ||
| Reclassification and remeasurement adjustments |
1,405,058 | |||
| Attribution of: |
||||
| Net income |
12,079 | |||
| Redemption of temporary equity |
(1,392,468 | ) | ||
| MGP’s issuance of Class A shares and Operating Partnership’s issuance of units |
18,418 | |||
| MGP BREIT Venture Transaction |
16,136 | |||
| Cash flow hedges |
(12,995 | ) | ||
| Share-based compensation |
292 | |||
| Deemed contribution - tax sharing agreement |
1,047 | |||
| MGP Dividends and Operating Partnership distributions declared |
(46,887 | ) | ||
| Other |
(680 | ) | ||
|
|
|
|||
| As of December 31, 2020 |
$ | — | ||
|
|
|
|||
Investment in and advances to unconsolidated affiliate. The Company has an investment in an unconsolidated affiliate accounted for under the equity method, which is currently comprised of MGP BREIT Venture. Under the equity method, carrying value is adjusted for the Company’s share of the investee’s earnings and losses, as well as distributions from the investee. The Company classifies its share of investee’s earnings as a component of “Other income (expense)”, as the Company’s investment in such unconsolidated affiliate is an extension of the Company’s core business operations.
The Company evaluates its investment in unconsolidated affiliate for impairment whenever events or changes in circumstances indicate that the carrying value of its investment may have experienced an “other-than-temporary” decline in value. If such conditions exist, the Company compares the estimated fair value of the investment to its carrying value to determine if an impairment is indicated and determines whether the impairment is “other-than-temporary” based on its assessment of all relevant factors, including consideration of the Company’s intent and ability to retain its investment.
Real estate investments. Real estate investments consist of land, buildings, improvements and integral equipment. The majority of the Company’s real property was contributed or acquired by the Operating Partnership from MGM as transactions between entities under common control, and as a result, such real estate was initially recorded by the Company at MGM’s historical cost basis, less accumulated depreciation (i.e., there was no change in the basis of the contributed assets), as of the contribution or acquisition dates. Costs of maintenance and repairs to real estate investments are the responsibility of the tenant under the MGM-MGP Master Lease.
Based upon the terms of the MGM-MGP Master Lease, although the tenant is responsible for all capital expenditures during the term of the lease, if, in the future, a deconsolidation event occurs, the Company will be required to pay the tenant, should the tenant so elect, for certain capital improvements that would not constitute “normal tenant improvements” in accordance with U.S. GAAP in effect at lease commencement (i.e. ASC 840) (“Non-Normal Tenant Improvements”), subject to an initial cap of $100 million in the first year of the lease increasing annually by $75 million each year thereafter. The Company will be entitled to receive additional rent based on the 10-year treasury yield plus 600 basis points multiplied by the value of the new capital improvements the Company is required to pay for in connection with a deconsolidation event and such capital improvements will be subject to the terms of the lease. Examples of Non-Normal Tenant Improvements include the costs of structural elements at the properties, including capital improvements that expand the footprint or square footage of any of the properties or extend the useful life of the properties, as well as equipment that would be a necessary improvement at any of the properties, including initial installation of elevators, air conditioning systems or electrical wiring. Inception-to-date Non-Normal Tenant Improvements were $48.4 million through December 31, 2021.
In accordance with accounting standards governing the impairment or disposal of long-lived assets, the carrying value of long-lived assets, including land, buildings and improvements, land improvements and integral equipment is evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Factors that could result in an impairment review include, but are not limited to, a current period cash flow loss combined with a history of cash flow losses, current cash flows that may be insufficient to recover the investment in the property over the remaining useful life, a projection that demonstrates continuing losses associated with the use of a long-lived asset, significant changes in the manner of use of the assets or significant changes in business strategies. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows
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plus net proceeds expected from disposition of the assets (if any) are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows, appraisals or other valuation techniques. There were no impairment charges related to long-lived assets recognized during the years ended December 31, 2021, 2020, and 2019.
Depreciation and property transactions. Depreciation expense is recognized over the useful lives of real estate investments applying the straight-line method over the following estimated useful lives, which are periodically reviewed:
| Buildings and building improvements |
20 to 40 years | |||
| Land improvements |
10 to 20 years | |||
| Furniture, fixtures and equipment |
3 to 20 years |
Property transactions, net are comprised of transactions related to long-lived assets, such as gains and losses on the disposition of assets.
Lease incentive asset. The Company’s lease incentive asset consists of the consideration paid to MGM as part of the Park MGM Transaction, net of the deferred revenue balance associated with Non-Normal Tenant Improvements related to Park MGM, which was derecognized. The Company amortizes the lease incentive asset as a reduction of rental revenue over the remaining term of the MGM-MGP Master Lease.
Deferred revenue. The Company received nonmonetary consideration related to Non-Normal Tenant Improvements as they become MGP’s property pursuant to the MGM-MGP Master Lease and recognized the cost basis of Non-Normal Tenant Improvements as real estate investments and deferred revenue. The Company depreciates the real estate investments over their estimated useful lives and amortizes the deferred revenue as additional rental revenue over the remaining term of the MGM-MGP Master Lease once the related real estate investments were placed in service.
Lessee leases. The Company determines if an arrangement is or contains a lease at inception or modification of the arrangement. An arrangement is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.
For leases with terms greater than twelve months, the operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The initial measurement of the operating lease ROU assets also includes any prepaid lease payments and are reduced by any previously accrued deferred rent. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company uses its incremental borrowing rate to discount the lease payments based on the information available at commencement date. Certain of the Company’s leases include fixed rental escalation clauses that are factored into the determination of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that such option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term.
Cash and cash equivalents. Cash and cash equivalents include investments and interest-bearing instruments with maturities of 90 days or less at the date of acquisition. Such investments are carried at cost, which approximates market value.
Revenue recognition. Rental revenue under the MGM-MGP Master Lease, which is accounted for as an operating lease, is recognized on a straight-line basis over the non-cancelable term and reasonably certain renewal periods, which includes the initial lease term of ten years and all four additional five-year terms under the lease, for all contractual revenues that are determined to be fixed and measurable, payment has been received or collectability is probable. The difference between such rental revenue earned and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of “Prepaid expenses and other assets” in the consolidated balance sheets or as “Deferred revenue” in the consolidated balance sheets if cash rent due exceeds rental revenue earned.
“Ground lease and other” on the consolidated statements of operations reflects the non-cash ground lease revenue from the tenant and the amortization of deferred revenue relating to Non-Normal Tenant Improvements.
Northfield generated gaming, food, beverage and other revenue, which primarily consisted of video lottery terminal (“VLT”) wager transactions and food and beverage transactions and such revenue relating to the operations of Northfield is classified as discontinued operations in 2019. Refer to Note 3 for further information.
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Ground lease expenses. Ground lease expenses arise from costs which include ground lease rent paid directly by the tenant pursuant to the third-party lessor on behalf of the Company.
Acquisition-related expenses. The Company expenses transaction costs associated with completed or announced acquisitions in the period in which they are incurred. These costs are included in “Acquisition-related expenses” within the consolidated statements of operations.
General and administrative. General and administrative expenses primarily include the salaries and benefits of employees and external consulting costs. In addition, pursuant to a corporate services agreement between the Operating Partnership and MGM (the “Corporate Services Agreement”), MGM provides the Operating Partnership and its subsidiaries with financial, administrative and operational support services, including accounting and finance support, human resources support, legal and regulatory compliance support, insurance advisory services, internal audit services, governmental affairs monitoring and reporting services, information technology support, construction services and various other support services. MGM is reimbursed for all costs it incurs directly related to providing the services thereunder. The Operating Partnership incurred expenses of $3.5 million pursuant to the Corporate Services Agreement for each year ended December 31, 2021, 2020 and 2019.
Deferred financing costs. Deferred financing costs were incurred in connection with the issuance of the term loan facilities, revolving credit facility and senior notes. Costs incurred in connection with term loan facilities and senior notes were capitalized and offset against the carrying amount of the related indebtedness. Costs incurred in connection with the Operating Partnership’s revolving credit facility are capitalized as a component of prepaid expenses and other assets. These costs are amortized over the term of the indebtedness and are included in interest expense in the consolidated statement of operations.
Concentrations of credit risk. As of December 31, 2021, all of the Company’s real estate properties have been leased to MGM and all of the Company’s revenues for the period ending December 31, 2021 are derived from the MGM-MGP Master Lease with MGM.
Derivative financial instruments. The Company accounts for its derivatives in accordance with FASB ASC Topic 815, Derivatives and Hedging, in which all derivative instruments are reflected at fair value as either assets or liabilities. For derivative instruments that are designated and qualify as hedging instruments, the Company records the gain or loss on the hedge instruments as a component of accumulated other comprehensive income. For derivative instruments that are not designated and do not quality as hedging instruments, the Company records the gain or loss on the derivative instruments as “Gain (loss) on unhedged interest rate swaps, net” on the consolidated statements of operations.
Fair value measurements. Fair value measurements are utilized in the accounting and impairment assessments of the Company’s real estate investments. investment in unconsolidated affiliate, and certain of its financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and is measured according to a hierarchy that includes: Level 1 inputs, such as quoted prices in an active market; Level 2 inputs, which are observable inputs for similar assets; or Level 3 inputs, which are unobservable inputs. The Company used the following inputs in its fair value measurements:
| • | Level 2 inputs for its debt fair value disclosures. See Note 7; and |
| • | Level 2 inputs when measuring the fair value of its interest rate swaps. See Note 8. |
Reportable segment. The Company’s operations consist of investments in real estate, both wholly owned and through its investment in MGP BREIT Venture, for which all such real estate properties are similar to one another in that they consist of large-scale destination entertainment and leisure properties and related offerings, whose tenants generally offer casino gaming, hotel, convention, dining, entertainment and retail amenities, have similar economic characteristics and are governed by triple-net operating leases. The operating results of the Company’s wholly owned and equity method real estate investments are regularly reviewed, in the aggregate, by the chief operating decision maker. As such, the Company has one reportable segment.
NOTE 3 — ACQUISITIONS AND DISPOSITIONS
Empire City Acquisition
As discussed in Note 1, on January 29, 2019, the Company acquired the developed real property associated with Empire City from MGM for fair value consideration of approximately $634.4 million. The Company funded the acquisition of the developed real property from MGM through the assumption of approximately $246.0 million of indebtedness, which was repaid with borrowings under its senior secured credit facility, and the issuance of approximately 12.9 million Operating Partnership units to MGM. Empire City was added to the MGM-MGP Master Lease, as further discussed in Note 6.
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The Empire City Transaction was accounted for as a transaction between entities under common control and, therefore, the Company recorded the Empire City real estate assets at the carryover basis of $625.0 million and recorded the difference between the purchase price of $634.4 million and carryover basis as a reduction to additional paid-in-capital.
Northfield OpCo Transaction
On April 1, 2019, the Company transferred Northfield OpCo to a subsidiary of MGM for fair value consideration of approximately $305.2 million consisting primarily of approximately 9.4 million Operating Partnership units that were ultimately redeemed by the Operating Partnership and the Company retained the real estate assets. The Company’s TRS that owned Northfield liquidated immediately prior to the transfer. Subsequently, MGM rebranded Northfield OpCo to MGM Northfield Park, which was then added to the MGM-MGP Master Lease. Refer to Note 6 for further discussion on the MGM-MGP Master Lease.
The Northfield OpCo Transaction was accounted for as a transaction between entities under common control and, therefore, the Company had carried the Northfield OpCo operating assets and liabilities as held and used until the close of the transaction on April 1, 2019. As a transaction between entities under common control, the Company recorded the difference between the purchase price of $305.2 million and the carrying value of net assets transferred of $292.3 million to additional paid-in-capital.
The Company’s results for Northfield OpCo for the year ended December 31, 2019 is reflected in discontinued operations on the consolidated statement of operations.
The results of the Northfield OpCo discontinued operations are summarized as follows:
| Year Ended December 31, | ||||
| 2019 | ||||
| (in thousands) | ||||
| Total revenues |
$ | 67,841 | ||
| Total expenses |
(48,735 | ) | ||
|
|
|
|||
| Income from discontinued operations before income taxes |
19,106 | |||
| Provision for income taxes |
(2,890 | ) | ||
|
|
|
|||
| Income from discontinued operations, net of tax |
16,216 | |||
| Less: Income attributable to noncontrolling interests - discontinued operations |
(11,434 | ) | ||
|
|
|
|||
| Income from discontinued operations attributable to Class A shareholders |
$ | 4,782 | ||
|
|
|
|||
MGM Springfield Transaction
As discussed in Note 1, on October 29, 2021, the Company acquired the real property associated with MGM Springfield from MGM for cash consideration of $400 million. The Company funded the acquisition primarily with cash on hand and through a $35 million draw under the revolving credit facility. MGM Springfield was added to the MGM-MGP Master Lease, as further discussed in Note 6.
The MGM Springfield Transaction was accounted for as a transaction between entities under common control and, therefore, the Company recorded the MGM Springfield real estate assets at the carryover basis of $695.6 million and recorded the difference between the purchase price of $400 million and carryover basis to additional paid-in-capital.
NOTE 4 — REAL ESTATE INVESTMENTS
As discussed in Note 1, on February 14, 2020, in connection with the MGP BREIT Venture Transaction, the real estate assets of Mandalay Bay (including Mandalay Place), were contributed to MGP BREIT Venture. The Company recorded the difference between the carrying value of the Mandalay Bay real estate assets of $2.3 billion and the consideration received of $2.1 billion, as well as the expenses of $10.0 million incurred in connection with the sale, as a net loss on sale of assets of $193.1 million, which is reflected within “Property transactions, net” in the consolidated statements of operations.
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The carrying value of real estate investments is as follows:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Land |
$ | 3,522,546 | $ | 3,431,228 | ||||
| Buildings, building improvements, land improvements and integral equipment |
8,142,008 | 7,426,110 | ||||||
|
|
|
|
|
|||||
| 11,664,554 | 10,857,338 | |||||||
| Less: Accumulated depreciation |
(2,884,033 | ) | (2,546,601 | ) | ||||
|
|
|
|
|
|||||
| $ | 8,780,521 | $ | 8,310,737 | |||||
|
|
|
|
|
|||||
NOTE 5 — INVESTMENT IN UNCONSOLIDATED AFFILIATE
As of December 31, 2021, the Operating Partnership’s investment in unconsolidated affiliate was comprised of its 50.1% interest in MGP BREIT Venture. The Operating Partnership recorded its share of income of $100.8 million and $89.1 million for the years ended December 31, 2021 and 2020, respectively, as “Income from unconsolidated affiliate” in the consolidated statements of operations. Additionally, the Operating Partnership received $94.1 million and $81.0 million in distributions from MGP BREIT Venture during the years ended December 31, 2021 and 2020, respectively.
Summarized balance sheet information of MGP BREIT Venture is as follows:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Real estate investments, net |
$ | 4,439,851 | $ | 4,523,638 | ||||
| Other assets |
193,200 | 95,342 | ||||||
| Debt, net |
2,994,782 | 2,994,269 | ||||||
| Other liabilities |
8,018 | 7,811 | ||||||
Summarized results of operations of MGP BREIT Venture are as follows:
| Year ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Net revenues |
$ | 394,725 | $ | 346,481 | ||||
| Net income |
201,246 | 177,757 | ||||||
MGP BREIT Venture guarantee. The Operating Partnership provides a guarantee for losses incurred by the lenders of the $3.0 billion indebtedness of the MGP BREIT Venture arising out of certain bad acts by the Operating Partnership, its venture partner, or the venture, such as fraud or willful misconduct, based on the party’s percentage ownership of the MGP BREIT Venture, which guarantee is capped at 10% of the principal amount outstanding at the time of the loss. The Operating Partnership and its venture partner have separately indemnified each other for the other party’s share of the overall liability exposure, if at fault. The guarantee is accounted for under ASC 460 at fair value; such value is immaterial.
MGP BREIT Venture excess cash flow guarantee. The MGP BREIT Venture loan agreement requires that the tenant EBITDAR to MGP BREIT Venture cash interest ratio is maintained above a specified level. If this ratio is not met for two consecutive fiscal quarters, then the borrowers will be unable to distribute excess cash flows to the venture partners unless and until an excess cash flow guarantee is provided. The ratio was not met for the two consecutive quarters ended December 31, 2020, and, as a result, in April 2021, the Operating Partnership and an entity affiliated with BREIT each delivered an excess cash flow guarantee to the lenders covering all distributions since January 1, 2021. The guarantee provides that the MGP BREIT Venture may distribute an aggregate amount of cash not to exceed 9.9% of the principal amount of the MGP BREIT Venture’s outstanding indebtedness under the loan agreement, after which distributions must remain at the MGP BREIT Venture in a restricted cash account until such time as the tenant EBITDAR to MGP BREIT Venture cash interest ratio is met for two consecutive quarters. In addition, in the event of a default under the loan agreement while the ratio is not met, the Company may be required to return its respective share of distributions received during the period covered by the guarantee.
25
NOTE 6 — LEASES
MGM-MGP Master Lease. The MGM-MGP Master Lease is accounted for as an operating lease and has an initial lease term of ten years that began on April 25, 2016 (other than with respect to MGM National Harbor as described below) with the potential to extend the term for four additional five-year terms thereafter at the option of the tenant (with additional renewal options with respect to MGM Springfield, as described below). The lease provides that any extension of its term must apply to all of the real estate under the lease at the time of the extension. With respect to MGM National Harbor, the initial lease term ends on August 31, 2024. Thereafter, the initial term of the lease with respect to MGM National Harbor may be renewed at the option of the tenant for an initial renewal period lasting until the earlier of the end of the then-current term of the lease or the next renewal term (depending on whether MGM elects to renew the other properties under the lease in connection with the expiration of the initial ten-year term). If, however, the tenant chooses not to renew the lease with respect to MGM National Harbor after the initial MGM National Harbor term under the lease, the tenant would also lose the right to renew the lease with respect to the rest of the properties when the initial ten-year lease term ends related to the rest of the properties in 2026. In addition to the four five-year renewal terms, the term of the lease with respect to MGM Springfield may be extended for an additional four five-year renewal terms.
The lease has a triple-net structure, which requires the tenant to pay substantially all costs associated with the lease, including real estate taxes, ground lease rent, insurance, utilities and routine maintenance, in addition to the base rent. Additionally, the lease provides MGP with a right of first offer with respect to any future gaming development by MGM on the undeveloped land adjacent to Empire City, which MGP may exercise should MGM elect to sell such property in the future.
Rent under the lease consists of a “base rent” component and a “percentage rent” component. As of December 31, 2021, the base rent represents approximately 91% of the rent payments due under the lease and the percentage rent represents approximately 9% of the rent payments due under the lease. The base rent includes a fixed annual rent escalator of 2.0% for the second through the sixth lease years (as defined in the lease). Thereafter, beginning on April 1, 2022, the annual escalator of 2.0% will be subject to the tenant and, without duplication, the MGM operating subsidiary sublessees of the tenant, collectively meeting an adjusted net revenue to rent ratio of 6.25:1.00 based on their net revenue from the leased properties subject to the lease (as determined in accordance with U.S. GAAP, adjusted to exclude net revenue attributable to certain scheduled subleases and, at the tenant’s option, reimbursed cost revenue). With respect to the additional renewal terms for MGM Springfield, for the first two additional renewal terms, base rent will include a fixed annual rent escalator of 2.0%, subject to the tenant and the MGM operating subsidiary sublessee of our tenant, collectively meeting an adjusted net revenue to rent ratio, discussed above. For each lease year subsequent to the first two additional renewal terms, the base rent shall be the Fair Market Rent (as defined in the MGM-MGP Master Lease) in respect of MGM Springfield. The percentage rent will initially be a fixed amount for approximately the first six years and will then be adjusted every five years based on the average annual adjusted net revenues of the tenant and, without duplication, the operating subtenants, from the leased properties subject to the lease at such time for the trailing five calendar-year period (calculated by multiplying the average annual adjusted net revenues, excluding net revenue attributable to certain scheduled subleases and, at the tenant’s option, reimbursed cost revenue, for the trailing five calendar-year period by 1.4%).
On January 29, 2019, Empire City was added to the MGM-MGP Master Lease. As a result, the annual rent payment to MGP increased by $50 million, prorated for the remainder of the lease year. Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2% per year until 2022. In addition, MGP has a right of first offer with respect to certain undeveloped land adjacent to the property to the extent MGM develops additional gaming facilities and chooses to sell or transfer the property in the future.
On March 7, 2019, the Company completed the Park MGM Transaction and amended the MGM-MGP Master Lease concurrent with which the Company paid $637.5 million, of which $605.6 million was cash and the remainder in issuance of approximately 1.0 million of Operating Partnership units, to a subsidiary of MGM. As a result of the transaction, the Company recorded a lease incentive asset which represents the consideration paid, less the existing deferred revenue balance of $94.0 million relating to the non-normal tenant improvements recorded for Park MGM, which was derecognized. Further, the annual rent payment to the Company increased by $50 million, prorated for the remainder of the lease year. Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2.0% per year until 2022. The Company was required to reassess the lease classification of the lease, which included estimating the fair value using an income approach and the residual value of the assets used in the determination of the implicit rate, and concluded that the lease continued to be an operating lease.
On April 1, 2019, MGM Northfield Park was added to the MGM-MGP Master Lease and the annual rent payment increased by $60 million. Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2.0% per year until 2022.
On February 14, 2020, in connection with the MGP BREIT Venture Transaction, the MGM-MGP Master Lease was modified to remove the Mandalay Bay property and the annual rent payment under the lease was reduced by $133 million. The Company reassessed the lease classification of the lease, which included estimating the fair value of the properties using an income approach and the residual value used in the determination of the implicit rate, and concluded that the lease will continue to be accounted for as an operating lease.
26
In connection with the commencement of the sixth lease year on April 1, 2021 and the corresponding 2.0% fixed annual rent escalator that went into effect on such date, the base rent under the MGM-MGP Master Lease increased to $764.9 million, resulting in total annual rent under the MGM-MGP Master Lease of $842.8 million.
On October 29, 2021, in connection with the MGM Springfield Transaction, MGM Springfield was added to the MGM-MGP Master Lease and the annual rent payment increased by $30 million. Consistent with the lease terms, 90% of this rent is fixed and will contractually grow at 2.0% per year until 2022. As a result, the total annual rent under the MGM-MGP Master Lease increased to $872.8 million. The Company assessed the lease classification for the MGM Springfield property, which included determining, for lease classification purposes, that the tenant is reasonably certain to exercise lease renewal options to the extent that the lease term for MGM Springfield is consistent with that of the other MGM-MGP Master Lease properties, and also included estimating the residual value used in the determination of the implicit rate, and concluded that the lease will be accounted for as an operating lease.
Straight-line rental revenues from the MGM-MGP Master Lease, which includes lease incentive asset amortization, were $757.9 million, $768.4 million, and $856.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. The Company also recognized revenue related to ground lease and other of $24.1 million, $24.2 million, and $24.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Under the MGM-MGP Master Lease, future non-cancelable minimum cash rental payments, which are the payments under the initial 10-year term through April 30, 2026 and do not include renewal options and, with respect to MGM National Harbor, through August 31, 2024, are as follows as of December 31, 2021:
| Year ending December 31, | (in thousands) | |||
| 2022 |
$ | 812,086 | ||
| 2023 |
791,861 | |||
| 2024 |
760,161 | |||
| 2025 |
696,760 | |||
| 2026 |
232,253 | |||
| Thereafter |
— | |||
|
|
|
|||
| Total |
$ | 3,293,121 | ||
|
|
|
|||
Lessee Leases. The Company is a lessee of land underlying MGM National Harbor and a portion of the land underlying Borgata and Beau Rivage. The Company is obligated to make lease payments through the non-cancelable term of the ground leases, which is through 2051 for Beau Rivage, 2070 for Borgata, and 2082 for MGM National Harbor. These ground leases will be paid by the tenant under the MGM-MGP Master Lease through 2046 (including renewal periods). Components of lease expense for each of the years ended December 31, 2021 and December 31, 2020 include operating lease cost of $23.8 million. Other information related to the Company’s operating leases was as follows:
| Supplemental balance sheet information | December 31, 2021 | December 31, 2020 | ||||||
| Weighted average remaining lease term (years) |
56 | 58 | ||||||
| Weighted average discount rate (%) |
7 | % | 7 | % | ||||
27
Maturities of operating lease liabilities were as follows:
| Year ending December 31, | (in thousands) | |||
| 2022 |
$ | 24,603 | ||
| 2023 |
24,478 | |||
| 2024 |
24,449 | |||
| 2025 |
24,449 | |||
| 2026 |
24,449 | |||
| Thereafter |
1,249,430 | |||
|
|
|
|||
| Total future minimum lease payments |
1,371,858 | |||
| Less: Amount of lease payments representing interest |
(1,034,398 | ) | ||
|
|
|
|||
| Total |
$ | 337,460 | ||
|
|
|
|||
NOTE 7 — DEBT
Debt consists of the following:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Senior secured revolving credit facility |
$ | 50,000 | $ | 10,000 | ||||
| 5.625% senior notes, due 2024 |
1,050,000 | 1,050,000 | ||||||
| 4.625% senior notes, due 2025 |
800,000 | 800,000 | ||||||
| 4.50% senior notes, due 2026 |
500,000 | 500,000 | ||||||
| 5.75% senior notes, due 2027 |
750,000 | 750,000 | ||||||
| 4.50% senior notes, due 2028 |
350,000 | 350,000 | ||||||
| 3.875% senior notes, due 2029 |
750,000 | 750,000 | ||||||
|
|
|
|
|
|||||
| 4,250,000 | 4,210,000 | |||||||
| Less: Unamortized discount and debt issuance costs |
(33,123 | ) | (41,041 | ) | ||||
|
|
|
|
|
|||||
| $ | 4,216,877 | $ | 4,168,959 | |||||
|
|
|
|
|
|||||
Operating Partnership credit agreement and bridge facility. At December 31, 2021, the Operating Partnership senior secured credit facility consisted of a $1.4 billion revolving credit facility. The revolving facility bears interest of London Inter-bank Offered Rate (“LIBOR”) plus 1.75% to 2.25% determined by reference to a total net leverage ratio pricing grid. At December 31, 2021, the interest rate on the revolving facility was 1.85%. The revolving facility will mature in June 2023.
The Operating Partnership’s senior credit facility limits the amount of letters of credit that can be issued to $75 million. No letters of credit were outstanding under the Operating Partnership senior secured credit facility at December 31, 2021. See Note 8 for further discussion of the Operating Partnership’s interest rate swap agreements.
In connection with the MGP BREIT Venture Transaction, on February 14, 2020, the Operating Partnership amended its senior secured credit facility to, among other things, allow for the transaction to occur, permit the incurrence by the Operating Partnership of a nonrecourse guarantee relating to the debt of the MGP BREIT Venture (refer to Note 5 for description of such guarantee), and permit the incurrence of the bridge loan facility. As a result of the transaction and the amendment, the Operating Partnership repaid its $1.3 billion outstanding term loan B facility in full with the proceeds of a bridge facility, which was then assumed by the MGP BREIT Venture as partial consideration for the Operating Partnership’s contribution. Additionally, the Operating Partnership used the proceeds from the settlement of the forward equity issuances made in connection with its November 2019 equity offering and from its “at-the-market offering” (“ATM”) program to pay off the outstanding balance of $399 million of its term loan A facility in full. The Operating Partnership incurred a loss on retirement of debt of $18.1 million recorded in “Other” in the consolidated statements of operations.
The credit agreement contains customary representations and warranties, events of default and positive and negative covenants. The revolving credit facility also requires that the Operating Partnership maintain compliance with a maximum senior secured net debt to adjusted total asset ratio, a maximum total net debt to adjusted asset ratio and a minimum interest coverage ratio. The Operating Partnership was in compliance with its financial covenants at December 31, 2021.
28
The revolving credit facility and the term loan facilities are both guaranteed by each of the Operating Partnership’s existing and subsequently acquired direct and indirect wholly owned material domestic restricted subsidiaries, except MGM Springfield reDevelopment, LLC, which owns the real estate assets of MGM Springfield, and secured by a first priority lien security interest on substantially all of the Operating Partnership’s and such restricted subsidiaries’ material assets, including mortgages on its real estate, excluding the real estate assets of MGM National Harbor, Empire City, and MGM Springfield, and subject to other customary exclusions.
Bridge Facility. In connection with the Empire City Transaction, the Operating Partnership assumed $246.0 million of indebtedness under a bridge facility from a subsidiary of MGM. The Operating Partnership repaid the bridge facility with a combination of cash on hand and a draw on its revolving credit facility, which was subsequently repaid with proceeds from its offering of its 5.75% senior notes due 2027, as discussed below.
Operating Partnership senior notes. In January 2019, the Operating Partnership issued $750 million in aggregate principal amount of 5.75% senior notes due 2027. The senior notes will mature on February 1, 2027. Interest on the senior notes is payable on February 1 and August 1 of each year, which commenced on August 1, 2019.
In June 2020, the Operating Partnership issued $800 million in aggregate principal amount of 4.625% senior notes due 2025. The senior notes mature on June 15, 2025. Interest on the senior notes is payable on June 15 and December 15 of each year, commencing on December 15, 2020. The net proceeds from the offering were used in full to repay drawings under the Operating Partnership’s revolving credit facility.
In November 2020, the Operating Partnership issued $750 million in aggregate principal amount of 3.875% senior notes due 2029. The senior notes mature on February 15, 2029. Interest on the senior notes is payable on February 15 and August 15 of each year, commencing on August 15, 2021. The net proceeds from the offering were used for general corporate purposes and, ultimately, to redeem $700 million of Operating Partnership units held by MGM pursuant to the waiver agreement discussed in Note 1.
Each series of the Operating Partnership’s senior notes are fully and unconditionally guaranteed, jointly and severally, on a senior basis by all of the Operating Partnership’s subsidiaries that guarantee the Operating Partnership’s credit facilities, other than MGP Finance Co-Issuer, Inc., which is a co-issuer of the senior notes. The Operating Partnership may redeem all or part of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes plus, to the extent the Operating Partnership is redeeming senior notes prior to the date that is three months prior to their maturity date, an applicable make whole premium, plus, in each case, accrued and unpaid interest. The indentures governing the senior notes contain customary covenants and events of default. These covenants are subject to a number of important exceptions and qualifications set forth in the applicable indentures governing the senior notes, including, with respect to the restricted payments covenants, the ability to make unlimited restricted payments to maintain the REIT status of MGP.
Maturities of debt. Maturities of the principal amount of the Operating Partnership’s debt as of December 31, 2021 are as follows:
| Year ending December 31, | (in thousands) | |||
| 2022 |
$ | — | ||
| 2023 |
50,000 | |||
| 2024 |
1,050,000 | |||
| 2025 |
800,000 | |||
| 2026 |
500,000 | |||
| Thereafter |
1,850,000 | |||
|
|
|
|||
| $ | 4,250,000 | |||
|
|
|
|||
Fair value of debt. The estimated fair value of the Operating Partnership’s debt was $4.6 billion and $4.5 billion at December 31, 2021 and 2020, respectively. Fair value was estimated using quoted market prices for the Operating Partnership’s senior notes and senior secured credit facility.
NOTE 8 — DERIVATIVES AND HEDGING ACTIVITIES
The Operating Partnership uses derivative instruments to mitigate the effects of interest rate volatility inherent in its variable rate senior credit facility and forecasted debt issuances for the duration and amount of its interest rate swap agreements, which such variable rate could unfavorably impact future earnings and forecasted cash flows. The Operating Partnership and Company do not use derivative instruments for speculative or trading purposes.
29
In June 2019, the Operating Partnership entered into interest rate swap agreements, effective November 30, 2021, that were to mature in December 2024 with a combined notional amount of $900 million. The weighted average fixed rate paid under the swap agreements was 1.801% and the variable rate received reset monthly to the one-month LIBOR with no minimum floor.
Subsequently, in June 2021, the Operating Partnership modified and extended certain of its existing interest rate swaps with a combined notional amount of $900 million, effective June 30, 2022. The weighted average fixed rate paid under the modified swap agreements is 1.940% and the variable rate received resets monthly to the one-month LIBOR with no minimum floor. The maturity dates were extended to June 30, 2027.
In September 2019, the Operating Partnership entered into an interest rate swap agreement, effective September 6, 2019, that will mature in December 2024 with a notional amount of $300 million. The fixed rate paid under the swap agreement is 1.158% and the variable rate received resets monthly to the one-month LIBOR with no minimum floor.
In September 2019, the Operating Partnership modified and extended certain of its existing interest rate swaps with a combined notional amount of $400 million, effective October 1, 2019. The weighted average fixed rate paid under the modified swap agreements is 2.252% and the variable rate received resets monthly to the one-month LIBOR with no minimum floor. The maturity date was extended to December 2029.
In connection with prepayments of $541 million on the Operating Partnership’s senior credit facility in November 2019, as well as in contemplation of the proceeds that will be received upon settlement of the 12.0 million shares under forward purchase agreements discussed in Note 10, the Operating Partnership determined that such debt cash flows were no longer considered probable of occurring. As a result, the Operating Partnership de-designated the corresponding $600 million notional of interest rate swaps and reclassified the loss of $4.9 million reported in accumulated other comprehensive income relating to such notional into earnings within “Gain (loss) on unhedged interest rate swaps, net” on the consolidated income statements for the year ended December 31, 2019.
In connection with the $800 million issuance of senior notes in June 2020 and in connection with the $750 million issuance of senior notes in November 2020, each discussed in Note 7, the Operating Partnership determined that it will no longer be exposed to cash flow variability for the respective issuances and, accordingly, the Operating Partnership de-designated $600 million and $700 million notional of interest rate swaps in June 2020 and November 2020, respectively. Amounts deferred in accumulated comprehensive loss relating to the $600 million and $700 million notional of swaps will be amortized into earnings over the life of the hedged cash flows within “Interest expense” on the consolidated income statements.
In May 2021, the Operating Partnership terminated interest rate swap agreements with a notional amount of $1.2 billion which resulted in a loss of less than $0.1 million.
Changes in the fair value of the interest rate swaps that do not qualify for hedge accounting are also reflected in earnings within “Gain (loss) on unhedged interest rate swaps, net” on the consolidated income statements. The Operating Partnership recorded a $39.1 million gain, $2.1 million gain and a $1.0 million gain relating to such fair value changes for the year ended December 31, 2021, 2020 and 2019, respectively.
The interest rate swaps as of December 31, 2021 are summarized in the table below.
|
Notional Amount |
Weighted Average Fixed Rate |
Fair Value Liability |
Effective Date |
Maturity Date | ||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Derivatives designated as hedges: | ||||||||||||||||
| $ | 900,000 | 1.940 | % | $ | (25,299 | ) | June 30, 2022 | June 30, 2027 | ||||||||
|
|
|
|
|
|||||||||||||
| $ | 900,000 | $ | (25,299 | ) | ||||||||||||
| Derivatives not designated as hedges: | ||||||||||||||||
| $ | 300,000 | 1.158 | % | $ | (969 | ) | September 6, 2019 | December 31, 2024 | ||||||||
| 400,000 | 2.252 | % | (26,319 | ) | October 1, 2019 | December 31, 2029 | ||||||||||
|
|
|
|
|
|||||||||||||
| $ | 700,000 | $ | (27,288 | ) | ||||||||||||
|
|
|
|||||||||||||||
| $ | (52,587 | ) | ||||||||||||||
30
The interest rate swaps as of December 31, 2020 are summarized in the table below.
| Notional Amount | Weighted Average Fixed Rate |
Fair Value Liability |
Effective Date |
Maturity Date | ||||||||||||
| (in thousands, except percentages) | ||||||||||||||||
| Derivatives designated as hedges: |
|
|||||||||||||||
| $ | 900,000 | 1.801 | % | $ | (41,131 | ) | November 30, 2021 | December 31, 2024 | ||||||||
|
|
|
|
|
|||||||||||||
| $ | 900,000 | $ | (41,131 | ) | ||||||||||||
| Derivatives not designated as hedges: | ||||||||||||||||
| $ | 1,200,000 | 1.844 | % | $ | (18,889 | ) | May 3, 2017 | November 30, 2021 | ||||||||
| 300,000 | 1.158 | % | (10,451 | ) | September 6, 2019 | December 31, 2024 | ||||||||||
| 400,000 | 2.252 | % | (48,453 | ) | October 1, 2019 | December 31, 2029 | ||||||||||
|
|
|
|
|
|||||||||||||
| $ | 1,900,000 | $ | (77,793 | ) | ||||||||||||
|
|
|
|||||||||||||||
| $ | (118,924 | ) | ||||||||||||||
As of December 31, 2021 and 2020, the Operating Partnership’s interest rate swaps that are in a liability position are recorded within “Accounts payable, accrued expenses and other liabilities”.
NOTE 9 — INCOME TAXES
The Company elected to be taxed as a REIT as defined under Section 856(a) of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ended December 31, 2016. To qualify as a REIT, the Company must meet certain organizational, income, asset and distribution tests. Accordingly, except as described below, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions of all of its taxable income to its shareholders and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements, including certain asset, income, distribution and share ownership tests. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pays taxes at regular corporate income tax rates to the extent that it annually distributes less than 100% of its taxable income. The Company distributed 100% of its taxable income in the taxable year ended December 31, 2021 and expects to do so in future years. Accordingly, the consolidated financial statements do not reflect a provision for federal income taxes for its REIT operations; however, the Company was subject to federal, state and local income tax on its TRS operations which were disposed of during 2019 and may still be subject to federal excise tax, as well as certain state and local income and franchise taxes on its REIT operations. The Company’s TRS owned the real estate assets and operations of Northfield until it liquidated on April 1, 2019. The Company recorded a tax provision of $2.9 million in discontinued operations and a tax benefit of $1.1 million in continuing operations for a total tax provision of $1.8 million related to the operations of the TRS for the year ended December 31, 2019 and has no provision relating to TRS operations subsequent to the liquidation.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The MGM-MGP Master Lease landlord is required to join in the filing of a New Jersey consolidated corporation business tax return under the New Jersey Casino Control Act and include in such return its income and expenses associated with its New Jersey assets and is thus subject to an entity level tax in New Jersey. Although the consolidated New Jersey return also includes MGM and certain of its subsidiaries, the Company is required to record New Jersey state income taxes in the consolidated financial statements as if the MGM-MGP Master Lease landlord was taxed for state purposes on a stand-alone basis. The Company and MGM have entered into a tax sharing agreement providing for an allocation of taxes due in the consolidated New Jersey return. Pursuant to this agreement, the MGM-MGP Master Lease landlord will only be responsible for New Jersey taxes on any gain that may be realized upon a future sale of the New Jersey assets resulting solely from an appreciation in value of such assets over their value on the date they were contributed to the MGM-MGP Master Lease landlord by a subsidiary of MGM. MGM is responsible for all other taxes reported in the New Jersey consolidated return and, accordingly, the income tax balances related to such taxes are reflected within “Noncontrolling interest” within the consolidated financial statements. No amounts are due to MGM under the tax sharing agreement as of December 31, 2021 or December 31, 2020.
31
The provision for income taxes on continuing operations is as follows:
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
|
|
|
|
|
|
|
|||||||
| (in thousands) | ||||||||||||
| Federal: |
||||||||||||
| Deferred |
$ | — | $ | — | $ | (1,058 | ) | |||||
|
|
|
|
|
|
|
|||||||
| Provision for federal income taxes on continuing operations |
$ | — | $ | — | $ | (1,058 | ) | |||||
|
|
|
|
|
|
|
|||||||
| State: |
||||||||||||
| Current |
$ | 9,344 | $ | 6,345 | $ | 7,309 | ||||||
| Deferred |
(16 | ) | 3,389 | 1,347 | ||||||||
|
|
|
|
|
|
|
|||||||
| Provision for state income taxes on continuing operations |
$ | 9,328 | $ | 9,734 | $ | 8,656 | ||||||
|
|
|
|
|
|
|
|||||||
A reconciliation of the federal income tax statutory rate and the Company’s effective tax rate on income from continuing operations is as follows:
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Federal income tax statutory rate |
21.0 | % | 21.0 | % | 21.0 | % | ||||||
| Income not subject to federal income tax |
(21.0 | ) | (21.0 | ) | (21.4 | ) | ||||||
| State taxes |
2.5 | 5.7 | 3.2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Effective tax rate on income from continuing operations |
2.5 | % | 5.7 | % | 2.8 | % | ||||||
|
|
|
|
|
|
|
|||||||
The major tax-effected components of the Company’s net deferred tax liability are as follows:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
|
|
|
|
|
|||||
| (in thousands) | ||||||||
| Deferred tax liability - federal and state |
||||||||
| Real estate investments, net |
$ | (41,217 | ) | $ | (33,298 | ) | ||
|
|
|
|
|
|||||
| Total deferred tax liability |
(41,217 | ) | (33,298 | ) | ||||
| Net deferred tax liability |
$ | (41,217 | ) | $ | (33,298 | ) | ||
|
|
|
|
|
|||||
The Company assesses its tax positions using a two-step process. A tax position is recognized if it meets a “more likely than not” threshold, and is measured at the largest amount of benefit that is greater than 50% likely of being realized. Uncertain tax positions must be reviewed at each balance sheet date. Liabilities recorded as a result of this analysis must generally be recorded separately from any current or deferred income tax accounts. The Company currently has no uncertain tax positions. The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. No interest or penalties were recorded for the years ended December 31, 2021, 2020, or 2019.
The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. As of December 31, 2021, federal and Mississippi income tax returns for tax years 2018 and after, and all other state and local income tax returns filed for tax years 2017 and after, are subject to examination by the relevant taxing authorities.
NOTE 10 — SHAREHOLDERS’ EQUITY AND PARTNERS’ CAPITAL
MGP shareholders.
Issuance of Class A shares. On January 31, 2019, the Company completed an offering of 19.6 million Class A shares representing limited liability company interests in a registered public offering, including 2.6 million Class A shares sold pursuant to the exercise in full by the underwriters of their over-allotment option, for net proceeds of approximately $548.4 million.
On April 30, 2019, the Company entered into an ATM program to offer and sell up to an aggregate sales price of $300 million Class A shares through sales agents at prevailing market prices or agreed-upon prices. During the year ended December 31, 2019, the Company issued 5.3 million Class A shares under the program for net proceeds of approximately $161.0 million. On February 12, 2020, the Company received net proceeds of approximately $18.7 million for 0.6 million of forward shares settled under the ATM program.
32
On November 22, 2019, the Company completed an offering of 30.0 million Class A shares in a registered public offering. The offering consisted of 18.0 million shares sold directly to the underwriters at closing for net proceeds of approximately $540.6 million after deducting underwriting discounts and commissions and 12.0 million shares sold under forward purchase agreements. On February 11 through February 13, 2020, the Company received net proceeds of approximately $355.9 million for 12.0 million of forward shares settled. The forward shares settled in exchange for cash proceeds per share equal to the applicable forward sale price, which was the public offering price less the underwriting discount and was subject to certain adjustments as provided in the forward sale agreements.
On February 14, 2020, in connection with the MGP BREIT Venture Transaction, the Company completed a registered sale of 4.9 million Class A shares to BREIT for proceeds of $150.0 million.
On March 15, 2021, the Company completed an offering of 21.9 million Class A shares in a registered public offering for net proceeds of approximately $676.0 million.
On May 12, 2021, the Company resumed its 2019 ATM program to offer and sell the remaining $117.7 million of aggregate cash proceeds from sales of Class A shares under the $300 million program through sales agents at prevailing market prices or agreed-upon prices. The Company issued 3.3 million Class A shares for net proceeds of $116.8 million during the year ended December 31, 2021 and completed its ATM program.
Operating Partnership capital and noncontrolling interest ownership transactions.
The following discloses the effects of changes in the Company’s ownership percentage interest in its subsidiary, the Operating Partnership, on the Class A shareholders’ equity:
| For the years ended | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in thousands) | ||||||||||||
| Net income attributable to MGM Growth Properties |
$ | 205,503 | $ | 76,129 | $ | 90,260 | ||||||
| Transfers from/(to) noncontrolling interest: |
||||||||||||
| Empire City Transaction |
— | — | 23,745 | |||||||||
| Issuance of Class A shares |
656,361 | 442,717 | 1,049,582 | |||||||||
| Park MGM Transaction |
— | — | 2,496 | |||||||||
| Northfield OpCo Transaction |
— | — | (27,439 | ) | ||||||||
| MGP BREIT Venture Transaction |
— | 8,287 | — | |||||||||
| Redemption of temporary equity |
— | (114,924 | ) | — | ||||||||
| Redemption of Operating Partnership units |
(227,487 | ) | — | — | ||||||||
| Other |
(840 | ) | 1,275 | 1,183 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net transfers from noncontrolling interest |
428,034 | 337,355 | 1,049,567 | |||||||||
|
|
|
|
|
|
|
|||||||
| Change from net income attributable to MGM Growth Properties and transfers to noncontrolling interest |
$ | 633,537 | $ | 413,484 | $ | 1,139,827 | ||||||
|
|
|
|
|
|
|
|||||||
Empire City Transaction. On January 29, 2019, in connection with the Empire City Transaction, the Operating Partnership issued 12.9 million Operating Partnership units to a subsidiary of MGM and MGP’s indirect ownership percentage in the Operating Partnership decreased from 26.7% to 25.4%.
Issuance of Class A shares and Operating Partnership units - January 2019. On January 31, 2019, in connection with the Company’s registered offering of Class A shares, the Operating Partnership issued 19.6 million Operating Partnership units to the Company and MGP’s indirect ownership percentage in the Operating Partnership increased from 25.4% to 30.3%.
Park MGM Transaction. On March 7, 2019, in connection with the Park MGM Transaction, the Operating Partnership issued 1.0 million Operating Partnership units to a subsidiary of MGM and MGP’s indirect ownership percentage in the Operating Partnership decreased from 30.3% to 30.2%.
33
Northfield OpCo Transaction. On April 1, 2019, in connection with the Northfield OpCo Transaction, 9.4 million Operating Partnership units were ultimately redeemed by the Operating Partnership and MGP’s indirect ownership percentage in the Operating Partnership increased from 30.2% to 31.2%.
Issuance of Class A shares and Operating Partnership units - ATM Program - 2019. In connection with the Company’s issuance of Class A shares under the ATM program during 2019, the Operating Partnership issued 5.3 million Operating Partnership units to the Company. Subsequent to the collective issuances, the ownership percentage in the Operating Partnership was 32.4%.
Issuance of Class A shares and Operating Partnership units - November 2019. On November 22, 2019, in connection with the Company’s registered offering of Class A shares, the Operating Partnership issued 18.0 million Operating Partnership units to the Company. As a result of this transaction, MGP’s indirect ownership percentage in the Operating Partnership increased to 36.3%.
Issuance of Class A shares and Operating Partnership units - Forwards. In connection with the registered issuance of 12.0 million Class A shares by the Company from February 11 through February 13, 2020 pursuant to the settlement of forward sales agreements from the November 2019 registered offering, discussed above, the Operating Partnership issued 12.0 million Operating Partnership units to the Company. Further, in connection with the registered issuance of 0.6 million of shares by the Company on February 12, 2020 pursuant to the settlement of forward sales agreements under the Company’s ATM program, the Operating Partnership issued 0.6 million Operating Partnership units to the Company. As a result of these collective issuances, MGP’s indirect ownership percentage in the Operating Partnership increased to 38.8%.
Issuance of Class A shares and Operating Partnership units - BREIT. On February 14, 2020, in connection with the Company’s registered sale of Class A shares to BREIT, the Operating Partnership issued 4.9 million Operating Partnership units to the Company and the Company’s indirect ownership percentage in the Operating Partnership increased from 38.8% to 39.7%.
MGP BREIT Venture Transaction. On February 14, 2020, in connection with the MGP BREIT Venture Transaction, the Operating Partnership issued 2.6 million Operating Partnership units to MGM and the Company’s indirect ownership percentage in the Operating Partnership decreased from 39.7% to 39.4%.
Redemption of temporary equity. On May 18, 2020, in connection with the redemption waiver discussed in Note 1 and Note 2, the Operating Partnership redeemed 30.3 million Operating Partnership units from MGM for $700 million and the Company’s indirect ownership percentage in the Operating Partnership increased from 39.4% to 43.3%. On December 2, 2020 the Operating Partnership further redeemed 23.5 million Operating Partnership units from MGM for $700 million and the Company’s indirect ownership percentage in the Operating Partnership increased from 43.3% to 47.0%.
Proceeds from the issuance of Class A shares by MGP - March 2021. On March 15, 2021, the Company completed a registered offering of Class A shares for net proceeds of approximately $676.0 million, which such proceeds were used to satisfy, in part, the Company’s obligations under the notice of redemption of Operating Partnership units from MGM, as discussed below.
Redemption of Operating Partnership units - March 2021. On March 4, 2021, certain subsidiaries of MGM delivered a notice of redemption to the Company covering approximately 37.1 million Operating Partnership units that they held, in accordance with the terms of the Operating Partnership’s partnership agreement. In accordance with the terms of such agreement, upon receipt of the notice of redemption, the Company formed a conflicts committee to determine the mix of consideration that it would provide for the Operating Partnership units. The conflicts committee determined that the Company would redeem approximately 15.3 million Operating Partnership units for cash on March 12, 2021 (with such Operating Partnership units retired upon redemption) and would satisfy its remaining obligation under that notice covering the remaining 21.9 million Operating Partnership units using the proceeds, net of underwriters’ discount, from an offering of MGP’s Class A shares on March 15, 2021, for aggregate cash proceeds paid of approximately $1.2 billion. As a result of these collective transactions, MGP’s indirect ownership percentage in the Operating Partnership increased from 47.0% to 57.9%.
MGP Class A share issuance - ATM Program. During the year ended December 31, 2021, in connection with the Company’s issuance of Class A shares under the ATM program, which completed its ATM program, the Operating Partnership issued 3.3 million Operating Partnership units to the Company. As a result of these issuances, MGP’s ownership percentage in the Operating Partnership was 58.4% as of the date of completion of the ATM program.
34
Accumulated Other Comprehensive Income (Loss). Comprehensive income (loss) includes net income and all other non-shareholder changes in equity, or other comprehensive income (loss). Elements of the Company’s accumulated other comprehensive income (loss) are reported in the accompanying consolidated statement of shareholders’ equity. The following table summarizes the changes in accumulated other comprehensive income (loss) by component:
| Cash Flow Hedges |
Other | Total | ||||||||||
| (in thousands) | ||||||||||||
| Balance at December 31, 2018 |
$ | 4,306 | $ | (98 | ) | $ | 4,208 | |||||
| Other comprehensive loss before reclassifications |
(34,476 | ) | — | (34,476 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss to interest expense |
(5,599 | ) | — | (5,599 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss to (gain)/loss on unhedged interest rate swaps |
4,877 | — | 4,877 | |||||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive loss |
(35,198 | ) | — | (35,198 | ) | |||||||
| Other changes in accumulated other comprehensive loss: |
||||||||||||
| Empire City Transaction |
— | (195 | ) | (195 | ) | |||||||
| Issuance of Class A shares |
— | (1,512 | ) | (1,512 | ) | |||||||
| Park MGM Transaction |
— | (16 | ) | (16 | ) | |||||||
| Northfield OpCo Transaction |
— | 2 | 2 | |||||||||
|
|
|
|
|
|
|
|||||||
| Changes in accumulated other comprehensive loss: |
(35,198 | ) | (1,721 | ) | (36,919 | ) | ||||||
| Less: Other comprehensive loss attributable to noncontrolling interest |
25,666 | — | 25,666 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2019 |
(5,226 | ) | (1,819 | ) | (7,045 | ) | ||||||
| Other comprehensive loss before reclassifications |
(104,999 | ) | — | (104,999 | ) | |||||||
| Amounts reclassified from accumulated other comprehensive loss to interest expense |
17,922 | — | 17,922 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss to (gain)/loss on unhedged interest rate swaps |
(2,547 | ) | — | (2,547 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive loss |
(89,624 | ) | — | (89,624 | ) | |||||||
| Other changes in accumulated other comprehensive loss: |
||||||||||||
| Issuance of Class A shares |
— | (646 | ) | (646 | ) | |||||||
| MGP BREIT Venture Transaction |
— | 59 | 59 | |||||||||
| Redemption of temporary equity |
— | (8,773 | ) | (8,773 | ) | |||||||
| Other |
— | 45 | 45 | |||||||||
|
|
|
|
|
|
|
|||||||
| Changes in accumulated other comprehensive loss: |
(89,624 | ) | (9,315 | ) | (98,939 | ) | ||||||
| Less: Other comprehensive loss attributable to noncontrolling interest |
54,787 | — | 54,787 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2020 |
(40,063 | ) | (11,134 | ) | (51,197 | ) | ||||||
| Other comprehensive income before reclassifications |
16,378 | — | 16,378 | |||||||||
| Amounts reclassified from accumulated other comprehensive loss to interest expense |
22,200 | — | 22,200 | |||||||||
|
|
|
|
|
|
|
|||||||
| Other comprehensive income |
38,578 | — | 38,578 | |||||||||
| Other changes in accumulated other comprehensive loss: |
||||||||||||
| Issuance of Class A shares |
— | (4,172 | ) | (4,172 | ) | |||||||
| Redemption of Operating Partnership units |
— | (6,860 | ) | (6,860 | ) | |||||||
| Other |
— | (25 | ) | (25 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Changes in accumulated other comprehensive loss: |
38,578 | (11,057 | ) | 27,521 | ||||||||
| Less: Other comprehensive income attributable to noncontrolling interest |
(17,513 | ) | — | (17,513 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2021 |
$ | (18,998 | ) | $ | (22,191 | ) | $ | (41,189 | ) | |||
|
|
|
|
|
|
|
|||||||
At December 31, 2021, the estimated amount currently recorded in accumulated other comprehensive loss that will be recognized in earnings over the next 12 months is not material.
MGP dividends and Operating Partnership distributions. The Operating Partnership declares and pays distributions. MGP pays its dividends with the receipt of its share of the Operating Partnership’s distributions. Dividends with respect to MGP’s Class A shares are characterized for federal income tax purposes as taxable ordinary dividends, capital gains dividends, non-dividend distributions or a combination thereof.
35
A summary of the Company’s stock distributions for the years ended December 31, 2021, 2020, and 2019 is as follows:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||
| Non-qualified dividends |
$ | 1.6363 | 81.11 | % | $ | 1.4649 | 76.30 | % | $ | 1.6134 | 87.21 | % | ||||||||||||
| Return of capital |
0.3812 | 18.89 | % | 0.4551 | 23.70 | % | 0.2366 | 12.79 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | 2.0175 | 100.00 | % | $ | 1.9200 | 100.00 | % | $ | 1.8500 | 100.00 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
NOTE 11 — EARNINGS PER CLASS A SHARE
The table below provides earnings and the number of Class A shares used in the computations of “basic” earnings per share, which utilizes the weighted average number of Class A shares outstanding without regard to dilutive potential Class A shares, and “diluted” earnings per share, which includes all such shares. Diluted earnings per Class A share does not assume conversion of the Operating Partnership units held by MGM as such conversion would be antidilutive. Earnings per share has not been presented for the Class B shareholder as the Class B share is not entitled to any economic rights in the Company.
| Twelve Months Ended December 31, |
||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| (in thousands) | ||||||||||||
| Numerator: |
||||||||||||
| Income from continuing operations, net of tax |
$ | 359,240 | $ | 160,371 | $ | 259,349 | ||||||
| Less: Income from continuing operations attributable to noncontrolling interest |
(153,737 | ) | (84,242 | ) | (173,871 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Income from continuing operations attributable to Class A shares - basic and diluted |
205,503 | 76,129 | 85,478 | |||||||||
| Income from discontinued operations, net of tax |
— | — | 16,216 | |||||||||
| Less: Income from discontinued operations attributable to noncontrolling interest |
— | — | (11,434 | ) | ||||||||
|
|
|
|
|
|
|
|||||||
| Income from discontinued operations attributable to Class A shares - basic and diluted |
— | — | 4,782 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income attributable to Class A shares - basic and diluted |
$ | 205,503 | $ | 76,129 | $ | 90,260 | ||||||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Weighted average Class A shares outstanding (1) — basic |
151,000 | 129,491 | 93,047 | |||||||||
| Effect of dilutive shares for diluted net income per Class A share (2) |
194 | 162 | 252 | |||||||||
|
|
|
|
|
|
|
|||||||
| Weighted average Class A shares outstanding (1) — diluted |
151,194 | 129,653 | 93,299 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Includes weighted average deferred share units granted to certain members of the board of directors. |
| (2) | Less than 0.1 million shares related to outstanding share-based compensation awards were excluded due to being antidilutive for each of the years ended December 31, 2021, December 31, 2020 and December 31, 2019. |
36
NOTE 12 — EARNINGS PER OPERATING PARTNERSHIP UNIT
The table below provides earnings and the number of Operating Partnership units used in the computations of “basic” earnings per Operating Partnership unit, which utilizes the weighted average number of Operating Partnership units outstanding without regard to dilutive potential Operating Partnership units, and “diluted” earnings per Operating Partnership units, which includes all such Operating Partnership units.
| Twelve Months Ended December 31, |
||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
|
|
|
|
|
|
|
|||||||
| (in thousands) | ||||||||||||
| Numerator: |
||||||||||||
| Income from continuing operations, net of tax, attributable to unitholders—basic and diluted |
$ | 359,240 | $ | 160,371 | $ | 259,349 | ||||||
| Income from discontinued operations, net of tax — basic and diluted |
— | — | 16,216 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net income attributable to unitholders — basic and diluted |
$ | 359,240 | $ | 160,371 | $ | 275,565 | ||||||
|
|
|
|
|
|
|
|||||||
| Denominator: |
||||||||||||
| Weighted average Operating Partnership units outstanding (1) — basic |
269,674 | 310,688 | 293,885 | |||||||||
| Effect of dilutive shares for diluted net income per Operating Partnership unit (2) |
194 | 162 | 252 | |||||||||
|
|
|
|
|
|
|
|||||||
| Weighted average Operating Partnership units outstanding (1) — diluted |
269,868 | 310,850 | 294,137 | |||||||||
|
|
|
|
|
|
|
|||||||
| (1) | Includes weighted average deferred share units granted to certain members of the Board of Directors. |
| (2) | Less than 0.1 million units related to outstanding share-based compensation awards were excluded due to being antidilutive for each of the years ended December 31, 2021, December 31, 2020 and December 31, 2019. |
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Litigation. In the ordinary course of business, from time to time, the Company expects to be subject to legal claims and administrative proceedings, none of which are currently outstanding, which the Company believes could have, individually or in the aggregate, a material adverse effect on its business, financial position, results of operations, or cash flows.
37
MGM GROWTH PROPERTIES LLC AND MGM GROWTH PROPERTIES OPERATING PARTNERSHIP LP
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 2021
| Acquisition Costs | Costs Capitalized Subsequent to Acquisition |
Gross Amount at Which Carried at Close of Period(a) |
||||||||||||||||||||||||||||||||||||
| Property(b) (f) |
Encumbrances |
Land | Building, Improvements and Other |
Land | Building, Improvements and Other |
Land | Building, and Other |
Total | Accumulated Depreciation |
Year Acquired(c) |
Useful | |||||||||||||||||||||||||||
| Investment Properties: |
||||||||||||||||||||||||||||||||||||||
| New York- |
d | $ | 183,010 | $ | 585,354 | $ | — | $ | — | $ | 183,010 | $584,230 | $ | 767,240 | $ | (362,352 | ) | 2016 | g | |||||||||||||||||||
| The Mirage |
d | 1,017,562 | 760,222 | — | — | 1,017,562 | 746,186 | 1,763,748 | (560,213 | ) | 2016 | g | ||||||||||||||||||||||||||
| Luxor |
d | 440,685 | 710,796 | — | — | 440,685 | 699,688 | 1,140,373 | (417,117 | ) | 2016 | g | ||||||||||||||||||||||||||
| Excalibur |
d | 814,805 | 342,685 | — | 43,945 | 814,805 | 383,474 | 1,198,279 | (182,047 | ) | 2016 | g | ||||||||||||||||||||||||||
| Park MGM |
d | 291,035 | 376,625 | — | 103,406 | 291,035 | 362,743 | 653,778 | (147,077 | ) | 2016 | g | ||||||||||||||||||||||||||
| Beau Rivage |
d | 104,945 | 561,457 | — | — | 104,945 | 550,728 | 655,673 | (298,870 | ) | 2016 | g | ||||||||||||||||||||||||||
| MGM Grand Detroit |
d | 52,509 | 597,324 | — | — | 52,509 | 596,675 | 649,184 | (221,588 | ) | 2016 | g | ||||||||||||||||||||||||||
| Gold Strike Tunica |
d | 3,609 | 179,146 | — | — | 3,609 | 177,766 | 181,375 | (101,710 | ) | 2016 | g | ||||||||||||||||||||||||||
| Borgata |
d | 35,568 | 1,264,432 | — | — | 35,568 | 1,249,272 | 1,284,840 | (187,546 | ) | 2016 | g | ||||||||||||||||||||||||||
| MGM National Harbor |
— | — | 1,183,909 | — | — | — | 1,204,911 | 1,204,911 | (203,663 | ) | 2017 | g | ||||||||||||||||||||||||||
| MGM Northfield Park |
d | 392,500 | 376,842 | — | — | 392,500 | 373,324 | 765,824 | (47,078 | ) | 2018 | g | ||||||||||||||||||||||||||
| Empire City |
— | 95,000 | 530,000 | — | — | 95,000 | 530,000 | 625,000 | (72,051 | ) | 2019 | g | ||||||||||||||||||||||||||
| MGM Springfield |
— | 91,318 | 682,330 | — | — | 91,318 | 682,330 | 773,648 | (82,350 | ) | 2021 | g | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
| 3,522,546 | 8,151,122 | — | 147,351 | 3,522,546 | 8,141,327 | 11,663,873 | (2,883,662 | ) | ||||||||||||||||||||||||||||||
| Corporate Property: |
||||||||||||||||||||||||||||||||||||||
| MGP Corporate Office |
— | 488 | — | 192 | — | 681 | 681 | (371 | ) | 2017 | g | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
| $ | 3,522,546 | $ | 8,151,610 | $ | — | $ | 147,543 | $ | 3,522,546 | $8,142,008 | $ | 11,664,554 | $ | (2,884,033 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
| (a) | The aggregate cost of land, buildings and improvements for federal income tax purposes is approximately $8.9 billion. |
| (b) | All of the properties are large-scale destination entertainment and gaming-related properties, with the exception of MGP Corporate Office. See “Item 1 - Business - Our Properties” for additional detail about our properties. |
| (c) | We have omitted the date of construction of our properties on the basis that compiling this disclosure on a site-by-site basis would be impracticable because the majority of the real estate assets were constructed by other companies prior to acquisition and have had additions, expansions, and renovations subsequent to the original construction. |
| (d) | The assets comprising these Properties collectively secure the entire amount of the Operating Partnership’s senior secured credit facility. |
| (e) | Includes The Park dining and entertainment district. |
| (f) | This schedule does not include properties owned by MGP BREIT Venture. |
| (g) | Depreciation is computed based on the following estimated useful lives: |
| Buildings and building improvements |
20 to 40 years | |||
| Land improvements |
10 to 20 years | |||
| Fixtures and integral equipment |
3 to 20 years |
38
Reconciliation of Real Estate
| 2021 | 2020 | 2019 | ||||||||||
| Balance at beginning of year |
$ | 10,857,338 | $ | 13,924,496 | $ | 13,318,334 | ||||||
| Additions (1) |
773,648 | — | 625,000 | |||||||||
| Dispositions and write-offs (2) |
(4,666 | ) | (3,067,158 | ) | (27,377 | ) | ||||||
| Other |
38,234 | — | 8,539 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at end of year |
$ | 11,664,554 | $ | 10,857,338 | $ | 13,924,496 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | 2021 includes $773.6 million resulting from the Operating Partnership’s acquisition of the real estate assets of MGM Springfield. 2019 includes $625.0 million resulting from the Operating Partnership’s acquisition of the real estate assets of Empire City. |
| (2) | 2020 includes $3.1 billion resulting from the contribution of Mandalay Bay to MGP BREIT Venture as part of the MGP BREIT Venture Transaction. |
Reconciliation of Accumulated Depreciation
| 2021 | 2020 | 2019 | ||||||||||
| Balance at beginning of year |
$ | (2,546,601 | ) | $ | (3,096,524 | ) | $ | (2,812,205 | ) | |||
| Depreciation expense (1) |
(235,485 | ) | (236,853 | ) | (294,705 | ) | ||||||
| Dispositions and write-offs (2) |
2,956 | 786,776 | 16,533 | |||||||||
| Additions and other |
(104,903 | ) | — | (6,147 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at end of year |
$ | (2,884,033 | ) | $ | (2,546,601 | ) | $ | (3,096,524 | ) | |||
|
|
|
|
|
|
|
|||||||
| (1) | 2020 includes $785.3 million relating to the contribution of Mandalay Bay to MGP BREIT Venture as part of the MGP BREIT Venture Transaction. |
| (2) | 2021 includes $78.0 million resulting from the Operating Partnership’s acquisition of the real estate assets of MGM Springfield. |
39
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS – VICI PROPERTIES INC.
Unless otherwise stated in these unaudited pro forma condensed combined financial statements or the context otherwise requires, references to:
| • | “BREIT JV” refers to the joint venture of MGP with Blackstone Real Estate Income Trust, Inc. |
| • | “Cancelled Shares” refers to each MGP Class A Common Share held in treasury by MGP or owned by any of MGP’s wholly-owned subsidiaries and the MGP Class B Common Share. |
| • | “Closing” refers to the closing of the Mergers. |
| • | “Credit Agreement” refers to the Credit Agreement, dated as of February 8, 2022, by and among Existing VICI OP, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as amended from time to time. |
| • | “Credit Facilities” refers collectively to the Delayed Draw Term Loan and the Revolving Credit Facility. |
| • | “Delayed Draw Term Loan” refers to the three-year unsecured delayed draw term loan facility of Existing VICI OP, in the amount of $1.0 billion and scheduled to mature on March 31, 2025, provided under the Credit Agreement. |
| • | “Exchange Ratio” refers to 1.366 shares of VICI Common Stock per MGP Common Share, other than the Cancelled Shares, plus the right, if any, to receive cash in lieu of fractional shares of VICI Common Stock into which such MGP Common Shares would have been converted pursuant to the terms and subject to the conditions set forth in the Master Transaction Agreement. |
| • | “Existing VICI OP” means VICI Properties L.P., a Delaware limited partnership and a wholly owned subsidiary of VICI. |
| • | “Fractional Share Consideration” refers to cash in lieu of any fractional shares of VICI Common Stock (equal to such fractional part of a share of VICI Common Stock to which the holder would otherwise be entitled to receive in exchange for MGP Class A Common Shares held by such holder immediately prior to the REIT Merger Effective Time multiplied by the volume weighted average price of VICI Common Stock for the ten trading days immediately prior to the date of the Closing). |
| • | “June 2020 Forward Sale Agreement” refers to a primary follow-on offering by VICI of 29,900,000 shares of VICI Common Stock (inclusive of 3,900,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional common stock) at a public offering price of $22.15 per share, all of which were subject to a forward sale agreement, which was partially settled on September 28, 2020 by delivering 3,000,000 shares of VICI Common Stock to the forward purchaser in exchange for total net proceeds of approximately $63.0 million and fully settled on September 9, 2021 by delivering 26,900,000 shares of VICI Common Stock to the forward purchaser in exchange for total net proceeds of approximately $526.9 million. |
| • | “March 2021 Forward Sale Agreements” refers to a primary follow-on offering by VICI of 69,000,000 shares of VICI Common Stock (inclusive of 9,000,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional common stock) at a public offering price of $29.00 per share, all of which were subject to forward sale agreements, which were settled in full on February 18, 2022 in connection with the closing of the Venetian Acquisition in exchange for total net proceeds of approximately $1,828.6 million. |
| • | “Master Transaction Agreement” refers to the Master Transaction Agreement, dated as of August 4, 2021, by and among MGP, MGP OP, VICI, REIT Merger Sub, Existing VICI OP, VICI OP and MGM, as it may be amended or modified from time to time. |
| • | “Mergers” refers to the Partnership Merger and the REIT Merger. |
| • | “MGP” refers to MGM Growth Properties LLC, a Delaware limited liability company. |
| • | “MGP Acquisition Bridge Facility” refers to the 364-day first lien secured bridge facility in an aggregate principal amount of up to $9.250 billion in the aggregate, consisting of up to $5.008 billion in funding under Tranche 1, which can be used for the Redemption Consideration and to pay transaction costs, and up to $4.242 billion in funding under Tranche 2, which can be used to fund the change of control offers. Tranche 2 of the MGP Acquisition Bridge Facility was terminated on September 23, 2021 following the successful early tender results and participation of those certain exchange offers and consent solicitations for the outstanding indebtedness of MGP, the execution of supplemental indentures and the elimination of the change of control covenants in connection therewith. |
| • | “MGP Class A Common Shares” refers to the Class A common shares, no par value per share, of MGP. |
| • | “MGP Class B Common Share” refers to the single Class B common share, no par value per share, of MGP held by MGM. |
| • | “MGP Common Shares” refers to the MGP Class A Common Shares and the MGP Class B Common Share, as the context requires. |
| • | “MGP OP” refers to MGM Growth Properties Operating Partnership LP, a Delaware limited partnership. |
| • | “MGP OP Units” refers to outstanding partnership units in MGP OP. |
| • | “MGM” refers to MGM Resorts International, a Delaware corporation. |
| • | “MGM Master Lease” refers to the form of amended and restated triple-net master lease to be entered into by VICI and MGM with respect to certain properties that will be owned by consolidated subsidiaries of VICI following closing of the Mergers, as it may be amended or modified from time to time. |
1
| • | “MGP Transactions” refers to the Mergers and the other transactions contemplated by the Master Transaction Agreement. |
| • | “Partial Redemption” refers to the distribution by VICI OP to MGM and/or its applicable subsidiaries an amount equal to the Redemption Consideration in cash in redemption of the Redeemed Units held by MGM and/or its subsidiaries, as applicable. |
| • | “Partnership Merger” refers to the merger, following the REIT Merger, of the REIT Surviving Entity with and into MGP OP, with MGP OP surviving. |
| • | “Partnership Surviving Entity” refers to MGP OP, the surviving entity of the Partnership Merger. |
| • | “Prior Credit Agreement” refers to the Credit Agreement entered into in December 2017 by VICI Properties 1 LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of VICI, comprised of the Secured Revolving Credit Facility and Term Loan B Facility, which was terminated on February 8, 2022 concurrently with the entry into the New Unsecured Credit Agreement (as defined below). |
| • | “Redeemed Units” refers to a number of outstanding VICI OP Units held by MGM immediately prior to the Partial Redemption equal to (rounded down to the nearest whole unit) (i) (A) the Redemption Consideration divided by (B) $43.00, times (ii) the Exchange Ratio. |
| • | “Redemption Consideration” refers to a $4,404.0 million payment in connection with the Partial Redemption. |
| • | “REIT” refers to a real estate investment trust. |
| • | “REIT Merger” refers to the merger of MGP with and into REIT Merger Sub, with REIT Merger Sub surviving as a wholly-owned subsidiary of Existing VICI OP. |
| • | “REIT Merger Consideration” refers to the right to receive the following in exchange for each outstanding share of MGP Class A Common Share, other than Cancelled Shares, immediately prior to the REIT Merger Effective Time: (i) 1.366 shares of VICI Common Stock and (ii) the Fractional Share Consideration. |
| • | “REIT Merger Effective Time” refers to the time when the Certificate of Merger with respect to the REIT Merger has been duly filed with the Delaware Secretary of State, or such later time which the parties have agreed upon in writing and set forth in such Certificate of Merger in accordance with the Delaware Limited Liability Company Act. |
| • | “REIT Merger Sub” refers to Venus Sub LLC, a Delaware limited liability company, a wholly-owned subsidiary of Existing VICI OP. |
| • | “REIT Surviving Entity” refers to REIT Merger Sub, the surviving entity in the REIT Merger. |
| • | “Revolving Credit Facility” refers to the four-year unsecured revolving credit facility of the Existing VICI OP, in the amount of $2.5 billion and scheduled to mature on March 31, 2026, provided under the Credit Agreement. |
| • | “Secured Revolving Credit Facility” refers to the five-year first lien revolving credit facility entered into by VICI Properties 1 LLC in December 2017, as amended, which was terminated on February 8, 2022. |
| • | “September 2021 Equity Offering” refers to a primary follow-on offering by VICI of 115,000,000 shares of VICI Common Stock (inclusive of 15,000,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional common stock) at a public offering price of $29.50 per share for an aggregate offering value of approximately $3.4 billion, 50,000,000 shares of which are subject to the September 2021 Forward Sale Agreements. VICI initially received net proceeds, after deduction of the underwriting discount and expenses, of $1,859.0 million from the sale of the 65,000,000 shares of common stock in the offering, excluding proceeds from the settlement of the September 2021 Forward Sale Agreements. |
| • | “September 2021 Forward Sale Agreements” refers to a primary follow-on offering by VICI of 50,000,000 shares of VICI Common Stock at a public offering price of $29.50 per share, all of which were subject to forward sale agreements, which were settled on February 18, 2022 in connection with the closing of the Venetian Acquisition in exchange for total net proceeds of approximately $1,390.6 million. |
| • | “Term Loan B Facility” refers to the seven-year senior secured first lien term loan B facility entered into by VICI PropCo in December 2017, as amended from time to time, which was repaid in full on September 15, 2021. |
| • | “Venetian Acquisition” refers to the acquisition on February 23, 2022 by Existing VICI OP of the land and real estate assets associated with The Venetian Resort Las Vegas and the Venetian Expo (formerly the Sands Expo and Convention Center), located in Las Vegas, Nevada, and the acquisition by an affiliate of certain funds managed by affiliates of Apollo Global Management, Inc. of the operating assets and liabilities of The Venetian Resort and the Venetian Expo from Las Vegas Sands Corp. |
| • | “Venetian Acquisition Bridge Facility” refers to the 364-day first lien secured bridge facility of up to $4.0 billion in the aggregate, pursuant to a commitment letter among VICI Properties 1 LLC, Deutsche Bank Securities Inc., Deutsche Bank AG Cayman Islands Branch and Morgan Stanley Senior Funding, Inc. On March 8, 2021, following the entry into the March 2021 Forward Sale Agreements, the commitments under the Venetian Acquisition Bridge Facility were reduced by $1,890.0 million. On December 13, 2021, the commitments under Venetian Bridge Acquisition Facility were reduced by an additional $1,410.0 million. As of December 31, 2021, $700.0 million of commitments under the Venetian Acquisition Bridge Facility remained outstanding. On February 23, 2022, the remaining commitments under the Venetian Acquisition Bridge Facility were fully terminated in connection with the closing of the Venetian Acquisition. |
2
| • | “Venetian Lease” refers to the lease agreement for the land and real estate assets associated with The Venetian Resort Las Vegas and Venetian Expo, located in Las Vegas, Nevada, which we purchased on February 23, 2022. |
| • | “VICI” refers to VICI Properties Inc., a Maryland corporation. |
| • | “VICI Common Stock” refers to the common stock, par value $0.01 per share, of VICI. |
| • | “VICI OP” means VICI Properties OP LLC, a Delaware limited liability company and wholly owned subsidiary of VICI. |
| • | “VICI OP Units” refers to the units representing a fractional, undivided share of the membership interests of the members of VICI OP. |
3
The following unaudited pro forma condensed combined financial statements of VICI present the unaudited pro forma condensed combined balance sheet as of December 31, 2021 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2021. The unaudited pro forma condensed combined financial statements have been prepared in accordance with Article 11 of Regulation S-X in order to give effect to the MGP Transactions and other transactions as described below and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined balance sheet gives effect to the MGP Transactions and the Venetian Acquisition as if such transactions had been completed as of December 31, 2021, as the MGP Transactions and the Venetian Acquisition were not reflected in the historical balance sheet as of December 31, 2021. The Financing Transactions, as defined below, are excluded from the adjustments to the pro forma condensed combined balance sheet, as such adjustments are either (i) already reflected in the historical balance sheet as of December 31, 2021, in the case of the Term Loan B Facility Repayment and Interest Rate Swap Settlement, each as defined below or (ii) do not have a material reporting impact on the pro forma condensed combined balance sheet, in the case of the entry into the New Unsecured Credit Agreement, as defined below. The unaudited pro forma condensed combined statement of operations gives effect to (i) the MGP Transactions, (ii) the Venetian Acquisition and (iii) the Financing Transactions as if each such transaction had been completed on January 1, 2021.
The MGP Transactions
| • | The completion of the MGP Transactions for total consideration transferred of $11,147.2 million as further described below: |
| • | The issuance of 214,634,268 shares of VICI Common Stock in exchange for the outstanding MGP Class A Common Shares and MGP equity incentive award units at the fixed Exchange Ratio of 1.366x; |
| • | Conversion of MGP OP Units into VICI OP Units at the fixed Exchange Ratio of 1.366x, immediately subsequent to which the Redemption Consideration will be paid for the redemption of the Redeemed Units for $4,404.0 million in cash; and |
| • | MGM’s retention of 12,231,373 VICI OP Units. |
| • | The assumption of $4,200.0 million of outstanding MGP debt; |
| • | The incurrence of $4,404.0 million of long-term debt to finance the Partial Redemption of the Redeemed Units; |
| • | Entry into $2,500.0 million of forward-starting interest rate swap agreements, of which $500.0 million was entered into prior to December 31, 2021, and $500.0 million of U.S. Treasury Rate lock agreements to hedge a portion of the long-term debt to be used to finance the Partial Redemption of the Redeemed Units; |
| • | Entry into the MGM Master Lease to reflect an initial total annual rent of $860.0 million; |
| • | The net settlement of the outstanding MGP interest rate swaps on March 18, 2022; and |
| • | The termination of the MGP revolving credit facility. |
Venetian Acquisition
| • | The completion of the Venetian Acquisition on February 23, 2022, for a cash purchase price of $4,000.0 million; |
| • | The initial draw on the Revolving Credit Facility of $600.0 million on February 18, 2022, to finance a portion of the purchase price of the Venetian Acquisition; and |
| • | The issuance of 50,000,000 and 69,000,0000 shares of VICI Common Stock in connection with the full physical settlement of the September 2021 Forward Sale Agreements and March 2021 Forward Sale Agreements, respectively, on February 18, 2022, for net proceeds of $3,219.2 million to finance a portion of the purchase price of the Venetian Acquisition. |
Financing Transactions
Entry into New Unsecured Credit Agreement
| • | Entry into the Credit Agreement on February 8, 2022, comprised of (i) the Revolving Credit Facility in the amount of $2.5 billion scheduled to mature on March 31, 2026 and (ii) the Delayed Draw Term Loan in the amount of $1.0 billion scheduled to mature on March 31, 2025 (the “New Unsecured Credit Agreement”); and |
| • | The concurrent termination of the Secured Revolving Credit Facility and Prior Credit Agreement. |
Term Loan B Facility Repayment and Interest Rate Swap Settlement
| • | The full repayment of VICI’s Term Loan B Facility (the “Term Loan B Facility Repayment”) and the net settlement of the VICI outstanding interest rate swaps on September 15, 2021 (the “Interest Rate Swap Settlement”) using proceeds from (i) the issuance of 26,900,000 shares of VICI Common Stock upon settlement of the June 2020 Forward Sale Agreement and (ii) the issuance of 65,000,000 shares of VICI Common Stock (including 15,000,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional common stock) pursuant to the September 2021 Equity Offering. |
4
We refer to the Term Loan B Facility Repayment and the Interest Rate Swap Settlement and the entry into the New Unsecured Credit Agreement, collectively, as the “Financing Transactions.”
Pro forma adjustments are based on currently available information and, in many cases are based on assumptions, estimates and preliminary information. The assumptions underlying the pro forma adjustments are described in the accompanying notes to the unaudited pro forma condensed combined financial statements of VICI. We believe such assumptions are reasonable under the circumstances and reflect our best currently available estimates and judgments. However, no assurance can be given that the MGP Transactions will occur on the terms or timing contemplated herein, or at all. Similarly, the unaudited pro forma condensed combined financial statements include various assumptions, some of which are described in the accompanying notes, relating to (i) our incurrence of $4,404.0 million of long-term debt to finance the Partial Redemption of the Redeemed Units and (ii) the net settlement of the VICI forward-starting interest rate swaps. While these assumptions are based on currently available information and market conditions, there can be no assurance that we will be successful in obtaining the financing on the terms described herein or at all, and the actual terms of any such financings will depend on various factors, including our creditworthiness, the general condition of the capital markets, interest rates, the structure of our debt, our recent and anticipated financial position and results of operations, the price of VICI Common Stock, taxes and other factors at the time any such financings take place. Furthermore, the unaudited pro forma condensed combined financial statements are not reflective of our future financial condition or results of operations and do not necessarily reflect what our financial condition or results of operations would have been had the transactions to which the pro forma adjustments relate actually occurred on the dates indicated.
The unaudited pro forma condensed combined financial statements are derived from and should be read in conjunction with VICI’s and MGP’s consolidated financial statements and related notes included in their respective Annual Report on Form 10-K for the year ended December 31, 2021.
5
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 2021
(in thousands, except share and per share amounts)
| Historical | Transaction Accounting Adjustments | |||||||||||||||||||||||
| VICI | MGP (As Adjusted - Note 2) |
The MTA Transactions |
Venetian Acquisition |
Item in Note 4 |
VICI Pro Forma |
|||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Real estate portfolio: |
||||||||||||||||||||||||
| Investments in leases - sales-type, net |
$ | 13,136,664 | $ | — | $ | — | $ | 3,951,245 | (a | ) | $ | 17,087,909 | ||||||||||||
| Investments in leases - operating, net |
— | 8,780,521 | (8,780,521 | ) | — | (a | ) | — | ||||||||||||||||
| Investments in leases - financing receivables, net |
2,644,824 | — | 13,797,834 | — | (a | ) | 16,442,658 | |||||||||||||||||
| Lease incentive asset |
— | 487,141 | (487,141 | ) | — | (a | ) | — | ||||||||||||||||
| Investments in loans, net |
498,002 | — | — | — | 498,002 | |||||||||||||||||||
| Land |
153,576 | — | — | — | 153,576 | |||||||||||||||||||
| Investment in unconsolidated affiliate |
— | 816,756 | 586,038 | — | (a | ) | 1,402,794 | |||||||||||||||||
| Cash and cash equivalents |
739,614 | 8,056 | (59,748 | ) | (198,544 | ) | (b | ) | 489,378 | |||||||||||||||
| Other assets |
424,693 | 338,632 | 34,973 | 206,754 | (c | ) | 1,005,052 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total assets |
$ | 17,597,373 | $ | 10,431,106 | $ | 5,091,435 | $ | 3,959,455 | $ | 37,079,369 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Liabilities |
||||||||||||||||||||||||
| Debt, net |
$ | 4,694,523 | $ | 4,216,877 | $ | 4,412,197 | $ | 600,000 | (d | ) | $ | 13,923,597 | ||||||||||||
| Accrued expenses and deferred revenues |
113,530 | 282,354 | (215,627 | ) | — | (e | ) | 180,257 | ||||||||||||||||
| Dividends payable |
226,309 | 140,765 | — | — | 367,074 | |||||||||||||||||||
| Other liabilities |
375,837 | 431,265 | (79,522 | ) | 217,276 | (f | ) | 944,856 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities |
5,410,199 | 5,071,261 | 4,117,048 | 817,276 | 15,415,784 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Redeemable non-controlling interest |
— | — | 355,811 | — | (g | ) | 355,811 | |||||||||||||||||
| Stockholders’ equity |
||||||||||||||||||||||||
| Common stock, 1,350,000,000 shares authorized at December 31, 2021, 628,942,092 shares issued and outstanding at December 31, 2021 and 962,579,155 pro forma shares issued and outstanding |
6,289 | — | 2,146 | 1,190 | (h | ) | 9,625 | |||||||||||||||||
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares outstanding at December 31, 2021 and no pro forma shares outstanding |
— | — | — | — | — | |||||||||||||||||||
| Additional paid-in capital |
11,755,069 | 3,735,727 | 2,505,838 | 3,218,012 | (h | ) | 21,214,646 | |||||||||||||||||
| Accumulated other comprehensive loss |
884 | (41,189 | ) | 233,672 | — | (h | ) | 193,367 | ||||||||||||||||
| Retained earnings (deficit) |
346,026 | (537,715 | ) | 79,942 | (77,023 | ) | (h | ) | (188,770 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total VICI stockholders’ equity |
12,108,268 | 3,156,823 | 2,821,598 | 3,142,179 | 21,228,868 | |||||||||||||||||||
| Non-controlling interest |
78,906 | 2,203,022 | (2,203,022 | ) | — | (h | ) | 78,906 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total stockholders’ equity |
12,187,174 | 5,359,845 | 618,576 | 3,142,179 | 21,307,774 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 17,597,373 | $ | 10,431,106 | $ | 5,091,435 | $ | 3,959,455 | $ | 37,079,369 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
6
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2021
(in thousands, except share and per share amounts)
| Historical | Transaction Accounting Adjustments | |||||||||||||||||||||||||||
| VICI | MGP (As Adjusted - Note 2) |
The MTA Transactions |
Venetian Acquisition |
Financing Transactions |
Item in Note 5 |
VICI Pro Forma |
||||||||||||||||||||||
| Revenues |
||||||||||||||||||||||||||||
| Income from sales-type leases |
$ | 1,167,972 | $ | — | $ | — | $ | 314,810 | $ | — | (aa | ) | $ | 1,482,782 | ||||||||||||||
| Income from operating leases |
— | 757,941 | (757,941 | ) | — | — | (aa | ) | — | |||||||||||||||||||
| Income from lease financing receivables and loans |
283,242 | — | 1,117,540 | — | — | (aa | ) | 1,400,782 | ||||||||||||||||||||
| Other income |
27,808 | 24,122 | 396 | 17,788 | — | (bb | ) | 70,114 | ||||||||||||||||||||
| Golf revenues |
30,546 | — | — | — | — | 30,546 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenues |
1,509,568 | 782,063 | 359,995 | 332,598 | — | 2,984,224 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||||||
| General and administrative |
33,122 | 18,055 | — | — | — | (cc | ) | 51,177 | ||||||||||||||||||||
| Depreciation |
3,091 | 235,485 | (235,485 | ) | — | — | (cc | ) | 3,091 | |||||||||||||||||||
| Golf expenses |
20,762 | — | — | — | — | 20,762 | ||||||||||||||||||||||
| Change in allowance for credit losses |
(19,554 | ) | — | 442,628 | 76,109 | — | 499,183 | |||||||||||||||||||||
| Other expenses |
27,808 | 25,291 | (773 | ) | 17,788 | — | (cc | ) | 70,114 | |||||||||||||||||||
| Transaction and acquisition expenses |
10,402 | 9,210 | — | — | — | (cc | ) | 19,612 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
75,631 | 288,041 | 206,370 | 93,897 | — | 663,939 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income from unconsolidated affiliate |
— | 100,824 | 4,150 | — | — | (dd | ) | 104,974 | ||||||||||||||||||||
| Interest expense |
(392,390 | ) | (265,942 | ) | (140,617 | ) | (12,595 | ) | 114,630 | (ee | ) | (696,914 | ) | |||||||||||||||
| Interest income |
120 | 593 | — | — | — | 713 | ||||||||||||||||||||||
| Loss from extinguishment of debt |
(15,622 | ) | — | — | — | — | (15,622 | ) | ||||||||||||||||||||
| Gain on unhedged interest rate swaps, net |
— | 39,071 | (39,071 | ) | — | — | (ff | ) | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income before income taxes |
1,026,045 | 368,568 | (21,913 | ) | 226,106 | 114,630 | 1,713,436 | |||||||||||||||||||||
| Income tax expense |
(2,887 | ) | (9,328 | ) | 8,578 | — | — | (gg | ) | (3,637 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income |
1,023,158 | 359,240 | (13,335 | ) | 226,106 | 114,630 | 1,709,799 | |||||||||||||||||||||
| Less: Net income attributable to non-controlling interests |
(9,307 | ) | (153,737 | ) | 132,283 | — | — | (hh | ) | (30,761 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income attributable to common stockholders |
$ | 1,013,851 | $ | 205,503 | $ | 118,948 | $ | 226,106 | $ | 114,630 | $ | 1,679,038 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net Income per common share |
||||||||||||||||||||||||||||
| Basic |
$ | 1.80 | $ | 1.36 | $ | 1.74 | ||||||||||||||||||||||
| Diluted |
$ | 1.76 | $ | 1.36 | $ | 1.74 | ||||||||||||||||||||||
| Weighted average number of shares of common stock outstanding |
||||||||||||||||||||||||||||
| Basic |
564,467,362 | 151,000,000 | 63,634,268 | 119,000,000 | 64,665,574 | (ii | ) | 962,767,204 | ||||||||||||||||||||
| Diluted |
577,066,292 | 151,194,000 | 63,440,268 | 113,132,901 | 58,858,065 | (ii | ) | 963,691,525 | ||||||||||||||||||||
7
Note 1— Significant Accounting Policies
The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in VICI’s audited consolidated financial statements as of and for the year ended December 31, 2021. VICI’s management has determined that there were no significant accounting policy differences between VICI and MGP and, therefore, no adjustments are necessary to conform MGP’s financial statements to the accounting policies used by VICI in the preparation of the unaudited pro forma condensed combined financial statements, other than those reclassification adjustments required to confirm with VICI’s classifications described in Note 2. This conclusion is subject to change as further assessment is performed and finalized for purchase accounting.
In accordance with (“ASC”) 805—“Business Combinations” (“ASC 805”), management determined that the acquisition of MGP does not meet the definition of a business and is accordingly accounted for as an asset acquisition under ASC 805-50. Further, as part of the application of ASC 805, VICI will conduct a more detailed review of MGP’s accounting policies in an effort to determine if differences in accounting policies require further reclassification or adjustment of MGP’s results of operations or reclassification or adjustment of assets or liabilities to conform to VICI’s accounting policies and classifications. Therefore, VICI may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial statements. In certain cases, the information necessary to evaluate the differences in accounting policies and the impacts thereof may not be available until after the MGP Transactions are completed.
Note 2—Reclassification Adjustments
In these unaudited pro forma condensed combined financial statements, the MGP historical financial statement line items include the reclassification of certain historical balances to conform to the VICI presentation of these items, as described below. These reclassifications have no effect on previously reported total assets, total liabilities, stockholders’ equity or income from continuing operations of VICI or MGP.
Balance Sheet
| As of December 31, 2021 | ||||||||||||
| (In Thousands) |
MGP Historical | Adjustment | MGP, As Adjusted | |||||||||
| Assets |
||||||||||||
| Other assets |
$ | 22,237 | $ | 316,395 | $ | 338,632 | ||||||
| Above market lease, asset |
38,293 | (38,293 | ) | — | ||||||||
| Operating lease right-of-use assets |
278,102 | (278,102 | ) | — | ||||||||
| Liabilities |
||||||||||||
| Accrued expenses and deferred revenue |
— | 282,354 | 282,354 | |||||||||
| Accounts payable, accrued expenses and other liabilities |
57,543 | (57,543 | ) | — | ||||||||
| Due to MGM |
172 | (172 | ) | — | ||||||||
| Accrued interest |
55,685 | (55,685 | ) | — | ||||||||
| Deferred revenue |
221,542 | (221,542 | ) | — | ||||||||
| Other liabilities |
— | 431,265 | 431,265 | |||||||||
| Deferred income taxes |
41,217 | (41,217 | ) | — | ||||||||
| Operating lease liability |
337,460 | (337,460 | ) | — | ||||||||
8
Statement of Operations (In Thousands) Revenues Ground lease Other income Operating Expenses Ground lease expense Other expenses Property transactions, net Transaction and acquisition expenses Total operating expenses Other Income/Expenses Other expense Note 3 — Preliminary Purchase Price Allocation Estimated Preliminary Purchase Price The
unaudited pro forma condensed combined financial statements reflect the preliminary allocation of the purchase consideration to MGP’s identifiable net assets acquired, which is based upon an estimated preliminary purchase price of approximately
$11,147.2 million. The calculation of the estimated preliminary purchase price related to the MGP Transactions is as follows: (In Thousands) REIT Merger Consideration (1) Redemption Consideration
(2) MGP OP Unit rollover for MGM (3) Estimated transaction costs (4) Total consideration to be transferred Amount is based on the conversion of the outstanding MGP Class A Common Shares as of December 31,
2021, including the current estimate of shares underlying the MGP equity incentive award units, into shares of VICI Common Stock representing the REIT Merger Consideration as follows: ($ in Thousands) MGP Class A Common Shares MGP equity incentive award units Total MGP shares to be converted to VICI Common Stock Exchange Ratio REIT Merger Consideration Stock Issuance Represents the cash consideration for the Redeemed Units. Retention of MGP OP Units by MGM converted into 12,231,373 VICI OP Units at a value of $29.09 per unit,
representing the value of VICI Common Stock as of April 14, 2022. The MGP Transactions are accounted for as an asset acquisition and accordingly all transaction costs directly
related to the merger are capitalized. The amount represents the estimate of third-party advisory fees, legal fees and closing fees associated with the MGP Transactions. The actual value of the VICI Common Stock to be issued in the REIT Merger and the value of the MGP OP Units rollover for MGM will depend on
the market price of shares of VICI Common Stock at the Closing, and therefore, the actual purchase price will fluctuate with the market price of VICI Common Stock until the MGP Transactions are consummated. As a result, the final purchase price
could differ significantly from the current estimate, which could materially impact the unaudited pro forma condensed combined financial statements. A 10% difference in VICI’s stock price would change the purchase price by approximately
$660.0 million, which would be recorded as an adjustment to the fair value of the net assets acquired on a relative fair value basis. The outstanding number of shares of MGP Class A Common Shares and MGP OP Units may change prior to the closing of the MGP Transactions
due to transactions in the ordinary course of business, including unknown changes in vesting of outstanding MGP equity-based awards and any grants of new MGP equity-based awards since December 31, 2021. Any such changes are not expected to have
a material impact on the unaudited pro forma condensed combined financial statements. 9
Preliminary Purchase Price Allocation The preliminary purchase price allocation to the assets acquired and liabilities assumed is provided below. The following table provides a
summary of the preliminary purchase price allocation by major categories of assets acquired and liabilities assumed based on VICI management’s preliminary estimate of their respective relative fair values as of December 31, 2021: (In Thousands) Investments in leases - financing receivables Investment in unconsolidated affiliate Cash and cash equivalents (1) Other assets Debt, net
(2) Accrued expenses and deferred revenues (3) Dividends payable Total Purchase Price Amount is adjusted to include the proceeds from the net settlement of the MGP interest swaps on March 18,
2022, for net proceeds of $10.5 million. Refer to Note 4 (f) below. Amount includes $50.0 million of debt outstanding under the MGP revolving credit facility which will be
repaid in full upon consummation of the MGP Transactions. Refer to Note 4 (d) below. Amount excludes the fair value of the MGP interest rate swaps as such swaps were net settled on March 18,
2022 as noted above. The purchase price allocation presented above has not been finalized. The final determination of
the allocation of the purchase price will be based on the fair value of such assets and liabilities as of the actual consummation date of the MGP Transactions and will be completed after the MGP Transactions are consummated. These final fair values
will be determined based on VICI management’s judgment, which is based on various factors. Any increase or decrease in the fair value of the net assets acquired, as compared to the information shown herein, could change the portion of the
purchase consideration allocable to the different assets and liabilities and could impact the operating results of VICI and its subsidiaries following the MGP Transactions due to differences in the allocation of the purchase consideration. Note 4—Balance Sheet Pro Forma Adjustments Real
Estate Portfolio Represents the following pro forma adjustments to the real estate portfolio: The MGP Transactions The elimination of the MGM Master Lease as an operating lease, including the elimination of the lease incentive
asset balance and deferred revenue balance. The recognition of the MGM Master Lease at the fair value of the underlying assets, including the
reclassification of the MGM Master Lease to an Investment in leases—financing receivables, net accounted for under ASC 310—Receivables. Upon consummation of the MGP Transactions, the MGM Master Lease will be modified and classified as a
sales-type lease. Further, since MGM controlled and consolidated MGP prior to the MGP Transactions, the lease will be assessed under the sale-leaseback guidance and determined to be a failed sale-leaseback under which the lease will be accounted for
as a financing receivable under ASC 310. The Investment in leases—financing receivables, net is net of an estimated $431.0 million of allowance
for credit losses recognized on the investment balance, as required under ASC 326—Credit Losses. The recognition of the Investment in unconsolidated affiliate for the BREIT JV at fair value.
Venetian Acquisition The Venetian Acquisition, which is accounted for as a sales-type lease under ASC 842—Leases, inclusive of
$16.8 million of capitalized initial direct costs. The investment is net of an estimated $65.6 million of allowance for credit losses recognized on the investment balance, as required under ASC 326—Credit Losses.
Cash and Cash Equivalents Represents the cash used to pay for a portion of the transaction costs associated with the MGP Transactions,
including bridge commitment fees, third-party advisory and legal fees, closing costs and transfer taxes, and the cash used to pay for a portion of the purchase price of the Venetian Acquisition. 10
Other Assets Represents the pro forma adjustments to Other assets as a result of the MGP Transactions as follows:
(In Thousands) Elimination of deferred financing costs Elimination of above market lease asset Elimination of
right-of-use ground lease asset (1) Addition of sales-type ground lease asset (1) Expense of remaining MGP Acquisition Bridge Facility commitment fees Net settlement of VICI interest rate swap Venetian Acquisition Addition of sublease assets assumed in connection with the Venetian Acquisition (2) Total Pro Forma Adjustments Upon closing of the MGP Transactions, we will assume the MGP ground leases at Beau Rivage, Borgata and MGM
National Harbor. Although the cost of these leases are passed on to the tenant under the MGM Master Lease, we are the primary obligor under the leases and accordingly such leases are presented gross on our balance sheet and statement of operations.
Upon assumption we will reassess the lease classifications and expect them to classified as sales-type sub-leases. Accordingly, we have made adjustments to remove the prior operating lease balance and replace
it with sales-type sub-lease assets balance. The sales-type sub-lease is net of an estimated $11.6 million of allowance for credit losses recognized on the
investment balance, as required under ASC 326—Credit Losses. Upon closing of the Venetian Acquisition, we assumed certain leases from Las Vegas Sands Corp. (“LVS”)
in which we became the lessee and intermediate lessor. Although the cost of these leases are passed on to the tenant under the Venetian Lease, we determined that we are the primary obligor under the leases and accordingly such leases are presented
gross on our balance sheet and statement of operations. The sales-type sub-leases are net of an estimated $2.2 million of allowance for credit losses recognized on the investment balance, as required
under ASC 326—Credit Losses. Debt, net Represents the pro forma adjustments to Debt, net as follows: (In Thousands) The MGP Transactions Adjustment to fair value of assumed MGP debt Issuance of debt for the MGP Transactions, net of deferred financing costs (1) Repayment and termination of MGP revolving credit facility Venetian Acquisition Draw on Revolving Credit Facility for the Venetian Acquisition (2) Total Pro Forma Adjustments The incurrence of $4,404.0 million of long-term debt to finance the redemption of the Redeemed Units, net
of an estimated $37.5 million of deferred financing costs that we anticipate incurring in connection with the financing. In connection with the closing of the Venetian Acquisition, on February 18, 2022, we executed an initial
draw of $600.0 million under the Revolving Credit Facility to fund a portion of the purchase price of the Venetian Acquisition. Subsequent to the MGP Transactions, we anticipate VICI will have $13,954.0 million in principal amount of consolidated unsecured notes
outstanding and $1,503.0 million principal amount of unconsolidated CMBS debt, representing our share of the debt at the BREIT JV, resulting in 90% of our pro forma debt being unsecured and 10% of our pro forma debt secured. There can be no
assurance that we will be able to obtain long-term debt financing on the terms described herein, including those with respect to maturity or interest rate, or at all, especially if market or economic conditions change after the date of this Current
Report on Form 8-K. See paragraph (ee) to Note 5—Statement of Operations Pro Forma Adjustments below. To the extent we are unable to obtain the long-term debt financing as contemplated in these unaudited
pro forma condensed combined financial statements, we intend to borrow a similar amount under the MGP Acquisition Bridge Facility, Delayed Draw Term Loan and/or Revolving Credit Facility, as the case may be. Under the MGP Acquisition Bridge
Facility, we can borrow up to $5,008.0 million (following the termination of $4,242.0 million in committed financing representing Tranche 2 of the MGP Acquisition Bridge Facility in accordance with the terms of the related commitment
letter), under our Delayed Draw Term Loan we can borrow up to $1,000.0 million and under our Revolving Credit Facility we can borrow up to $1,900.0 million (net of the $600 million we borrowed under the Revolving Credit Facility on
February 18, 2022 to fund a portion of the purchase price of the Venetian Acquisition). 11
Accrued expenses and deferred revenues Represents the elimination of deferred revenue related to MGP upon the acquisition of MGP and reclassification
of the MGM Master Lease to a financing receivable, as described in (a) above, and the addition of the cash portion of the expected liability in connection with the severance of MGP employees. Other Liabilities Represents the pro forma adjustments to Other liabilities as a result of the MGP Transactions as follows:
(In Thousands) The MGP Transactions Net settlement of MGP interest rate swaps Elimination of MGP deferred income taxes Elimination of operating ground lease liability (1) Addition of finance ground lease liability (1) Payment of remaining MGP Acquisition Bridge Facility commitment fees Venetian Acquisition Addition of sublease liabilities assumed in connection with the Venetian Acquisition (2) Total Pro Forma Adjustments Upon closing of the MGP Transactions, we will assume the MGP ground leases at Beau Rivage, Borgata and MGM
National Harbor. Although the cost of these leases are passed on to the tenant under the MGM Master Lease, we are the primary obligor under the leases and accordingly such leases are presented gross on our balance sheet and statement of operations.
Upon assumption we will reassess the lease classifications and expect them to classified as finance sub-lease liabilities. Accordingly, we have made adjustments to remove the prior operating lease liability
balance and replace it with a finance lease liability balance. Upon closing of the Venetian Acquisition, we assumed certain leases from LVS in which we became the lessee and
intermediate lessor. Although the cost of these leases are passed on to the tenant under the Venetian Lease, we determined that we are the primary obligor under the leases and accordingly such leases are presented gross on our balance sheet and
statement of operations. Redeemable Non-controlling Interest Represents the pro forma adjustment for the MGM redeemable
non-controlling interest in the VICI OP as a result of the conversion of the MGP OP Units to VICI OP Units as part of the MGP Transactions consideration, as described in Note 3. The redemption features of the
VICI OP Units retained by MGM in VICI OP contain provisions which could require VICI OP to settle the redemption in cash. As a result, the VICI OP Units retained by MGM are classified outside permanent equity. 12
Stockholders’ Equity Represents the pro forma adjustments to the components of Stockholders’ equity as follows:
(In Thousands) The MTA Transactions Elimination of MGP historical balances REIT Merger Consideration (1) VICI interest rate swap settlements (2) Retained earnings
(3) Venetian Acquisition Settlement of Forward Sale Agreements (4) Retained earnings
(3) Total Pro Forma Adjustments Represents the conversion of the outstanding MGP Class A Common Shares, including the shares underlying the
MGP equity incentive award units as of December 31, 2021, into shares of VICI Common Stock representing the REIT Merger Consideration at the share price as of April 14, 2022 of $29.09 per share. Represents the settlement of the VICI forward-starting interest rate swap agreements and US Treasury Rate lock
agreements, as described in (ee) below, and the corresponding discontinuation of the hedge accounting resulting in accumulated comprehensive income, which amount will be amortized into interest expense over the term of the interest rate swap or US
Treasury Rate lock, which matches that of the related debt. As of April 14, 2022, our forward-starting interest rate swaps and US Treasury Rate locks were in an estimated fair value asset position of $193.4 million, the fair value of which
has been adjusted in Accumulated other comprehensive income. Represents the pro forma adjustment to retained earnings from the following
non-recurring items: $518.7 million expense, which represents the estimated allowance for credit losses recognized on the
additional investment balances, as required under ASC 326—Credit Losses, as described in (a) and (c) above; and $16.1 million expense related to the remaining commitment and structuring fees relating to the MGP
Acquisition Bridge Facility and Venetian Acquisition Bridge Facility; Represents (i) the issuance of 50,000,000 shares of VICI Common Stock in connection with the full physical
settlement of the September 2021 Forward Sale Agreements on February 18, 2022 at the forward settlement price of $27.81 per share for total net proceeds of $1,390.6 million and (ii) the issuance of 69,000,000 shares of VICI Common
Stock in connection with the full physical settlement of the March 2021 Forward Sale Agreements on February 18, 2022 at the forward settlement price of $26.50 per share for total net proceeds of $1,828.6 million. Note 5—Statement of Operations Pro Forma Adjustments Lease and Loan Revenues Represents pro forma adjustments to revenues as follows: The MGP Transactions Elimination of the historical operating lease revenue for MGP, which was previously determined to be an operating
lease. Upon consummation of the MGP Transactions, the MGM Master Lease will be modified and classified as an Investment
in leases—financing receivable, net, as further described in Note 4 (a) above, resulting in $1,117.5 million of Income from lease financing receivables and loans for the year ended December 31, 2021. Pro forma cash received from the
MGM Master Lease during the year ended December 31, 2021 would have been $860.0 million. Venetian
Acquisition $314.8 million of Income from sales-type leases for the year ended December 31, 2021 associated with
the rent from the Venetian Lease. Pro forma cash received from the Venetian Lease during the year ended December 31, 2021 would have been $250.0 million. 13
Other Income Represents pro forma adjustments to Other income as follows: The MGP Transactions Upon closing of the MGP Transactions, we will assume the MGP ground leases at Beau Rivage, Borgata and MGM
National Harbor in which we will become the lessee and intermediate lessor. We will reassess the classifications of these leases and expect them to be financing sub-lease liabilities and sales-type sub-lease assets and, accordingly, adjusted the income to reflect the difference from the MGP historical balance. All payments under the ground leases are paid directly by our tenant to the landlord; however, we are
required to present such payments on a gross basis under the accounting principles generally accepted in the United States of America (“GAAP”). The Venetian Acquisition Upon closing of the Venetian Acquisition, we assumed certain leases from LVS in which we became the lessee and
intermediate lessor. We determined that we are the primary obligor under the leases and, accordingly, such leases are presented gross on our balance sheet and statement of operations. All payments under the leases are paid directly by our tenant to
the landlord; however, we are required to present such payments on a gross basis under GAAP. Operating Expenses Represents the pro forma adjustments to operating expenses as follows: The MGP Transactions Elimination of the historical property depreciation for the properties under the MGM Master Lease. Since the MGM
Master Lease is determined to be an investment in lease—financing receivable, no depreciation is recognized for pro forma purposes. The amount of allowance for credit losses recognized on the initial investment balances for the MGM Master Lease,
as required under ASC 326—Credit Losses. Reassessment of the classification of the MGP ground leases at Beau Rivage, Borgata and MGM National Harbor as
noted in (bb) above. The pro forma General and administrative expenses are not reflective of expected synergies
subsequent to the MGP Transactions. The Transaction and acquisition expenses related to the MGP Transactions are not expected to recur in the future. Venetian Acquisition The amount of allowance for credit losses recognized on the initial investment balances for the Venetian Lease,
as required under ASC 326—Credit Losses. The gross presentation of the Venetian sub-leases as noted in (bb) above.
Income from Unconsolidated affiliate Represents the pro forma adjustments to Income from unconsolidated affiliate for the amortization of basis
differences resulting from the adjustment to fair value of the BREIT JV upon the closing of the MGP Transactions. 14
Interest Expense Represents the pro forma adjustments to interest expense for the MGP Transactions, Venetian Acquisition and
Financing Transactions as follows: ($ in Thousands) The MGP Transactions Elimination of the historical amortization of MGP deferred financing costs and interest expense of
MGP interest rate swaps Interest expense on new debt incurred in connection with the MGP Transactions (1) Amortization of VICI forward-starting interest rate swap agreements and treasury rate lock
agreements (2) Amortization of premium/discount on the MGP debt resulting from the adjustment to fair
value Non-recurring expenses related to the bridge commitment
fees The MGP Transactions
sub-total Venetian Acquisition Interest expense on the draw on the Revolving Credit Facility in connection with the Venetian
Acquisition (3) Non-recurring expenses related to bridge commitment
fees Venetian Acquisition
sub-total Financing Transactions Reduction in interest expense for the full repayment of the Term Loan B Facility and net
settlement of VICI interest rate swap Commitment fees and amortization of deferred costs incurred in connection with the Revolving
Credit Facility and Delayed Draw Term Loan Financing Transactions
sub-total Total Pro Forma Adjustments Estimated increase in interest expense for the incurrence of $4,404.0 million of long-term debt financing
to finance the redemption of the Redeemed Units, and related fees and expenses. For purposes of the pro forma condensed combined statement of operations, we have assumed that the $4,404.0 million of long-term debt has a weighted average fixed
interest rate of 4.85%, plus the amortization of estimated debt issuance costs. A $100.0 million increase or decrease in the long-term debt amount at the assumed interest rate would result in a change in interest expense of approximately
$4.9 million for the year ended December 31, 2021. A one-eighth of a percentage point increase or decrease in the weighted average fixed interest rate of the $4,404.0 million of long-term debt
would result in a change in interest expense of approximately $5.5 million for the year ended December 31, 2021. We have entered into five forward-starting interest rate swap agreements with a combined notional amount of
$2,500.0 million and two US Treasury Rate lock agreements with a combined notional amount of $500.0 million to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted
issuance date of the long-term debt associated with the MGP Transactions. The forward-starting interest rate swaps and US Treasury Rate locks were designated as cash-flow hedges and, accordingly, upon the incurrence of the $4,404.0 million of
long-term debt financing associated with the MGP Transactions, we will settle the forward-starting interest rate swap agreements and the fair value at settlement that is recorded in accumulated other comprehensive income will be amortized into
interest expense over the life of the interest rate swap or US Treasury Rate lock, which matches that of the hedged long-term debt. As of April 14, 2022 our forward-starting interest rate swaps were in a fair value asset position of
$193.4 million, which will be amortized into interest expense over the life of the interest rate swap which matches that of the hedged long-term debt. Estimated increase in interest expense for the $600.0 million of debt outstanding on the Revolving Credit
Facility used to finance a portion of the purchase price of the Venetian Acquisition. For purposes of the pro forma condensed combined statement of operations, we have assumed that the $600.0 million of debt outstanding on the Revolving Credit
Facility has a variable interest rate of 1.95%, using the one-month CME Term SOFR reference rate of 0.52% as of April 14, 2022. A one-eighth of a percentage point
increase or decrease in the one-month SOFR rate would result in a change in interest expense of approximately $0.8 million for the year ended December 31, 2021. There can be no assurance that we will be able to obtain long-term debt financing on the terms described above, including those with respect to
maturity or interest rate, or at all, especially if market or economic conditions change after the date of this Current Report on Form 8-K. See paragraph (d) to Note 4—Balance Sheet Pro Forma
Adjustments above. To the extent we are unable to obtain the long-term debt financing as contemplated above, we intend to borrow a similar amount under the MGP Acquisition Bridge Facility, Delayed Draw Term Loan and/or our Revolving Credit Facility,
as the case may be, and our interest expense may be greater than assumed in the pro forma condensed combined statement of operations. Gain on Unhedged
Interest Rate Swaps, Net Represents the elimination of the previously recognized unrealized gain on the unhedged portion of the MGP
interest rate swaps. 15
Income Tax Expense Represents the pro forma adjustments to income tax expense to eliminate the historical MGP income taxes and add
estimated federal, state and local taxes that are not reimbursable by our tenants. Non-Controlling Interests Represents the pro forma adjustment to net income attributable to
non-controlling interests for the MGM redeemable non-controlling interest in the VICI OP as a result of the conversion of the MGP OP Units to VICI OP Units as part of
the MGP Transactions consideration, as described in Note 3. Weighted Average Shares Outstanding Pro forma net income per common share is based on the historical weighted average shares of VICI Common Stock
outstanding, adjusted as follows to assume the following shares of VICI Common Stock were outstanding for the entire period presented: ($ in Thousands, Except Share
Amounts) Net income attributable to common stockholders VICI historical weighted average common shares outstanding—basic The MTA Transactions VICI Stock Issuance Venetian Acquisition Settlement of September 2021 Forward Sale Agreements Settlement of March 2021 Forward Sale Agreements Financing Transactions September 2021 equity offering Settlement of June 2020 Forward Sale Agreement Pro forma weighted average common shares outstanding – Basic Impact of outstanding equity incentive awards Pro forma weighted average common shares outstanding – Diluted Net Income per common share Basic Diluted 16
Year Ended December 31, 2021
MGP Historical
Adjustment
MGP, As Adjusted
$
24,122
$
(24,122)
$
—
—
24,122
24,122
$
23,648
$
(23,648)
$
—
—
25,291
25,291
1,710
(1,710
)
—
7,500
1,710
9,210
286,398
1,643
288,041
(1,643
)
1,643
—
Amount
$
6,243,711
4,404,000
355,811
143,650
$
11,147,172
(1)
Amount
156,750,325
375,786
157,126,111
1.366
214,634,268
(2)
(3)
(4)
Amount
$
14,228,826
1,402,794
18,513
17,088
(4,312,557
)
(66,727
)
(140,765
)
$
11,147,172
(1)
(2)
(3)
(a)
•
•
•
•
•
(b)
(c)
Amount
$
(5,149
)
(38,293
)
(278,102
)
372,546
(15,145
)
(884
)
206,754
$
241,727
(1)
(2)
(d)
Amount
$
95,680
4,366,517
(50,000
)
600,000
$
5,012,197
(1)
(2)
(e)
(f)
Amount
$
(52,588
)
(41,217
)
(337,460
)
384,183
(32,440
)
217,276
$
137,754
(1)
(2)
(g)
(h)
Common
Stock
Additional
Paid-in
Capital
Accumulated Other
Comprehensive
Income
Retained
Earnings
Total VICI
Stockholders’
Equity
Non-controlling
Interests
Total
Stockholders’
Equity
$
—
$
(3,735,727
)
$
41,189
$
537,715
$
(3,156,823
)
$
(2,203,022
)
$
(5,359,845
)
2,146
6,241,565
—
—
6,243,711
—
6,243,711
—
—
192,483
—
192,483
—
192,483
—
—
—
(457,773
)
(457,773
)
—
(457,773
)
1,190
3,218,012
—
—
3,219,202
—
3,219,202
—
—
—
(77,023
)
(77,023
)
—
(77,023
)
$
3,336
$
5,723,850
$
233,672
$
2,919
$
5,963,777
$
(2,203,022
)
$
3,760,755
(1)
(2)
(3)
•
•
(4)
(aa)
•
•
•
(bb)
•
•
(cc)
•
•
•
•
•
(dd)
(ee)
Year Ended
December 31, 2021
$
(60,248
)
219,870
(22,962
)
(11,188
)
15,145
140,617
11,681
914
12,595
(125,541
)
10,911
(114,630
)
$
38,582
(1)
(2)
(3)
(ff)
(gg)
(hh)
(ii)
Year Ended
December 31, 2021
$
1,679,038
564,467,362
214,634,268
50,000,000
69,000,000
45,997,268
18,668,306
962,767,204
924,321
963,691,525
$
1.74
$
1.74
Exhibit 99.3
VICI PROPERTIES L.P.
Consolidated financial statements as of December 31, 2021 and 2020
and for the years ended December 31, 2021, 2020 and 2019
With report of Independent Auditors
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) |
2 | |||
| Consolidated Balance Sheets as of December 31, 2021 and 2020 |
3 | |||
| Years Ended December 31, 2021, 2020 and 2019 |
||||
| Consolidated Statements of Operations and Comprehensive Income |
4 | |||
| Consolidated Statements of Partners’ Capital |
5 | |||
| Consolidated Statements of Cash Flows |
6 | |||
| Notes to Consolidated Financial Statements |
8 | |||
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of VICI Properties L.P. and the Board of Directors of VICI Properties Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of VICI Properties L.P. and subsidiaries (the “Partnership”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, partners’ capital, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 5 to the financial statements, effective January 1, 2020, the Partnership adopted Accounting Standard Update No. 2016-13 - Financial Instruments-Credit Losses (Topic 326) using the modified retrospective approach.
Basis for Opinion
These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses— Refer to Notes 2 and 5 to the financial statements
Critical Audit Matter Description
The Partnership applies Accounting Standard Codification Topic 326- Financial Instruments-Credit Losses to measure and record current expected credit losses (“CECL”) using a discounted cash flow model for its sales-type leases, lease financing receivables and loans. This model requires the Partnership to develop cash flows which are used to project estimated credit losses over the life of the sales-type lease, lease financing receivable or loan and discount these cash flows at the asset’s effective interest rate.
Expected losses within the Partnership’s cash flows are determined by estimating the probability of default (“PD”) and loss given default (“LGD”) of its tenants or borrowers and their parent guarantors over the life of each sales-type lease, lease financing receivable or loan by using a model from an independent third-party provider. The PD and LGD are estimated during a reasonable and supportable period which is developed by using the current financial condition of the tenants or borrowers and their parent guarantors and applying it to a projection of economic conditions over a two-year term. The PD and LGD are also estimated for a long-term period by using the average historical default rates and historical loss rates of public companies that have similar credit profiles or characteristics to the Partnership’s tenants or borrowers and their parent guarantors. Significant inputs to the Partnership’s forecasting methods include the tenants’ short-term and long-term PD and LGD based on the tenant’s or borrower’s and their parent guarantor’s credit profile as well as the cash flows from each sales-type lease, lease financing receivable or loan.
Given the significant amount of judgment required by management to estimate the allowance for credit losses, performing audit procedures to evaluate the reasonableness of the estimated allowance for credit losses on the Partnership’s portfolio of sales-type leases, lease financing receivables and loans required a high degree of auditor judgment and increased effort, including the need to involve our credit specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the allowance for credit losses for the Partnership’s sales-type leases, lease financing receivables and loans included the following, among others:
| • | We tested the effectiveness of controls over the allowance for credit losses, including management’s controls over the data used in the model. |
| • | With the assistance of our credit specialists, we evaluated the reasonableness of the model’s methodology, which includes PD and LGD assumptions. |
| • | We tested the inputs used to determine the short-term and long-term PD of the tenants or borrowers and their parent guarantors by agreeing the respective credit rating and equity value of each entity to independent data. |
| • | We reconciled the cash flow inputs used in the CECL model by agreeing them to the respective contractual agreements. |
/s/ Deloitte & Touche LLP
New York, New York
April 18, 2022
We have served as the Partnership’s auditor since 2022.
2
VICI PROPERTIES L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except unit and per unit data)
| December 31, 2021 | December 31, 2020 | |||||||
| Assets |
||||||||
| Real estate portfolio: |
||||||||
| Investments in leases - sales-type, net |
$ | 13,136,664 | $ | 13,027,644 | ||||
| Investments in leases - financing receivables, net |
2,644,824 | 2,618,562 | ||||||
| Investments in loans, net |
498,002 | 536,721 | ||||||
| Land |
153,576 | 158,190 | ||||||
| Cash and cash equivalents |
705,566 | 286,245 | ||||||
| Short-term investments |
— | 19,973 | ||||||
| Other assets |
344,014 | 305,720 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 17,482,646 | $ | 16,953,055 | ||||
|
|
|
|
|
|||||
| Liabilities |
||||||||
| Debt, net |
$ | 4,694,523 | $ | 6,765,532 | ||||
| Accrued expenses and deferred revenue |
110,056 | 150,214 | ||||||
| Distributions payable |
226,309 | 176,992 | ||||||
| Other liabilities |
361,270 | 457,138 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
5,392,158 | 7,549,876 | ||||||
|
|
|
|
|
|||||
| Commitments and Contingencies (Note 10) |
||||||||
| Partners’ Capital |
||||||||
| Partners’ capital, 628,942,092 and 536,669,722 operating partnership units issued and outstanding as of December 31, 2021 and December 31, 2020, respectively |
12,010,698 | 9,417,794 | ||||||
| Accumulated other comprehensive income (loss) |
884 | (92,521 | ) | |||||
|
|
|
|
|
|||||
| Total partners’ capital |
12,011,582 | 9,325,273 | ||||||
| Non-controlling interest |
78,906 | 77,906 | ||||||
|
|
|
|
|
|||||
| Total capital attributable to partners |
12,090,488 | 9,403,179 | ||||||
|
|
|
|
|
|||||
| Total liabilities and partners’ capital |
$ | 17,482,646 | $ | 16,953,055 | ||||
|
|
|
|
|
|||||
Note: As of December 31, 2021 and December 31, 2020, our Investments in leases - sales-type, Investments in leases - financing receivables, Investments in loans and Other assets (sales-type sub-leases) are net of $434.9 million, $91.1 million, $0.8 million and $6.5 million, respectively, and $454.2 million, $91.0 million, $1.8 million, and $6.9 million, respectively, of Allowance for credit losses. Refer to Note 5 - Allowance for Credit Losses for further details.
See accompanying Notes to Consolidated Financial Statements.
3
VICI PROPERTIES L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except unit and per unit data)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Revenues |
||||||||||||
| Income from sales-type and direct financing leases |
$ | 1,167,972 | $ | 1,007,508 | $ | 822,205 | ||||||
| Income from operating leases |
— | 25,464 | 43,653 | |||||||||
| Income from lease financing receivables and loans |
283,242 | 153,017 | — | |||||||||
| Other income |
27,808 | 15,793 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
1,479,022 | 1,201,782 | 865,858 | |||||||||
| Operating expenses |
||||||||||||
| General and administrative |
33,122 | 30,654 | 24,569 | |||||||||
| Depreciation |
121 | 116 | 16 | |||||||||
| Other expenses |
27,808 | 15,793 | — | |||||||||
| Change in allowance for credit losses |
(19,554 | ) | 244,517 | — | ||||||||
| Transaction and acquisition expenses |
10,402 | 8,684 | 4,998 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total operating expenses |
51,899 | 299,764 | 29,583 | |||||||||
| Interest expense |
(392,390 | ) | (308,605 | ) | (248,384 | ) | ||||||
| Interest income |
103 | 6,712 | 6,489 | |||||||||
| Loss from extinguishment of debt |
(15,622 | ) | (39,059 | ) | (58,143 | ) | ||||||
| Gain upon lease modification |
— | 333,352 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Income before income taxes |
1,019,214 | 894,418 | 536,237 | |||||||||
| Income tax expense |
(1,373 | ) | (276 | ) | (470 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net income |
1,017,841 | 894,142 | 535,767 | |||||||||
| Less: Net income attributable to non-controlling interest |
(9,307 | ) | (4,534 | ) | (8,317 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net income attributable to partners |
$ | 1,008,534 | $ | 889,608 | $ | 527,450 | ||||||
|
|
|
|
|
|
|
|||||||
| Net income per Partnership unit |
||||||||||||
| Basic |
$ | 1.79 | $ | 1.76 | $ | 1.21 | ||||||
| Diluted |
$ | 1.75 | $ | 1.74 | $ | 1.20 | ||||||
| Weighted average number of Partnership units outstanding |
||||||||||||
| Basic |
564,467,362 | 506,140,642 | 435,071,096 | |||||||||
| Diluted |
577,066,292 | 510,908,755 | 439,152,946 | |||||||||
| Other comprehensive income |
||||||||||||
| Net income attributable to partners |
$ | 1,008,534 | $ | 889,608 | $ | 527,450 | ||||||
| Unrealized gain (loss) on cash flow hedges |
29,166 | (27,443 | ) | (42,954 | ) | |||||||
| Reclassification of realized loss on cash flow hedges to net income |
64,239 | — | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Comprehensive income attributable to partners |
$ | 1,101,939 | $ | 862,165 | $ | 484,496 | ||||||
|
|
|
|
|
|
|
|||||||
See accompanying Notes to Consolidated Financial Statements.
4
VICI PROPERTIES L.P.
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(In thousands, except unit and per unit data)
| Partners’ Capital | Accumulated Other Comprehensive Income (Loss) |
Non-Controlling Interest |
Total | |||||||||||||
| Balance as of December 31, 2018 |
$ | 5,861,034 | $ | (22,124 | ) | $ | 83,573 | $ | 5,922,483 | |||||||
| Net income |
527,450 | — | 8,317 | 535,767 | ||||||||||||
| Stock-based compensation |
5,195 | — | — | 5,195 | ||||||||||||
| Contributions from Partners |
1,813,127 | — | — | 1,813,127 | ||||||||||||
| Distributions to Partners |
(260,739 | ) | — | — | (260,739 | ) | ||||||||||
| Distributions to non-controlling interest |
— | — | (8,084 | ) | (8,084 | ) | ||||||||||
| Unrealized loss on cash flow hedges |
— | (42,954 | ) | — | (42,954 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance as of December 31, 2019 |
7,946,067 | (65,078 | ) | 83,806 | 7,964,795 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cumulative effect of adoption of ASC 326 |
(307,114 | ) | — | (2,248 | ) | (309,362 | ) | |||||||||
| Net income |
889,608 | — | 4,534 | 894,142 | ||||||||||||
| Stock-based compensation |
7,322 | — | — | 7,322 | ||||||||||||
| Contributions from Partners |
1,544,363 | — | — | 1,544,363 | ||||||||||||
| Distributions to Partners |
(662,452 | ) | — | — | (662,452 | ) | ||||||||||
| Distributions to non-controlling interest |
— | — | (8,186 | ) | (8,186 | ) | ||||||||||
| Unrealized loss on cash flow hedges |
— | (27,443 | ) | — | (27,443 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance as of December 31, 2020 |
9,417,794 | (92,521 | ) | 77,906 | 9,403,179 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income |
1,008,534 | — | 9,307 | 1,017,841 | ||||||||||||
| Stock-based compensation |
9,266 | — | — | 9,266 | ||||||||||||
| Contributions from Partners |
2,405,602 | — | — | 2,405,602 | ||||||||||||
| Distributions to Partners |
(830,498 | ) | — | — | (830,498 | ) | ||||||||||
| Distributions to non-controlling interest |
— | — | (8,307 | ) | (8,307 | ) | ||||||||||
| Unrealized gain on cash flow hedges |
— | 29,166 | — | 29,166 | ||||||||||||
| Reclassification of realized loss on cash flow hedges to net income |
— | 64,239 | — | 64,239 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance as of December 31, 2021 |
$ | 12,010,698 | $ | 884 | $ | 78,906 | $ | 12,090,488 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying Notes to Consolidated Financial Statements.
5
VICI PROPERTIES L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except unit and per unit data)
| Year Ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| Cash flows from operating activities |
||||||||||||
| Net income |
$ | 1,017,841 | $ | 894,142 | $ | 535,767 | ||||||
| Adjustments to reconcile net income to cash flows provided by operating activities: |
||||||||||||
| Non-cash leasing and financing adjustments |
(119,969 | ) | (41,764 | ) | 239 | |||||||
| Stock-based compensation |
9,266 | 7,322 | 5,195 | |||||||||
| Depreciation |
121 | 116 | 16 | |||||||||
| Amortization of debt issuance costs and original issue discount |
71,452 | 19,872 | 33,034 | |||||||||
| Change in allowance for credit losses |
(19,554 | ) | 244,517 | — | ||||||||
| Loss on extinguishment of debt |
15,622 | 39,059 | 58,143 | |||||||||
| Gain upon lease modification |
— | (333,352 | ) | — | ||||||||
| Change in operating assets and liabilities: |
||||||||||||
| Other assets |
2,143 | (3,885 | ) | (6,330 | ) | |||||||
| Accrued expenses and deferred revenue |
(91,026 | ) | 46,402 | 35,267 | ||||||||
| Other liabilities |
308 | (97 | ) | 29 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
886,204 | 872,332 | 661,360 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from investing activities |
||||||||||||
| Investments in leases - sales-type and direct financing |
— | (1,407,260 | ) | (846,723 | ) | |||||||
| Investments in leases - financing receivables |
(6,000 | ) | (2,694,503 | ) | — | |||||||
| Investments in loans |
(33,614 | ) | (535,476 | ) | — | |||||||
| Principal repayments of lease financing receivables |
543 | 1,961 | — | |||||||||
| Principal repayments of loan and receipts of deferred fees |
70,448 | — | — | |||||||||
| Capitalized transaction costs |
(20,697 | ) | (264 | ) | (8,698 | ) | ||||||
| Investments in short-term investments |
— | (19,973 | ) | (97,586 | ) | |||||||
| Maturities of short-term investments |
19,973 | 59,474 | 141,337 | |||||||||
| Proceeds from sale of real estate |
13,301 | 50,050 | 1,044 | |||||||||
| Acquisition of property and equipment |
(15 | ) | (589 | ) | (610 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) investing activities |
43,939 | (4,546,580 | ) | (811,236 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Cash flows from financing activities |
||||||||||||
| Proceeds from February 2020 Senior Unsecured Notes |
— | 2,500,000 | — | |||||||||
| Proceeds from November 2019 Senior Unsecured Notes |
— | — | 2,250,000 | |||||||||
| Repayment of Term Loan B Facility |
(2,100,000 | ) | — | — | ||||||||
| Redemption of Second Lien Notes |
— | (537,538 | ) | — | ||||||||
| Repayment of CPLV CMBS Debt |
— | — | (1,663,544 | ) | ||||||||
| Contributions from Partners |
2,386,911 | 1,539,862 | 729,619 | |||||||||
| Distribution to Partners |
(758,300 | ) | (614,057 | ) | (226,971 | ) | ||||||
| CPLV CMBS Debt prepayment penalty reimbursement |
— | 55,401 | — | |||||||||
| Debt issuance costs |
(31,126 | ) | (57,794 | ) | (56,055 | ) | ||||||
| Distributions to non-controlling interests |
(8,307 | ) | (8,186 | ) | (8,084 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash (used in) provided by financing activities |
(510,822 | ) | 2,877,688 | 1,024,965 | ||||||||
|
|
|
|
|
|
|
|||||||
6
VICI PROPERTIES L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Net increase (decrease) in cash, cash equivalents and restricted cash |
419,321 | (796,560 | ) | 875,089 | ||||||||
| Cash, cash equivalents and restricted cash, beginning of period |
286,245 | 1,082,805 | 207,716 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash, cash equivalents and restricted cash, end of period |
$ | 705,566 | $ | 286,245 | $ | 1,082,805 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental cash flow information: |
||||||||||||
| Cash paid for interest |
$ | 323,219 | $ | 262,464 | $ | 209,379 | ||||||
| Cash paid for income taxes |
1,397 | 561 | 490 | |||||||||
| Supplemental non-cash investing and financing activity: |
||||||||||||
| Distributions payable |
$ | 226,309 | $ | 176,992 | $ | 137,059 | ||||||
| Debt issuance costs payable |
43,005 | — | 16,066 | |||||||||
| Deferred transaction costs payable |
3,877 | 496 | 1,314 | |||||||||
| Non-cash change in Investments in leases - financing receivables |
21,139 | 8,116 | — | |||||||||
| Lease liabilities arising from obtaining right-of-use assets |
— | 282,054 | 15,383 | |||||||||
| Transfer of Investments in leases - operating to Investments in leases - sales-type and direct financing due to modification of the Caesars Lease Agreements in connection with the Eldorado Transaction |
— | 1,023,179 | — | |||||||||
| Transfer of Investments in leases - operating to Land due to modification of the Caesars Lease Agreements in connection with the Eldorado Transaction |
— | 63,479 | — | |||||||||
| Non-cash contribution of real estate assets from partner |
— | — | 965,681 | |||||||||
| Non-cash contribution of short-term investments from partner |
— | — | 103,225 | |||||||||
| CPLV CMBS Debt prepayment penalty reimbursement receivable from Caesars |
— | — | 55,401 |
See accompanying Notes to Consolidated Financial Statements.
7
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In these notes, the words “Partnership,” “we,” “our,” and “us” refer to VICI Properties L.P. and its subsidiaries, on a consolidated basis, unless otherwise stated or the context requires otherwise.
We refer to (i) our consolidated Financial Statements as our “Financial Statements,” (ii) our consolidated Balance Sheets as our “Balance Sheet,” (iii) our consolidated Statements of Operations and Comprehensive Income as our “Statement of Operations,” and (iv) our consolidated Statement of Cash Flows as our “Statement of Cash Flows.” References to numbered “Notes” refer to the Notes to our Financial Statements.
“2025 Notes” refers to $750.0 million aggregate principal amount of 3.500% senior unsecured notes due 2025 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“2026 Notes” refers to $1.25 billion aggregate principal amount of 4.250% senior unsecured notes due 2026 issued by us and VICI Note Co. Inc., as Co-Issuer, in November 2019.
“2027 Notes” refers to $750.0 million aggregate principal amount of 3.750% senior unsecured notes due 2027 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“2029 Notes” refers to $1.0 billion aggregate principal amount of 4.625% senior unsecured notes due 2029 issued by us and VICI Note Co. Inc., as Co-Issuer, in November 2019.
“2030 Notes” refers to $1.0 billion aggregate principal amount of 4.125% senior unsecured notes due 2030 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“Apollo” refers to Apollo Global Management, Inc., a Delaware corporation, and, as the context requires, certain of its subsidiaries and affiliates.
“BREIT JV” refers to the joint venture between MGP and Blackstone Real Estate Income Trust, Inc. in which we will retain MGP’s existing 50.1% ownership stake following the closing of the MGP Transactions.
“Caesars” refers to Caesars Entertainment, Inc., a Delaware corporation, formerly Eldorado, following the consummation of the Eldorado/Caesars Merger on July 20, 2020 and Eldorado’s conversion to a Delaware corporation.
“Caesars Forum Convention Center” refers to the Caesars Forum Convention Center in Las Vegas, Nevada, and 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.
“Caesars Lease Agreements” refer collectively to (i) prior to the consummation of the Eldorado Transaction, the CPLV Lease Agreement, the Non-CPLV Lease Agreement, the Joliet Lease Agreement and the HLV Lease Agreement, and (ii) from and after the consummation of the Eldorado Transaction, the Las Vegas Master Lease Agreement, the Regional Master Lease Agreement and the Joliet Lease Agreement, in each case, unless the context otherwise requires.
“Caesars Southern Indiana” refers to the real estate assets associated with the Caesars Southern Indiana Casino and Hotel, located in Elizabeth, Indiana, the operations of which were purchased by EBCI from Caesars on September 3, 2021, and which retained the Caesars brand name in accordance with the terms of a licensing agreement negotiated between EBCI and Caesars.
“Century Casinos” refers to Century Casinos, Inc., a Delaware corporation, and, as the context requires, its subsidiaries.
“Century Portfolio” refers to the real estate assets associated with the (i) Mountaineer Casino, Racetrack & Resort located in New Cumberland, West Virginia, (ii) Century Casino Caruthersville located in Caruthersville, Missouri and (iii) Century Casino Cape Girardeau located in Cape Girardeau, Missouri, which we purchased on December 6, 2019.
“Century Portfolio Lease Agreement” refers to the lease agreement for the Century Portfolio, as amended from time to time.
“Co-Issuer” refers to VICI Note Co. Inc., a Delaware corporation, and co-issuer of the Senior Unsecured Notes.
“CPLV CMBS Debt” refers to $1.55 billion of asset-level real estate mortgage financing of Caesars Palace Las Vegas, incurred by our subsidiary on October 6, 2017 and repaid in full on November 26, 2019.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
“CPLV Lease Agreement” refers to the lease agreement for Caesars Palace Las Vegas, as amended from time to time, which was combined with the HLV Lease Agreement into the Las Vegas Master Lease Agreement upon the consummation of the Eldorado Transaction.
“Credit Agreement” refers to the Credit Agreement, dated as of February 8, 2022, by and among us, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as amended from time to time.
“Credit Facilities” refers collectively to the Delayed Draw Term Loan and the Revolving Credit Facility.
“Delayed Draw Term Loan” refers to our three-year unsecured delayed draw term loan facility provided under the Credit Agreement.
“EBCI” refers to the Eastern Band of Cherokee Indians, a federally recognized Tribe located in western North Carolina, and, as the context requires, its subsidiary and affiliate entities.
“EBCI Lease Agreement” refers to the lease agreement for Caesars Southern Indiana, as amended from time to time.
“Eldorado” refers to Eldorado Resorts, Inc., a Nevada corporation, and, as the context requires, its subsidiaries. Following the consummation of the Eldorado/Caesars Merger on July 20, 2020, Eldorado converted to a Delaware corporation and changed its name to Caesars Entertainment, Inc.
“Eldorado Master Transaction Agreement” or “Eldorado MTA” refers to the Master Transaction Agreement dated June 24, 2019 with Eldorado relating to the Eldorado Transaction. The Eldorado MTA was previously referred to as the “Master Transaction Agreement” or “MTA”.
“Eldorado Transaction” refers to a series of transactions between us and Eldorado in connection with the Eldorado/Caesars Merger, including the acquisition of the Harrah’s Original Call Properties, modifications to the Caesars Lease Agreements, and rights of first refusal.
“Eldorado/Caesars Merger” refers to the merger consummated on July 20, 2020 under an Agreement and Plan of Merger pursuant to which a subsidiary of Eldorado merged with and into Pre-Merger Caesars, with Pre-Merger Caesars surviving as a wholly owned subsidiary of Caesars (which changed its name from Eldorado in connection with the closing of the Eldorado/ Caesars Merger).
“February 2020 Senior Unsecured Notes” refers collectively to the 2025 Notes, the 2027 Notes and the 2030 Notes.
“Greektown” refers to the real estate assets associated with the Greektown Casino-Hotel, located in Detroit, Michigan, which we purchased on May 23, 2019.
“Greektown Lease Agreement” refers to the lease agreement for Greektown, as amended from time to time.
“Hard Rock” means Seminole Hard Rock International, LLC, and, as the context requires, its subsidiary and affiliate entities.
“Hard Rock Cincinnati” refers to the casino-entitled land and real estate and related assets associated with the Hard Rock Cincinnati Casino, located in Cincinnati, Ohio, which we purchased on September 20, 2019.
“Hard Rock Cincinnati Lease Agreement” refers to the lease agreement for Hard Rock Cincinnati, as amended from time to time.
“Harrah’s Original Call Properties” refers to the land and real estate assets associated with Harrah’s New Orleans, Harrah’s Laughlin and Harrah’s Atlantic City, which we purchased on July 20, 2020 upon the consummation of the Eldorado Transaction. The Harrah’s Original Call Properties were previously referred to as the “MTA Properties”.
“HLV Lease Agreement” refers to the lease agreement for the Harrah’s Las Vegas facilities, as amended from time to time, which was combined with the CPLV Lease Agreement into the Las Vegas Master Lease Agreement upon the consummation of the Eldorado Transaction.
“JACK Entertainment” refers to JACK Ohio LLC, and, as the context requires, its subsidiary and affiliate entities.
“JACK Cleveland/Thistledown” refers to the casino-entitled land and real estate and related assets associated with the JACK Cleveland Casino located in Cleveland, Ohio, and the video lottery gaming and pari-mutuel wagering authorized land and real estate and related assets of JACK Thistledown Racino located in North Randall, Ohio, which we purchased on January 24, 2020.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
“JACK Cleveland/Thistledown Lease Agreement” refers to the lease agreement for JACK Cleveland/Thistledown, as amended from time to time.
“Joliet Lease Agreement” refers to the lease agreement for the facility in Joliet, Illinois, as amended from time to time.
“Las Vegas Master Lease Agreement” refers to the lease agreement for Caesars Palace Las Vegas and the Harrah’s Las Vegas facilities, as amended from time to time, from and after the consummation of the Eldorado Transaction.
“Lease Agreements” refer collectively to the Caesars Lease Agreements, the Penn National Lease Agreements, the Hard Rock Cincinnati Lease Agreement, the Century Portfolio Lease Agreement, the JACK Cleveland/Thistledown Lease Agreement, the EBCI Lease Agreement and the Venetian Lease Agreement, unless the context otherwise requires.
“Margaritaville” refers to the real estate of Margaritaville Resort Casino, located in Bossier City, Louisiana, which we purchased on January 2, 2019.
“Margaritaville Lease Agreement” refers to the lease agreement for Margaritaville, as amended from time to time.
“Mergers” refers to a series of transactions contemplated under the MGP Master Transaction Agreement, consisting of (i) the contribution of VICI REIT’s Partnership interest to VICI OP, which will serve as VICI REIT’s new operating company, followed by (ii) the merger of MGP with and into REIT Merger Sub, with REIT Merger Sub surviving the merger, followed by (iii) the distribution by REIT Merger Sub of the interests of the general partner of MGP OP to us and, (iv) the merger of REIT Merger Sub with and into MGP OP, with MGP OP surviving such merger.
“MGM” refers to MGM Resorts International, a Delaware corporation, and, as the context requires, its subsidiaries.
“MGM Master Lease Agreement” refers to the form of amended and restated triple-net master lease to be entered into by us and MGM with respect to certain MGM properties that will be owned by us upon consummation of the MGP Transactions.
“MGM Tax Protection Agreement” refers to the form of tax protection agreement that we have agreed to enter into with MGM upon consummation of the MGP Transactions.
“MGP” refers to MGM Growth Properties LLC, a Delaware limited liability company, and, as the context requires, its subsidiaries.
“MGP Master Transaction Agreement” refers to that certain Master Transaction Agreement between VICI REIT, MGP, MGP OP, the Partnership, Venus Sub LLC, a Delaware limited liability company and wholly owned subsidiary of the Partnership (“REIT Merger Sub”), VICI Properties OP LLC, a Delaware limited liability company and parent of the Partnership (“VICI OP”), and MGM entered into on August 4, 2021.
“MGP OP” refers to MGM Growth Properties Operating Partnership LP, a Delaware limited partnership, and, as the context requires, its subsidiaries.
“MGP OP Notes” refers collectively to the notes issued by MGP OP and MGP Finance Co-Issuer, Inc. (“MGP Co-Issuer” and, together with MGP OP, the “MGP Issuers”), consisting of (i) the 5.625% Senior Notes due 2024 issued pursuant to the indenture, dated as of April 20, 2016, (ii) the 4.625% Senior Notes due 2025 issued pursuant to the indenture, dated as of June 5, 2020, (iii) the 4.500% Senior Notes due 2026 issued pursuant to the indenture, dated as of August 12, 2016, (iv) the 5.750% Senior Notes due 2027 issued pursuant to the indenture, dated as of January 25, 2019, (v) the 4.500% Senior Notes due 2028 issued pursuant to the indenture, dated as of September 21, 2017, and (vi) the 3.875% Senior Notes due 2029 issued pursuant to the indenture, dated as of November 19, 2020, in each case, as amended or supplemented as of the date hereof, among the MGP Issuers, the subsidiary guarantors party thereto (the “MGP Subsidiary Guarantors”) and U.S. Bank National Association, as trustee (the “MGP Trustee”).
“MGP Transactions” refers, collectively, to a series of transactions pursuant to the MGP Master Transaction Agreement between VICI REIT, us, MGP and MGM and the other parties thereto in connection with VICI REIT’s acquisition of MGP, as contemplated by the MGP Master Transaction Agreement, including the MGM Tax Protection Agreement and the MGM Master Lease Agreement.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
“Non-CPLV Lease Agreement” refers to the lease agreement for regional properties (other than the facility in Joliet, Illinois) leased to Pre-Merger Caesars prior to the consummation of the Eldorado Transaction, as amended from time to time, which was replaced by the Regional Master Lease Agreement upon the consummation of the Eldorado Transaction.
“November 2019 Senior Unsecured Notes” refers collectively to the 2026 Notes and the 2029 Notes.
“Parent” refers to VICI REIT, as defined below.
“Partners” refers to the holders of the Partnership’s common units, including VICI REIT and such other holders from time to time.
“Penn National” refers to Penn National Gaming, Inc., a Pennsylvania corporation, and, as the context requires, its subsidiaries.
“Penn National Lease Agreements” refer collectively to the Margaritaville Lease Agreement and the Greektown Lease Agreement, unless the context otherwise requires.
“Pre-Merger Caesars” refers to Caesars Entertainment Corporation, a Delaware corporation, and, as the context requires, its subsidiaries. Following the consummation of the Eldorado/Caesars Merger on July 20, 2020, Pre-Merger Caesars became a wholly owned subsidiary of Caesars.
“Regional Master Lease Agreement” refers to the lease agreement for the regional properties (other than the facility in Joliet, Illinois) leased to Caesars, as amended from time to time, from and after the consummation of the Eldorado Transaction.
“Revolving Credit Facility” refers to our four-year unsecured revolving credit facility provided under the Credit Agreement.
“Second Lien Notes” refers to $766.9 million aggregate principal amount of 8.0% second priority senior secured notes due 2023 issued by our subsidiary in October 2017, the remaining $498.5 million aggregate principal amount outstanding as of December 31, 2019 of which was redeemed in full on February 20, 2020.
“Secured Revolving Credit Facility” refers to the five-year first lien revolving credit facility entered into by VICI PropCo in December 2017, as amended, which was terminated on February 8, 2022.
“Seminole Hard Rock” means Seminole Hard Rock Entertainment, Inc.
“Term Loan B Facility” refers to the seven-year senior secured first lien term loan B facility entered into by VICI PropCo in December 2017, as amended from time to time, which was repaid in full on September 15, 2021.
“Venetian Acquisition” refers to our acquisition of the Venetian Resort, with Apollo, which closed on February 23, 2022.
“Venetian Lease Agreement” refers to the lease agreement for the Venetian Resort.
“Venetian Resort” refers to the land and real estate assets associated with the Venetian Resort Las Vegas and Venetian Expo, located in Las Vegas, Nevada, which we purchased on February 23, 2022.
“Venetian Tenant” refers to an affiliate of certain funds managed by affiliates of Apollo.
“VICI Issuers” refers collectively to us and VICI Note Co. Inc., a Delaware corporation.
“VICI PropCo” refers to VICI Properties 1 LLC, a Delaware limited liability company and our wholly-owned subsidiary..
“VICI REIT” refers to VICI Properties Inc., a Maryland corporation and the direct parent company to us. VICI operates as a publicly traded real estate investment trust (“REIT”).
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1 — Business and Organization
We are a Delaware partnership, and wholly owned subsidiary of VICI REIT, that is primarily engaged in the business of owning and acquiring gaming, hospitality and entertainment destinations, subject to long-term triple net leases. Our national, geographically diverse portfolio consisted of 27 market-leading properties, including Caesars Palace Las Vegas and Harrah’s Las Vegas (and following the closing of the acquisition of the Venetian Resort on February 23, 2022, our portfolio consists of 28 properties). Our properties are leased to, and our tenants are, subsidiaries of Caesars, Penn National, Hard Rock, Century Casinos, JACK Entertainment and EBCI (and following the closing of the acquisition of the Venetian Resort on February 23, 2022, an entity managed by Apollo also became one of our tenants).
Impact of the COVID-19 Pandemic on our Business
Since the emergence of the COVID-19 pandemic in early 2020, among the broader public health, societal and global impacts, the pandemic has resulted in governmental and/or regulatory actions imposing temporary closures or restrictions from time to time on our tenants’ operations at our properties. Although all of our leased properties are currently open and operating, without restriction in some jurisdictions, they remain subject to any current or future operating limitations, restrictions or closures imposed by governmental and/or regulatory authorities. While our tenants’ recent performance at many of our leased properties has been at or above pre-pandemic levels, our tenants may continue to face additional challenges and uncertainty due to the impact of the COVID-19 pandemic, such as complying with operational and capacity restrictions and ensuring sufficient employee staffing and service levels, and the sustainability of maintaining improved operating margins and financial performance. Due to prior closures, operating restrictions and other factors, our tenants’ operations, liquidity and financial performance have been adversely affected, and the ongoing nature of the pandemic, including emerging variants, may further adversely affect our tenants’ businesses and, accordingly, our business and financial performance could be adversely affected in the future.
All of our tenants have fulfilled their rent obligations through April 2022 and we regularly engage with our tenants in connection with their business performance, operations, liquidity and financial results. 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, the full extent to which the COVID-19 pandemic continues to adversely affect our tenants, and ultimately impacts us, depends on future developments which cannot be predicted with confidence, including the actions taken to contain the pandemic or mitigate its impact, including the availability, distribution, public acceptance and efficacy of approved vaccines, new or mutated variants of COVID-19 (including vaccine-resistant variants) or a similar virus, the direct and indirect economic effects of the pandemic and containment measures on our tenants, our tenants’ financial performance and any future operating limitations or closures.
Note 2 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) as set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).
Principles of Consolidation and Non-controlling Interest
The accompanying consolidated Financial Statements include our accounts and the accounts of our subsidiaries in which we have a controlling interest. All intercompany account balances and transactions have been eliminated in consolidation. We consolidate all subsidiaries in which we have a controlling financial interest and variable interest entities for which we or one of our consolidated subsidiaries is the primary beneficiary.
We present non-controlling interest and classify such interest as a component of consolidated equity, separate from Partners’ capital. Our non-controlling interest represents a 20% third-party ownership of Harrah’s Joliet LandCo LLC, the entity that owns the Harrah’s Joliet property and is the lessor under the related Joliet Lease Agreement.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from these estimates.
Reportable Segments
Our real property business represents one reportable segment. The real property business segment consists of leased real property and real estate lending activities and represents the entirety of our business.
Cash, Cash Equivalents and Restricted Cash
Cash consists of cash-on-hand and cash-in-bank. Highly liquid investments with an original maturity of three months or less from the date of purchase are considered cash equivalents and are carried at cost, which approximates fair value. As of December 31, 2021 and 2020, we did not have any restricted cash.
Short-Term Investments
Investments with an original maturity of greater than three months and less than one year from the date of purchase are considered short-term investments and are stated at fair value.
We may invest our excess cash in short-term investment grade commercial paper as well as discount notes issued by government-sponsored enterprises including the Federal Home Loan Mortgage Corporation and certain of the Federal Home Loan Banks. These investments generally have original maturities between 91 and 180 days and are accounted for as available for sale securities. Interest on our short-term investments is recognized as interest income in our Statement of Operations. We had $20.0 million of short-term investments as of December 31, 2020. We did not have any short-term investments as of December 31, 2021.
Investments in Leases - Sales-type, Net
We account for our investments in leases under ASC 842 “Leases” (“ASC 842”). Upon lease inception or lease modification, we assess lease classification to determine whether the lease should be classified as a direct financing, sales-type or operating lease. As required by ASC 842, we separately assess the land and building components of the property to determine the classification of each component. If the lease component is determined to be a direct financing or sales-type lease, we record a net investment in the lease, which is equal to the sum of the lease receivable and the unguaranteed residual asset, discounted at the rate implicit in the lease. Any difference between the fair value of the asset and the net investment in the lease is considered selling profit or loss and is either recognized upon execution of the lease or deferred and recognized over the life of the lease, depending on the classification of the lease. Since we purchase properties and simultaneously enter into new leases directly with the tenants, the net investment in the lease is generally equal to the purchase price of the asset, and, due to the long-term nature of our leases, the land and building components of an investment generally have the same lease classification.
We have determined that the land and building components of the Las Vegas Master Lease Agreement, the Regional Master Lease Agreement (excluding the Harrah’s Original Call Properties (as defined in Note 3 - Property Transactions)), the Joliet Lease Agreement, the Margaritaville Lease Agreement, the Greektown Lease Agreement, the Hard Rock Cincinnati Lease Agreement, the Century Portfolio Lease Agreement and the EBCI Lease Agreement meet the definition of a sales-type lease under ASC 842.
Investments in Leases - Financing Receivables, Net
In accordance with ASC 842, for transactions in which we enter into a contract to acquire an asset and lease it back to the seller under a sales-type lease (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred to us. As a result, we do not recognize the underlying asset but instead recognize a financial asset in accordance with ASC 310 “Receivables” (“ASC 310”). The accounting for the financing receivable under ASC 310 is materially consistent with the accounting for our investments in leases - sales-type under ASC 842. We determined that the land and building components of the JACK Cleveland/Thistledown Lease Agreement meet the definition of a sales-type lease and, since we purchased and leased the assets back to the seller under a sale leaseback transaction, control is not considered to have transferred to us under GAAP.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accordingly, the JACK Cleveland/Thistledown Lease Agreement is accounted for as Investments in leases - financing receivables on our Balance Sheet, net of allowance for credit losses, in accordance with ASC 310.
Upon the consummation of the Eldorado Transaction on July 20, 2020, we reassessed the classification of the Caesars Lease Agreements and determined that the Harrah’s Original Call Properties Acquisitions (as defined in Note 3 - Property Transactions) meet the definition of a separate contract under ASC 842. In accordance with this guidance, we are required to separately assess the lease classification apart from the other assets in the Regional Master Lease Agreement. We determined that the land and building components of the Harrah’s Original Call Properties meet the definition of a sales-type lease and, since we purchased and leased the assets back to Caesars, control is not considered to have transferred to us under GAAP. Accordingly, the Harrah’s Original Call Properties are accounted for as Investments in leases - financing receivables on our Balance Sheet, net of allowance for credit losses, in accordance with ASC 310.
Lease Term
We assess the noncancelable lease term under ASC 842, which includes any reasonably assured renewal periods. All of our Lease Agreements provide for an initial term, with multiple tenant renewal options. We have individually assessed all of our Lease Agreements and concluded that the lease term includes all of the periods covered by extension options as it is reasonably certain our tenants will renew the Lease Agreements. We believe our tenants are economically compelled to renew the Lease Agreements due to the importance of our real estate to the operation of their business, the significant capital they have invested in our properties and the lack of suitable replacement assets.
Income from Leases and Lease Financing Receivables
We recognize the related income from our sales-type leases, direct financing leases and lease financing receivables on an effective interest basis at a constant rate of return over the terms of the applicable leases. As a result, the cash payments accounted for under sales-type leases, direct financing leases and lease financing receivables will not equal income from our Lease Agreements. Rather, a portion of the cash rent we receive is recorded as Income from sales-type and direct financing leases or Income from lease financing receivables and loans, as applicable, in our Statement of Operations and a portion is recorded as a change to Investments in leases - sales-type, net or Investments in leases - financing receivables, net, as applicable.
Under ASC 840, we determined that the land component of Caesars Palace Las Vegas was greater than 25% of the overall fair value of the combined land and building components. At lease inception, the land was determined to be an operating lease and we recorded the related income on a straight-line basis over the lease term. The amount of annual minimum lease payments attributable to the land element after deducting executory costs, including any profit thereon, was determined by applying the lessee’s incremental borrowing rate to the value of the land. Revenue from this lease was recorded as Income from operating leases in our Statement of Operations. Further, upon adoption of ASC 842 on January 1, 2019, we made an accounting policy election to use a package of practical expedients that, among other things, allow us to not reassess prior lease classifications or initial direct costs for leases that existed as of the balance sheet date. Upon the consummation of the Eldorado Transaction on July 20, 2020, the land component of Caesars Palace Las Vegas was reassessed for lease classification and determined to be a sales-type lease. Accordingly, subsequent to July 20, 2020, the income is recognized as Income from sales-type leases and we no longer have any leases classified as operating or direct financing and, as such, there is no longer any income recorded through Income from operating leases.
Initial direct costs incurred in connection with entering into investments classified as sales-type or direct financing leases are included in the balance of the net investment in lease. Such amounts will be recognized as a reduction to Income from investments in leases over the life of the lease using the effective interest method. Costs that would have been incurred regardless of whether the lease was signed, such as legal fees and certain other third-party fees, are expensed as incurred to Transaction and acquisition expenses in our Statement of Operations.
Loan origination fees and costs incurred in connection with entering into investments classified as lease financing receivables are included in the balance of the net investment and such amounts will be recognized as a reduction to Income from investments in loans and lease financing receivables over the life of the lease using the effective interest method.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments in Loans, net
Investments in loans are held-for-investment and are carried at historical cost, net of unamortized loan origination costs and fees and allowances for credit losses. Income is recognized on an effective interest basis at a constant rate of return over the life of the related loan.
Allowance for Credit Losses
On January 1, 2020, we adopted ASC 326 “Financial Instruments-Credit Losses” (“ASC 326”), 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 leases - sales-type, Investments in leases - financing receivables and Investments in loans.
We have elected to use a discounted cash flow model to estimate the Allowance for credit losses, or CECL allowance. This model requires us to develop cash flows which is used to project estimated credit losses over the life of the lease or loan and discount these cash flows at the asset’s effective interest rate. We then record a CECL allowance equal to the difference between the amortized cost basis of the asset and the present value of the expected credit loss cash flows.
Expected losses within our cash flows are determined by estimating the probability of default (“PD”) and loss given default (“LGD”) of our tenants or borrowers and their parent guarantors over the life of each individual lease or financial asset. We have engaged a nationally recognized data analytics firm to assist us with estimating both the PD and LGD of our tenants or borrowers and their parent guarantors. The PD and LGD are estimated during a reasonable and supportable period for which we believe we are able to estimate future economic conditions (the “R&S Period”) and a long-term period for which we revert to long-term historical averages (the “Long-Term Period”). The PD and LGD estimates for the R&S Period are developed using the current financial condition of the tenant or borrower and the parent guarantor and applied to a projection of economic conditions over a two-year term. The PD and LGD for the Long-Term Period are estimated using the average historical default rates and historical loss rates, respectively, of public companies over the past 35 years that have similar credit profiles or characteristics to our tenants or borrowers and their parent guarantors. We are unable to use our historical data to estimate losses as we have no loss history to date.
The CECL allowance is recorded as a reduction to our net Investments in leases - sales-type, Investments in leases - financing receivables and Investments in loans on our Balance Sheet. We are required to update our CECL allowance on a quarterly basis with the resulting change being recorded in the Statement of Operations for the relevant period. Finally, each time we make a new investment in an asset subject to ASC 326, we are required to record an initial CECL allowance for such asset, which will result in a non-cash charge to the Statement of Operations for the relevant period.
We are required to estimate a CECL allowance related to contractual commitments to extend credit, such as future funding commitments under a revolving credit facility, delayed draw term loan or construction loan. We estimate the amount that we will fund for each contractual commitment based on (i) discussions with our borrowers, (ii) our borrowers’ business plans and financial condition and (iii) other relevant factors. Based on these considerations, we apply a CECL allowance to the estimated amount of credit we expect to extend. The CECL allowance for unfunded commitments is calculated using the same methodology as the allowance for all of our other investments subject to the CECL model. The CECL allowance related to these future commitments is recorded as a component of Other liabilities on our Balance Sheet.
Charge-offs are deducted from the allowance in the period in which they are deemed uncollectible. Recoveries previously written off are recorded when received. There were no charge-offs or recoveries for the years ended December 31, 2021, 2020 and 2019.
Refer to Note 5 - Allowance for Credit Losses for further information.
Investments in Land
Our investments in land are held at historical cost and comprised of the following:
| • | Las Vegas Land. We own certain underdeveloped or undeveloped land adjacent to the Las Vegas strip. |
| • | Vacant, Non-Operating Land. We own certain vacant, non-operating land parcels located outside of Las Vegas. |
| • | Eastside Property. In 2017, we sold 18.4 acres of property located in Las Vegas, Nevada, east of Harrah’s Las Vegas, known as the Eastside Property, to Caesars for a sales price of $73.6 million. It was determined that the transaction did not meet the requirements of a completed sale for accounting purposes due to a put/call option on the land parcels and the Caesars Forum Convention Center. The amount of $73.6 million is presented as Land with a corresponding amount of $73.6 million recorded in Other liabilities in our Balance Sheet. |
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment
We assess our investments in land for impairment under ASC 360 “Property, Plant and Equipment” (“ASC 360”) on a quarterly basis or whenever certain events or changes in circumstances indicate a possible impairment of the carrying value of the asset. Events or circumstances that may occur include changes in management’s intended holding period or potential sale to a third party, significant changes in real estate market conditions or tenant financial difficulties resulting in non-payment of the lease.
Impairments are measured as the amount by which the current book value of the asset exceeds the estimated fair value of the asset. With respect to estimated expected future cash flows for determining whether an asset is impaired, assets are grouped at the lowest level of identifiable cash flows.
Other income and Other expenses
Other income primarily represents sub-lease income related to certain ground and use leases. Under the Lease Agreements, the tenants are required to pay all costs associated with such ground and use leases and provides for their direct payment to the landlord. This income and the related expense are recorded on a gross basis in our Statement of Operations as required under GAAP as we are the primary obligor under the ground and use leases.
We previously recorded the sub-lease income as a component of General and administrative expenses on a net basis with the sub-lease expense. Beginning with the three months ended March 31, 2020, we recorded these amounts to be presented gross in Other income with an offsetting amount in Other expenses within the Statement of Operations. For the year ended December 31, 2019, such amounts, included net in General and administrative expenses, were $2.9 million.
Fair Value Measurements
We measure the fair value of financial instruments based on assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. In accordance with the fair value hierarchy, Level 1 assets/liabilities are valued based on quoted prices for identical instruments in active markets, Level 2 assets/ liabilities are valued based on quoted prices in active markets for similar instruments, on quoted prices in less active or inactive markets or on other “observable” market inputs, and Level 3 assets/liabilities are valued based significantly on “unobservable” market inputs.
Refer to Note 9 - Fair Value for further information.
Derivative Financial Instruments
We record our derivative financial instruments as either Other assets or Other liabilities on our Balance Sheet at fair value.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows are considered cash flow hedges. We formally document our hedge relationships and designation at the contract’s inception. This documentation includes the identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and our evaluation of the effectiveness of its hedged transaction.
On a quarterly basis, we also assess whether the derivative we designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in the value or cash flows of the hedged transactions. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued and the changes in fair value of the instrument are included in Net income prospectively. If the hedge relationship is terminated, then the value of the derivative previously recorded in Accumulated other comprehensive income (loss) is recognized in earnings when the hedged transactions affect earnings. Changes in the fair value of our derivative instruments that qualify as hedges are reported as a component of Accumulated other comprehensive income (loss) on our Balance Sheet with a corresponding change in Unrealized gain (loss) on cash flows hedges within Other comprehensive income on our Statement of Operations.
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VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We use derivative instruments to mitigate the effects of interest rate volatility, whether from variable rate debt or future forecasted transactions, which could unfavorably impact our future earnings and forecasted cash flows. We do not use derivative instruments for speculative or trading purposes.
Income Taxes
All federal and state income tax liabilities and/or benefits of the Partnership are passed through to the Partners. As such, no recognition of federal and state income taxes for the Partnership, or its subsidiaries that are organized as limited liability companies treated as partnerships, have been provided for in the Financial Statements, however certain local jurisdictions in which we operate require an income tax. Specifically, we have recognized $1.4 million of local income tax expense related to Hard Rock Cincinnati and JACK Cleveland/Thistledown.
VICI REIT operates and qualifies as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, and, accordingly, the Partnership also operates as a REIT to enable VICI REIT to continue to qualify for REIT status for its U.S. federal income tax purposes. As a REIT, VICI REIT generally will not be subject to U.S. federal income taxes on its taxable income to the extent that it annually distributes all of its net taxable income to its stockholders and maintains its qualification as a REIT.
We recognize any interest and penalties, as incurred, in general and administrative expenses in our Statement of Operations.
Debt Issuance Costs
Debt issuance costs are deferred and amortized to interest expense over the contractual term of the underlying indebtedness. We present unamortized deferred financing costs as a direct deduction from the carrying amount of the associated debt liability.
Transaction and Acquisition Expenses
Transaction and acquisition-related expenses that are not capitalizable under GAAP, including most leasing costs under ASC 842, are expensed in the period they occur. Transaction and acquisition expenses also include dead deal costs.
Stock-Based Compensation
Employees of the Partnership receive stock-based compensation from our parent company, VICI REIT, which we are required to record on the Partnerships’ financial statements in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 requires us to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant. For non-vested share awards that vest over a predetermined time period, we use the 10-day volume weighted average price using the 10 trading days ending on the grant date. For non-vested share awards that vest based on market conditions, we use a Monte Carlo simulation (risk-neutral approach) to determine the value of each tranche.
The unrecognized compensation relating to awards under our stock incentive plan will be amortized to general and administrative expense over the awards’ remaining vesting periods. Vesting periods for award of equity instruments range from zero to three years.
See Note 12—Stock-Based Compensation for further information related to the stock-based compensation.
Earnings Per Unit
Earnings per unit (“EPU”) is calculated in accordance with ASC 260, “Earnings Per Share”. Basic EPU is computed by dividing net income applicable to partners’ capital by the weighted-average number of partnership units outstanding during the period. Diluted EPU reflects the additional dilution for all potentially dilutive securities, including those from the stock incentive plan and forward sale agreements of VICI REIT.
See Note 11—Earnings Per Unit for the detailed EPU calculation.
Concentrations of Credit Risk
Caesars is the guarantor of all the lease payment obligations of the tenants under the respective leases of the properties that it leases from us. Revenue from the Caesars Lease Agreements represented 85%, 84%, and 93% of our lease revenues for the years ended December 31, 2021, 2020 and 2019, respectively. Additionally, our properties on the Las Vegas Strip generated approximately 32%, 30%, and 33% of our lease revenues for the years ended December 31, 2021, 2020 and 2019, respectively. Following the MGP Transactions, MGM will be guarantor of all the lease payment obligations of the tenants under the MGM Master Lease Agreement. We do not believe there are any other significant concentrations of credit risk.
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Caesars and MGM are publicly traded companies that are subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and are required to file periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K with the SEC. Caesars’ and MGM’s SEC filings are available to the public from the SEC’s web site at www.sec.gov. We make no representation as to the accuracy or completeness of the information regarding Caesars and MGM that is available through the SEC’s website or otherwise made available by Caesars, MGM or any third party, and none of such information is incorporated by reference herein.
Note 3 — Property Transactions
Summary of Recent Activities 2021 Transactions
Our significant activities in 2021 are as follows:
MGP Transactions
On August 4, 2021, we entered into the MGP Master Transaction Agreement, pursuant to which we will acquire MGP for total consideration of $17.2 billion, inclusive of the assumption of approximately $5.7 billion of debt. MGP is a publicly traded gaming REIT and the MGP Transactions will add $1,009.0 million of annualized rent to our portfolio from 15 Class A entertainment casino resort properties spread across nine regions and comprising 33,000 hotel rooms, 3.6 million square feet of meeting and convention space and hundreds of food, beverage and entertainment venues.
MGP’s portfolio, including properties owned by the BREIT JV, includes seven large-scale entertainment and gaming-related properties located on the Las Vegas Strip: Mandalay Bay, MGM Grand Las Vegas, The Mirage, Park MGM, New York-New York (and The Park, a dining and entertainment district located between New York-New York and Park MGM), Luxor and Excalibur. Outside of Las Vegas, MGP also owns eight high-quality casino resort properties: MGM Grand Detroit in Detroit, Michigan, Beau Rivage in Biloxi, Mississippi, Gold Strike Tunica in Tunica, Mississippi, Borgata in Atlantic City, New Jersey, MGM National Harbor in Prince George’s County, Maryland, MGM Northfield Park in Northfield, Ohio, Empire City in Yonkers, New York and MGM Springfield in Springfield, Massachusetts. MGP’s portfolio includes two of the five largest hotels in the United States and two of the three largest Las Vegas resorts by room count and convention space.
We expect the MGP Transactions, which are subject to customary closing conditions, including regulatory approvals, to be completed in the first half of 2022. However, we can provide no assurances that the MGP Transactions will close in the anticipated timeframe, on the contemplated terms or at all.
The following is a summary of the contemplated agreements and related activities under the MGP Transactions:
| • | MGP Master Transaction Agreement. On August 4, 2021, we and VICI REIT entered into the MGP Master Transaction Agreement with MGP, MGP OP, REIT Merger Sub, VICI OP, and MGM. Pursuant to the terms and subject to the conditions set forth in the MGP Master Transaction Agreement, at the effective time of the REIT Merger, each outstanding Class A common share, no par value per share, of MGP (“MGP Common Shares”) (other than MGP Common Shares then held in treasury by MGP or owned by any of MGP’s wholly owned subsidiaries) will be converted into the right to receive 1.366 (the “Exchange Ratio”) shares of common stock of VICI REIT (such consideration, the “REIT Merger Consideration”), plus the right, if any, to receive cash in lieu of fractional shares of the common stock of VICI REIT into which such MGP Common Shares would have been converted pursuant to the terms and subject to the conditions set forth in the MGP Master Transaction Agreement. The outstanding Class B common share, no par value per share, of MGP (the “Class B Share”), which is held by MGM, will be cancelled at the effective time of the REIT Merger. The REIT Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). |
Following the REIT Merger, pursuant to and subject to the terms set forth in the MGP Master Transaction Agreement, at the effective time of the Partnership Merger, each limited partnership unit in MGP OP (other than the limited partnership units in MGP OP held by REIT Merger Sub or any subsidiary of MGP OP), all of which are held by MGM and certain of its subsidiaries, will be converted into the right to receive a number of limited liability company units of
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VICI OP (“VICI OP Units”, and such consideration, the “Partnership Merger Consideration”) equal to the Exchange Ratio. We will redeem a majority of the VICI OP Units to be received by MGM in the Partnership Merger for $4,404.0 million in cash (the “Redemption Consideration”) using the proceeds of long-term debt financing or, if unavailable, borrowings under the MGP Transactions Bridge Facility (as defined below) on the closing date of the Mergers (the “Redemption”). Following the Redemption, MGM will retain approximately 12.0 million VICI OP Units.
The MGP Master Transaction Agreement contains customary covenants, representations, warranties, and closing conditions, as well as certain termination rights for MGP and us, in each case, as more fully described in the MGP Master Transaction Agreement. The consummation of the Mergers is also subject to certain customary closing conditions, including regulatory approvals.
| • | MGM Master Lease Agreement and BREIT JV Lease. Simultaneous with the closing of the Mergers, we will enter into the MGM Master Lease Agreement. The MGM Master Lease Agreement will have an initial term of 25 years, with three 10-year tenant renewal options and will have an initial total annual rent of $860.0 million, which will be reduced by $90.0 million to $770.0 million, subject to MGM’s pending sale of the operations of the Mirage to Hard Rock and entrance into the Mirage Lease. Rent under the MGM Master Lease Agreement will escalate at a rate of 2.0% per annum for the first 10 years and thereafter at the greater of 2.0% per annum or the increase in the consumer price index (“CPI”), subject to a 3.0% cap. The tenant’s obligations under the MGM Master Lease will be guaranteed by MGM. |
Additionally, we will retain MGP’s existing 50.1% ownership stake in the BREIT JV, which owns the real estate assets of MGM Grand Las Vegas and Mandalay Bay. The BREIT JV lease will remain unchanged and provides for current total annual base rent of approximately $298.0 million, of which approximately $149.0 million is attributable to MGP’s investment in the BREIT JV, and an initial term of thirty years with two 10-year tenant renewal options. Rent under the BREIT JV lease escalates at a rate of 2.0% per annum for the first fifteen years and thereafter at the greater of 2.0% per annum or CPI, subject to a 3.0% cap. The tenant’s obligations under the BREIT JV lease will be guaranteed by MGM.
| • | Tax Protection Agreement. In connection with the closing of the MGP Transactions, VICI REIT and VICI OP have agreed with MGM to enter into a tax protection agreement (the “MGM Tax Protection Agreement”) pursuant to which VICI OP will agree, subject to certain exceptions, for a period of 15 years following the closing of the Mergers (subject to early termination under certain circumstances), to indemnify MGM and certain of its subsidiaries (the “Protected Parties”) for certain tax liabilities resulting from (1) the sale, transfer, exchange or other disposition of a property owned directly or indirectly by MGP OP immediately prior to the closing date of the Mergers (each, a “Protected Property”), (2) a merger, consolidation, transfer of all assets of, or other significant transaction involving VICI OP pursuant to which the ownership interests of the Protected Parties in VICI OP are required to be exchanged in whole or in part for cash or other property, (3) the failure of VICI OP to maintain approximately $8.5 billion of nonrecourse indebtedness allocable to MGM, which amount may be reduced over time in accordance with the MGM Tax Protection Agreement, and (4) the failure of VICI OP or VICI REIT to comply with certain tax covenants that would impact the tax liabilities of the Protected Parties. In the event that VICI OP or VICI REIT breaches restrictions in the MGM Tax Protection Agreement, VICI OP will be liable for grossed-up tax amounts associated with the income or gain recognized as a result of such breach. In addition, the BREIT JV previously entered into a tax protection agreement with MGM with respect to built-in gain and debt maintenance related to MGM Grand Las Vegas and Mandalay Bay, which is effective through mid-2029, and by acquiring MGP, the we will bear its 50.1% proportionate share in the BREIT JV of any indemnity under this existing tax protection agreement. |
| • | Exchange Offers and Consent Solicitations. On September 13, 2021, VICI REIT announced that the VICI Issuers commenced (i) private exchange offers to certain eligible holders (collectively, the “Exchange Offers”) for any and all of each series of the MGP OP Notes for up to an aggregate principal amount of $4.2 billion of new notes issued by the VICI Issuers and (ii) consent solicitations with respect to each series of MGP OP Notes (collectively, the “Consent Solicitations”) to adopt certain proposed amendments to each of the indentures governing the MGP OP Notes (collectively, the “MGP OP Notes Indentures”), which, among other things, eliminate or modify certain of the covenants, restrictions, provisions and events of default in each of the MGP OP Notes Indentures. |
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On September 27, 2021, VICI REIT announced the early tender results of the Exchange Offers and the early participation results of the Consent Solicitations, as well as the extension of the expiration date of the Exchange Offers from October 12, 2021 to December 31, 2021 (such date and time, as the same may be further extended, the “Expiration Date”). Following the receipt of the requisite consents pursuant to the Consent Solicitations, on September 23, 2021, the MGP Issuers executed supplemental indentures to each of the MGP OP Notes Indentures in order to effect the proposed amendments (the “MGP OP Supplemental Indentures”). The MGP OP Supplemental Indentures will become operative upon the settlement of the Exchange Offers and the Consent Solicitations (the “Settlement Date”), which is expected to occur promptly after the Expiration Date on or about the closing date of the Mergers. To the extent the consummation of the MGP Transactions is not anticipated to occur on or before the then-anticipated Settlement Date, for any reason, the VICI Issuers anticipate continuing to extend the Expiration Date until such time that the Mergers may be consummated on or before the Settlement Date. On December 28, 2021, VICI REIT announced the further extension of the Expiration Date from December 31, 2021 to February 15, 2022. On February 14, 2022, VICI REIT announced the further extension of the Expiration Date to March 31, 2022. The Expiration Date was again extended on March 31, 2022 to April 14, 2022 and, on April 14, 2022, to April 29, 2022.
The Exchange Offers and Consent Solicitations are being made solely pursuant to the terms and conditions set forth in the confidential offering memorandum, dated September 13, 2021, in a private offering exempt from, or not subject to, registration under the Securities Act of 1933, as amended (the “Securities Act”), and are subject to the satisfaction of certain conditions, including the consummation of the Mergers.
| • | Mirage Severance Lease. On December 13, 2021, in connection with MGM’s agreement to sell the operations of the Mirage Hotel & Casino to Hard Rock, we agreed to enter into a new separate lease with Hard Rock related to the operation of the Mirage (the “Mirage Lease”), and enter into an amendment to the MGM Master Lease Agreement relating to the sale of the Mirage. The Mirage Lease will have initial annual base rent of $90.0 million with other economic terms substantially similar to the MGM Master Lease Agreement, including a base term of 25 years with three 10-year tenant renewal options, escalation of 2.0% per annum (with escalation of the greater of 2.0% and CPI, capped at 3.0%, beginning in lease year 11) and minimum capital expenditure requirements of 1.0% of annual net revenue. The MGM Master Lease Agreement will be amended to account for MGM’s divestiture of the Mirage operations and will result in a reduction of the initial annual base rent under the MGM Master Lease Agreement by $90.0 million. We expect these transactions to be completed in the second half of 2022, and they remain subject to customary closing conditions, regulatory approvals and the closing of the MGP Transactions. Additionally, subject to certain conditions, we may fund up to $1.5 billion of Hard Rock’s redevelopment plan for the Mirage through VICI REIT’s arrangements with certain tenants for the funding of “same-store” capital improvements, including redevelopment, new construction projects and other property improvements, in exchange for increased rent pursuant to the terms of our existing Lease Agreements (the “Partner Property Growth Fund”). Specific terms of the redevelopment and related funding remain under discussion and subject to final documentation. |
BigShots Loan
Subsequent to year end, on April 11, 2022, we entered into a loan with BigShots Golf (“BigShots Golf”) a subsidiary of ClubCorp Holdings, Inc. (“ClubCorp”), an Apollo Global Management fund portfolio company, to provide up to $80.0 million of mortgage financing (“BigShots Loan”) for the construction of certain new BigShots Golf facilities throughout the United States. The BigShots Loan bears interest at a rate of 10.0% per annum and has an initial term of five years with two successive 12-month extension options, subject to certain conditions. Our commitment to fund the loan will be subject to customary terms and conditions in disbursements to the borrower based upon construction of the development. In addition, we entered into a right of first offer and call right agreement, whereby we have a call right to acquire the real estate assets associated with any BigShots Golf facility financed by us, which transaction will be structured as a sale leaseback. In addition, for so long as the BigShots Loan remains outstanding and we continue to hold a majority interest therein, subject to additional terms and conditions, we will have a right of first offer on any multi-site mortgage, mezzanine, preferred equity, or other similar financing that is treated as debt to be obtained by BigShots Golf (or any of its affiliates) in connection with the development of BigShots Golf facilities.
Venetian Acquisition
Subsequent to year end, on February 23, 2022, we closed on the previously announced transaction to acquire all of the land and real estate assets associated with the Venetian Resort from LVS for $4.0 billion in cash, and the Venetian Tenant acquired the operating assets of the Venetian Resort for $2.25 billion, of which $1.2 billion is in the form of a secured term loan from LVS and the remainder was paid in cash. We funded the Venetian Acquisition with (i) $3.2 billion in net proceeds contributed to us from VICI REIT’s physical settlement of its outstanding forward sale agreements, (ii) an initial draw on the Revolving Credit Facility of $600.0 million, and (iii) cash on hand. Simultaneous with the closing of the Venetian Acquisition, we entered into the Venetian Lease Agreement with the Venetian Tenant. The Venetian Lease Agreement has an initial total annual rent of $250.0 million and an initial term of 30 years, with two ten-year tenant renewal options. The annual rent will be subject to escalation equal to the greater of 2.0% and the increase in the CPI, capped at 3.0%, beginning in the earlier of (i) the beginning of the third lease year, and (ii) the month following the month in which the net revenue generated by the Venetian Resort returns to its 2019 level (the year immediately prior to the onset of the COVID-19 pandemic) on a trailing twelve-month basis. We anticipate that the land and building components of the Venetian Lease Agreement will meet the definition of a sales-type lease and accordingly, during the three months ended March 31, 2022, we will record the corresponding asset, including related transaction and acquisition expenses, with an offsetting CECL allowance in Investments in leases - sales-type and direct financing on our Balance Sheet.
In connection with the Venetian Acquisition, we entered into a Property Growth Fund Agreement (“Venetian PGFA”) with the Venetian Tenant. Under the Venetian PGFA we agreed to provide up to $1.0 billion for various development and construction projects affecting the Venetian Resort to be identified by the Venetian Tenant and that satisfy certain criteria more particularly set forth in the Venetian PGFA, in consideration of additional incremental rent to be paid by the Venetian Tenant under the Venetian Lease Agreement and calculated in accordance with a formula set forth in the Venetian PGFA. Upon execution of the PGFA we will be required to estimate a CECL allowance related to the contractual commitments to extend credit, which will be in part based on our best estimates of funding such commitments. Accordingly, during the three months ended March 31, 2022, we will record a CECL allowance for our unfunded commitment in Other liabilities.
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In addition, LVS agreed with the Venetian Tenant pursuant to an agreement (the “Contingent Lease Support Agreement”) entered into simultaneously with the closing of the Venetian Acquisition to provide lease payment support designed to guarantee the Venetian Tenant’s rent obligations under the Venetian Lease Agreement through 2023, subject to early termination if EBITDAR (as defined in such agreement) generated by the Venetian Resort in 2022 equals or exceeds $550.0 million, or a tenant change of control occurs. We are a third-party beneficiary of the Contingent Lease Support Agreement and have certain enforcement rights pursuant thereto. The Contingent Lease Support Agreement is limited to coverage of the Venetian Tenant’s rent obligations and does not cover any environmental expenses, litigation claims, or any cure or enforcement costs. The obligations of the Venetian Tenant under the Venetian Lease Agreement are not guaranteed by Apollo or any of its affiliates. After the termination of the Contingent Lease Support Agreement, the Venetian Tenant will be required to provide a letter of credit to secure seven and one-half months of the rent, real estate taxes and assessments and insurance obligations of the Venetian Tenant if the operating results from the Venetian Resort do not exceed certain thresholds.
Sale of Louisiana Downs
On November 1, 2021, we and Caesars closed on the previously announced transaction to sell Harrah’s Louisiana Downs Casino for $22.0 million to Rubico Acquisition Corp. We received $5.5 million of the proceeds from the sale and Caesars received $16.5 million of the proceeds. We did not recognize any gain or loss on the sale of Louisiana Downs as the asset was sold at its carrying amount. The annual rent payments under the Regional Master Lease Agreement remain unchanged following completion of the disposition.
Caesars Southern Indiana Lease Agreement
On September 3, 2021, in connection and concurrent with EBCI’s acquisition of the operations of Caesars Southern Indiana from Caesars, we entered into a triple-net lease agreement with a subsidiary of EBCI, the EBCI Lease Agreement, with respect to the real property associated with Caesars Southern Indiana. Initial total annual rent under the lease with EBCI is $32.5 million. The lease has an initial term of 15 years, with four 5-year tenant renewal options. The tenant’s obligations under the lease are guaranteed by EBCI. Annual base rent payments under the Regional Master Lease Agreement were reduced by $32.5 million upon completion of EBCI’s acquisition of the operations of Caesars Southern Indiana and the execution of the EBCI Lease Agreement. We determined that the land and building components of the EBCI Lease Agreement meet the definition of a sales-type lease and, as the asset continues to meet the definition of a sales-type lease under ASC 842, the existing lease balance of Caesars Southern Indiana was transferred from Caesars to EBCI, as the new tenant, and the income is recognized using the revised rate implicit in the lease. In addition, as part of the transaction, EBCI and Caesars entered into a right of first refusal agreement pursuant to which we have the first right to enter into a sale leaseback transaction with respect to the real property associated with the development of a new casino resort in Danville, Virginia (the “Danville ROFR Agreement”).
Great Wolf Mezzanine Loan
On June 16, 2021, we entered into a mezzanine loan agreement (the “Great Wolf Mezzanine Loan”) with an affiliate of Great Wolf Resorts, Inc. (“Great Wolf”) to provide up to $79.5 million in financing to partially fund the development of the Great Wolf Lodge Maryland, an expansive 48-acre indoor water park resort located in Perryville, MD. The Great Wolf Mezzanine Loan bears interest at a rate of 8.0% per annum and has an initial term of three years with two successive 12-month extension options, subject to certain conditions. Our commitment will be funded subject to customary terms and conditions in disbursements to the borrower based upon construction of the development and, as of December 31, 2021, approximately $33.6 million of the funds have been disbursed. We expect to fund our entire $79.5 million commitment by mid-2022.
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In addition, pursuant to a non-binding letter agreement, we will have the opportunity for a period of up to five years to provide up to a total of $300.0 million of mezzanine financing, inclusive of the $79.5 million related to the Great Wolf Lodge Maryland, for the development and construction of Great Wolf’s extensive domestic and international indoor water park resort pipeline.
2020 Transactions
Our significant activities in 2020, in reverse chronological order, are as follows:
Sale of Harrah’s Reno and Bally’s Atlantic City
On September 30, 2020, we and Caesars closed on the previously announced transaction to sell Harrah’s Reno to a third party at a purchase price of $41.5 million. Pursuant to the agreement, we received $31.1 million of the proceeds of the sale and Caesars received $10.4 million of the proceeds. We did not recognize any gain or loss on the sale of Harrah’s Reno as the asset was sold at its carrying amount. The annual rent payments under the Regional Master Lease Agreement remain unchanged following completion of the disposition.
On November 18, 2020, we and Caesars closed on the previously announced transaction to sell Bally’s Atlantic City Hotel & Casino for $25.0 million to Bally’s Corporation. We received approximately $19.0 million of the proceeds from the sale and Caesars received approximately $6.0 million of the proceeds. We did not recognize any gain or loss on the sale of Bally’s Atlantic City as the asset was sold at its carrying amount. The annual rent payments under the Regional Master Lease Agreement remain unchanged following completion of the disposition.
Caesars Forum Convention Center Mortgage Loan
On September 18, 2020, we entered into a mortgage loan agreement with a subsidiary of Caesars (the “Forum Convention Center Borrower”) pursuant to which we loaned $400.0 million to the Forum Convention Center Borrower for a term of five years, prepayable beginning in year three, subject to certain conditions (the “Forum Convention Center Mortgage Loan”). The Forum Convention Center Mortgage Loan is secured by, among other things, a first priority fee mortgage on the Caesars Forum Convention Center. The interest rate on the Forum Convention Center Mortgage Loan was initially 7.7% per annum, with annual interest payments subject to 2.0% annual escalation (resulting in year two annual interest of $31.4 million based on a year two interest rate of 7.854%), with interest paid monthly in cash in arrears.
Amended and Restated Convention Center Put-Call Agreement
On September 18, 2020, concurrent with the entry into the Forum Convention Center Mortgage Loan, we and a subsidiary of Caesars amended and restated the Amended and Restated Put-Call Right Agreement entered into on July 20, 2020 in connection with the consummation of the Eldorado Transaction (as further amended, the “A&R Convention Center Put-Call Agreement”) related to the Caesars Forum Convention Center. The A&R Convention Center Put-Call Agreement provides for (i) a call right in our favor and a put right in favor of Caesars, which, if exercised by either party, 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 Call Right”), 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). We may exercise the call right from September 18, 2025 (the scheduled maturity date of the Forum Convention Center Mortgage Loan) until December 31, 2026, and Caesars may exercise the put right between January 1, 2024 and December 31, 2024. If there is an event of default under the Forum Convention Center Mortgage Loan, the Convention Center Put Right will not be exercisable and 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).
The A&R Convention Center Put-Call Agreement also provides for, 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 the Harrah’s Las Vegas property by us to Caesars (the “HLV Repurchase Right”), exercisable 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 the Harrah’s Las Vegas property for the most recently ended annual period for which Caesars’ financial statements are available as of Caesars’ election to exercise the HLV Repurchase Right.
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Chelsea Piers Mortgage Loan
On August 31, 2020, we entered into an $80.0 million mortgage loan agreement (the “Chelsea Piers Mortgage Loan”) with Chelsea Piers New York (“Chelsea Piers”) secured by the Chelsea Piers complex in New York City, pursuant to which we provided (i) an initial term loan of $65.0 million and (ii) a $15.0 million delayed draw term loan at the borrowers’ election (which remained undrawn as of December 31, 2021), subject to certain conditions. The Chelsea Piers Mortgage Loan bears interest at a rate of 7.0% per annum, with a term of 7 years.
Consummation of the Eldorado Transaction
On July 20, 2020, concurrent with the consummation of the Eldorado/Caesars Merger, we consummated the Eldorado Transaction contemplated by the Eldorado MTA and the Harrah’s Original Call Property Purchase Agreements (as defined below). We funded the Eldorado Transaction with a combination of cash on hand, the proceeds from VICI REIT’s physical settlement, on June 2, 2020, of the its June 2019 forward sale agreements and the proceeds from our February 2020 Senior Unsecured Notes offering. Any references to Caesars in the subsequent transaction discussion refer to the combined Eldorado/ Caesars subsequent to the consummation of the Eldorado/Caesars Merger.
The closing of the Eldorado Transaction includes the consummation of the transactions contemplated by the following agreements:
| • | Acquisition of the Harrah’s Original Call 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 “Harrah’s Original Call Properties”) for an aggregate purchase price of $1,823.5 million (the “Harrah’s Original Call 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 Harrah’s Original Call Properties being included in the Regional Master Lease Agreement as further described in “—Lease Amendments and Terminations” below. |
| • | 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 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 Palace 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 (D) to 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 also now subject to the higher rent escalator under the Las Vegas Master Lease Agreement. |
| • | Lease Amendments and Terminations. Each of the Caesars Lease Agreements was amended to, among other things, (i) remove the rent coverage floors, which coverage floors served to reduce the rent escalators under such leases in the event that the “EBITDAR to Rent Ratio” (as defined in the applicable Caesars Lease Agreements) coverage was below the stated floor and (ii) extend the term of each such lease by such additional period of time as necessary to ensure that each lease will have a full 15-year initial lease term following the consummation of the Eldorado Transaction. |
Caesars has executed new guaranties (and terminated the previous guarantees) with respect to the Las Vegas Master Lease Agreement (the “Las Vegas Lease Guaranty”), the Regional Master Lease Agreement (the “Regional Lease Guaranty”) and the Joliet Lease Agreement (the “Joliet Lease Guaranty” and, together with the Las Vegas Lease Guaranty and the Regional Lease Guaranty, the “Caesars Guaranties”), guaranteeing the prompt and complete payment and performance in full of: (i) all monetary obligations of the tenants under the Caesars Lease Agreements, including all rent and other sums payable by the tenants under the Caesars Lease Agreements and any obligation to pay monetary damages in connection with any breach and to pay any indemnification obligations of the tenants under the Caesars Lease Agreements; and (ii) the performance when due of all other covenants, agreements and requirements to be performed and satisfied by the tenants under the Caesars Lease Agreements.
23
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | Caesars Indianapolis Put-Call Agreement. We entered into a Put-Call Right Agreement with Caesars (the “Caesars Indianapolis Put-Call Agreement”), with respect to two gaming facilities in Indiana, Harrah’s Hoosier Park and Horseshoe Indianapolis (together, the “Indianapolis Properties”) whereby (i) we have the right to acquire all of the land and real estate assets associated with the Indianapolis Properties at a price equal to 13.0x the initial annual rent of each facility (determined as provided below), and to simultaneously lease back each such property to a subsidiary of Caesars for initial annual rent equal to the property’s trailing four quarters EBITDA at the time of acquisition divided by 1.3 (i.e., the initial annual rent will be set at 1.3x rent coverage) and (ii) Caesars will have the right to require us to acquire the Indianapolis Properties at a price equal to 12.5x the initial annual rent of each facility, and to simultaneously lease back each such Indianapolis Property to a subsidiary of Caesars for initial annual rent equal to the property’s trailing four quarters EBITDA at the time of acquisition divided by 1.3 (i.e., the initial annual rent will be set at 1.3x rent coverage). Either party will be able to trigger its respective put or call, as applicable, beginning on January 1, 2022 and ending on December 31, 2024. The Caesars Indianapolis Put-Call Agreement provides that the leaseback of the Indianapolis Properties will be implemented through the addition of the Indianapolis Properties to the Regional Master Lease Agreement. |
| • | Amended and Restated Caesars Forum Convention Center Put-Call Agreement. Upon the consummation of the Eldorado Transaction, we entered into an A&R Put-Call Right Agreement with Caesars amending and restating that certain put-call agreement related to the Caesars Forum Convention Center. In connection with the consummation of the Forum Convention Center Mortgage Loan on September 18, 2020, we further amended the agreement as described above in “—Amended and Restated Convention Center Put-Call Agreement”. |
| • | 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. |
| • | Eldorado Bridge Facilities. On June 24, 2019, in connection with the Eldorado Transaction, VICI PropCo entered into a $4.8 billion commitment letter to provide for bridge financing for the purpose of providing a portion of the financing necessary to fund the Eldorado Transaction. The commitments under the related bridge facilities were fully terminated at our election in June 2020. |
Closing of Purchase of JACK Cleveland/Thistledown, Subsequent Amendments to the JACK Cleveland/Thistledown Lease Agreement and Termination of the Amended and Restated ROV Loan
On January 24, 2020, we completed the acquisition of the casino-entitled land and real estate and related assets of the JACK Cleveland Casino (“JACK Cleveland”), located in Cleveland, Ohio and the JACK Thistledown Racino (“JACK Thistledown”) located in North Randall, Ohio (the “JACK Cleveland/Thistledown Acquisition”) from JACK Entertainment, for approximately $843.3 million. Simultaneous with the closing of the JACK Cleveland/Thistledown Acquisition, we entered into a master triple-
24
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
net lease agreement for JACK Cleveland and JACK Thistledown with a subsidiary of JACK Entertainment. The lease had an initial total annual rent of $65.9 million and an initial term of 15 years (increased by $1.8 million beginning in the second quarter of 2022 in connection with our funding of an $18.0 million capital project at the property), with four five-year tenant renewal options. The tenant’s obligations under the lease are guaranteed by Rock Ohio Ventures. Additionally, we made a $70.0 million term loan and $25.0 million revolving credit facility (inclusive of all loans subsequent to the initial extension of credit, the “ROV Loan”) to affiliates of Rock Ohio Ventures secured by, among other things, certain non-gaming real estate assets owned by such affiliates and guaranteed by Rock Ohio Ventures. We determined that the land and building components of the JACK Cleveland/Thistledown Lease Agreement meet the definition of a sales-type lease and, since we purchased and leased the assets back to the seller under a sale leaseback transaction, control is not considered to have transferred to us under GAAP. Accordingly, the JACK Cleveland/Thistledown Lease Agreement is accounted for as Investments in leases - financing receivables on our Balance Sheet, net of allowance for credit losses in accordance with ASC 310.
On October 4, 2021, we and JACK Entertainment entered into an amendment to the JACK Cleveland/Thistledown Lease Agreement (the “Second JACK Lease Agreement Amendment”), pursuant to which, among other things, the variable rent and the rent coverage floor provisions were removed and, accordingly, all of the rent in the JACK Cleveland/Thistledown Lease Agreement will escalate on an annual basis for the duration of its term. Concurrent with the Second JACK Lease Agreement Amendment, JACK Entertainment also repaid the ROV Loan in full and we terminated our commitment under the credit facility.
Note 4 — Real Estate Portfolio
As of December 31, 2021, our real estate portfolio consisted of the following:
| • | Investments in leases - sales-type, representing our investment in 22 casino assets leased on a triple net basis to our tenants, Caesars, Penn National, Hard Rock, Century Casinos, and EBCI under eight separate lease agreements; |
| • | Investments in leases - financing receivables, representing our investment in five casino assets leased on a triple net basis to our tenants, Caesars and JACK Entertainment, under two separate lease agreements; |
| • | Investments in loans, representing our investment in the Chelsea Piers Mortgage Loan, Forum Convention Center Mortgage Loan and Great Wolf Mezzanine Loan; and |
| • | Land, representing our investment in certain underdeveloped or undeveloped land adjacent to the Las Vegas strip and non-operating, vacant land parcels. |
The following is a summary of the balances of our real estate portfolio as of December 31, 2021 and 2020:
| (In thousands) |
December 31, 2021 | December 31, 2020 | ||||||
| Minimum lease payments receivable under sales-type leases (1) |
$ | 44,485,224 | $ | 45,500,260 | ||||
| Estimated residual values of leased property (not guaranteed) |
3,334,549 | 3,348,174 | ||||||
|
|
|
|
|
|||||
| Gross investment in sales-type leases |
47,819,773 | 48,848,434 | ||||||
| Unamortized initial direct costs |
23,363 | 23,764 | ||||||
| Less: Unearned income |
(34,271,620 | ) | (35,390,353 | ) | ||||
| Less: Allowance for credit losses |
(434,852 | ) | (454,201 | ) | ||||
|
|
|
|
|
|||||
| Investments in leases - sales-type, net |
13,136,664 | 13,027,644 | ||||||
| Investments in leases - financing receivables, net |
2,644,824 | 2,618,562 | ||||||
|
|
|
|
|
|||||
| Total investments in leases, net |
15,781,488 | 15,646,206 | ||||||
| Investments in loans, net |
498,002 | 536,721 | ||||||
| Land |
153,576 | 158,190 | ||||||
|
|
|
|
|
|||||
| Total real estate portfolio |
$ | 16,433,066 | $ | 16,341,117 | ||||
|
|
|
|
|
|||||
| (1) | Minimum lease payments do not include contingent rent, as discussed below, that may be received under the Lease Agreements. |
25
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Lease Portfolio
The following table details the components of our income from sales-type, direct financing and operating leases and lease financing receivables:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Income from sales-type and direct financing leases, excluding contingent |
$ | 1,161,655 | $ | 1,007,193 | $ | 822,205 | ||||||
| Income from operating leases (2) |
— | 25,464 | 43,653 | |||||||||
| Income from lease financing receivables (1) (3) |
243,008 | 137,344 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenue, excluding contingent rent |
1,404,663 | 1,170,001 | 865,858 | |||||||||
| Contingent rent (1) |
6,317 | 315 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total lease revenue |
1,410,980 | 1,170,316 | 865,858 | |||||||||
| Non-cash adjustment (4) |
(119,790 | ) | (39,883 | ) | 239 | |||||||
|
|
|
|
|
|
|
|||||||
| Total contractual lease revenue |
$ | 1,291,190 | $ | 1,130,433 | $ | 866,097 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | At lease inception (or upon modification), we determine the minimum lease payments under ASC 842 (or ASC 840), which exclude amounts determined to be contingent rent. Contingent rent is generally amounts in excess of specified floors or the variable rent portion of our leases. The minimum lease payments are recognized on an effective interest basis at a constant rate of return over the life of the lease and the contingent rent portion of the lease payments are recognized as earned, both in accordance with ASC 842. As of December 31, 2021, we have recognized contingent rent on our Margaritaville Lease Agreement and Greektown Lease Agreement, in relation to the variable rent portion of the lease, and the Las Vegas Master Lease Agreement, in relation to amounts above the specified CPI floor. Refer to the Lease Provisions section below for information regarding contingent rent on each lease. |
| (2) | Represents the 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 Regional Master Lease Agreement. Upon the consummation of the Eldorado Transaction on July 20, 2020, the land component of Caesars Palace Las Vegas and certain operating land parcels were reassessed for lease classification and were determined to be a sales-type lease. Accordingly, subsequent to July 20, 2020, such income is recognized as Income from sales-type leases. |
| (3) | Represents the Harrah’s Original Call Properties and the JACK Cleveland/Thistledown Lease Agreement, both of which were sale leaseback transactions. In accordance with ASC 842, since the lease agreements were determined to meet the definition of a sales-type lease and control of the asset is not considered to have been transferred to us, such lease agreements are accounted for as financings under ASC 310. |
| (4) | Amounts represent the non-cash adjustment to the minimum lease payments from direct financing leases, 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. |
At December 31, 2021, minimum lease payments owed to us for each of the five succeeding years under sales-type leases and our leases accounted for as financing receivables, are as follows:
| Minimum Lease Payments (1) (2) | ||||||||||||
| Investments in Leases | ||||||||||||
| (In thousands) |
Sales-Type | Financing Receivables | Total | |||||||||
| 2022 |
$ | 1,075,509 | $ | 227,627 | $ | 1,303,136 | ||||||
| 2023 |
1,094,189 | 232,320 | 1,326,509 | |||||||||
| 2024 |
1,111,961 | 236,452 | 1,348,413 | |||||||||
| 2025 |
1,126,098 | 239,835 | 1,365,933 | |||||||||
| 2026 |
1,140,571 | 243,281 | 1,383,852 | |||||||||
| Thereafter |
38,936,896 | 8,556,214 | 47,493,110 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 44,485,224 | $ | 9,735,729 | $ | 54,220,953 | ||||||
|
|
|
|
|
|
|
|||||||
| Weighted Average Lease Term (2) |
33.5 | 33.4 | 33.5 | |||||||||
| (1) | Minimum lease payments do not include contingent rent, as discussed below, that may be received under the Lease Agreements. |
| (2) | The minimum lease payments and weighted average remaining lease term assumes the exercise of all tenant renewal options, consistent with our conclusions under ASC 842 and ASC 310. |
26
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Lease Provisions
Caesars Lease Agreements - Overview
The following is a summary of the material lease provisions of our Caesars Lease Agreements:
| ($ in thousands) |
Regional Master Lease Agreement and Joliet Lease Agreement |
Las Vegas Master Lease Agreement | ||
| Lease Provision (1) | As Amended |
As Amended | ||
| Initial Term (2) |
18 years | 18 years | ||
| Initial Term maturity (2) |
7/31/2035 | 7/31/2035 | ||
| Renewal Terms |
Four, five-year terms | Four, five-year terms | ||
| Current annual rent (3) |
$649,572 | $422,224 | ||
| Escalator (4) |
Lease years 2-5 - 1.5% Lease years 6-end of term - CPI subject to 2% floor |
CPI subject to 2% floor | ||
| Variable Rent adjustment |
Year 8: 70% base rent / 30% variable rent Years 11 & 16: 80% base rent / 20% variable rent |
Years 8, 11 & 16: 80% base rent / 20% variable rent | ||
| Variable Rent adjustment calculation (5) |
4% of revenue increase/decrease: Year 8: Avg. of years 5-7 less avg. of years 0-2 Year 11: Avg. of years 8-10 less avg. of years 5-7 Year 16: Avg. of years 13-15 less avg. of years 8-10 |
4% of revenue increase/decrease: Year 8: Avg. of years 5-7 less avg. of years 0-2 Year 11: Avg. of years 8-10 less avg. of years 5-7 Year 16: Avg. of years 13-15 less avg. of years 8-10 |
| (1) | All capitalized terms used without definition herein have the meanings detailed in the applicable Caesars Lease Agreements. |
| (2) | Upon the consummation of the Eldorado Transaction, the Caesars Lease Agreements were extended such that each lease has a full 15-year initial term. |
| (3) | The amounts represent the current annual base rent payable for the current lease year, which is the period from November 1, 2021 through October 31, 2022. Annual rental payments under the Regional Master Lease Agreement were reduced by $32.5 million, which represents the annual rent for the EBCI Lease Agreement related to the Caesars Southern Indiana property, the operations of which were acquired by EBCI from Caesars on September 3, 2021, as further described in Note 3 - Property Transactions. Refer to the EBCI Lease Agreement summary below for details of the EBCI Lease Agreement. |
| (4) | Any amounts representing rents in excess of the CPI floors specified above are considered contingent rent in accordance with GAAP. In relation to the Las Vegas Master Lease Agreement during the year ended December 31, 2021, we recognized approximately $2.0 million in contingent rent. No such rent has been recognized for the years ended December 31, 2020 and 2019. In relation to the Regional Master Lease Agreement and Joliet Lease Agreement, no such rent has been recognized for the years ended December 31, 2021, 2020 and 2019. |
| (5) | Variable Rent is not subject to the Escalator. |
27
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Penn National Lease Agreements - Overview
The following is a summary of the material provisions of the Penn National Lease Agreements:
| ($ in thousands) |
||||
| Lease Provision | Margaritaville Lease Agreement |
Greektown Lease Agreement | ||
| Initial term |
15 years | 15 years | ||
| Initial term maturity |
1/31/2034 | 5/23/2034 | ||
| Renewal terms |
Four, five-year terms | Four, five-year terms | ||
| Current annual rent (1) |
$23,813 | $51,321 | ||
| Escalation commencement (2) |
Lease year two | Lease year four | ||
| Escalation |
2% of building base rent, subject to the net revenue to rent ratio floor | 2% of building base rent, subject to the net revenue to rent ratio floor | ||
| Performance to rent ratio floor (2) |
6.1x net revenue commencing lease year two | Net revenue ratio to be mutually agreed upon prior to the commencement of lease year four | ||
| Percentage rent (3) |
$2,918 | $2,149 | ||
| Percentage rent reset |
Lease year three and each and every other lease year thereafter | Lease year three and each and every other lease year thereafter | ||
| Percentage rent multiplier |
The product of (i) 4% and (ii) the excess (if any) of (a) the average annual net revenue of a trailing two-year period preceding such reset year over (b) a threshold amount (defined as 50% of LTM net revenues prior to acquisition) | The product of (i) 4% and (ii) the excess (if any) of (a) the average annual net revenue of a trailing two-year period preceding such reset year over (b) a threshold amount (defined as 50% of LTM net revenues prior to acquisition) |
| (1) | In relation to the Margaritaville Lease Agreement, the amount represents current annual base rent payable for the current lease year, which is the period from February 1, 2022 through January 31, 2023. In relation to the Greektown Lease Agreement, the amount represents current annual base rent payable for the current lease year, which is the period from June 1, 2021 through May 31, 2022. |
| (2) | In the event that the net revenue to rent ratio coverage, as applicable, is below the stated floor, the escalation will be reduced to such amount to achieve the stated net revenue to rent ratio coverage, as applicable, provided that the amount shall never result in a decrease to the prior year’s rent. In relation to the Greektown Lease Agreement, in May 2020, the lease was adjusted to remove the escalation for lease years 2 and 3 and to provide for a net revenue to rent ratio coverage floor to be mutually agreed upon by both parties prior to the commencement of lease year four. |
| (3) | Percentage rent is subject to the percentage rent multiplier. After the percentage rent reset in lease year three, any amounts related to percentage rent are considered contingent rent in accordance with GAAP. During the years ended December 31, 2021 and 2020, we recognized approximately $3.0 million and $0.3 million in contingent rent in relation to the Margaritaville Lease Agreement escalation, respectively. No such rent has been recognized for the year ended December 31, 2019. In relation to the Greektown Lease Agreement during the year ended December 31, 2021, we recognized approximately $1.3 million in contingent rent. No such rent has been recognized for the years ended December 31, 2020 and 2019. |
28
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hard Rock Cincinnati Lease Agreement - Overview
The following is a summary of the material lease provisions of the Hard Rock Cincinnati Lease Agreement:
| ($ in thousands) |
||
| Lease Provision | Term | |
| Initial term |
15 years | |
| Initial term maturity |
9/30/2034 | |
| Renewal terms |
Four, five-year terms | |
| Current annual rent (1) |
$44,042 | |
| Escalator commencement |
Lease year two | |
| Escalator (2) |
Lease years 2-4 - 1.5% Lease years 5-15 - The greater of 2% or the change in CPI unless the change in CPI is less than 0.5%, in which case there is no escalation in rent for such lease year | |
| Variable rent commencement/reset |
Lease year 8 | |
| Variable rent split (3) |
80% base rent and 20% variable rent | |
| Variable rent percentage (3) |
4% |
| (1) | The amount represents the current annual base rent payable for the current lease year, which is the period from October 1, 2021 through September 30, 2022. |
| (2) | Any amounts representing rents in excess of the CPI floors specified above are considered contingent rent in accordance with GAAP. No such rent has been recognized for the years ended December 31, 2021, 2020 and 2019. |
| (3) | Variable rent is not subject to the escalator and is calculated as an increase or decrease of the average of net revenues for lease years 5 through 7 compared to the average net revenue for lease years 1 through 3, multiplied by the Variable rent percentage. |
Century Portfolio Lease Agreement - Overview
The following is a summary of the material lease provisions of the Century Portfolio Lease Agreement:
| ($ in thousands) |
||
| Lease Provision |
Term | |
| Initial term |
15 years | |
| Initial term maturity |
12/31/2034 | |
| Renewal terms |
Four, five-year terms | |
| Current annual rent (1) |
$25,503 | |
| Escalator commencement |
Lease year two | |
| Escalator (2) |
Lease years 2-3 - 1.0% Lease years 4-15 - The greater of 1.25% or the change in CPI | |
| Net revenue to rent ratio floor |
7.5x commencing lease year six - if the coverage ratio is below the stated amount the escalator will be reduced to 0.75% | |
| Variable rent commencement/reset |
Lease year 8 and 11 | |
| Variable rent split (3) |
80% Base Rent and 20% Variable Rent | |
| Variable rent percentage (3) |
4% |
| (1) | The amount represents the current annual base rent payable for the current lease year, which is the period from January 1, 2022 through December 31, 2022. |
| (2) | Any amounts representing rents in excess of the CPI floors specified above are considered contingent rent in accordance with GAAP. No such rent has been recognized for the years ended December 31, 2021, 2020 and 2019. |
| (3) | Variable rent is not subject to the escalator and is calculated for lease year 8 as an increase or decrease of the average of net revenues for lease years 5 through 7 compared to the average net revenue for lease years 1 through 3 and for lease year 11 as an increase or decrease of the average of net revenues for lease years 8 through 10 compared to the average net revenue for lease years 5 through 7, in each case multiplied by the Variable rent percentage. |
29
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JACK Cleveland/Thistledown Lease Agreement - Overview
The following is a summary of the material lease provisions of our JACK Cleveland/Thistledown Lease Agreement:
| ($ in thousands) |
||
| Lease Provision | Term | |
| Initial term |
20 years | |
| Initial term maturity |
1/31/2040 | |
| Renewal terms |
Three, five-year terms | |
| Current annual rent (1) |
$68,704 | |
| Escalator commencement |
Lease year three | |
| Escalator (2) |
Lease years 3-4 - 1.0% Lease years 5-7 - 1.5% Lease years 8-15 - The greater of 1.5% or the change in CPI capped at 2.5% |
| (1) | The amount represents the current annual base rent payable for the current lease year, which is the period from February 1, 2022 through January 31, 2023. Effective April 1, 2022, the annualized rent increased by $1.8 million related to the gaming patio amenity at JACK Thistledown. |
| (2) | Any amounts representing rents in excess of the CPI floors specified above are considered contingent rent in accordance with GAAP. No such rent has been recognized for the years ended December 31, 2021, 2020 and 2019. |
EBCI Lease Agreement - Overview
The following is a summary of the material lease provisions of our EBCI Lease Agreement:
| ($ in thousands) |
||
| Lease Provision | Term | |
| Initial term |
15 years | |
| Initial term maturity |
8/31/2036 | |
| Renewal terms |
Four, five-year terms | |
| Current annual rent (1) |
$32,500 | |
| Escalator commencement |
Lease year two | |
| Escalator (2) |
Lease years 2-5 - 1.5% Lease years 6-15 - The greater of 2.0% or the change in CPI | |
| Variable rent commencement/reset |
Lease year 8 and 11 | |
| Variable rent split (3) |
80% Base Rent and 20% Variable Rent | |
| Variable rent percentage (3) |
4% |
| (1) | The amount represents the current annual base rent payable for the current lease year, which is the period from September 3, 2021 through August 31, 2022. |
| (2) | Any amounts representing rents in excess of the CPI floors specified above are considered contingent rent in accordance with GAAP. No such rent has been recognized for the year ended December 31, 2021. |
| (3) | Variable rent is not subject to the escalator and is calculated for lease year 8 as an increase or decrease of the average of net revenues for lease years 5 through 7 compared to the average net revenue for the year preceding lease commencement and lease years 1 through 2 and for lease year 11 as an increase or decrease of the average of net revenues for lease years 8 through 10 compared to the average net revenue for lease years 5 through 7, in each case multiplied by the variable rent percentage. |
30
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Venetian Lease Agreement - Overview
The following is a summary of the material lease provisions of our Venetian Lease Agreement, as entered into on February 23, 2022:
| ($ in thousands) |
||
| Lease Provision | Term | |
| Initial term |
30 years | |
| Initial term maturity |
2/29/2052 | |
| Renewal terms |
Two, ten-year terms | |
| Current annual rent (1) |
$250,000 | |
| Escalator commencement (2) |
Lease year two | |
| Escalator |
The greater of 2.0% or the change in CPI capped at 3.0% |
| (1) | The amount represents the current annual base rent payable for the current lease year, which is the period from February 23, 2022 through the date specified in the Venetian Lease Agreement. |
| (2) | Lease year two will begin on the earlier of (i) March 1, 2024 and (ii) the first day of the first month following the month in which the net revenue of the Venetian Resort for the trailing twelve months equals or exceeds 2019 net revenue. |
Capital Expenditure Requirements
We manage our residual asset risk through protective covenants in our Lease Agreements, which require the tenant to, among other things, hold specific insurance coverage, engage in ongoing maintenance of the property and invest in capital improvements. With respect to the capital improvements, the Lease Agreements specify certain minimum amounts that our tenants must spend on capital expenditures that constitute installation, restoration and repair or other improvements of items with respect to the leased properties.
The following table summarizes the capital expenditure requirements of the respective tenants under the Caesars Lease Agreements:
| Lease Provision | Regional Master Lease Agreement and Joliet Lease Agreement |
Las Vegas Master Lease | ||
| Yearly minimum expenditure |
1% of net revenues (1) | 1% of net revenues for CPLV (commencing in 2022 with respect to HLV) (1) | ||
| Rolling three-year minimum (2) |
$311 million | $84 million | ||
| Initial minimum capital expenditure |
N/A | $171 million (2017 - 2021) (with respect solely to HLV) |
| (1) | The lease agreements require a $114.5 million floor on annual capital expenditures for Caesars Palace Las Vegas, Joliet and the Regional Master Lease Agreement properties in the aggregate. Additionally, annual building & improvement capital improvements must be equal to or greater than 1% of prior year net revenues. |
| (2) | Certain tenants under the Caesars Lease Agreements, as applicable, are required to spend $380.3 million on capital expenditures (excluding gaming equipment) over a rolling three-year period, with $286.0 million allocated to the regional assets, $84.0 million allocated to Caesars Palace Las Vegas and the remaining balance of $10.3 million to facilities (other than the Harrah’s Las Vegas Facility) covered by any Caesars Lease Agreement in such proportion as such tenants may elect. Additionally, the tenants under the Regional Master Lease Agreement and Joliet Lease Agreement are required to expend a minimum of $537.5 million on capital expenditures (including gaming equipment) across certain of its affiliates and other assets, together with the $380.3 million requirement. |
In connection with the ongoing COVID-19 pandemic and its impact on operations and financial performance, we entered into an Omnibus Amendment to Leases with Pre-Merger Caesars on June 1, 2020 to provide limited relief with respect to a portion of their capital expenditure obligations under the Las Vegas Master Lease Agreement, the Regional Master Lease Agreement and the Joliet Lease Agreement (which relief was subsequently adjusted on October 27, 2020 to provide for a proportionate adjustment to account for the addition of the Harrah’s Original Call Properties to the Regional Master Lease Agreement). This relief is 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 amendment, and (iii) no tenant event of default occurring under any of the Caesars Lease Agreements during the compliance period set forth in the amendment. Caesars will receive credit for certain deemed capital expenditure amounts, which credit may
31
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 currently set forth in the Las Vegas Master Lease Agreement, the Regional Master Lease Agreement and the Joliet Lease Agreement or, in certain cases, to deposit amounts in respect thereof into a capital expenditure reserve in accordance with the Omnibus Amendment.
The following table summarizes the capital expenditure requirements of the respective tenants under the Penn National Lease Agreements, Hard Rock Cincinnati Lease Agreement, Century Portfolio Lease Agreement, JACK Cleveland/Thistledown Lease Agreement and EBCI Lease Agreement:
| Lease Provision | Penn National Lease Agreements |
Hard Rock Cincinnati Lease Agreement |
Century Portfolio Lease Agreement |
JACK Cleveland/ Thistledown Lease Agreement |
EBCI Lease Agreement |
Venetian Lease Agreement | ||||||||||||||||||||||||
| Yearly minimum expenditure |
1% of net revenues based on rolling four- year basis |
1% of net revenues |
1% of net gaming revenues (1) |
Initial minimum of $30 million (2) Thereafter - 1% of net revenues on a rolling three- year basis |
1% of net revenues |
2% of net revenues based on rolling three-year basis | ||||||||||||||||||||||||
| (1) | Minimum of 1% of net gaming revenue on a rolling three-year basis for each individual facility and 1% of net gaming revenues per fiscal year for the facilities collectively. |
| (2) | Initial minimum required to be spent from the period commencing April 1, 2019 through December 31, 2022, which includes $18.0 million to be advanced by us and expended by JACK Entertainment for the construction of the new gaming patio amenity at JACK Thistledown Racino (which construction was completed in the first quarter of 2021). |
Loan Portfolio
The following is a summary of our investments in loans as of December 31, 2021 and 2020:
| ($ in thousands) |
December 31, 2021 |
|||||||||||||||||||||
| Investment Name | Loan Type |
Principal Balance |
Carrying Value (1) |
Future Funding Commitments (2) |
Interest Rate (3) |
Final Maturity (4) |
||||||||||||||||
| Forum Convention Center Mortgage Loan |
Senior Secured | $ | 400,000 | $ | 400,036 | $ | — | 7.9 | % | 9/18/2025 | ||||||||||||
| Chelsea Piers Mortgage Loan |
Senior Secured | 65,000 | 64,998 | 15,000 | 7.0 | % | 8/31/2027 | |||||||||||||||
| Great Wolf Mezzanine Loan |
Mezzanine | 33,614 | 32,968 | 45,886 | 8.0 | % | 7/9/2026 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 498,614 | $ | 498,002 | $ | 60,886 | 7.3 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
| ($ in thousands) |
December 31, 2020 |
|||||||||||||||||||||
| Investment Name | Loan Type |
Principal Balance |
Carrying Value (1) |
Future Funding Commitments (2) |
Interest Rate (3) |
Final Maturity (4) |
||||||||||||||||
| Forum Convention Center Mortgage Loan |
Senior Secured | $ | 400,000 | $ | 400,045 | $ | — | 7.7 | % | 9/18/2025 | ||||||||||||
| Chelsea Piers Mortgage Loan |
Senior Secured | 65,000 | 64,880 | 15,000 | 7.0 | % | 8/31/2027 | |||||||||||||||
| Amended and Restated ROV Loan |
||||||||||||||||||||||
| ROV Term Loan (5) |
Senior Secured | 70,000 | 71,796 | — | 9.0 | % | 1/24/2027 | |||||||||||||||
| ROV Credit Facility (5) |
Senior Secured | — | — | 25,000 | L + 2.75 | % | 1/24/2027 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 535,000 | $ | 536,721 | $ | 40,000 | 7.8 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) | Carrying value is net of unamortized loan origination costs and allowance for credit losses. |
| (2) | Our future funding commitments are subject to our borrowers’ compliance with the financial covenants and other applicable provisions of each respective loan agreement. |
| (3) | Represents current interest rate per annum. The interest rate of the Forum Convention Center Mortgage Loan is subject to a 2.0% annual escalation. |
| (4) | Final maturity assumes all extension options are exercised; however, our loans may be repaid, subject to certain conditions, prior to such date. |
| (5) | On October 4, 2021, the ROV Term Loan was repaid in full and the Amended and Restated ROV Loan, including the ROV Credit Facility, was terminated. |
32
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5 — Allowance for Credit Losses
Adoption of ASC 326
On January 1, 2020, we adopted ASC 326, and, as a result, we are required to estimate and record non-cash expected credit losses related to our historical and any future investments in sales-type leases, lease financing receivables and loans. Upon adoption we elected to use the modified retrospective approach, and recorded a $309.4 million cumulative adjustment, representing a 2.88% CECL allowance. Such amount was recorded as a cumulative-effect adjustment to our opening balance sheet with a reduction in our Investments in leases - sales-type and a corresponding charge to retained earnings. Periods prior to the adoption date that are presented for comparative purposes are not adjusted.
Allowance for Credit Losses
During the year ended December 31, 2021, we recognized a $19.6 million decrease in our allowance for credit losses primarily driven by (i) the decrease in the short-term reasonable and supportable period probability of default, or R&S Period PD, of our tenants or borrowers and their parent guarantors as a result of an improvement in their economic outlook due to the reopening of all of their gaming operations and relative performance of such operations during 2021, (ii) the decrease in the long-term reasonable and supportable period probability of default, or Long-Term Period PD, due to an upgrade of the credit rating of the senior secured debt used to determine the Long-Term Period PD for one of our tenants during 2021 and (iii) the decrease in the R&S Period PD and loss given default, or LGD, as a result of standard annual updates that were made to the inputs and assumptions in the model that we utilize to estimate our CECL allowance. This decrease was partially offset by an increase in the existing amortized cost balances subject to the CECL allowance.
During the year ended December 31, 2020, we recognized a $244.5 million increase in our allowance for credit losses primarily driven by the increase in investment balances subject to CECL. Specifically, the increase was primarily attributable to (i) the increase in investment balances resulting from the Eldorado Transaction, which includes (A) an initial CECL allowance on our $1.8 billion investment in the MTA Properties, (B) an additional CECL allowance on our aggregate $1.4 billion increased investment in the Las Vegas Master Lease Agreement as a result of the CPLV Additional Rent Acquisition and HLV Additional Rent Acquisition and (C) an additional CECL allowance on the $333.4 million increased balance of our existing Caesars Lease Agreements as a result of the mark to fair value in connection with the reassessment of lease classification, (ii) an increase related to our initial investment in JACK Cleveland/Thistledown and the ROV Loan in January 2020, (iii) an increase in the R&S Period PD of Caesars as a result of the Eldorado/Caesars Merger and (iv) an increase in the Long-term Period PD of our tenants due to downgrades on certain of the credit ratings of our tenants’ senior secured debt in connection with the COVID-19 pandemic. The credit loss standard does not require retrospective application and as such there is no corresponding charge for the year ended December 31, 2019.
As of December 31, 2021 and 2020, and since our formation date on October 6, 2017, all of our Lease Agreements and loan investments are current in payment of their obligations to us and no investments are on non-accrual status.
The following tables detail the allowance for credit losses as of December 31, 2021 and December 31, 2020:
| December 31, 2021 | ||||||||||||||||
| (In thousands) |
Amortized Cost | Allowance (1) | Net Investment | Allowance as a % of Amortized Cost |
||||||||||||
| Investments in leases - sales-type |
$ | 13,571,516 | $ | (434,852 | ) | $ | 13,136,664 | 3.20% | ||||||||
| Investments in leases - financing receivables |
2,735,948 | (91,124 | ) | 2,644,824 | 3.33% | |||||||||||
| Investments in loans |
498,775 | (773 | ) | 498,002 | 0.15% | |||||||||||
| Other assets - sales-type sub-leases |
280,510 | (6,540 | ) | 273,970 | 2.33% | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | 17,086,749 | $ | (533,289 | ) | $ | 16,553,460 | 3.12% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
33
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| December 31, 2020 | ||||||||||||||||
| (In thousands) |
Amortized Cost | Allowance | Net Investment | Allowance as a % of Amortized Cost |
||||||||||||
| Investments in leases - sales-type |
$ | 13,481,845 | $ | (454,201 | ) | $ | 13,027,644 | 3.37% | ||||||||
| Investments in leases - financing receivables |
2,709,520 | (90,958 | ) | 2,618,562 | 3.36% | |||||||||||
| Investments in loans |
538,547 | (1,826 | ) | 536,721 | 0.34% | |||||||||||
| Other assets - sales-type sub-leases |
284,376 | (6,894 | ) | 277,482 | 2.42% | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Totals |
$ | 17,014,288 | $ | (553,879 | ) | $ | 16,460,409 | 3.26% | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | The total allowance excludes the CECL allowance for unfunded loan commitments. As of December 31, 2021, such allowance is $1.0 million and is recorded in Other liabilities. As of December 31, 2020, there was no CECL allowance related to unfunded loan commitments. |
The following chart reflects the roll-forward of the allowance for credit losses on our real estate portfolio for the year ended December 31, 2021 and 2020:
| Year Ended December 31, |
||||||||
| (In thousands) |
2021 | 2020 | ||||||
| Beginning Balance January 1, |
$ | 553,879 | $ | — | ||||
| Initial allowance upon adoption |
— | 309,362 | ||||||
| Initial allowance from current period investments |
1,725 | 90,368 | ||||||
| Current period change in credit allowance |
(21,279 | ) | 154,149 | |||||
| Charge-offs |
— | — | ||||||
| Recoveries |
— | — | ||||||
|
|
|
|
|
|||||
| Ending Balance December 31, |
$ | 534,325 | $ | 553,879 | ||||
|
|
|
|
|
|||||
Credit Quality Indicators
We assess the credit quality of our investments through the credit ratings of the senior secured debt of the guarantors of our leases, as we believe that our Lease Agreements have a similar credit profile to a senior secured debt instrument. The credit quality indicators are reviewed by us on a quarterly basis as of quarter-end. In instances where the guarantor of one of our Lease Agreements does not have senior secured debt with a credit rating, we use either a comparable proxy company or the overall corporate credit rating, as applicable. We also use this credit rating to determine the Long-Term Period PD when estimating credit losses for each investment.
The following tables detail the amortized cost basis of our investments by the credit quality indicator we assigned to each lease or loan guarantor as of December 31, 2021 and December 31, 2020:
| December 31, 2021 | ||||||||||||||||||||||||||||
| (In thousands) |
Ba2 | Ba3 | B1 | B2 | B3 | N/A (1) | Total | |||||||||||||||||||||
| Investments in leases - sales-type and financing receivable, Investments in loans, Other assets and Other liabilities |
$ | — | $ | 951,033 | $ | 14,888,770 | $ | 868,629 | $ | 279,579 | $ | 98,739 | $ | 17,086,749 | ||||||||||||||
34
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| December 31, 2020 | ||||||||||||||||||||||||||||
| (In thousands) |
Ba2 | Ba3 | B1 | B2 | B3 | N/A (1) | Total | |||||||||||||||||||||
| Investments in leases - sales-type and financing receivable and Investments in loans |
$ | — | $ | — | $ | 15,733,402 | $ | 934,628 | $ | 281,246 | $ | 65,012 | $ | 17,014,288 | ||||||||||||||
| (1) | We estimate the CECL allowance for the Chelsea Piers Mortgage Loan and Great Wolf Mezzanine Loan using a traditional commercial real estate model based on standardized credit metrics to estimate potential losses. |
Note 6 — Other Assets and Other Liabilities
Other Assets
The following table details the components of our other assets as of December 31, 2021 and 2020:
| (In thousands) |
December 31, 2021 | December 31, 2020 | ||||||
| Sales-type sub-leases, net |
$ | 273,970 | $ | 277,481 | ||||
| Debt financing costs |
24,928 | 8,879 | ||||||
| Deferred acquisition costs |
24,690 | 1,788 | ||||||
| Right of use assets |
6,123 | 6,641 | ||||||
| Tenant receivable for property taxes |
5,032 | 3,384 | ||||||
| Prepaid expenses |
2,901 | 1,841 | ||||||
| Interest receivable |
2,780 | 2,742 | ||||||
| Property and equipment used in operations, net |
1,006 | 1,112 | ||||||
| Forward swap asset |
884 | — | ||||||
| Other receivables |
183 | 507 | ||||||
| Other |
1,517 | 1,345 | ||||||
|
|
|
|
|
|||||
| Total other assets |
$ | 344,014 | $ | 305,720 | ||||
|
|
|
|
|
|||||
| (1) | As of December 31, 2021 and December 31, 2020, sales-type sub-leases are net of $6.5 million and $6.9 million of Allowance for credit losses, respectively. Refer to Note 5 - Allowance for Credit Losses for further details. |
Property and equipment used in operations, included within other assets, is primarily attributable to furniture and equipment at our corporate headquarters and consists of the following as of December 31, 2021 and 2020:
| (In thousands) |
December 31, 2021 | December 31, 2020 | ||||||
| Furniture and equipment |
$ | 1,266 | $ | 1,251 | ||||
|
|
|
|
|
|||||
| Total property and equipment used in operations |
1,266 | 1,251 | ||||||
| Less: accumulated depreciation |
(260 | ) | (139 | ) | ||||
|
|
|
|
|
|||||
| Total property and equipment used in operations, net |
$ | 1,006 | $ | 1,112 | ||||
|
|
|
|
|
|||||
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Depreciation expense |
$ | 121 | $ | 116 | $ | 16 | ||||||
35
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Liabilities
The following table details the components of our other liabilities as of December 31, 2021 and 2020:
| (In thousands) |
December 31, 2021 | December 31, 2020 | ||||||
| Finance sub-lease liabilities |
$ | 280,510 | $ | 284,376 | ||||
| Deferred financing liability |
73,600 | 73,600 | ||||||
| Lease liabilities |
6,123 | 6,641 | ||||||
| CECL allowance for unfunded loan commitments |
1,037 | — | ||||||
| Derivative liability |
— | 92,521 | ||||||
|
|
|
|
|
|||||
| Total other liabilities |
$ | 361,270 | $ | 457,138 | ||||
|
|
|
|
|
|||||
Note 7 — Debt
The following tables detail our debt obligations as of December 31, 2021 and 2020:
| ($ in thousands) |
December 31, 2021 | |||||||||||||||
| Description of Debt |
Final Maturity |
Interest Rate |
Face Value |
Carrying Value (1) |
||||||||||||
| Secured Revolving Credit Facility (2) |
2024 | L + 2.00 | % | $ | — | $ | — | |||||||||
| Senior Unsecured Notes (3) |
||||||||||||||||
| 2025 Notes |
2025 | 3.500 | % | 750,000 | 742,677 | |||||||||||
| 2026 Notes |
2026 | 4.250 | % | 1,250,000 | 1,235,972 | |||||||||||
| 2027 Notes |
2027 | 3.750 | % | 750,000 | 741,409 | |||||||||||
| 2029 Notes |
2029 | 4.625 | % | 1,000,000 | 987,331 | |||||||||||
| 2030 Notes |
2030 | 4.125 | % | 1,000,000 | 987,134 | |||||||||||
|
|
|
|
|
|||||||||||||
| Total Debt |
$ | 4,750,000 | $ | 4,694,523 | ||||||||||||
|
|
|
|
|
|||||||||||||
| ($ in thousands) |
December 31, 2020 | |||||||||||||||
| Description of Debt |
Final Maturity |
Interest Rate |
Face Value |
Carrying Value (1) |
||||||||||||
| VICI PropCo Senior Secured Credit Facilities |
||||||||||||||||
| Secured Revolving Credit Facility (2) |
2024 | L + 2.00 | % | $ | — | $ | — | |||||||||
| Term Loan B Facility (4) |
2024 | L + 1.75 | % | 2,100,000 | 2,080,974 | |||||||||||
| Senior Unsecured Notes (3) |
||||||||||||||||
| 2025 Notes |
2025 | 3.500 | % | 750,000 | 740,333 | |||||||||||
| 2026 Notes |
2026 | 4.250 | % | 1,250,000 | 1,233,119 | |||||||||||
| 2027 Notes |
2027 | 3.750 | % | 750,000 | 739,733 | |||||||||||
| 2029 Notes |
2029 | 4.625 | % | 1,000,000 | 985,730 | |||||||||||
| 2030 Notes |
2030 | 4.125 | % | 1,000,000 | 985,643 | |||||||||||
|
|
|
|
|
|||||||||||||
| Total Debt |
$ | 6,850,000 | $ | 6,765,532 | ||||||||||||
|
|
|
|
|
|||||||||||||
| (1) | Carrying value is net of original issue discount and unamortized debt issuance costs incurred in conjunction with debt. |
| (2) | The commitment fee under the Secured Revolving Credit Facility was calculated on a leverage-based pricing grid with a range of 0.375% to 0.5%, in each case depending on our total net debt to adjusted total assets ratio. Subsequent to year end, on February 8, 2022, we terminated the Secured Revolving Credit Facility (including the first priority lien on substantially all of VICI PropCo’s and its existing and subsequently acquired wholly owned material domestic restricted subsidiaries’ material assets) and the Existing Credit Agreement, and entered into the Credit Agreement providing for the Credit Facilities, as described below. |
| (3) | Interest is payable semi-annually. |
| (4) | The Term Loan B Facility was repaid in full on September 15, 2021 using the proceeds from the settlement of the June 2020 forward sale agreement and September 2021 equity offering of VICI REIT, which were contributed to the Partnership. Additionally, all of our outstanding interest rate swap agreements were subsequently unwound and settled. |
36
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table is a schedule of future minimum payments of our debt obligations as of December 31, 2021:
| ($ in thousands) |
Future Minimum Payments | |||
| 2022 |
$ | — | ||
| 2023 |
— | |||
| 2024 |
— | |||
| 2025 |
750,000 | |||
| 2026 |
1,250,000 | |||
| Thereafter |
2,750,000 | |||
|
|
|
|||
| Total minimum repayments |
$ | 4,750,000 | ||
|
|
|
|||
Senior Unsecured Notes
November 2019 Senior Unsecured Notes
On November 26, 2019, we and the Co-Issuer (together with the Partnership, the “Issuers”) issued (i) $1,250.0 million in aggregate principal amount of 4.250% 2026 Notes, which mature on December 1, 2026, and (ii) $1,000.0 million in aggregate principal amount of 4.625% 2029 Notes, which mature on December 1, 2029, under separate indentures, each dated as of November 26, 2019, among the Issuers, the subsidiary guarantors party thereto and UMB Bank, National Association, as trustee (the “Trustee”). We used a portion of the net proceeds of the offering to repay in full the $1.55 billion mortgage financing of Caesars Palace Las Vegas, and pay certain fees and expenses including the net prepayment penalty of $55.4 million. On January 24, 2020, the remaining net proceeds were used to pay for a portion of the purchase price of the JACK Cleveland/ Thistledown Acquisition.
Interest on the November 2019 Senior Unsecured Notes is payable semi-annually in cash in arrears on June 1 and December 1 of each year. The 2026 Notes and 2029 Notes are redeemable at our option, in whole or in part, at any time on or after December 1, 2022 and December 1, 2024, respectively, at the redemption prices set forth in the respective indenture. We may redeem some or all of the 2026 Notes or the 2029 Notes prior to such respective dates at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to December 1, 2022, we may redeem up to 40% of the aggregate principal amount of the 2026 Notes or the 2029 Notes using the proceeds of certain equity offerings at the redemption price set forth in the respective indenture.
February 2020 Senior Unsecured Notes
On February 5, 2020, the Issuers issued (i) $750.0 million in aggregate principal amount of 3.500% 2025 Notes, which mature on February 15, 2025, (ii) $750.0 million in aggregate principal amount of 3.750% 2027 Notes, which mature on February 15, 2027, and (iii) $1,000.0 million in aggregate principal amount of 4.125% 2030 Notes, which mature on August 15, 2030, under separate indentures, each dated as of February 5, 2020, among the Issuers, the subsidiary guarantors party thereto and the Trustee. 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 July 20, 2020), and 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 (as defined in the Second Lien Notes indenture), for a total redemption cost of approximately $537.5 million.
Interest on the February 2020 Senior Unsecured Notes is payable semi-annually in cash in arrears on February 15 and August 15 of each year. The 2025 Notes, 2027 Notes and 2030 Notes are redeemable at our option, in whole or in part, at any time on or after February 15, 2022, February 15, 2023, and February 15, 2025, respectively, at the redemption prices set forth in the respective indenture. We may redeem some or all of the 2025 Notes, 2027 Notes or 2030 Notes prior to such respective dates at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to February 15, 2022, with respect to the 2025 Notes, and February 15, 2023, with respect to the 2027 Notes and 2030 Notes, we may redeem up to 40% of the aggregate principal amount of the 2025 Notes, 2027 Notes or 2030 Notes using the proceeds of certain equity offerings at the redemption price set forth in the respective indenture.
37
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Guarantee and Financial Covenants
Until February 8, 2022, the November 2019 Senior Unsecured Notes and the February 2020 Senior Unsecured Notes (together, the “Senior Unsecured Notes”) were fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future direct and indirect wholly owned material domestic subsidiaries that incurs or guarantees certain bank indebtedness or any other material capital market indebtedness, other than certain excluded subsidiaries and the Co-Issuer. All subsidiary guarantees were released upon the execution of the Credit Agreement on February 8, 2022.
The respective indentures for the Senior Unsecured Notes each contain covenants that limit the Issuers’ and their restricted subsidiaries’ ability to, among other things: (i) incur additional debt; (ii) pay dividends on or make other distributions in respect of their capital stock or make other restricted payments; (iii) make certain investments; (iv) sell certain assets; (v) create or permit to exist dividend and/or payment restrictions affecting their restricted subsidiaries; (vi) create liens on certain assets to secure debt; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; (viii) enter into certain transactions with their affiliates; and (ix) designate their subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of exceptions and qualifications, including the ability to declare or pay any cash dividend or make any cash distribution to VICI REIT to the extent necessary for VICI REIT to fund a dividend or distribution by VICI REIT that it believes is necessary to maintain its status as a REIT or to avoid payment of any tax for any calendar year that could be avoided by reason of such distribution, and the ability to make certain restricted payments not to exceed 95% of our cumulative Funds From Operations (as defined in the Senior Unsecured Notes indentures), plus the aggregate net proceeds from (i) the sale of certain equity interests in, (ii) capital contributions to, and (iii) certain of our convertible indebtedness. As of December 31, 2021, our restricted net assets were approximately $7.4 billion.
New Unsecured Credit Facilities
Subsequent to year end, in February 2022, we entered into the Credit Agreement providing for (i) the Revolving Credit Facility in the amount of $2.5 billion scheduled to mature on March 31, 2026 and (ii) the Delayed Draw Term Loan in the amount of $1.0 billion scheduled to mature on March 31, 2025. The Revolving Credit Facility includes two six-month maturity extension options and the Delayed Draw Term Loan includes two twelve-month extension options, in each case, the exercise of which is subject to customary conditions and the payment of an extension fee of 0.0625% on the extended commitments, in the case of each six-month extension of the Revolving Credit Facility, and 0.125% on the extended term loans, in the case of each twelve-month extension of the Delayed Draw Term Loan. The Credit Facilities include the option to increase the revolving loan commitments by up to $1.0 billion and increase the delayed draw term loan commitments or add one or more new tranches of term loans by up to $1.0 billion in the aggregate, in each case, to the extent that any one or more lenders (from the syndicate or otherwise) agree to provide such additional credit extensions.
Borrowings under the Credit Facilities will bear interest, at the Partnership’s option, (i) with respect to the Revolving Credit Facility, at a rate based on SOFR (including a credit spread adjustment) plus a margin ranging from 0.775% to 1.325% or a base rate plus a margin ranging from 0.00% to 0.325%, in each case, with the actual margin determined according to our debt ratings, and (ii) with respect to the Delayed Draw Term Loan, at a rate based on SOFR (including a credit spread adjustment) plus a margin ranging from 0.85% to 1.60% or a base rate plus a margin ranging from 0.00% to 0.60%, in each case, with the actual margin determined according to our debt ratings. The base rate is the highest of (i) the prime rate of interest last quoted by the Wall Street Journal in the U.S. then in effect, (ii) the NYFRB rate from time to time plus 0.5% and (iii) the SOFR rate for a one-month interest period plus 1.0%, subject in each case to a floor of 1.0%. In addition, the Revolving Credit Facility requires the payment of a facility fee ranging from 0.15% to 0.375% (depending on our debt rating) of total revolving commitments.
Pursuant to the terms of the Credit Agreement, we are subject to, among other things, customary covenants and the maintenance of various financial covenants. The Credit Agreement is consistent with certain tax-related requirements related to security for our debt. If the MGP Transactions Bridge Facility and/or the Venetian Acquisition Bridge Facility (each as described below) is funded and remains outstanding for 90 days, then the Credit Facilities are required to be secured on a second priority basis with the same collateral securing the MGP Transactions Bridge Facility for so long as the MGP Transactions Bridge Facility remains outstanding.
On February 18, 2022, we drew on the Revolving Credit Facility in the amount of $600.0 million to fund a portion of the purchase price of the Venetian Acquisition.
38
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Secured Credit Facilities
In December 2017, VICI PropCo entered into a credit agreement (as amended, amended and restated and otherwise modified, the “Existing Credit Agreement”), which was subsequently amended and restated in May 2019 and amended in January 2020, comprised of a $2.2 billion Term Loan B Facility and a $1.0 billion Secured Revolving Credit Facility (the Term Loan B Facility and the Secured Revolving Credit Facility, as amended, are referred to together as the “Senior Secured Credit Facilities”). Pursuant to the Existing Credit Agreement, the Term Loan B Facility bore interest at a rate of LIBOR plus 1.75% and the Secured Revolving Credit Facility was subject to an interest rate based on a leverage-based pricing grid with a range of between 1.75% to 2.00% over LIBOR, 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 commitment fee payable under the Secured Revolving Credit Facility bore interest at a rate based on a leverage-based pricing grid with a range of between 0.375% to 0.50% depending on our total net debt to adjusted total assets ratio. The Secured Revolving Credit Facility also required the payment of a commitment fee of between 0.375% to 0.50% depending on our total net debt to adjusted total assets ratio. The Credit Agreement contained customary covenants and, with respect to the Secured Revolving Credit Facility, certain financial covenants.
The Senior Secured Credit Facilities were secured by a first priority lien on substantially all of VICI PropCo’s material assets (and those of its existing and subsequently acquired wholly owned material domestic restricted subsidiaries), including mortgages on their respective real estate, subject to customary exclusions. The Partnership was not subject to the covenants of the Existing Credit Agreement nor was the Partnership a guarantor of the Senior Secured Credit Facilities.
On September 15, 2021, we repaid in full the Term Loan B Facility, including accrued interest, using proceeds that VICI REIT contributed to us from the settlement of its June 2020 forward sale agreement and its issuance of 65,000,000 shares of common stock from its September 2021 equity offering. In connection with the full repayment, we recognized a loss on extinguishment of debt of $15.6 million during the year ended December 31, 2021, representing the write-off of the remaining unamortized deferred financing costs. Following the repayment in full of the Term Loan B Facility, the Secured Revolving Credit Facility remained in effect pursuant to the Existing Credit Agreement.
On February 8, 2022, we terminated the Secured Revolving Credit Facility (including the first priority lien on substantially all of VICI PropCo’s material assets and those of its existing and subsequently acquired wholly owned material domestic restricted subsidiaries) and the Existing Credit Agreement, and entered into the Credit Agreement providing for the Credit Facilities, as described above.
Bridge Facilities
MGP Transactions Bridge Facility
On August 4, 2021, in connection with the MGP Transactions, VICI PropCo entered into a Commitment Letter (the “MGP Transactions Commitment Letter”) with Morgan Stanley Senior Funding, Inc., JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc. (collectively, the “MGP Transactions Bridge Lender”), pursuant to which, and subject to the terms and conditions set forth therein, the MGP Transactions Bridge Lender provided commitments in an amount up to $9.3 billion in the aggregate, consisting of a 364-day first lien secured bridge facility (the “MGP Transactions Bridge Facility”), for the purpose of providing a portion of the financing necessary to fund (i) the consideration to be paid in connection with the Redemption pursuant to the terms of the MGP Master Transaction Agreement, (ii) amounts to be paid in connection with offers to repurchase the MGP OP Notes pursuant to their respective indentures if the assumption of such notes by the Partnership in the Mergers is unsuccessful and (iii) related fees and expenses. The commitment fee is equal to, (i) with respect to any commitments that remain outstanding on or prior to September 15, 2021, 0.25% of such commitments, (ii) with respect to any commitments that remain outstanding after September 15, 2021 and are terminated on or prior to August 4, 2022, 0.50% of such commitments, and (iii) with respect to any commitments that remain outstanding after August 4, 2022, 0.75% of such commitments. For the year ended December 31, 2021, we recognized $38.7 million of fees related to the MGP Transactions Bridge Facility in Interest expense on our Statement of Operations.
Commitments and loans under the MGP Transactions Bridge Facility will be reduced or prepaid, as applicable, in part with the proceeds of certain incurrences of indebtedness, issuances of equity and asset sales. If we use the MGP Transactions Bridge Facility, funding is contingent on the satisfaction of certain customary conditions set forth in the MGP Transactions Commitment Letter, including, among others, (i) the execution and delivery of definitive documentation with respect to the MGP Transactions Bridge Facility in accordance with the terms set forth in the MGP Transactions Commitment Letter and (ii) the consummation of the MGP Transactions in accordance with the MGP Master Transaction Agreement. Although we do not currently expect VICI PropCo to make any borrowings under the MGP Transactions Bridge Facility, there can be no assurance
39
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that such borrowings will not be made or that we will be able to incur alternative long-term debt financing in lieu of borrowings under the MGP Transactions Bridge Facility on favorable terms, or at all. Interest under the MGP Transactions Bridge Facility, if funded, will be calculated on a rate between (i) LIBOR plus 200 basis points and LIBOR plus 275 basis points or (ii) the base rate plus 100 basis points and the base rate plus 175 basis points, in each case depending on duration. The MGP Transactions Bridge Facility, if funded, will contain restrictive covenants and events of default substantially similar to those contained in the Senior Secured Credit Facilities. If we draw upon the MGP Transactions Bridge Facility, there can be no assurances that we would be able to refinance the MGP Transactions Bridge Facility on satisfactory terms, or at all.
On September 23, 2021, following the successful early tender results and participation of the Exchange Offers and Consent Solicitations, the execution of the MGP OP Supplemental Indentures and the elimination of the change of control covenants in connection therewith, $4,242.0 million in committed financing (representing the second tranche of the MGP Transactions Bridge Facility) was terminated in accordance with the terms of the MGP Transactions Commitment Letter.
Venetian Acquisition Bridge Facility
On March 2, 2021, in connection with the Venetian Acquisition, VICI PropCo entered into a Commitment Letter (the “Venetian Acquisition Commitment Letter”) with Deutsche Bank Securities Inc. and Deutsche Bank AG Cayman Islands Branch, and Morgan Stanley Senior Funding, Inc. (collectively, the “Venetian Acquisition Bridge Lender”), pursuant to which, and subject to the terms and conditions set forth therein, the Venetian Acquisition Bridge Lender has provided commitments in an amount up to $4.0 billion in the aggregate, consisting of a 364-day first lien secured bridge facility (the “Venetian Acquisition Bridge Facility”), for the purpose of providing a portion of the financing necessary to fund the consideration in connection with the Venetian PropCo Acquisition. On March 8, 2021, following VICI REIT’s entry into certain March 2021 forward sale agreements, the commitments under the Venetian Acquisition Bridge Facility were reduced by $1,890.0 million. On December 13, 2021, the commitments under Venetian Bridge Acquisition Facility were reduced by an additional $1,410.0 million. As of December 31, 2021, $700.0 million of commitments under the Venetian Acquisition Bridge Facility remained outstanding. Subsequent to year end, on February 23, 2022, the remaining commitments under the Venetian Acquisition Bridge Facility were fully terminated in connection with the closing of the Venetian Acquisition. The Venetian Acquisition Bridge Facility was subject to a tiered commitment fee based on the period the commitment is outstanding and a structuring fee. For the year ended December 31, 2021, we recognized $16.4 million of fees related to the Venetian Acquisition Bridge Facility in Interest expense on our Statement of Operations.
Eldorado Transaction Bridge Facilities
On June 24, 2019, in connection with the Eldorado Transaction, VICI PropCo entered into a commitment letter with Deutsche Bank Securities Inc. and Deutsche Bank AG Cayman Islands Branch (collectively, the “Eldorado Transaction Bridge Lender”), pursuant to which and subject to the terms and conditions set forth therein, the Eldorado Transaction Bridge Lender agreed to provide (i) a 364-day first lien secured bridge facility of up to $3.3 billion in the aggregate and (ii) a 364-day second lien secured bridge facility of up to $1.5 billion in the aggregate (collectively the “Eldorado Transaction Bridge Facilities”), for the purpose of providing a portion of the financing necessary to fund the consideration to be paid pursuant to the terms of the Eldorado Transaction documents and related fees and expenses. Following the November 2019 Senior Unsecured Notes offering, the commitments under the Eldorado Transaction Bridge Facilities were reduced by $1.6 billion, to $3.2 billion. Following the February 2020 Senior Unsecured Notes offering, we placed $2.0 billion of the net proceeds of the offering into escrow pending the consummation of the Eldorado Transaction and the commitments under the Eldorado Transaction Bridge Facilities were further reduced by $2.0 billion to $1.2 billion. The Eldorado Transaction Bridge Facilities were subject to a tiered commitment fee based on the period the commitment is outstanding and a structuring fee. The structuring fee was equal to 0.10% of the total aggregate commitments at June 24, 2019 and was payable as such commitments were terminated. For the year ended December 31, 2020, we recognized $3.1 million of fees related to the Eldorado Transaction Bridge Facilities in Interest expense on our Statement of Operations. No such amount was recognized for the year ended December 31, 2021 as the Eldorado Transaction Bridge Facilities were fully terminated at our election in June 2020.
Second Lien Notes
The Second Lien Notes were issued on October 6, 2017, pursuant to an indenture by and among VICI PropCo and its wholly owned subsidiary, VICI FC Inc., the subsidiary guarantors party thereto, and UMB Bank National Association, as trustee. On February 20, 2020, we used a portion of the proceeds from the issuance of the 2025 Notes, together with cash on hand, to redeem in full the Second Lien Notes at a redemption price of 100% of the principal amount of the Second Lien Notes then outstanding plus the Second Lien Notes Applicable Premium (as defined in the Second Lien Notes indenture), for a total redemption cost of $537.5 million. In connection with the full redemption, we recognized a loss on extinguishment of debt of $39.1 million during the year ended December 31, 2020.
40
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CPLV CMBS Debt
The CPLV CMBS Debt was incurred on October 6, 2017 pursuant to a loan agreement, and was secured by a first priority lien on all of the assets of CPLV Property Owner LLC, as borrower. On November 26, 2019, we used the proceeds from the November 2019 Senior Unsecured Notes offering to repay in full the CPLV CMBS Debt. Due to the prepayment of the CPLV CMBS Debt, we recognized a loss on extinguishment of debt of $58.1 million during the year ended December 31, 2019, the majority of which related to the prepayment penalty.
Financial Covenants
As described above, our debt obligations are subject to certain customary financial and protective covenants that restrict us and our subsidiaries’ ability to incur additional debt, sell certain asset and restrict certain payments, among other things. These covenants are subject to a number of exceptions and qualifications, including the ability to make restricted payments to maintain the REIT status of VICI REIT. At December 31, 2021, we are in compliance with all financial covenants under our debt obligations.
Note 8 — Derivatives
In December 2021, we entered into a forward-starting interest rate swap agreement with a notional amount of $500.0 million to hedge against changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $500.0 million of long-term debt. We hedged our exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending December 2023. The forward-starting interest rate swap was designated as a cash-flow hedge. Subsequent to year-end, we entered into additional forward-starting interest rate swap agreements with an aggregate notional amount of $2.0 billion and fixed rates ranging from 1.5850% to 1.6900% and maturities ranging from May 2, 2027 to May 2, 2032. Additionally, subsequent to year end we entered into two U.S. Treasury Rate Lock agreements with an aggregate notional amount of $500.0 million to hedge against the changes in future cash flows resulting from changes in interest rates from the trade date through the forecasted issuance date of $500.0 million of long term debt. The treasury locks were designated as cash-flow hedges. The additional forward-starting interest rate swap agreements continue to hedge our exposure to the variability in future cash flows for a forecasted issuance of long-term debt over a maximum period ending December 2023 and are designated as cash-flow hedges.
In April 2018 and January 2019, we entered into six interest rate swap agreements with third party financial institutions having an aggregate notional amount of $2.0 billion. The interest rate swap transactions were designated as cash flow hedges that effectively fix the LIBOR component of the interest rate on a portion of the outstanding debt under the Term Loan B Facility at 2.8297%. On September 15, 2021, in connection with the full repayment of the Term Loan B Facility, we unwound and settled all of our outstanding interest rate swap agreements resulting in a cash payment of $66.9 million, inclusive of accrued interest of $2.7 million. As the Term Loan B Facility was repaid in full with proceeds from the issuance of 65,000,000 shares of common stock on September 14, 2021 and proceeds from the settlement of the VICI REIT June 2020 forward sale agreement with no replacement debt, the full amount held in Other comprehensive income, $64.2 million, was immediately reclassified to Interest expense.
The following tables detail our outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of December 31, 2020 and 2021:
| ($ in thousands) | December 31, 2021 | |||||||||||||
| Instrument |
Number of Instruments |
Fixed Rate |
Notional | Index |
Maturity | |||||||||
| Forward-starting interest rate swap |
1 | 1.3465 | % | $ | 500,000 | USD SOFR-COMPOUND | May 2, 2032 | |||||||
| ($ in thousands) | December 31, 2020 | |||||||||||||
| Instrument |
Number of Instruments |
Fixed Rate |
Notional | Index |
Maturity | |||||||||
| Interest rate swaps |
4 | 2.8297 | % | $ | 1,500,000 | USD LIBOR | April 22, 2023 | |||||||
| Interest rate swaps |
2 | 2.3802 | % | $ | 500,000 | USD LIBOR | January 22, 2021 | |||||||
41
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2021 and 2020, the swaps are in net unrealized gain and loss positions, respectively and are recorded within Other assets and Other liabilities, respectively. The following table presents the effect of our derivative financial instruments on our Statement of Operations:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Unrealized gain (loss) recorded in other comprehensive income |
$ | 29,166 | $ | (27,443 | ) | $ | (42,954 | ) | ||||
| Interest recorded in interest expense |
29,960 | 42,797 | 9,269 | |||||||||
| Interest rate swap settlement recorded in interest expense |
64,239 | — | — | |||||||||
The following tables summarize our assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020:
| December 31, 2021 | ||||||||||||||||
| (In thousands) |
Carrying Amount | Fair Value | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Financial assets: |
||||||||||||||||
| Derivative instruments - forward-starting interest rate swap (1) |
$ | 884 | $ | — | $ | 884 | $ | — | ||||||||
| December 31, 2020 | ||||||||||||||||
| (In thousands) |
Carrying Amount | Fair Value | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Financial assets: |
||||||||||||||||
| Short-term investments (2) |
$ | 19,973 | $ | — | $ | 19,973 | $ | — | ||||||||
| Financial liabilities: |
||||||||||||||||
| Derivative instruments - interest rate swaps (1) |
$ | 92,521 | $ | — | $ | 92,521 | $ | — | ||||||||
| (1) | The fair values of our interest rate swap derivative instruments were estimated using advice from a third-party derivative specialist, based on contractual cash flows and observable inputs comprising interest rate curves and credit spreads, which are Level 2 measurements as defined under ASC 820. |
| (2) | The carrying value of these investments is equal to their fair value due to the short-term nature of the investments as well as their credit quality. |
42
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated fair values of our financial instruments at December 31, 2021 and 2020 for which fair value is only disclosed are as follows:
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||
| (In thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||
| Financial assets: |
||||||||||||||||||||
| Investments in leases - financing receivables (1) |
$ | 2,644,824 | $ | 3,104,337 | $ | 2,618,562 | $ | 2,684,955 | ||||||||||||
| Investments in loans (2) |
498,002 | 498,614 | 536,721 | 538,151 | ||||||||||||||||
| Cash and cash equivalents |
705,566 | 705,566 | 286,245 | 286,245 | ||||||||||||||||
| Financial liabilities: |
| |||||||||||||||||||
| Debt (3) |
||||||||||||||||||||
| Secured Revolving Credit Facility |
$ | — | $ | — | $ | — | $ | — | ||||||||||||
| Term Loan B Facility |
— | — | 2,080,974 | 2,065,875 | ||||||||||||||||
| 2025 Notes |
742,677 | 763,125 | 740,333 | 766,875 | ||||||||||||||||
| 2026 Notes |
1,235,972 | 1,296,875 | 1,233,119 | 1,296,875 | ||||||||||||||||
| 2027 Notes |
741,409 | 772,500 | 739,733 | 763,125 | ||||||||||||||||
| 2029 Notes |
987,331 | 1,067,500 | 985,730 | 1,070,000 | ||||||||||||||||
| 2030 Notes |
987,134 | 1,055,000 | 985,643 | 1,045,000 | ||||||||||||||||
| (1) | These investments represent the JACK Cleveland/Thistledown Lease Agreement and the Harrah’s Original Call Properties. The fair value of these assets are based on significant “unobservable” market inputs and, as such, these fair value measurements are considered Level 3 of the fair value hierarchy. |
| (2) | These investments represent the (i) Caesars Forum Convention Center Mortgage Loan, (ii) Chelsea Piers Mortgage Loan, (iii) Amended and Restated ROV Loan (which was terminated on October 4, 2021) and (iv) Great Wolf Mezzanine Loan. We believe the current principal balance of the investments approximates their fair value. |
| (3) | The fair value of our debt instruments was estimated using quoted prices for identical or similar liabilities in markets that are not active and, as such, these fair value measurements are considered Level 2 of the fair value hierarchy. |
Gain Upon Lease Modification in Connection with the Eldorado Transaction
On July 20, 2020, in connection with the Eldorado Transaction and as required under ASC 842, we reassessed the lease classifications of the Las Vegas Master Lease Agreement, Regional Master Lease Agreement and Joliet Lease Agreement and determined the leases meet the definition of a sales-type lease, including the land component of Caesars Palace Las Vegas. As a result of the reclassifications of the Caesars Lease Agreements from direct financing and operating leases to sales-type leases, we recorded the investments at their estimated fair values as of the modification date and recognized a net gain equal to the difference in fair value of the asset and its carrying value immediately prior to the modification.
We valued the real estate portfolio using a rent multiple taking into consideration a variety of factors, including (i) asset quality and location, (ii) property and lease-level operating performance and (iii) supply and demand dynamics of each property’s respective market. With respect to certain assets which were subject to signed sale agreements as of the date of reassessment, and were subject to removal from the Regional Master Lease Agreement upon consummation of such transactions, which includes Harrah’s Reno, Bally’s Atlantic City and Louisiana Downs, these assets were recorded at fair value using the contract price less costs to sell.
As a result of the re-measurement of the Caesars Lease Agreements to fair value, we recognized a $333.4 million gain upon lease modification in our Statement of Operations during the year ended December 31, 2020.
43
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes our assets measured at fair value on a non-recurring basis in relation to the gain upon modification of the Caesars Lease Agreements on July 20, 2020 the date of modification:
| July 20, 2020 | ||||||||||||||||
| (In thousands) | Carrying Amount | Fair Value | ||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| Financial assets: |
||||||||||||||||
| Investments in sales-type leases - Caesars Lease Agreements (1) |
$ | 10,228,465 | $ | — | $ | — | $ | 10,228,465 | ||||||||
| Investments in sales-type leases - assets subject to sales |
$ | 55,325 | $ | — | $ | 55,325 | $ | — | ||||||||
| (1) | The fair value measurement of the Caesars Lease Agreements excludes the Harrah’s Original Call Properties Acquisitions, HLV Additional Rent Acquisition and CPLV Additional Rent Acquisition as these transactions occurred in connection with the Eldorado Transaction and the investments are measured at historical cost. |
| (2) | Represents the Harrah’s Reno, Bally’s Atlantic City and Louisiana Downs assets, which were subject to sales agreements at the date of the modification. The fair value of these investments is based on the contract price and represents a Level 2 measurement as defined in ASC 820. |
The following table summarizes the significant unobservable inputs used in non-recurring Level 3 fair value measurements:
| Significant Assumptions | ||||||||||||||||
| (In thousands) |
Fair Value (1) |
Valuation Technique |
Range | Weighted Average (2) |
||||||||||||
| Asset Type | ||||||||||||||||
| Investment in sales-type lease - Casinos |
$ | 10,228,465 | Rent Multiple | 9.75x - 15.50x | 13.0x | |||||||||||
| (1) | The fair value measurement of the Caesars Lease Agreements excludes the Harrah’s Original Call Properties Acquisitions, HLV Additional Rent Acquisition and CPLV Additional Rent Acquisition as these transactions occurred in connection with the Eldorado Transaction and the investments are measured at historical cost. |
| (2) | Weighted by relative fair value. |
Note 10 — Commitments and Contingent Liabilities
Litigation
In the ordinary course of business, from time to time, we may be subject to legal claims and administrative proceedings. As of December 31, 2021, we are not subject to any litigation that we believe could have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations, liquidity or cash flows.
In connection with the Mergers, three lawsuits were filed by purported MGP shareholders and six lawsuits were filed by purported VICI REIT stockholders challenging the disclosures made, as applicable, in VICI REIT’s Registration Statement on Form S-4 filed on September 8, 2021 and VICI REIT’s Prospectus filed on September 23, 2021. The plaintiffs in each action sought, among other things, to enjoin the Mergers and the transactions contemplated by the MGP Master Transaction Agreement and an award of costs and attorneys’ fees. Each of the lawsuits has been dismissed pursuant to applicable litigation procedure, although additional lawsuits arising out of the MGP Transactions may be filed in the future.
Operating Lease Commitments
We are the lessee under various operating leases for offices in New Orleans, LA and New York, NY, which expire in 2022 and 2030, respectively. The discount rate for the New York lease of 5.3% was determined based on the yield of our current secured borrowings, adjusted to match borrowings of similar terms. The weighted average remaining lease term as of December 31, 2021 under our operating leases was 8.42.
44
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total rental expense, included general and administrative expenses in our Statement of Operations and contractual rent expense under these agreements were as follows:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Rent expense |
$ | 942 | $ | 942 | $ | 557 | ||||||
| Contractual rent |
$ | 949 | $ | 686 | $ | 375 | ||||||
As of December 31, 2021, we have a $6.1 million right of use asset and corresponding lease liability recorded in Other assets and Other liabilities, respectively, on our Balance Sheet related to our operating lease commitments for which we are the lessee.
The future minimum lease commitments relating to the base lease rent portion of noncancelable operating leases at December 31, 2021 are as follows:
| (In thousands) |
Lease Commitments | |||
| 2022 |
$ | 933 | ||
| 2023 |
857 | |||
| 2024 |
857 | |||
| 2025 |
899 | |||
| 2026 |
929 | |||
| Thereafter |
3,251 | |||
|
|
|
|||
| Total minimum lease commitments |
$ | 7,726 | ||
|
|
|
|||
| Discounting factor |
1,603 | |||
| Lease liability |
$ | 6,123 | ||
Finance Lease Commitments
Certain of our acquisitions necessitate that we assume, as the lessee, ground and use leases, the cost of which is passed to our tenants through the Lease Agreements, which require the tenants to pay all costs associated with such ground and use leases and provide for their direct payment to the landlord.
We have determined we are the primary obligor of certain of such ground and use leases and, accordingly, have presented these leases on a gross basis on our Balance Sheet and Statement of Operations. Further, we assessed the classification of the sub-lease to our tenant through the Lease Agreements, and our obligation as primary obligor of the ground and use leases and determined that they meet the definition of a sales-type lease and finance lease, respectively. The following table details the balance and location in our Balance Sheet of the ground and use leases as of December 31, 2021 and 2020, which is primarily comprised of the HNO Ground Lease:
| (In thousands) |
December 31, 2021 | December 31, 2020 | ||||||
| Others assets (sales-type sub-lease) |
$ | 273,970 | $ | 277,481 | ||||
| Other liabilities (finance sub-lease liability) |
280,510 | 284,376 | ||||||
Total rental income and rental expense, included in Other income and Other expenses, respectively, in our Statement of Operations and contractual rent expense under these agreements were as follows:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Rental income and expense (1) |
$ | 22,484 | $ | 11,632 | $ | 410 | ||||||
| Contractual rent |
$ | 26,350 | $ | 17,983 | $ | 452 | ||||||
| (1) | For the years ended December 31, 2021 and 2020, these amounts are presented gross in Other income with an offsetting amount in Other expenses within the Statement of Operations. For the year ended December 31, 2019, we recorded such amounts as a component of General and administrative expenses on a net basis as these charges were not material to the Statement of Operations. |
45
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The future minimum lease commitments relating to the ground and use leases at December 31, 2021 are as follows:
| (In thousands) |
Lease Commitments | |||
| 2022 |
$ | 26,350 | ||
| 2023 |
23,350 | |||
| 2024 |
23,350 | |||
| 2025 |
23,350 | |||
| 2026 |
23,350 | |||
| Thereafter |
741,729 | |||
|
|
|
|||
| Total minimum lease commitments |
$ | 861,479 | ||
|
|
|
|||
| Discounting factor |
580,969 | |||
| Finance sub-lease liability |
$ | 280,510 | ||
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 8%. The weighted average remaining lease term as of December 31, 2021 under our finance leases was 36.8 years.
Note 11 — Earnings Per Unit
Basic earnings per unit is computed by dividing net income attributable to partners’ capital by the weighted-average number of units outstanding during the period. In accordance with the Partnership agreement, for each share of common stock issued at VICI REIT, a corresponding unit is issued by the Partnership. Accordingly, diluted earnings per unit reflects the additional dilution for all potentially dilutive units resulting from potentially dilutive VICI REIT stock issuances, such as options, unvested restricted stock awards, unvested performance-based restricted stock awards and the units to be issued by us upon settlement of any outstanding forward sale agreements of VICI REIT. The units issuable upon settlement of any outstanding forward sale agreements of VICI REIT are reflected in the diluted earnings per unit calculations using the treasury stock method. Under this method, the number of units used in calculating diluted earnings per unit is deemed to be increased by the excess, if any, of the number of units that would be issued upon full physical settlement of the units under any outstanding forward sale agreements over the number of shares of VICI REIT common stock 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 VICI REIT physically or net share settles the shares of VICI REIT common stock under the outstanding forward sale agreements, the delivery of shares of VICI REIT common stock will result in an increase in the number of Partnership units outstanding and resulting dilution to earnings per unit.
The following tables reconcile the weighted-average units outstanding used in the calculation of basic earnings per unit to the weighted-average number of units outstanding used in the calculation of diluted earnings per unit:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Determination of shares: |
||||||||||||
| Weighted-average units outstanding |
564,467 | 506,141 | 435,071 | |||||||||
| Assumed conversion of VICI REIT restricted stock |
924 | 412 | 566 | |||||||||
| Assumed settlement of VICI REIT forward sale agreements |
11,675 | 4,356 | 3,516 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted weighted-average units outstanding |
577,066 | 510,909 | 439,153 | |||||||||
|
|
|
|
|
|
|
|||||||
46
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic and Diluted Earnings Per Unit
| Year Ended December 31, | ||||||||||||
| (In thousands, except per unit data) |
2021 | 2020 | 2019 | |||||||||
| Basic: |
||||||||||||
| Net income attributable to partners |
$ | 1,008,534 | $ | 889,608 | $ | 527,450 | ||||||
| Weighted-average units outstanding |
564,467 | 506,141 | 435,071 | |||||||||
|
|
|
|
|
|
|
|||||||
| Basic EPU |
$ | 1.79 | $ | 1.76 | $ | 1.21 | ||||||
|
|
|
|
|
|
|
|||||||
| Diluted: |
||||||||||||
| Net income attributable to partners |
$ | 1,008,534 | $ | 889,608 | $ | 527,450 | ||||||
| Diluted weighted-average units outstanding |
577,066 | 510,909 | 439,153 | |||||||||
|
|
|
|
|
|
|
|||||||
| Diluted EPU |
$ | 1.75 | $ | 1.74 | $ | 1.20 | ||||||
|
|
|
|
|
|
|
|||||||
Note 12 — Stock-Based Compensation
The 2017 Stock Incentive Plan of VICI REIT (the “Plan”) is designed to provide long-term equity-based compensation to our employees and the directors of VICI REIT. It is administered by the Compensation Committee of the Board of Directors of VICI REIT. Awards under the Plan may be granted with respect to an aggregate of 12,750,000 shares of common stock of VICI REIT 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 of VICI REIT with respect to which awards may be granted to any employee or director during any one calendar year. At December 31, 2021, 10,988,035 shares of common stock remained available for issuance by VICI REIT as equity awards under the Plan.
Time-Based Restricted Stock
During the years ended December 31, 2021, 2020 and 2019, VICI REIT granted approximately 172,000, 179,000, and 177,000 shares of VICI REIT restricted stock, respectively, under the Plan, respectively, to employees of the Partnership subject to vesting restrictions based on service. Such restricted time-based stock awards of VICI REIT vest ratably on an annual basis over a service period of one to three years. The number of shares granted was determined based on the 10-day volume weighted average price using the 10 trading days immediately preceding the grant date.
Performance-Based Restricted Stock Units
During the years ended December 31, 2021, 2020 and 2019 VICI REIT granted approximately 188,000, 239,000, and 158,000 restricted stock units, respectively, under the Plan to employees of the Partnership, subject to vesting restrictions based on specified absolute and relative total stockholder return goals measured over a three-year performance period. We used a Monte Carlo Simulation (risk-neutral approach) to determine the number of shares that may be earned and vested pursuant to the award as these awards were deemed to have a market condition. The risk-free interest rate assumptions used in the Monte Carlo Simulation were determined based on the zero-coupon risk-free rate of 0.2% - 2.4% and an expected price volatility of 13.8% - 35.0%. The expected price volatility was calculated based on both historical and implied volatility.
The following table details the stock-based compensation expense recorded as General and administrative expense in the Statement of Operations:
| Year Ended December 31, | ||||||||||||
| (In thousands) |
2021 | 2020 | 2019 | |||||||||
| Stock-based compensation expense |
$ | 9,266 | $ | 7,322 | $ | 5,195 | ||||||
47
VICI PROPERTIES L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table details the activity of our incentive stock, time-based restricted stock and performance-based restricted stock units:
| (In thousands, except for per unit data) |
VICI REIT Shares | Weighted Average Grant Date Fair Value |
||||||
| Outstanding as of December 31, 2018 |
398,253 | $ | 19.60 | |||||
| Granted |
338,788 | 22.03 | ||||||
| Vested |
(121,786 | ) | 18.57 | |||||
| Forfeited |
(13,783 | ) | 20.44 | |||||
| Canceled |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding as of December 31, 2019 |
601,472 | 21.16 | ||||||
|
|
|
|
|
|||||
| Granted |
423,181 | 21.49 | ||||||
| Vested |
(144,694 | ) | 20.21 | |||||
| Forfeited |
(24,655 | ) | 21.21 | |||||
| Canceled |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding as of December 31, 2020 |
855,304 | 21.48 | ||||||
|
|
|
|
|
|||||
| Granted |
494,335 | 18.79 | ||||||
| Vested |
(397,204 | ) | 19.19 | |||||
| Forfeited |
(64,271 | ) | 19.58 | |||||
| Canceled |
— | — | ||||||
|
|
|
|
|
|||||
| Outstanding as of December 31, 2021 |
888,164 | $ | 21.15 | |||||
|
|
|
|
|
|||||
As of December 31, 2021, there was $9.8 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 1.7 years.
48
Exhibit 99.4
VICI Properties LP and Subsidiaries - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of VICI Properties L.P. should be read in conjunction with the audited consolidated Financial Statements and notes thereto included in Exhibit 99.1 of this Current Report on Form 8-K. Some of the information contained in this discussion and analysis, including information with respect to our business and growth strategies, statements regarding the industry outlook and our expectations regarding the future performance of our business contained herein are forward-looking statements. You should review the “Risk Factors” section in Item 1A of the most recent VICI Properties Inc. Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements.
In this discussion, the words “Partnership,” “we,” “our,” and “us” refer to VICI Properties L.P. and its subsidiaries, on a consolidated basis, unless otherwise stated or the context requires otherwise.
We refer to (i) our consolidated Financial Statements as our “Financial Statements,” (ii) our consolidated Balance Sheets as our “Balance Sheet,” (iii) our consolidated Statements of Operations and Comprehensive Income as our “Statement of Operations,” and (iv) our consolidated Statement of Cash Flows as our “Statement of Cash Flows.” References to numbered “Notes” refer to the Notes to our Financial Statements.
“2025 Notes” refers to $750.0 million aggregate principal amount of 3.500% senior unsecured notes due 2025 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“2026 Notes” refers to $1.25 billion aggregate principal amount of 4.250% senior unsecured notes due 2026 issued by us and VICI Note Co. Inc., as Co-Issuer, in November 2019.
“2027 Notes” refers to $750.0 million aggregate principal amount of 3.750% senior unsecured notes due 2027 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“2029 Notes” refers to $1.0 billion aggregate principal amount of 4.625% senior unsecured notes due 2029 issued by us and VICI Note Co. Inc., as Co-Issuer, in November 2019.
“2030 Notes” refers to $1.0 billion aggregate principal amount of 4.125% senior unsecured notes due 2030 issued by us and VICI Note Co. Inc., as Co-Issuer, in February 2020.
“Apollo” refers to Apollo Global Management, Inc., a Delaware corporation, and, as the context requires, certain of its subsidiaries and affiliates.
“BREIT JV” refers to the joint venture between MGP and Blackstone Real Estate Income Trust, Inc. in which we will retain MGP’s existing 50.1% ownership stake following the closing of the MGP Transactions.
“Caesars” refers to Caesars Entertainment, Inc., a Delaware corporation, formerly Eldorado, following the consummation of the Eldorado/Caesars Merger on July 20, 2020 and Eldorado’s conversion to a Delaware corporation.
“Caesars Forum Convention Center” refers to the Caesars Forum Convention Center in Las Vegas, Nevada, and 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.
“Caesars Lease Agreements” refer collectively to (i) prior to the consummation of the Eldorado Transaction, the CPLV Lease Agreement, the Non-CPLV Lease Agreement, the Joliet Lease Agreement and the HLV Lease Agreement, and (ii) from and after the consummation of the Eldorado Transaction, the Las Vegas Master Lease Agreement, the Regional Master Lease Agreement and the Joliet Lease Agreement, in each case, unless the context otherwise requires.
“Caesars Southern Indiana” refers to the real estate assets associated with the Caesars Southern Indiana Casino and Hotel, located in Elizabeth, Indiana, the operations of which were purchased by EBCI from Caesars on September 3, 2021, and which retained the Caesars brand name in accordance with the terms of a licensing agreement negotiated between EBCI and Caesars.
“Century Casinos” refers to Century Casinos, Inc., a Delaware corporation, and, as the context requires, its subsidiaries.
“Century Portfolio” refers to the real estate assets associated with the (i) Mountaineer Casino, Racetrack & Resort located in New Cumberland, West Virginia, (ii) Century Casino Caruthersville located in Caruthersville, Missouri and (iii) Century Casino Cape Girardeau located in Cape Girardeau, Missouri, which we purchased on December 6, 2019.
“Century Portfolio Lease Agreement” refers to the lease agreement for the Century Portfolio, as amended from time to time.
“Co-Issuer” refers to VICI Note Co. Inc., a Delaware corporation, and co-issuer of the Senior Unsecured Notes.
“CPLV CMBS Debt” refers to $1.55 billion of asset-level real estate mortgage financing of Caesars Palace Las Vegas, incurred by our subsidiary on October 6, 2017 and repaid in full on November 26, 2019.
“CPLV Lease Agreement” refers to the lease agreement for Caesars Palace Las Vegas, as amended from time to time, which was combined with the HLV Lease Agreement into the Las Vegas Master Lease Agreement upon the consummation of the Eldorado Transaction.
“Credit Agreement” refers to the Credit Agreement, dated as of February 8, 2022, by and among us, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A., as administrative agent, as amended from time to time.
“Credit Facilities” refers collectively to the Delayed Draw Term Loan and the Revolving Credit Facility.
“Delayed Draw Term Loan” refers to our three-year unsecured delayed draw term loan facility provided under the Credit Agreement.
“EBCI” refers to the Eastern Band of Cherokee Indians, a federally recognized Tribe located in western North Carolina, and, as the context requires, its subsidiary and affiliate entities.
“EBCI Lease Agreement” refers to the lease agreement for Caesars Southern Indiana, as amended from time to time.
“Eldorado” refers to Eldorado Resorts, Inc., a Nevada corporation, and, as the context requires, its subsidiaries. Following the consummation of the Eldorado/Caesars Merger on July 20, 2020, Eldorado converted to a Delaware corporation and changed its name to Caesars Entertainment, Inc.
“Eldorado Master Transaction Agreement” or “Eldorado MTA” refers to the Master Transaction Agreement dated June 24, 2019 with Eldorado relating to the Eldorado Transaction. The Eldorado MTA was previously referred to as the “Master Transaction Agreement” or “MTA”.
“Eldorado Transaction” refers to a series of transactions between us and Eldorado in connection with the Eldorado/Caesars Merger, including the acquisition of the Harrah’s Original Call Properties, modifications to the Caesars Lease Agreements, and rights of first refusal.
“Eldorado/Caesars Merger” refers to the merger consummated on July 20, 2020 under an Agreement and Plan of Merger pursuant to which a subsidiary of Eldorado merged with and into Pre-Merger Caesars, with Pre-Merger Caesars surviving as a wholly owned subsidiary of Caesars (which changed its name from Eldorado in connection with the closing of the Eldorado/Caesars Merger).
“February 2020 Senior Unsecured Notes” refers collectively to the 2025 Notes, the 2027 Notes and the 2030 Notes.
“Greektown” refers to the real estate assets associated with the Greektown Casino-Hotel, located in Detroit, Michigan, which we purchased on May 23, 2019.
“Greektown Lease Agreement” refers to the lease agreement for Greektown, as amended from time to time.
“Hard Rock” means Seminole Hard Rock International, LLC, and, as the context requires, its subsidiary and affiliate entities.
“Hard Rock Cincinnati” refers to the casino-entitled land and real estate and related assets associated with the Hard Rock Cincinnati Casino, located in Cincinnati, Ohio, which we purchased on September 20, 2019.
“Hard Rock Cincinnati Lease Agreement” refers to the lease agreement for Hard Rock Cincinnati, as amended from time to time.
“Harrah’s Original Call Properties” refers to the land and real estate assets associated with Harrah’s New Orleans, Harrah’s Laughlin and Harrah’s Atlantic City, which we purchased on July 20, 2020 upon the consummation of the Eldorado Transaction. The Harrah’s Original Call Properties were previously referred to as the “MTA Properties”.
“HLV Lease Agreement” refers to the lease agreement for the Harrah’s Las Vegas facilities, as amended from time to time, which was combined with the CPLV Lease Agreement into the Las Vegas Master Lease Agreement upon the consummation of the Eldorado Transaction.
“JACK Entertainment” refers to JACK Ohio LLC, and, as the context requires, its subsidiary and affiliate entities.
“JACK Cleveland/Thistledown” refers to the casino-entitled land and real estate and related assets associated with the JACK Cleveland Casino located in Cleveland, Ohio, and the video lottery gaming and pari-mutuel wagering authorized land and real estate and related assets of JACK Thistledown Racino located in North Randall, Ohio, which we purchased on January 24, 2020.
“JACK Cleveland/Thistledown Lease Agreement” refers to the lease agreement for JACK Cleveland/Thistledown, as amended from time to time.
“Joliet Lease Agreement” refers to the lease agreement for the facility in Joliet, Illinois, as amended from time to time.
“Las Vegas Master Lease Agreement” refers to the lease agreement for Caesars Palace Las Vegas and the Harrah’s Las Vegas facilities, as amended from time to time, from and after the consummation of the Eldorado Transaction.
“Lease Agreements” refer collectively to the Caesars Lease Agreements, the Penn National Lease Agreements, the Hard Rock Cincinnati Lease Agreement, the Century Portfolio Lease Agreement, the JACK Cleveland/Thistledown Lease Agreement, the EBCI Lease Agreement and the Venetian Lease Agreement, unless the context otherwise requires.
“Margaritaville” refers to the real estate of Margaritaville Resort Casino, located in Bossier City, Louisiana, which we purchased on January 2, 2019.
“Margaritaville Lease Agreement” refers to the lease agreement for Margaritaville, as amended from time to time.
“Mergers” refers to a series of transactions contemplated under the MGP Master Transaction Agreement, consisting of (i) the contribution of VICI REIT’s Partnership interest to VICI OP, which will serve as VICI REIT’s new operating company, followed by (ii) the merger of MGP with and into REIT Merger Sub, with REIT Merger Sub surviving the merger, followed by (iii) the distribution by REIT Merger Sub of the interests of the general partner of MGP OP to us and, (iv) the merger of REIT Merger Sub with and into MGP OP, with MGP OP surviving such merger.
“MGM” refers to MGM Resorts International, a Delaware corporation, and, as the context requires, its subsidiaries.
“MGM Master Lease Agreement” refers to the form of amended and restated triple-net master lease to be entered into by us and MGM with respect to certain MGM properties that will be owned by us upon consummation of the MGP Transactions.
“MGM Tax Protection Agreement” refers to the form of tax protection agreement that we have agreed to enter into with MGM upon consummation of the MGP Transactions.
“MGP” refers to MGM Growth Properties LLC, a Delaware limited liability company, and, as the context requires, its subsidiaries.
“MGP Master Transaction Agreement” refers to that certain Master Transaction Agreement between VICI REIT, MGP, MGP OP, the Partnership, Venus Sub LLC, a Delaware limited liability company and wholly owned subsidiary of the Partnership (“REIT Merger Sub”), VICI Properties OP LLC, a Delaware limited liability company and parent of the Partnership (“VICI OP”), and MGM entered into on August 4, 2021.
“MGP OP” refers to MGM Growth Properties Operating Partnership LP, a Delaware limited partnership, and, as the context requires, its subsidiaries.
“MGP OP Notes” refers collectively to the notes issued by MGP OP and MGP Finance Co-Issuer, Inc. (“MGP Co-Issuer” and, together with MGP OP, the “MGP Issuers”), consisting of (i) the 5.625% Senior Notes due 2024 issued pursuant to the indenture, dated as of April 20, 2016, (ii) the 4.625% Senior Notes due 2025 issued pursuant to the indenture, dated as of June 5, 2020, (iii) the 4.500% Senior Notes due 2026 issued pursuant to the indenture, dated as of August 12, 2016, (iv) the 5.750% Senior Notes due 2027 issued pursuant to the indenture, dated as of January 25, 2019, (v) the 4.500% Senior Notes due 2028 issued pursuant to the indenture, dated as of September 21, 2017, and (vi) the 3.875% Senior Notes due 2029 issued pursuant to the indenture, dated as of November 19, 2020, in each case, as amended or supplemented as of the date hereof, among the MGP Issuers, the subsidiary guarantors party thereto (the “MGP Subsidiary Guarantors”) and U.S. Bank National Association, as trustee (the “MGP Trustee”).
“MGP Transactions” refers, collectively, to a series of transactions pursuant to the MGP Master Transaction Agreement between VICI REIT, us, MGP and MGM and the other parties thereto in connection with VICI REIT’s acquisition of MGP, as contemplated by the MGP Master Transaction Agreement, including the MGM Tax Protection Agreement and the MGM Master Lease Agreement.
“Non-CPLV Lease Agreement” refers to the lease agreement for regional properties (other than the facility in Joliet, Illinois) leased to Pre-Merger Caesars prior to the consummation of the Eldorado Transaction, as amended from time to time, which was replaced by the Regional Master Lease Agreement upon the consummation of the Eldorado Transaction.
“November 2019 Senior Unsecured Notes” refers collectively to the 2026 Notes and the 2029 Notes.
“Parent” refers to VICI REIT, as defined below.
“Partners” refers to the holders of the Partnership’s common units, including VICI REIT and such other holders from time to time.
“Penn National” refers to Penn National Gaming, Inc., a Pennsylvania corporation, and, as the context requires, its subsidiaries.
“Penn National Lease Agreements” refer collectively to the Margaritaville Lease Agreement and the Greektown Lease Agreement, unless the context otherwise requires.
“Pre-Merger Caesars” refers to Caesars Entertainment Corporation, a Delaware corporation, and, as the context requires, its subsidiaries. Following the consummation of the Eldorado/Caesars Merger on July 20, 2020, Pre-Merger Caesars became a wholly owned subsidiary of Caesars.
“Regional Master Lease Agreement” refers to the lease agreement for the regional properties (other than the facility in Joliet, Illinois) leased to Caesars, as amended from time to time, from and after the consummation of the Eldorado Transaction.
“Revolving Credit Facility” refers to our four-year unsecured revolving credit facility provided under the Credit Agreement.
“Second Lien Notes” refers to $766.9 million aggregate principal amount of 8.0% second priority senior secured notes due 2023 issued by our subsidiary in October 2017, the remaining $498.5 million aggregate principal amount outstanding as of December 31, 2019 of which was redeemed in full on February 20, 2020.
“Secured Revolving Credit Facility” refers to the five-year first lien revolving credit facility entered into by VICI PropCo in December 2017, as amended, which was terminated on February 8, 2022.
“Seminole Hard Rock” means Seminole Hard Rock Entertainment, Inc.
“Term Loan B Facility” refers to the seven-year senior secured first lien term loan B facility entered into by VICI PropCo in December 2017, as amended from time to time, which was repaid in full on September 15, 2021.
“Venetian Acquisition” refers to our acquisition of the Venetian Resort, with Apollo, which closed on February 23, 2022.
“Venetian Lease Agreement” refers to the lease agreement for the Venetian Resort.
“Venetian Resort” refers to the land and real estate assets associated with the Venetian Resort Las Vegas and Venetian Expo, located in Las Vegas, Nevada, which we purchased on February 23, 2022.
“Venetian Tenant” refers to an affiliate of certain funds managed by affiliates of Apollo.
“VICI Issuers” refers collectively to us and VICI Note Co. Inc., a Delaware corporation.
“VICI PropCo” refers to VICI Properties 1 LLC, a Delaware limited liability company and our wholly-owned subsidiary..
“VICI REIT” refers to VICI Properties Inc., a Maryland corporation and the direct parent company to us. VICI operates as a publicly traded real estate investment trust (“REIT”).
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 28 market-leading properties, including Caesars Palace Las Vegas, Harrah’s Las Vegas and the Venetian Resort, three 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 62 million square feet, our well-maintained properties are currently located across urban, destination and drive-to markets in twelve states, contain approximately 25,000 hotel rooms and feature over 250 restaurants, bars and nightclubs. Subsequent to the closing of the MGP Transactions, which we anticipate will occur in the first half of 2022, we will have 43 market leading properties, 10 of which will be located on the Las Vegas Strip, consisting of 117 million square feet, 57,500 hotel rooms and featuring over 730 restaurants, bars and nightclubs across our portfolio.
Our portfolio also includes three real estate loans, which we have originated for strategic reasons in connection with transactions that may provide the potential to convert our investment into the ownership of certain of the underlying real estate in the future. In addition, we own 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 operate so as to enable VICI REIT’s continued qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. All of VICI REIT’s real property business is conducted through us. VICI REIT’s golf course business is conducted through a TRS of VICI REIT that is not a subsidiary of us.
Impact of the COVID-19 Pandemic on Our Business
Since the emergence of the COVID-19 pandemic in early 2020, among the broader public health, societal and global impacts, the pandemic has resulted in governmental and/or regulatory actions imposing temporary closures or restrictions from time to time on our tenants’ operations at our properties. Although all of our leased properties are currently open and operating, without restriction in some jurisdictions, they remain subject to any current or future operating limitations, restrictions or closures imposed by governments and/or regulatory authorities. While our tenants’ recent performance at many of our leased properties has been at or above pre-pandemic levels, our tenants may continue to face challenges and additional uncertainty due to the impact of the COVID-19 pandemic, such as complying with operational and capacity restrictions and ensuring sufficient employee staffing and service levels, and the sustainability of maintaining improved operating margins and financial performance. The ongoing nature of the pandemic, including the impact of emerging variants, may further adversely affect our tenants’ businesses and, accordingly, our business and financial performance could be adversely affected in the future.
All of our tenants have fulfilled their rent obligations through April 2022 and we regularly engage with our tenants in connection with their business performance, operations, liquidity and financial results. 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, the full extent to which the COVID-19 pandemic continues to adversely affect our tenants, and ultimately impacts us, depends on future developments which cannot be predicted with confidence, including the actions taken to contain the pandemic or mitigate its impact, including the availability, distribution, public acceptance and efficacy of approved vaccines, new or mutated variants of COVID-19 (including vaccine-resistant variants) or a similar virus, the direct and indirect economic effects of the pandemic and containment measures on our tenants, our tenants’ financial performance and any future operating limitations or closures. For more information, refer to “Part I – Item 1A. Risk Factors” included in VICI REIT’s Annual Report on Form 10-K.
Key 2021 Highlights
Operating Results
| • | Collected 100% of rent in cash. |
| • | Total revenues increased 23.1% year-over-year to $1.5 billion. |
| • | Net income attributable to partners was $1,008.5 million, or $1.75 per diluted unit. |
Significant Achievements
| • | Announced over $21.3 billion in transaction activity, including: |
| • | The MGP Transactions for approximately $17.2 billion, which upon closing will add $1,009.0 million of annualized rent to our portfolio; |
| • | The Venetian Acquisition for total consideration of $4.0 billion, which upon closing on February 23, 2022, added $250.0 million of annualized rent to our portfolio; and |
| • | The Great Wolf Mezzanine Loan, with a total commitment of $79.5 million and interest rate of 8.0%. |
| • | Repaid in full the $2.1 billion secured Term Loan B Facility and settled the outstanding interest rate swap agreements. |
SUMMARY OF SIGNIFICANT 2021 ACTIVITIES
Acquisition and Investment Activity
| • | MGP Transactions. On August 4, 2021, VICI REIT, MGP and MGM, MGP’s controlling shareholder, announced that we entered into the MGP Master Transaction Agreement, pursuant to which we will acquire MGP for total consideration of $17.2 billion, inclusive of the assumption of approximately $5.7 billion of debt. MGP is a publicly traded gaming REIT and the transaction will add $1,009.0 million of annualized rent to our portfolio from 15 Class A entertainment casino resort properties (including the Mirage) spread across nine regions and comprising 33,000 hotel rooms, 3.6 million square feet of meeting and convention space and hundreds of food, beverage and entertainment venues. Under the terms of the MGP Master Transaction Agreement, holders of MGP Common Shares will receive 1.366 shares of VICI REIT’s newly issued common stock in exchange for each Class A common share of MGP. The fixed Exchange Ratio represents an agreed upon price of $43.00 per share of MGP Class A common shares based on VICI REIT’s trailing 5-day volume weighted average price of $31.47 as of July 30, 2021. MGM will receive $43.00 per unit in cash for the redemption of the majority of its MGP Operating Partnership units that it holds for total cash consideration of approximately $4.404 billion and will also retain approximately 12.0 million units in a newly formed operating partnership of VICI REIT. The MGP Class B share that is held by MGM will be cancelled and cease to exist. |
Simultaneous with the closing of the transaction, we will enter into the MGM Master Lease Agreement with MGM. The MGM Master Lease Agreement will have an initial term of 25 years, with three 10-year tenant renewal options and will have an initial total annual rent of $860.0 million, which will be reduced by $90.0 million to $770.0 million, subject to the pending sale of the Mirage (although, in connection with such sale, we agreed to enter into a new separate lease with Hard Rock related to the land and real estate assets of the Mirage which will have initial annual base rent of $90.0 million with other economic terms substantially similar to the MGM Master Lease Agreement, as further described below). Rent under the MGM Master Lease Agreement will escalate at a rate of 2.0% per annum for the first 10 years and thereafter at the greater of 2.0% per annum and the annual increase in the CPI, subject to a 3.0% cap. Additionally, we will retain MGP’s existing 50.1% ownership stake in the BREIT JV, which owns the real estate assets of MGM Grand Las Vegas and Mandalay Bay. The BREIT JV lease will remain unchanged and provides for current annual base rent of approximately $298.0 million, of which approximately $149.0 million is attributable to MGP’s investment in the BREIT JV, and an initial term of 30 years, with two 10-year tenant renewal options. Rent under the BREIT JV lease escalates at a rate of 2.0% per annum for the first 15 years and thereafter at the greater of 2.0% per annum and the annual increase in CPI, subject to a 3.0% cap. On a combined basis, the MGM Master Lease Agreement and BREIT JV lease will deliver initial attributable rent to us of approximately $1,009.0 million (which will be reduced to approximately $919.0 million upon closing of the sale of the Mirage). The tenant’s obligations under the MGM Master Lease and BREIT JV lease will continue to be guaranteed by MGM.
We expect the MGP Transactions, subject to regulatory approvals and customary closing conditions, to be completed in the first half of 2022. However, we can provide no assurances that the MGP Transactions will close in the anticipated timeframe, on the contemplated terms or at all.
| • | Venetian Acquisition. Subsequent to year end, on February 23, 2022, we closed on the previously announced transaction to acquire all of the land and real estate assets associated with the Venetian Resort from LVS for $4.0 billion in cash, and the Venetian Tenant acquired the operating assets of the Venetian Resort for $2.25 billion, of which $1.2 billion is in the form of a secured term loan from LVS and the remainder was paid in cash. We funded the Venetian Acquisition with (i) $3.2 billion in net proceeds contributed to us from the physical settlement of VICI REIT’s outstanding forward sale agreements, (ii) an initial draw on the Revolving Credit Facility of $600.0 million, and (iii) cash on hand. Simultaneous with the closing of the Venetian Acquisition, we entered into the Venetian Lease Agreement with the Venetian Tenant. The Venetian Lease Agreement has an initial total annual rent of $250.0 million and an initial term of 30 years, with two ten-year tenant renewal options. The annual rent is subject to escalation equal to the greater of 2.0% and the increase in the CPI, capped at 3.0%, beginning in the earlier of (i) the beginning of the third lease year, and (ii) the month following the month in which the net revenue generated by the Venetian Resort returns to its 2019 level (the year immediately prior to the onset of the COVID-19 pandemic) on a trailing twelve-month basis. |
In connection with the Venetian Acquisition, we entered into a Property Growth Fund Agreement (“Venetian PGFA”) with the Venetian Tenant. Under the Venetian PGFA, we agreed to provide up to $1.0 billion for various development and construction projects affecting the Venetian Resort to be identified by the Venetian Tenant and that satisfy certain criteria more particularly set forth in the Venetian PGFA, in consideration of additional incremental rent to be paid by the Venetian Tenant under the Venetian Lease Agreement and calculated in accordance with a formula set forth in the Venetian PGFA.
In addition, LVS agreed with the Venetian Tenant pursuant to an agreement (the “Contingent Lease Support Agreement”) entered into simultaneously with the closing of the Venetian Acquisition to provide lease payment support designed to guarantee the Venetian Tenant’s rent obligations under the Venetian Lease Agreement through 2023, subject to early termination if EBITDAR (as defined in such agreement) generated by the Venetian Resort in 2022 equals or exceeds $550.0 million, or a tenant change of control occurs. We are a third-party beneficiary of the Contingent Lease Support Agreement and have certain enforcement rights pursuant thereto. The Contingent Lease Support Agreement is limited to coverage of the Venetian Tenant’s rent obligations and does not cover any environmental expenses, litigation claims, or any cure or enforcement costs. The obligations of the Venetian Tenant under the Venetian Lease Agreement are not guaranteed by Apollo or any of its affiliates. After the termination of the Contingent Lease Support Agreement, the Venetian Tenant will be required to provide a letter of credit to secure seven and one-half months of the rent, real estate taxes and assessments and insurance obligations of the Venetian Tenant if the operating results from the Venetian Resort do not exceed certain thresholds.
| • | BigShots Strategic Arrangement. Subsequent to year end, on April 11, 2022, we entered into a loan with BigShots Golf (“BigShots Golf”) a subsidiary of ClubCorp Holdings, Inc. (“ClubCorp”), an Apollo Global Management fund portfolio company, to provide up to $80.0 million of mortgage financing (“BigShots Loan”) for the construction of certain new BigShots Golf facilities throughout the United States. The BigShots Loan bears interest at a rate of 10.0% per annum and has an initial term of five years with two successive 12-month extension options, subject to certain conditions. Our commitment to fund the loan will be subject to customary terms and conditions in disbursements to the borrower based upon construction of the development. In addition, we entered into a right of first offer and call right agreement, whereby we have a call right to acquire the real estate assets associated with any BigShots Golf facility financed by us, which transaction will be structured as a sale leaseback. In addition, for so long as the BigShots Loan remains outstanding and we continue to hold a majority interest therein, we will have a right of first offer on any additional mortgage, mezzanine, preferred equity, or other similar financing that is treated as debt to be obtained by BigShots Golf (or any of its affiliates) for any multisite financing related to the development of BigShots Golf facilities. |
| • | Great Wolf Mezzanine Loan. On June 16, 2021, we entered into a mezzanine loan agreement (the “Great Wolf Mezzanine Loan”) with an affiliate of Great Wolf Resorts, Inc. (“Great Wolf”) to provide up to $79.5 million to partially fund the development of the Great Wolf Lodge Maryland, a 48-acre indoor water park resort located in Perryville, MD. The Great Wolf Mezzanine Loan bears interest at a rate of 8.0% per annum and has an initial term of 3 years with two successive 12-month extension options, subject to certain conditions. Our commitment will be funded subject to customary terms and conditions in disbursements to the borrower based upon construction of the development and, as of December 31, 2021, approximately $33.6 million of funds have been disbursed. We expect to fund our entire $79.5 million commitment by mid-2022. |
In addition, pursuant to a non-binding letter agreement, we will have the opportunity for a period of up to five years to provide up to a total of $300.0 million of mezzanine financing, inclusive of the $79.5 million related to the Great Wolf Lodge Maryland, for the development and construction of Great Wolf’s extensive domestic and international indoor water park resort pipeline.
Disposition Activity
| • | Sale of Louisiana Downs. On November 1, 2021, we and Caesars closed on the previously announced transaction to sell Harrah’s Louisiana Downs to Rubico Acquisition Corp. for proceeds of $5.5 million to us. The annual base rent payments under the Regional Master Lease Agreement remained unchanged following completion of the disposition. |
Other Portfolio Activity
| • | Mirage Severance Lease. On December 13, 2021, VICI REIT announced that in connection with MGM’s agreement to sell the operations of the Mirage Hotel & Casino to Hard Rock, we agreed to enter into a new separate lease with Hard Rock related to the land and real estate assets of the Mirage (the “Mirage Lease”), and enter into an amendment to the MGM Master Lease Agreement to reflect the sale of the Mirage. The Mirage Lease will have initial annual base rent of $90.0 million with other economic terms substantially similar to the MGM Master Lease Agreement, including a base term of 25 years with three 10-year tenant renewal options, escalation of 2.0% per annum (with escalation of the greater of 2.0% and the increase in the CPI, capped at 3.0%, beginning in lease year 11) and minimum capital expenditure requirements of 1.0% of annual net revenue. Upon closing of the transaction, the MGM Master Lease |
Agreement will be amended to account for MGM’s divestiture of the Mirage operations and will result in a reduction of the initial annual base rent under the MGM Master Lease Agreement by $90.0 million. We expect these transactions to be completed in the second half of 2022, and they remain subject to customary closing conditions, regulatory approvals and the closing of the MGP Transactions. Additionally, subject to certain conditions, we may fund up to $1.5 billion of improvements for the Mirage through VICI REIT’s Partner Property Growth Fund in connection with Hard Rock’s redevelopment plan if Hard Rock elects to seek third-party financing for such redevelopment. Specific terms of the redevelopment and related funding remain under discussion and subject to final documentation.
| • | Caesars Southern Indiana Lease Agreement. On September 3, 2021, in connection and concurrent with EBCI’s acquisition of the operations of Caesars Southern Indiana from Caesars, we entered into the EBCI Lease Agreement with a subsidiary of EBCI with respect to the real property associated with Caesars Southern Indiana. Initial total annual rent under the lease with EBCI is $32.5 million. The lease has an initial term of 15 years, with four 5-year tenant renewal options. The tenant’s obligations under the lease are guaranteed by EBCI. Annual base rent payments under the Regional Master Lease Agreement were reduced by $32.5 million upon completion of EBCI’s acquisition of the operations of Caesars Southern Indiana and the execution of the EBCI Lease between us and the tenant. In addition, as part of the transaction, we, EBCI and Caesars entered into the Danville ROFR Agreement pursuant to which we have the first right to enter into a sale leaseback transaction with respect to the real property associated with the development of a new casino resort in Danville, Virginia. |
Financing and Capital Markets Activity
| • | Entry into New Unsecured Credit Agreement. Subsequent to year end, on February 8, 2022, we entered into the Credit Facilities pursuant to the Credit Agreement, comprised of (i) the Revolving Credit Facility in the amount of $2.5 billion scheduled to mature on March 31, 2026 and (ii) the Delayed Draw Term Loan in the amount of $1.0 billion scheduled to mature on March 31, 2025. Concurrently, we terminated our Secured Revolving Credit Facility (including the first priority lien on substantially all of VICI PropCo’s and its existing and subsequently acquired wholly owned material domestic restricted subsidiaries’ material assets) and the related credit agreement. The Credit Facilities include the option to increase the revolving loan commitments by up to $1.0 billion in the aggregate and increase the delayed draw term loan commitments or add one or more new tranches of term loans by up to $1.0 billion in the aggregate, in each case, to the extent that any one or more lenders (from the syndicate or otherwise) agree to provide such additional credit extensions. Borrowings under the Credit Facilities will bear interest, at the Partnership’s option, (i) with respect to the Revolving Credit Facility, at a rate based on SOFR (including a credit spread adjustment) plus a margin ranging from 0.775% to 1.325% or a base rate plus a margin ranging from 0.00% to 0.325%, in each case, with the actual margin determined according to the Partnership’s debt ratings, and (ii) with respect to the Delayed Draw Term Loan, at a rate based on SOFR (including a credit spread adjustment) plus a margin ranging from 0.85% to 1.60% or a base rate plus a margin ranging from 0.00% to 0.60%, in each case, with the actual margin determined according to the Partnership’s debt ratings. On February 18, 2022, we drew on the Revolving Credit Facility in the amount of $600.0 million to fund a portion of the purchase price of the Venetian Acquisition. |
| • | Entry into Forward-Starting Interest Rate Swap Agreement. On December 23, 2021, we entered into a forward-starting interest rate swap agreement with a third-party financial institution having an aggregate notional amount of $500.0 million. Subsequent to year end, we have entered into four additional forward-starting interest rate swap agreements with third-party financial institutions having an aggregate notional amount of $2.0 billion. The interest rate swap transactions are intended to reduce the variability in the forecasted interest expense related to the fixed-rate debt we expect to incur in connection with closing the MGP Transactions. |
| • | Exchange Offers and Consent Solicitations. On September 27, 2021, VICI REIT announced the successful early tender and participation results of the private exchange offers to certain eligible holders (collectively, the “Exchange Offers”) and consent solicitations with respect to each series of MGP OP Notes (collectively, the “Consent Solicitations”). Following the successful Consent Solicitations, the MGP Issuers executed supplemental indentures to each of the MGP OP Notes Indentures in order to effect the proposed amendments (the “MGP OP Supplemental Indentures”) to each of the indentures governing the MGP OP Notes (collectively, the “MGP OP Notes Indentures”) in order to, among other things, eliminate or modify certain of the covenants, restrictions, provisions and events of default in each of the indentures. The MGP OP Supplemental Indentures will become operative upon settlement of the Exchange Offers and the Consent Solicitations, which are expected to occur on or about the closing date of the MGP Transactions. |
| • | Repayment of Term Loan B Facility and Settlement of Interest Rate Swaps. On September 15, 2021, we used $2,102.5 million of proceeds contributed by VICI REIT from its September 2021 equity offering and settlement of its June 2020 forward sale agreement to repay in full the Term Loan B Facility. In connection with the payoff of the Term Loan B Facility, the related interest rate swap agreements were unwound and settled and VICI PropCo incurred swap breakage costs of approximately $64.2 million and an accrued interest payment of approximately $2.7 million. |
KEY TRENDS THAT MAY AFFECT OUR BUSINESS
Subsidiaries of Caesars, Penn National, Seminole Hard Rock, Century Casino, JACK Entertainment, and EBCI are the lessees of all of our properties pursuant to the Lease Agreements, and Caesars, Penn National, Seminole Hard Rock, Century Casinos, Rock Ohio Ventures LLC and EBCI guarantee the obligations of their respective subsidiary tenants under the Lease Agreements. The Lease Agreements account for a substantial majority of our revenues. Additionally, we expect to realize organic growth in rental revenue through annual rent escalators in our Lease Agreements. Accordingly, we are dependent on our tenants, the gaming industry and the health of the economies in the areas where our properties are located for the foreseeable future, and an event that has a material adverse effect on any of our tenant’s business, financial condition, liquidity, results of operations or prospects, such as the ongoing COVID-19 pandemic, would have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. See Item 1A - “Risk Factors—Risks Related to Our Business and Operations.” in VICI REIT’s most recent Annual Report on Form 10-K.
We actively seek to grow our portfolio through acquisitions of, and investments in, experiential real estate in geographically diverse dynamic markets spanning hospitality, entertainment, food and beverage, leisure and gaming properties. We expect to grow our portfolio through a mix of acquisitions with new tenants and by pursuing opportunities to execute sale leaseback transactions with our existing tenants pursuant to our right of first refusal agreements and put-call agreements, as well as the funding of “same store” capital improvements with certain of our tenants at our leased properties in exchange for increased rent pursuant to the terms of our existing Lease Agreements with such tenants through VICI REIT’s Partner Property Growth Fund. Finally, we believe the approximately 34 acres of undeveloped or underdeveloped land on and adjacent to the Las Vegas Strip that we own may provide attractive opportunities for potential future expansion and development. In pursuing external growth initiatives, we will generally seek to acquire or invest in properties that can generate stable revenue through long-term leases with tenants with established operating histories, and we will consider various factors when evaluating acquisitions and other investments, including the ability to continue to diversify our tenant base and increasing our geographic diversification.
Our operating and financial performance in the future will be significantly influenced by the success of our acquisition strategy, and the timing and the availability and terms of financing of any acquisitions that we may complete, as well as broader macroeconomic and other conditions that affect our tenants’ operating and financial performance, including the impact of the COVID-19 pandemic, such as inflation, labor shortages, travel restrictions and supply chain disruptions. We can provide no assurance that we will exercise any of our contractual rights to purchase one or more properties from Caesars, that Caesars or EBCI, as applicable, will trigger the rights of first offer under the Las Vegas Strip ROFR Agreement, Horseshoe Baltimore ROFR Agreement or Danville ROFR Agreement, as applicable, that we will otherwise be successful in acquiring any properties (whether subject to the Las Vegas Strip ROFR Agreement, the Horseshoe Baltimore ROFR Agreement, the Danville ROFR Agreement, or otherwise), or that our tenants will utilize any available financing opportunities under the Partner Property Growth Fund. Additionally, our ability to successfully implement our acquisition and investment strategy will depend upon the availability and terms of financing, including debt and equity capital. Further, the pricing of any acquisitions or other investments we may consummate and the terms of any leases that we may enter into will significantly impact our future results. Competition to enter into transactions, including sale leaseback transactions, with attractive properties and desirable tenants is intense, and we can provide no assurance that any future acquisitions, investments or leases will be on terms as favorable to us as those relating to recent or historical transactions. We anticipate that we would seek to finance these acquisitions with a combination of debt and equity, although no assurance can be given that we would be able to issue equity in such amounts on favorable terms, or at all, or that we would not determine to incur more debt on a relative basis at the relevant time due to market conditions or otherwise. In addition to rent, our current Lease Agreements require our tenants to pay the following: (1) all facility maintenance; (2) all insurance required in connection with the leased properties and the business conducted on the leased properties; (3) taxes levied on or with respect to the leased properties (other than taxes on our income); and (4) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Accordingly, due to the “triple-net” structure of our leases, we do not expect to incur significant property-level expenses.
DISCUSSION OF OPERATING RESULTS
Results of Operations for the Years Ended December 31, 2021, December 31, 2020 and December 31, 2019
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| Revenues |
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| Income from sales-type and direct financing leases |
$ | 1,167,972 | $ | 1,007,508 | $ | 160,464 | $ | 1,007,508 | $ | 822,205 | $ | 185,303 | ||||||||||||
| Income from operating leases |
— | 25,464 | (25,464 | ) | 25,464 | 43,653 | (18,189 | ) | ||||||||||||||||
| Income from lease financing receivables and loans |
283,242 | 153,017 | 130,225 | 153,017 | — | 153,017 | ||||||||||||||||||
| Other income |
27,808 | 15,793 | 12,015 | 15,793 | — | 15,793 | ||||||||||||||||||
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| Total revenues |
1,479,022 | 1,201,782 | 277,240 | 1,201,782 | 865,858 | 335,924 | ||||||||||||||||||
| Operating expenses |
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| General and administrative |
33,122 | 30,654 | 2,468 | 30,654 | 24,569 | 6,085 | ||||||||||||||||||
| Depreciation |
121 | 116 | 5 | 116 | 16 | 100 | ||||||||||||||||||
| Other expenses |
27,808 | 15,793 | 12,015 | 15,793 | — | 15,793 | ||||||||||||||||||
| Change in allowance for credit losses |
(19,554 | ) | 244,517 | (264,071 | ) | 244,517 | — | 244,517 | ||||||||||||||||
| Transaction and acquisition expenses |
10,402 | 8,684 | 1,718 | 8,684 | 4,998 | 3,686 | ||||||||||||||||||
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| Total operating expenses |
51,899 | 299,764 | (247,865 | ) | 299,764 | 29,583 | 270,181 | |||||||||||||||||
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| Interest expense |
(392,390 | ) | (308,605 | ) | (83,785 | ) | (308,605 | ) | (248,384 | ) | (60,221 | ) | ||||||||||||
| Interest income |
103 | 6,712 | (6,609 | ) | 6,712 | 6,489 | 223 | |||||||||||||||||
| Loss from extinguishment of debt |
(15,622 | ) | (39,059 | ) | 23,437 | (39,059 | ) | (58,143 | ) | 19,084 | ||||||||||||||
| Gain upon lease modification |
— | 333,352 | (333,352 | ) | 333,352 | — | 333,352 | |||||||||||||||||
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| Income before income taxes |
1,019,214 | 894,418 | 124,796 | 894,418 | 536,237 | 358,181 | ||||||||||||||||||
| Income tax expense |
(1,373 | ) | (276 | ) | (1,097 | ) | (276 | ) | (470 | ) | 194 | |||||||||||||
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| Net income |
1,017,841 | 894,142 | 123,699 | $ | 894,142 | $ | 535,767 | 358,375 | ||||||||||||||||
| Less: Net income attributable to non-controlling interest |
(9,307 | ) | (4,534 | ) | (4,773 | ) | (4,534 | ) | (8,317 | ) | 3,783 | |||||||||||||
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| Net income attributable to partners |
$ | 1,008,534 | $ | 889,608 | $ | 118,926 | $ | 889,608 | $ | 527,450 | $ | 362,158 | ||||||||||||
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Revenue
For the years ended December 31, 2021, 2020 and 2019, our revenue was comprised of the following items:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| Leasing revenue |
$ | 1,410,979 | $ | 1,170,317 | $ | 240,662 | $ | 1,170,317 | $ | 865,858 | $ | 304,459 | ||||||||||||
| Income from loans |
40,235 | 15,672 | 24,563 | 15,672 | — | 15,672 | ||||||||||||||||||
| Other income |
27,808 | 15,793 | 12,015 | 15,793 | — | 15,793 | ||||||||||||||||||
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| Total revenues |
$ | 1,479,022 | $ | 1,201,782 | $ | 277,240 | $ | 1,201,782 | $ | 865,858 | $ | 335,924 | ||||||||||||
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Leasing Revenue
The following table details the components of our income from sales-type, direct financing, operating and financing receivables leases:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| Income from sales-type and direct financing leases |
$ | 1,167,972 | $ | 1,007,508 | $ | 160,464 | $ | 1,007,508 | $ | 822,205 | $ | 185,303 | ||||||||||||
| Income from operating leases (1) |
— | 25,464 | (25,464 | ) | 25,464 | 43,653 | (18,189 | ) | ||||||||||||||||
| Income from lease financing receivables (2) |
243,007 | 137,345 | 105,662 | 137,345 | — | 137,345 | ||||||||||||||||||
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| Total leasing revenue |
1,410,979 | 1,170,317 | 240,662 | 1,170,317 | 865,858 | 304,459 | ||||||||||||||||||
| Non-cash adjustment (3) |
(119,790 | ) | (39,883 | ) | (79,907 | ) | (39,883 | ) | 239 | (40,122 | ) | |||||||||||||
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| Total contractual leasing revenue |
$ | 1,291,189 | $ | 1,130,434 | $ | 160,755 | $ | 1,130,434 | $ | 866,097 | $ | 264,337 | ||||||||||||
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| (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 Regional Master Lease Agreement. Upon the consummation of the Eldorado Transaction on July 20, 2020, the land component of Caesars Palace Las Vegas and 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 is recognized as Income from sales-type and direct financing leases. |
| (2) | Represents the Harrah’s Original Call Properties and the JACK Cleveland/Thistledown Lease Agreement, both of which were sale leaseback transactions. In accordance with ASC 842, since the lease agreements were determined to meet the definition of a sales-type lease and control of the asset is not considered to have transferred to us, such lease agreements are accounted for as financings under ASC 310. |
| (3) | Amounts represent the non-cash adjustment to income from sales-type leases, direct financing 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 $240.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. Total contractual leasing revenue increased $160.8 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was primarily driven by the addition of the Harrah’s Original Call Properties to our real estate portfolio in July 2020, as well as the CPLV Additional Rent Acquisition and the HLV Additional Rent Acquisition in July 2020.
Total leasing revenue increased $304.5 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. Total contractual leasing revenue increased $264.3 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increases were primarily driven by the addition of Greektown, Hard Rock Cincinnati, the Century Portfolio, JACK Cleveland/Thistledown and the Harrah’s Original Call Properties to our real estate portfolio in May 2019, September 2019, December 2019, January 2020 and July 2020, respectively, as well as the CPLV Additional Rent Acquisition and the HLV Additional Rent Acquisition in July 2020.
Income From Loans
Income from loans increased $24.6 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase was driven by the addition to our investment portfolio of the Amended and Restated ROV Loan in July 2020, the Chelsea Piers Mortgage Loan in August 2020, the Forum Convention Center Mortgage Loan in September 2020 and the Great Wolf Mezzanine Loan in June 2021.
Income from loans increased $15.7 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was driven by the addition of the Amended and Restated ROV Loan, Chelsea Piers Mortgage Loan and Forum Convention Center Mortgage Loan to our real estate portfolio in January 2020, August 2020 and September 2020, respectively.
Other Income
Other income increased $12.0 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 and increased $15.8 million during the year ended December 31, 2020 compared to the year ended December 31, 2019, in each case driven primarily by the additional income and offsetting expense as a result of the assumption of the HNO Ground Lease as part of the Harrah’s Original Call Properties Acquisitions in July 2020. For the year ended December 31, 2019, Other income was included net in General and administrative expenses. During the year ended December 31, 2020, we re-classified Other income to be presented gross with an offsetting expense as a result of the assumption of the HNO Ground Lease, as part of the Harrah’s Original Call Properties Acquisitions.
Operating Expenses
For the years ended December 31, 2021 and 2020, our operating expenses were comprised of the following items:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| General and administrative |
$ | 33,122 | $ | 30,654 | $ | 2,468 | $ | 30,654 | $ | 24,569 | $ | 6,085 | ||||||||||||
| Depreciation |
121 | 116 | 5 | 116 | 16 | 100 | ||||||||||||||||||
| Other expenses |
27,808 | 15,793 | 12,015 | 15,793 | — | 15,793 | ||||||||||||||||||
| Change in allowance for credit losses |
(19,554) | 244,517 | (264,071) | 244,517 | — | 244,517 | ||||||||||||||||||
| Transaction and acquisition expenses |
10,402 | 8,684 | 1,718 | 8,684 | 4,998 | 3,686 | ||||||||||||||||||
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| Total operating expenses |
$ | 51,899 | $ | 299,764 | $ | (247,865) | $ | 299,764 | $ | 29,583 | $ | 270,181 | ||||||||||||
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General and Administrative Expenses
General and administrative expenses increased $2.5 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 and increased $6.1 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increases were primarily driven by increases in compensation, including stock-based compensation.
Other Expenses
Other expenses increased $12.0 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 and increased $15.8 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in each case was driven primarily by the additional income and offsetting expense as a result of the assumption of the HNO Ground Lease as part of the Harrah’s Original Call Properties Acquisitions in July 2020. For the year ended December 31, 2019, Other expenses were included net in General and administrative expenses. During the year ended December 31, 2020, we have re-classified Other expenses to be presented gross with an offsetting amount within Other income.
Change in Allowance for Credit Losses
Under Accounting Standard Update (“ASU”) No. 2016-13 - Financial Instruments-Credit Losses (Topic 326) (“ASU 326”), we are required to record an estimated credit loss for our (i) Investments in leases - sales-type, (ii) Investments in leases - financing receivables and (iii) Investments in loans. During the year ended December 31, 2021, we recognized a $19.6 million decrease in our allowance for credit losses primarily driven by (i) the decrease in the reasonable and supportable period probability of default of our tenants or borrowers and their parent guarantors as a result of an improvement in their economic outlook due to the reopening of all of their gaming operations and relative performance of such operations during 2021, (ii) the decrease in the long term period probability of default due to an upgrade of the credit rating of the senior secured debt used to determine the long term period probability of default for one of our tenants during 2021 and (iii) the decrease in the reasonable and supportable period probability of default and loss given default as a result of standard annual updates that were made to the inputs and assumptions in the model that we utilize to estimate our CECL allowance. This decrease was partially offset by an increase in the existing amortized cost balances subject to the CECL allowance.
During the year ended December 31, 2020, we recognized a $244.5 million increase in our allowance for credit losses primarily driven by the increase in investment balances subject to CECL. Specifically, the increase was primarily attributable to (i) the increase in investment balances resulting from the Eldorado Transaction, which includes (A) an initial CECL allowance on our $1.8 billion investment in the Harrah’s Original Call Properties, (B) an additional CECL allowance on our aggregate $1.4 billion increased investment in the Las Vegas Master Lease Agreement as a result of the CPLV Additional Rent Acquisition and HLV Additional Rent Acquisition and (C) an additional CECL allowance on the $333.4 million increased balance of our existing Caesars Lease Agreements as a result of the mark to fair value in connection with the reassessment of lease classification, (ii) an increase related to our initial investment in JACK Cleveland/Thistledown and the ROV Loan in January 2020, (iii) an increase in the short-term probability of default of Caesars as a result of the Eldorado/Caesars Merger and (iv) an increase in the long-term probability of default of our tenants due to downgrades on certain of the credit ratings of our tenants’ senior secured debt in connection with the COVID-19 pandemic.
We adopted ASU 326 on January 1, 2020, which does not require retrospective application and, as such, there is no corresponding charge for the year ended December 31, 2019.
Transaction and Acquisition Expenses
Transaction and acquisition costs increased $1.7 million during the year ended December 31, 2021 compared to the year ended December 31, 2020 and increased $3.7 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. Changes in transaction and acquisition expenses are related to fluctuations in (i) costs incurred for investments during the period that are not capitalizable under GAAP and (ii) costs incurred for investments that we are no longer pursuing.
Non-Operating Income and Expenses
For the years ended December 31, 2021, 2020 and 2019, our non-operating income and expenses were comprised of the following items:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| Interest expense |
$ | (392,390) | $ | (308,605) | $ | (83,785) | $ | (308,605) | $ | (248,384) | $ | (60,221) | ||||||||||||
| Interest income |
103 | 6,712 | (6,609) | 6,712 | 6,489 | 223 | ||||||||||||||||||
| Loss from extinguishment of debt |
(15,622) | (39,059) | 23,437 | (39,059) | (58,143) | 19,084 | ||||||||||||||||||
| Gain upon lease modification |
— | 333,352 | (333,352) | 333,352 | — | 333,352 | ||||||||||||||||||
Interest Expense
Interest expense increased $83.8 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. The increase is primarily driven by (i) the $64.2 million payment in connection with the early settlement of the outstanding interest rate swap agreements, (ii) the amortization of the commitment fees associated with the bridge facilities we entered into in connection with the Venetian Acquisition and MGP Transactions and (iii) the increase in aggregate debt of $2.5 billion from the February 2020 Senior Unsecured Notes offering. Additionally, the above increase was partially offset by (i) the redemption of the Second Lien Notes in February 2020, (ii) the full repayment of the Term Loan B Facility in September 2021 and (iii) a decrease in the weighted average annualized interest rate of our debt to 4.04% during the year ended December 31, 2021 from 4.47% during the year ended December 31, 2020 as a result of (a) the weighted average interest rate on the February 2020 Senior Unsecured Notes being lower than the weighted average interest rate of the Second Lien Notes and (b) a decrease in LIBOR on the $600.0 million portion of our variable rate debt that was not hedged for the portion of the period the Term Loan B Facility was still outstanding.
Interest expense increased $60.2 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase is primarily attributable to the increase in debt of $4.75 billion from the February 2020 Senior Unsecured Notes offering and the November 2019 Senior Unsecured Notes offering, partially offset by a $2.05 billion reduction in debt as a result of the full redemption of the Second Lien Notes in February 2020 and full repayment of the CPLV CMBS Debt in November 2019. Additionally, the weighted average annualized interest rate of our debt decreased to 4.47% during the year ended December 31, 2020 from 4.95% during the year ended December 31, 2019 as a result of (i) the weighted average interest rate on the February 2020 Senior Unsecured Notes and the November 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 from LIBOR plus 2.00% to LIBOR plus 1.75%.
Interest Income
Interest income decreased $6.6 million during the year ended December 31, 2021 compared to the year ended December 31, 2020. The decrease was primarily driven by an overall decrease in our cash on hand throughout the current year as compared to the prior year, coupled with a decrease in the interest rates earned on our excess cash.
Interest income increased $0.2 million during the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily driven by proceeds from the February 2020 Notes Offering held in escrow, offset by an overall decrease in our cash on hand throughout 2020 as compared to the prior year, coupled with a decrease in the interest rates earned on our excess cash.
Loss on Extinguishment of Debt
During the year ended December 31, 2021, we recognized a loss on extinguishment of debt of $15.6 million resulting from the write-off of the unamortized deferred financing fees in connection with the full repayment of our Term Loan B Facility in September 2021. During the year ended December 31, 2020, we recognized a loss on extinguishment of debt of $39.1 million resulting from the full redemption of our Second Lien Notes in February 2020. During the year ended December 31, 2019, we recognized a loss on extinguishment of debt of $58.1 million resulting from the $110.8 million prepayment penalties associated with the full repayment of our CPLV CMBS Debt in November 2019, net of $55.4 million of which was reimbursed by Caesars.
Gain Upon Lease Modification
In 2020, in connection with the Eldorado Transaction and as required under ASC 842, we reassessed the lease classification of the Las Vegas Master Lease Agreement, Regional Master Lease Agreement and Joliet Lease Agreement and determined the leases meet the definition of a sales-type lease, including the land component of Caesars Palace Las Vegas. As a result of the reclassifications of the Caesars Lease Agreements from direct financing and operating leases to sales-type leases, in 2020, we recorded the investments at their estimated fair values as of the modification date and recognized a net gain equal to the difference in fair value of the assets and their carrying values immediately prior to the modification. No such similar transaction occurred in the current year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
As of December 31, 2021, our available cash balances, capacity under our Secured Revolving Credit Facility and additional available proceeds were as follows:
| (In thousands) |
December 31, 2021 | |||
| Cash and cash equivalents |
$ | 705,566 | ||
| Capacity under the Secured Revolving Credit Facility (1) |
1,000,000 | |||
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| Total |
$ | 1,705,566 | ||
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| (1) | Subsequent to year end, on February 8, 2022, we entered into the Credit Agreement providing for the Credit Facilities, comprised of the Revolving Credit Facility in the amount of $2.5 billion and the Delayed Draw Term Loan in the amount of $1.0 billion, and concurrently terminated our Secured Revolving Credit Facility (including the first priority lien on substantially all of VICI PropCo’s and its existing and subsequently acquired wholly owned material domestic restricted subsidiaries’ material assets) and Existing Credit Agreement. The Credit Facilities include the option to increase the revolving loan commitments by up to $1.0 billion and increase the delayed draw term loan commitments or add one or more new tranches of term loans by up to $1.0 billion in the aggregate, in each case, to the extent that any one or more lenders (from the syndicate or otherwise) agree to provide such additional credit extensions. |
We believe that we have sufficient liquidity to meet our material cash requirements, including our contractual obligations and commitments as well as our additional funding requirements, primarily through currently available cash and cash equivalents, cash received under our Lease Agreements, existing borrowings from banks, including our Delayed Draw Term Loan and undrawn capacity under our Revolving Credit Facility, and proceeds from future issuances of debt and equity securities (including issuances under our ATM Agreement (as defined below)) for the next 12 months and in future periods.
All of the Lease Agreements call for an initial term of between fifteen and thirty years with additional 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, and may continue to do so, due to the impact of operating restrictions and limitations imposed from time to time, as well as potential property reclosures. 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 above to meet all of our contractual obligations for a significant period of time. Additionally, we do not have any debt maturities until 2025. For more information, refer to the risk factors in Part I. Item 1A. Risk Factors in VICI REIT’s most recent Annual Report on Form 10-K.
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 as a result of the COVID-19 pandemic. In particular, in connection with the COVID-19 pandemic and its impact on our tenants’ operations and financial performance, 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, any 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, or result in a default. Further, current or future 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.
Material Cash Requirements
Contractual Obligations
Our short-term obligations consist primarily of regular interest payments on our debt obligations, dividends to VICI REIT, including in connection with dividends to its common stockholders, normal recurring operating expenses, recurring expenditures for corporate and administrative needs and certain non-recurring expenditures. For more information on our material contractual commitments refer to Note 10 - Commitments and Contingent Liabilities in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K.
Our long-term obligations consist primarily of principal payments on our outstanding debt obligations and future funding commitments under our lease and loan agreements. As of December 31, 2021, we have $4.8 billion of debt obligations outstanding, none of which are maturing in the next twelve months. For a summary of principal debt balances and their maturity dates and principal terms, refer to Note 7 - Debt in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K. For a summary of our future funding commitments under our loan portfolio refer to Note 4 - Real Estate Portfolio in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K.
As described in our leases, capital expenditures for properties under the Lease Agreements are the responsibility of the tenants. Minimum capital expenditure spending requirements of the tenants are described in Note 4 - Real Estate Portfolio in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K.
Information concerning our material contractual 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 following table as of December 31, 2021. Amounts in this table omit, among other things, non-contractual commitments and items such as distributions to VICI REIT in connection with VICI REIT’s dividend payments and recurring or non-recurring operating expenses and other expenditures, including acquisitions and other investments:
| Payments Due By Period | ||||||||||||||||||||||||
| (In thousands) | Total | 2022 | 2023 | 2024 | 2025 | 2026 and Thereafter |
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| Long-term debt, principal (1) |
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| 2025 Notes (2) |
$ | 750,000 | $ | — | $ | — | $ | — | $ | 750,000 | $ | — | ||||||||||||
| 2026 Notes (2) |
1,250,000 | — | — | — | — | 1,250,000 | ||||||||||||||||||
| 2027 Notes (2) |
750,000 | — | — | — | — | 750,000 | ||||||||||||||||||
| 2029 Notes (2) |
1,000,000 | — | — | — | — | 1,000,000 | ||||||||||||||||||
| 2030 Notes (2) |
1,000,000 | — | — | — | — | 1,000,000 | ||||||||||||||||||
| Secured Revolving Credit Facility (3) |
— | — | — | — | — | — | ||||||||||||||||||
| Scheduled interest payments |
1,262,469 | 198,802 | 198,802 | 196,427 | 181,875 | 486,563 | ||||||||||||||||||
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| Total debt contractual obligations |
6,012,469 | 198,802 | 198,802 | 196,427 | 931,875 | 4,486,563 | ||||||||||||||||||
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| Leases and contracts |
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| Future funding commitments – loan investments and lease agreements (4) |
60,886 | 45,886 | — | — | — | 15,000 | ||||||||||||||||||
| Office leases |
7,726 | 933 | 857 | 857 | 899 | 4,180 | ||||||||||||||||||
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| Total leases and contract obligations |
75,518 | 50,272 | 4,310 | 857 | 899 | 19,180 | ||||||||||||||||||
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| Total contractual commitments |
$ | 6,087,987 | $ | 249,075 | $ | 203,112 | $ | 197,284 | $ | 932,774 | $ | 4,505,743 | ||||||||||||
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| (1) | Does not include long-term debt expected to be incurred to fund the consummation of the MGP Transactions. |
| (2) | 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. |
| (3) | Subsequent to year end, on February 8, 2022, we entered into the Credit Agreement providing for the Credit Facilities, comprised of the Revolving Credit Facility in the amount of $2.5 billion and the Delayed Draw Term Loan in the amount of $1.0 billion, and concurrently terminated our Secured Revolving Credit Facility (including the first priority lien on substantially all of VICI PropCo’s and its existing and subsequently acquired wholly owned material domestic restricted subsidiaries’ material assets) and Existing Credit Agreement. |
| (4) | The allocation of our future funding commitments is based on the construction draw schedule, commitment funding date or expiration date, as applicable, although we may be obligated to fund these commitments earlier than such date. |
Additional Funding Requirements
In addition to the contractual obligations and commitments set forth in the table above, we have and may enter into additional agreements that commit us to potentially acquire properties in the future, fund future property improvements or otherwise provide capital to our tenants, borrowers and other counterparties, including through our put-call agreements and other agreements to which we have committed to fund capital improvements for our tenants, including VICI REIT’s “Partner Property Growth Fund.” We are also committed to funding the pending MGP Transactions, which are expected to close in the first half of 2022. We expect to fund the MGP Transactions with a mix of cash on hand and debt (through up to an additional $4.4 billion of long-term debt financing and/or under the bridge facility committed financing entered into in connection with the MGP Transactions (the “MGP Transactions Bridge Facility”, as the case may be). In particular, we currently intend to issue additional senior unsecured notes to fund a portion of the cash consideration for the entire cash portion of the MGP Transactions, but, absent such a long-term debt financing, we may borrow a similar amount under the MGP Transactions Bridge Facility, Delayed Draw Term Loan and/or undrawn capacity under our Revolving Credit Facility. To the extent we utilized the MGP Transactions Bridge Facility and/or undrawn capacity under our Revolving credit facility to fund the entirety or portion of the cash consideration for the MGP Transaction we would expect to refinance such amounts borrowed with long-term debt financing, as applicable, subject to market and other conditions. We anticipate funding future transactions with a mix of debt, equity and available cash.
Cash Flow Analysis
The table below summarizes our cash flows for the years ended December 31, 2021 and 2020:
| (In thousands) |
2021 | 2020 | Variance | 2020 | 2019 | Variance | ||||||||||||||||||
| Cash, cash equivalents and restricted cash |
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| Provided by operating activities |
$ | 886,204 | $ | 872,332 | $ | 13,872 | $ | 872,332 | $ | 661,360 | $ | 210,972 | ||||||||||||
| Provided by (used in) investing activities |
43,939 | (4,546,580 | ) | 4,590,519 | (4,546,580 | ) | (811,236 | ) | (3,735,344 | ) | ||||||||||||||
| (Used in) provided by financing activities |
(510,822 | ) | 2,877,688 | (3,388,510 | ) | 2,877,688 | 1,024,965 | 1,852,723 | ||||||||||||||||
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| Net increase (decrease) in cash, cash equivalents and restricted cash |
$ | 419,321 | $ | (796,560 | ) | $ | 1,215,881 | $ | (796,560 | ) | $ | 875,089 | $ | (1,671,649 | ) | |||||||||
Cash Flows from Operating Activities
Net cash provided by operating activities increased $13.9 million for the year ended December 31, 2021 compared with the year ended December 31, 2020. The increase is primarily driven by an increase in cash rental income from the Eldorado Transaction in July 2020 and interest income from the addition of the Amended and Restated ROV Loan, the Chelsea Piers Mortgage Loan, the Forum Convention Center Mortgage Loan and the Great Wolf Mezzanine Loan to our real estate portfolio in July 2020, August 2020, September 2020 and June 2021, respectively. The increase was partially offset by the $64.2 million payment for early settlement of the outstanding interest rate swap agreements in September 2021.
Net cash provided by operating activities increased $211.0 million for the year ended December 31, 2020 compared with the year ended December 31, 2019. The increase was primarily due to (i) cash rental payments from the addition of Greektown, Hard Rock Cincinnati, the Century Portfolio, JACK Cleveland/Thistledown and the Harrah’s Original Call Properties to our real estate portfolio in May 2019, September 2019, December 2019, January 2020 and July 2020, respectively, as well as the CPLV Additional Rent Acquisition and the HLV Additional Rent Acquisition in July 2020 and (ii) interest income from the ROV Loan, Chelsea Piers Mortgage Loan and the Forum Convention Center Mortgage Loan, all of which were originated in 2020. The increase was partially offset by a decrease due to the prepayment of certain rent in December 2019 related to January 2020.
Cash Flows from Investing Activities
Net cash provided by investing activities increased $4,590.5 million for the year ended December 31, 2021 compared with the year ended December 31, 2020 and decreased $3,735.3 million for the year ended December 31, 2020 compared with the year ended December 31, 2019.
During the year ended December 31, 2021, the primary sources and uses of cash from investing activities included:
| • | Proceeds from the repayment of the Amended and Restated ROV Loan and receipt of deferred fees of $70.4 million; |
| • | Payments to fund a portion of the Great Wolf Mezzanine Loan totaling $33.6 million; |
| • | Proceeds from net maturities of short-term investments of $20.0 million; |
| • | Proceeds from the sale of certain parcels of vacant land and Louisiana Downs in the aggregate amount of $13.3 million; |
| • | Final payment of the funding of a new gaming patio amenity at JACK Thistledown Racino of $6.0 million; and |
| • | Capitalized transaction costs of $20.7 million; |
During the year ended December 31, 2020, the primary sources and uses of cash from investing activities included:
| • | The JACK Cleveland/Thistledown Acquisition and the Eldorado Transaction for a total cost of $4,101.8 million, including acquisition costs; |
| • | The ROV Loan, the Chelsea Piers Mortgage Loan and the Forum Convention Center Mortgage Loan for a total cost of $535.5 million, including loan origination costs; |
| • | Proceeds from the sale of Harrah’s Reno and Bally’s Atlantic City in the aggregate amount of $50.1 million; |
| • | Proceeds from net maturities of short-term investments of $39.5 million; |
| • | Acquisition of property and equipment costs of $0.6 million; and |
| • | Deferred transaction costs of $0.3 million. |
During the year ended December 31, 2019, the primary sources and uses of cash from investing activities included:
| • | The acquisitions of Margaritaville, Greektown, Hard Rock Cincinnati and the Century portfolio for a total cost of $855.4 million, including acquisition costs; |
| • | Proceeds from net maturities of short-term investments of $43.8 million; |
| • | Proceeds from the sale of vacant, non-operating land of $1.0 million; |
| • | Acquisition of property and equipment cost of $0.6 million; and |
| • | Deferred transaction costs of $8.7 million. |
Cash Flows from Financing Activities
Net cash used in financing activities decreased $3,388.5 million for the year ended December 31, 2021 compared with the year ended December 31, 2020 and increased $1,852.7 million for the year ended December 31, 2020 compared with the year ended December 31, 2019.
During the year ended December 31, 2021, the primary sources and uses of cash from financing activities included:
| • | Contributions from Partners of $2,386.9 million in proceeds from its September 2021 equity offering and pursuant to the full physical settlement of its June 2020 forward sale agreement; |
| • | Full repayment of the $2,100.0 million outstanding aggregate principal amount of our Term Loan B Facility; |
| • | Distributions to Partners of $758.3 million in connection with dividend payments to its common stockholders; |
| • | Debt issuance costs of $31.1 million; and |
| • | Distributions of $8.3 million to non-controlling interest. |
During the year ended December 31, 2020, the primary sources and uses of cash from financing activities included:
| • | Contributions from Partners of $1,539.9 million in proceeds from the full physical settlement of its June 2019 forward sale agreements, the partial physical settlement of its June 2020 forward sale agreement and pursuant to its ATM 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; |
| • | Reimbursement of the CPLV CMBS Debt prepayment penalty from Caesars in the amount of $55.4 million; |
| • | Distributions to Partners of $614.1 million in connection with dividend payments to its common stockholders; |
| • | Debt issuance costs of $57.8 million; and |
| • | Distributions of $8.2 million to non-controlling interest. |
During the year ended December 31, 2019, the primary sources and uses of cash from financing activities included:
| • | Contributions from Partners of $729.6 million in proceeds from its June 2019 equity offering and pursuant to its ATM program; |
| • | Gross proceeds from our November 2019 Senior Unsecured Notes offering of $2,250.0 million; |
| • | Full repayment of $1,550.0 million of our CPLV CMBS Debt, including the $110.8 million prepayment penalty plus fees; |
| • | Distributions to Partners of $227.0 million in connection with dividend payments to its common stockholders; |
| • | Debt issuance costs of $56.1 million; and |
| • | Distributions of $8.1 million to non-controlling interest. |
Debt
For a summary of our debt obligations as of December 31, 2021, refer to Note 7 - Debt in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K. For a summary of our financing activities in 2021, refer to “Summary of Significant 2021 Activity - Financing and Capital Markets Activity” above.
Covenants
Our debt obligations are subject to certain customary financial and operating 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 in order for VICI REIT to maintain its REIT status.
At December 31, 2021, the we were in compliance with all required debt-related financial covenants.
CRITICAL ACCOUNTING ESTIMATES
Our Financial Statements are prepared in accordance with GAAP which requires us to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. We believe that the following discussion addresses our most critical accounting estimates, which are those that have a significant level of estimation uncertainty, requiring our most difficult, subjective and complex judgments, and significantly impacts the Balance Sheet and Statement of Operations in the reporting period. Actual results may differ from the estimates. Refer to Note 2 - Summary of Significant Accounting Policies in the notes to the consolidated Financial Statements included in Exhibit 99.1 of this Current Report on Form 8-K for a full discussion of our accounting policies.
Lease Accounting
We account for our investments in leases under ASC 842 “Leases” (“ASC 842”), which requires significant estimates and judgments by management in its application. Upon lease inception or lease modification, we assess the lease classification of both the land and building components of the property to determine whether each component should be classified as a direct financing, sales-type or operating lease. The determination of lease classification requires the calculation of the rate implicit in the lease, which is driven by significant estimates, including the estimation of both the value assigned to the land and building property components upon acquisition and the estimation of the unguaranteed residual value of such components at the end of the non-cancelable lease term. If the lease component is determined to be a direct financing or sales-type lease, revenue is recognized over the life of the lease using the rate implicit in the lease.
Management uses industry standard practices to estimate both the value assigned to the land and building property components upon acquisition and the unguaranteed residual value of such components, including comparable sales and replacement cost analyses. Although management believes its estimate of both the value assigned to the land and building property components upon acquisition and the unguaranteed residual value of such components is reasonable, no assurance can be given that such amounts will be correct. In particular a change in the estimates could have a material impact on the lease classification determination and the timing and amount of income recognized over the life of the lease.
Allowance for Credit Losses
ASC 326 “Credit Losses” (“ASC 326”) 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 leases - sales-type, Investments in leases - financing receivables and Investments in loans. We have elected to use a discounted cash flow model to estimate the Allowance for credit losses, or CECL allowance. This model requires us to develop cash flows which project estimated credit losses over the life of the lease or loan and discount these cash flows at the asset’s effective interest rate. We then record a CECL allowance equal to the difference between the amortized cost basis of the asset and the present value of the expected credit loss cash flows.
Expected losses within our cash flows are determined by estimating the probability of default (“PD”) and loss given default (“LGD”) of our tenants and their parent guarantors over the life of each individual lease or financial asset. The PD and LGD are estimated during a reasonable and supportable period for which we believe we are able to estimate future economic conditions (the “R&S Period”) and a long-term period for which we revert to long-term historical averages (the “Long-Term Period”). We are unable to use our historical data to estimate losses as we have no loss history to date.
Given the length of our leases, the Long-Term Period PD and LGD are the most material and significant drivers of the CECL allowance. The PD and LGD for the Long-Term Period are estimated using the average historical default rates and historical loss rates, respectively, of public companies over the past 35 years that have similar credit profiles or characteristics to our tenants and their parent guarantors. We have engaged a nationally recognized data analytics firm to assist us with estimating both the PD and LGD of our tenants and their parent guarantors. Changes to the Long-Term Period PD and LGD are generally driven by (i) updated studies from the nationally recognized data analytics firm we employ to assist us with calculating the allowance and (ii) changes in the credit rating assigned to our tenants and their parent guarantors.
The following table illustrates the impact on the CECL allowance of our investment portfolio as a result of a 10% increase and decrease in the weighted average percentages used to estimate Long-Term PD and LGD of all of our tenants and their parent guarantors:
| ($ in thousands) |
Long-Term PD | Long-Term LGD | ||||||||||||||
| Change |
Change in CECL Allowance % |
Change in CECL Allowance $ |
Change in CECL Allowance % |
Change in CECL Allowance $ |
||||||||||||
| 10% increase |
0.24 | % | $ | 41,604 | 0.30 | % | $ | 52,250 | ||||||||
| 10% decrease |
(0.26 | )% | $ | (43,147 | ) | (0.30 | )% | $ | (50,333 | ) | ||||||
Although management believes its estimate of the Long-Term PD and LGD described above is reasonable, no assurance can be given that the Long-Term PD and LGD for our tenants, or other drivers of the CECL allowance, will be correct. Any significant variation of Long-Term PD or LGD from management’s expectations could have a material impact on our financial condition and operating results.