Late Tuesday night, Lauren Thomas (my daughter) of The Wall Street Journal broke a story that immediately captured the attention of investors across the gaming, real estate, and private equity spheres.
According to the report, Tilman Fertitta – the United States’ current ambassador to Italy – just made an offer to acquire Caesars Entertainment (CZR) through his company, Fertitta Entertainment. The bid is for roughly $7 billion, or $34 per share…
One dollar per share more than billionaire activist investor Carl Icahn offered a few weeks ago.
Caesars closed on Tuesday at $26.01, which puts its market capitalization at just above $5 billion. But it surged nearly 12% the next day to close at $29.07.
It will be fascinating to see where shares go from here if a bidding war ensues. After all, the notoriously aggressive Icahn has been building up a stake in Caesars since 2024, and he doesn’t like to lose.
Moreover, I’m sure Fertitta knew that going in. And he’s playing for keeps, too.
So let the games begin!
As for me, I’m of course exceptionally proud of my daughter for breaking such very big news. But my real estate-minded brain takes a turn right from who’s going to own Caesars to what happens to the rent it pays.
I know I’ve written about its landlord, VICI Properties (VICI), a few times in the last few weeks alone (including here). But this latest round of news calls for another assessment altogether.
The Casino Industry’s Quiet Transformation
The gaming industry that Caesars is such a big part of has undergone an enormous structural shift in the last decade.
Once upon a time, big casino operators owned their own properties along with their equipment and gaming licenses. But now it’s much more normal for them to run the business while real estate investment trusts (“REITs”) like VICI, Gaming and Leisure Properties (GLPI), and Realty Income (O) hold the real estate.
Which means these casinos pay monthly rent for the right to utilize the buildings they’re known for. This is typically through triple-net leases, where they also pay for building-specific taxes, insurance, and maintenance in exchange for cheaper rates.
This arrangement tends to work out well for everyone, with landlords like VICI getting paid on time every single month like clockwork… even during the COVID-19 lockdowns. That’s part of the reason I’ve been so confident about VICI’s prospects even as Caesars itself has seen some setbacks.
Both companies are survivors and know how to manage their business through positive and negative economic environments alike.
Another reason I continue to like VICI so much is that I make a habit of keeping in touch with the CEOs of companies I follow – including VICI’s Ed Pitoniak. In fact, I just spoke with him yesterday before the Fertitta news broke.
Maybe he knew about it at the time, but I didn’t. Still, we did talk extensively about Caesars, the Las Vegas market, and the long-term durability of casino real estate. And one of the themes that stood out was how dramatically Las Vegas has evolved.
The renowned Strip is no longer simply a gaming destination. Instead, it’s increasingly an enormous entertainment platform filled with conventions, sporting events, concerts, and nightlife that’s famous the world ‘round.
That diversification only strengthens the real estate underneath the casinos. And, again, that real estate is precisely what VICI owns.
Mizuho Weighs In
When VICI listed shares in February 2018, it had 100% exposure to Caesars, its only client. Today, that number has fallen to 39%, consisting of 18 properties that generate over $1.25 million in annualized cash rent.
Even so, Caesars does remain its biggest source of income.
The casino operator can’t exist without VICI, for all intents and purposes. But, conversely, VICI would take quite the hit if something happened to Caesars. So for better or worse, they have to get along.
Moreover, they have to get along no matter who ultimately owns Caesars since the lease isn’t up yet – and even when it does end, it’s almost impossible to find space elsewhere.
This close relationship doesn’t mean VICI has any say whatsoever in its tenant’s buyout. Nobody had to tell me that, but someone asked Mizuho analyst Haendel St. Juste about it yesterday, and so he wrote up an entire research note examining the definites and probabilities we can count on.
For example, he pointed out how small Caesars Digital is concerning VICI’s income stream since that division possibly could be part of whatever acquisition eventually takes place.
St. Juste writes that it represents roughly 5% of Caesars’ net revenue. VICI would still have roughly 2.5 corporate coverage on its Caesars exposure without it. So even if that segment were separated or sold to a third party, it wouldn’t make much of a difference to the REIT.
Another question investors raised is whether regulators could require the casino to sell properties as part of a buyout. But the chances of that happening are exceptionally low.
While state regulators will need to approve any deal that’s made, they’ll be considering numerous angles in their decision-making process. The number of properties a casino owner operates is very, very low on that list, if it’s there at all.
A much more important question that St. Juste addressed is the issue of credit quality – particularly if Caesars becomes a privately operated company. Because while Icahn Enterprises is publicly traded with the ticker symbol IEP… Fertitta Entertainment is not.
Therefore, it wouldn’t be governed by the same strict Securities and Exchange Commission (“SEC”) reporting rules and could be less transparent about Caesars’ operations than VICI investors are currently used to.
Fortunately, private ownership doesn’t automatically mean weaker credit. In fact, the larger gaming industry already includes several large and well-capitalized private operators – none of which have presented such problems.
So, the big question for VICI once again isn’t whether the tenant is public or private. It’s whether the winner can pay its rent…
And I’m confident that will happen regardless.
The Real Lesson for Investors
The Fertitta story may dominate the headlines this week, especially if a bidding war ensues. But the bigger story has been unfolding quietly for years now as casinos and their real estate become very different investments.
Operators take the volatility of the gaming business; landlords present much more reliable rent-based income opportunities. So while Caesars’ investors have had quite the volatile ride this last year – with shares falling through February, only to jolt upwards this month – VICI Properties is still sitting pretty on one of the most powerful positions in the entire gaming ecosystem.
Its underlying real estate continues doing exactly what it was designed to do: generate durable, long-term rent and above-average total returns. Here at Wide Moat Research, that’s what we’re looking for, and that’s what we tend to hold.
VICI is no exception to that rule.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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