424B4 1 d496153d424b4.htm 424B4 424B4
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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-221997

PROSPECTUS

60,500,000 Shares

 

LOGO

VICI Properties Inc.

Common Stock

 

 

This is the initial public offering of VICI Properties Inc. We are offering 60,500,000 shares of our common stock.

Our common stock has been approved for listing on the New York Stock Exchange (the “NYSE”) under the ticker symbol “VICI”.

We intend to elect and qualify to be taxed as a real estate investment trust as defined under Section 856(a) of the Internal Revenue Code of 1986, as amended (the “Code”), for U.S. Federal income tax purposes. We currently expect such election to be effective commencing with our taxable year ending December 31, 2017. To assist us in qualifying to be taxed as a REIT, among other purposes, our charter contains certain restrictions relating to the ownership and transfer of our shares and a provision generally restricting stockholders from owning more than 9.8% in value or in number, whichever is more restrictive, of any class or series of our shares, including if repurchases by us cause a person’s holdings to exceed such limitations. In addition to the restrictions set forth above, our outstanding shares of capital stock are held subject to applicable gaming laws. Any person owning or controlling at least 5% of the outstanding shares of any class of our capital stock is required to promptly notify us of such person’s identity. See “Description of Capital Stock” for a detailed description of the ownership and transfer restrictions applicable to our shares.

Investing in our common stock involves risks. You should carefully consider the matters described under the caption “Risk Factors” beginning on page 23 of this prospectus.

 

 

 

      

Per Share

      

Total

 

Initial public offering price

     $ 20.00        $ 1,210,000,000  

Underwriting discounts and commissions to be paid by us(1)

     $ 1.15        $ 69,575,000  

Proceeds, before expenses, to us

     $ 18.85        $ 1,140,425,000  

 

(1) We refer you to “Underwriting” beginning on page 193 of this prospectus for additional information regarding underwriting compensation.

The underwriters may also exercise their overallotment option to purchase an additional 9,075,000 shares from us, at the initial public offering price, less the underwriting discounts, for 30 days after the date of this prospectus.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE OR OTHER SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The underwriters expect to deliver the shares against payment in New York, New York on February 5, 2018.

 

 

Joint Book-Running Managers

 

Morgan Stanley   Goldman Sachs & Co. LLC   BofA Merrill Lynch

 

Barclays   Citigroup   Deutsche Bank Securities

Co-Managers

 

Credit Suisse    UBS Investment Bank    Stifel

 

Citizens Capital Markets   Wells Fargo Securities   Nomura   Union Gaming

The date of this Prospectus is January 31, 2018.


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LOGO

INVEST IN THE EXPERIENCE TM VICI TM CAESARS PALACE LAS VEGAS, NV HARVEYS LAKE TAHOE STATELINE, NV BALLY’S ATLANTIC CITY ATLANTIC CITY, NJ CASCATA GOLF COURSE BOULDER CITY, NV HARRAH’S LAS VEGAS, NV HARRAH’S GULF COAST BILOXI, MS


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TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. Neither we nor the underwriters have authorized any other person to provide you with different or additional information, and if anyone provides you with different or additional information, you should not rely on it. Neither we nor the underwriters are making an offer to sell, or soliciting an offer to buy, these securities in a jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or another date as may be specified herein. Our business, financial condition, cash flows, operating and financial results, and prospects may have changed since such dates.

 

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TRADEMARKS AND TRADE NAMES

The names of the brands under which the properties operate are trademarks of the respective owners of those brands, and neither they nor any of their officers, directors, agents or employees:

 

    have approved any disclosure in which they or the names of their brands appear; or

 

    are responsible or liable for any of the content of this document.

CERTAIN NON-GAAP FINANCIAL MEASURES OF THE COMPANY

In this prospectus, we present Funds From Operations (“FFO”), Adjusted Funds From Operations (“AFFO”) and Adjusted EBITDA, which are not required by, or presented in accordance with, generally accepted accounting principles in the United States (“GAAP”). These are non-GAAP financial measures and should not be construed as alternatives to net income or as an indicator of operating performance (as determined in accordance with GAAP). We believe FFO, AFFO and Adjusted EBITDA provide a meaningful perspective of the underlying operating performance of our business.

FFO is a non-GAAP financial measure that is considered a supplemental measure for the real estate industry and a supplement to GAAP measures. Consistent with the definition used by The National Association of Real Estate Investment Trusts (“NAREIT”), we define FFO as net income (or loss) (computed in accordance with GAAP) excluding gains (or losses) from sales of property plus real estate depreciation. We define AFFO as FFO adjusted for direct financing lease adjustments and other depreciation (which is comprised of the depreciation related to our golf course operations). We define Adjusted EBITDA as net income as adjusted for gains (or losses) from sales of property, real estate depreciation, direct financing lease adjustments, other depreciation (which is comprised of the depreciation related to our golf course operations), provision for income taxes and interest expense, net.

Because not all companies calculate FFO, AFFO and Adjusted EBITDA in the same way we do and other companies may not perform such calculations, those measures as used by other companies may not be consistent with the way we calculate such measures and should not be considered as alternative measures of operating income or net income. Our presentation of these measures does not replace the presentation of our financial results in accordance with GAAP.

Please see “Prospectus Summary—Summary Pro Forma Financial Data,” for reconciliations of net income to FFO, AFFO and Adjusted EBITDA, in each case on a pro forma basis.

CERTAIN NON-GAAP FINANCIAL MEASURES OF CAESARS AND CEOC

In this prospectus, we include Adjusted EBITDA of Caesars (which is the guarantor of the lease payment obligations under the Formation Lease Agreements) and CEOC (subsidiaries of which are tenants under the Formation Lease Agreements), all as reported by Caesars in its publicly available filings with the SEC. Adjusted EBITDA is a non-GAAP financial measure and should not be construed as an alternative to net income/(loss) as an indicator of operating performance or as an alternative to cash flow provided by operating activities as a measure of liquidity (as determined in accordance with GAAP) of Caesars or CEOC.

Adjusted EBITDA of Caesars and CEOC is defined as net income/(loss) before (i) interest expense, net of interest capitalized and interest income, (ii) income tax provision, (iii) depreciation and amortization, (iv) corporate expenses, and (v) certain items that are not considered indicative of ongoing operating performance at an operating property level, further adjusted to exclude certain non-cash and other items.

Adjusted EBITDA of Caesars and CEOC may not be comparable to similarly titled measures reported by other companies within the industry. Caesars has indicated in its publicly available filings with the SEC that

 

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management of Caesars uses Adjusted EBITDA of Caesars and CEOC to measure performance and allocate resources and believes that Adjusted EBITDA provides investors with additional information consistent with that used by management and allows a better understanding of the results of operational activities separate from the financial impact of decisions made for the long-term benefit of the Caesars and CEOC. We, in turn, use Adjusted EBITDA of Caesars and CEOC to evaluate the capacity of Caesars and CEOC to meet their respective obligations under the Formation Lease Agreements. Such information is not publicly available for the applicable tenant under the HLV Lease Agreement or its guarantor.

Please see Annex I for reconciliations of net income/(loss) of Caesars and CEOC to Adjusted EBITDA of Caesars and CEOC, respectively, all as reported by Caesars in its publicly available filings with the SEC.

MARKET AND INDUSTRY DATA

Although we are responsible for all of the disclosures contained in this prospectus, this prospectus contains industry, market and competitive position data and estimates that are based on industry publications and studies conducted by third parties. The industry publications and third-party studies generally state that the information that they contain has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that the market position, market opportunity and market size information included in this prospectus is generally reliable, we have not independently investigated or verified such data. The industry forward-looking statements included in this prospectus may be materially different than our or the industry’s actual results.

 

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GLOSSARY OF SELECTED TERMS

Unless the context otherwise requires, the following terms used throughout this prospectus have the following meanings:

Amended and Restated Right of First Refusal Agreement” refers to the Amended and Restated Right of First Refusal Agreement, dated as of December 22, 2017, by and between Caesars and VICI.

Caesars” refers to Caesars Entertainment Corporation, a Delaware corporation and guarantor of the lease payment obligations under the Formation Lease Agreement, (NASDAQ: CZR), and, unless the context otherwise requires, its consolidated subsidiaries.

Caesars Entertainment Outdoor” refers to the historical operations of the following golf courses that were transferred from CEOC to VICI Golf on the Formation Date: the Rio Secco golf course in Henderson, Nevada; the Cascata golf course in Boulder City, Nevada; the Grand Bear golf course in Saucier, Mississippi; and the Chariot Run golf course in Laconia, Indiana.

Call Right Agreements” refers to our option to acquire three properties from subsidiaries of Caesars pursuant to call right agreements.

CEOC” refers to Caesars Entertainment Operating Company, Inc., a Delaware corporation, prior to the Formation Date, and following the Formation Date, CEOC, LLC, a Delaware limited liability company and the tenant, together with certain of its subsidiaries, under the Formation Lease Agreements.

CPLV” or “Caesars Palace Las Vegas” refers to Caesars Palace Las Vegas facilities located on the Las Vegas Strip, which was transferred by CEOC to CPLV Mortgage Borrower on the Formation Date.

CPLV CMBS Debt” refers to $1.55 billion of asset-level real estate mortgage financing of CPLV, incurred by CPLV Mortgage Borrower on October 6, 2017.

CPLV Lease Agreement” refers to the lease agreement for Caesars Palace Las Vegas.

“CPLV Mortgage Borrower” refers to CPLV Property Owner LLC, a Delaware limited liability company, the special purpose bankruptcy remote entity that is the fee owner of CPLV (subject to the CPLV Lease Agreement) and that is indirectly wholly-owned by VICI PropCo.

CRC” refers to Caesars Resort Collection, LLC, a subsidiary of Caesars and guarantor of the lease payment obligations under the HLV Lease Agreement.

Eastside Property” refers to the approximately 18.4 acres of land located in Las Vegas, Nevada, east of Harrah’s Las Vegas, which we sold to Caesars in December 2017.

Eastside Convention Center Property” refers to a convention center that Caesars may construct on the Eastside Property (which is currently anticipated to be approximately 300,000 square feet, but which must be at least 250,000 square feet in order for the put right or call right to be exercised), together with the Eastside Property and all buildings, fixtures and improvements located thereon and all real property rights and interests relating thereto.

Formation Date” refers to October 6, 2017, the effective date of the Plan of Reorganization.

Formation Lease Agreements” refers collectively to the CPLV Lease Agreement, the Non-CPLV Lease Agreement and the Joliet Lease Agreement.

Formation Transactions” refer to the transactions described under “Formation of Our Company.”

General Partner” refers to VICI Properties GP LLC, a Delaware limited liability company and wholly owned subsidiary of VICI REIT.

 

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HLV” or “Harrah’s Las Vegas” refers to the real estate of Harrah’s Las Vegas Hotel & Casino facility located in the Las Vegas Strip, which we purchased from a subsidiary of Caesars in December 2017.

HLV Lease Agreement” refers to the lease agreement for the Harrah’s Las Vegas facilities.

HLV Owner” refers to Claudine Propco LLC, a Delaware limited liability company and an indirect, wholly owned subsidiary of VICI REIT.

HLV Tenant” refers to Harrah’s Las Vegas, LLC, a Delaware limited liability company and an indirect subsidiary of Caesars.

Joliet Lease Agreement” refers to the lease agreement for the facilities in Joliet, Illinois.

Las Vegas Strip” or “the Strip” refers to the four-mile stretch of Las Vegas Boulevard South of Las Vegas, Nevada.

Lease Agreements” refers collectively to the CPLV Lease Agreement, the Non-CPLV Lease Agreement, the Joliet Lease Agreement and the HLV Lease Agreement, unless the context otherwise requires.

Mandatory Conversions” refers to the Mandatory Preferred Conversion and the Mandatory Mezzanine Conversion.

Mandatory Mezzanine Conversion” refers to the automatic conversion of the junior tranche of the Prior CPLV Mezzanine Debt in the aggregate amount of $250.0 million into an aggregate of 17,630,700 shares of our common stock on November 6, 2017.

Mandatory Preferred Conversion” refers to the automatic conversion of all of our shares of Series A preferred stock into 51,433,692 shares of our common stock on November 6, 2017.

MGCL” refers to the Maryland General Corporation Law.

MSA” refers to metropolitan statistical area.

Non-CPLV Lease Agreement” refers to the lease agreement for regional properties other than the facilities in Joliet, Illinois and the facilities subject to the HLV Lease Agreement.

Operating Partnership” refers to VICI Properties L.P., a Delaware limited partnership and our operating partnership.

Plan of Reorganization” refers to Third Amended Joint Plan of Reorganization of Caesars Entertainment Operating Company, Inc. et. al. confirmed by the United States Bankruptcy Court for the Northern District of Illinois (Chicago) on January 17, 2017.

Prior CPLV Mezzanine Debt” refers to three tranches of mezzanine debt of CPLV in the initial aggregate principal amount of $650.0 million, of which $250.0 million was subject to the Mandatory Mezzanine Conversion on November 6, 2017 and the balance was repurchased in full in December 2017.

Prior First Lien Notes” refers to $311.7 million aggregate principal amount of first priority senior secured floating rate notes due 2022 issued by a subsidiary of our Operating Partnership, which were discharged in full in December 2017.

Prior Term Loans” refers to $1,638.4 million aggregate principal amount of senior secured first lien term loans under a senior secured credit facility issued by a subsidiary of our Operating Partnership, which were repaid in full in December 2017.

 

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Private Equity Placement” refers to the issuance and sale in December 2017 of 54,054,053 shares of our common stock at a price of $18.50 per share in a private placement transaction, for net proceeds of approximately $963.9 million, contemporaneously with the consummation of the acquisition of the Harrah’s Las Vegas.

Purchase Agreement” refers to that certain Purchase and Sale Agreement, dated as of November 29, 2017, by and between HLV Tenant, as seller, and Claudine Property Owner LLC, a Delaware limited liability company, as buyer, relating to the purchase of all of the equity interests in HLV Owner, the owner of the Harrah’s Las Vegas real estate.

Put-Call Agreement” refers to the agreement between HLV Owner and certain subsidiaries of Caesars which provides for rights and obligations between Caesars and HLV Owner with respect to the Eastside Convention Center Property and HLV.

REIT” refers to a real estate investment trust within the meaning of Sections 856 through 860 of the Code.

Revolving Credit Facility” refers to $400 million five year first lien revolving credit facility entered into by VICI PropCo in December 2017.

Sale Agreement” refers to that certain Purchase and Sale Agreement, dated as of November 29, 2017, by and between Vegas Development LLC, a Delaware limited liability company, as seller, and Eastside Convention Center, LLC, a Delaware limited liability company, as buyer, relating to the sale of all of the equity interests in Vegas Development Land Owner LLC, a Delaware limited liability company, the owner of the Eastside Property.

Second Lien Notes” refers to $766.9 million aggregate principal amount of 8.0% second-priority senior secured notes due 2023 issued by a subsidiary of our Operating Partnership in October 2017.

Tax Matters Agreement” refers to the tax matters agreement that addresses matters relating to the payment of taxes and entitlement to tax refunds by Caesars, CEOC, the Operating Partnership and us.

Term Loan B Facility” refers to $2.2 billion seven year senior secured first lien term loan B facility entered into by VICI PropCo in December 2017.

TRS” refers to a taxable REIT subsidiary.

VICI Golf” refers to VICI Golf LLC, a Delaware limited liability company, which is a TRS and the owner and operator of the Caesars Entertainment Outdoor business.

VICI PropCo” refers to VICI Properties 1 LLC, a Delaware limited liability company, which through its subsidiaries owns our real estate assets.

VICI PropCo Credit Facility” refers to the new credit facility entered into by VICI PropCo in December 2017, consisting of the Term Loan B Facility and the Revolving Credit Facility.

VICI REIT,” “VICI,” “we,” “our,” “us” and “our company” refers to VICI Properties Inc., a Maryland corporation, and, unless the context otherwise requires, its subsidiaries.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that may be important to you and your investment decision. You should read the following summary, together with the more detailed information and financial statements appearing elsewhere in this prospectus. You should read this entire prospectus carefully, including the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Cautionary Note Regarding Forward-Looking Statements” sections and the consolidated and pro forma financial information and the notes to those financial statements appearing elsewhere in this prospectus before making an investment decision to invest in our common stock.

Except as otherwise indicated or unless the context otherwise requires, all references in this prospectus to “on a pro forma basis” refers to on a pro forma basis giving effect to the items described in “Selected Historical and Pro Forma Financial Data—Unaudited Pro Forma Combined Condensed Financial Information.”

Unless otherwise indicated, the information contained in this prospectus is as of the date set forth on the cover of this prospectus and assumes that the underwriters’ overallotment option is not exercised.

Overview of the Company

We are an owner, acquirer and developer of experiential real estate assets across leading gaming, hospitality, entertainment and leisure destinations. Our national, geographically diverse portfolio consists of 20 market-leading properties, including Caesars Palace Las Vegas and Harrah’s Las Vegas, two of the most iconic entertainment facilities on the Las Vegas Strip. Our entertainment facilities are leased to leading brands that seek to drive consumer loyalty and value with guests through superior services, experiences, products and continuous innovation. Across more than 36 million square feet, our well-maintained properties are located in nine states, contain nearly 14,000 hotel rooms and feature over 150 restaurants, bars and nightclubs. Our portfolio also includes approximately 34 acres of undeveloped land adjacent to the Strip that is leased to Caesars, which we may look to monetize as appropriate. We also own and operate four championship golf courses located near certain of our properties, two of which are in close proximity to the Las Vegas Strip. As a growth focused public real estate company, we expect our relationship with our partners will position us for the acquisition of additional properties across leisure and hospitality.

In December 2017, we acquired from an affiliate of Caesars and then leased back the real estate assets of Harrah’s Las Vegas for approximately $1.14 billion, and we simultaneously sold to Caesars approximately 18.4 acres of undeveloped land located behind the LINQ Hotel & Casino and Harrah’s Las Vegas for $73.6 million. Simultaneous with the transaction, we entered into a new VICI PropCo Credit Facility, comprised of a $2.2 billion senior secured Term Loan B Facility and a $400 million senior secured Revolving Credit Facility, and we used the proceeds from the Term Loan B Facility and drawings under the Revolving Credit Facility to refinance a portion of our outstanding long-term debt. See “—Recent Developments” below.

We believe we have a mutually beneficial relationship with Caesars, a leading owner and operator of gaming, entertainment and leisure properties. Our long-term triple-net Lease Agreements with subsidiaries of Caesars provide us with a highly predictable revenue stream with embedded growth potential. We believe our geographic diversification limits the effect of changes in any one market on our overall performance. We are focused on driving long-term total returns through managing assets and allocating capital diligently, maintaining a highly productive tenant base, capitalizing on strategic development and redevelopment opportunities, and optimizing our capital structure to support opportunistic growth.



 

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Our portfolio is competitively positioned and well-maintained. Pursuant to the terms of the Lease Agreements, which require Caesars to invest in our properties, and in line with its commitment to build guest loyalty, we anticipate Caesars will continue to make strategic value-enhancing investments in our properties over time, helping to maintain their competitive position. In addition, given our scale and deep industry knowledge, we believe we are well-positioned to execute highly complementary single-asset and portfolio acquisitions to augment growth.

We intend to elect and qualify to be taxed as a REIT for U.S. Federal income tax purposes commencing with our taxable year ending December 31, 2017. We believe our election of REIT status combined with the income generation from the Lease Agreements will enhance our ability to make distributions to our stockholders, providing investors with current income as well as long-term growth.

We are one of the largest net lease REITs in the United States with $648.9 million and $862.5 million of revenue, $439.1 million and $582.5 million of net income and $544.6 million and $724.0 million of Adjusted EBITDA for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively, in each case on a pro forma basis. For a definition of Adjusted EBITDA and a reconciliation to net income, in each case on a pro forma basis, see “—Summary Pro Forma Financial Data.”

Overview of Caesars

Caesars is a leading owner and operator of gaming, entertainment and leisure properties. Caesars maintains a diverse brand portfolio with a wide range of options that appeal to a variety of gaming, travel and entertainment consumers. As of September 30, 2017 and after giving effect to the sale of Harrah’s Las Vegas to us, Caesars operates 48 properties, consisting of 20 owned and operated properties, eight properties that it manages on behalf of third parties and 20 properties that it leases from us. Caesars or CRC guarantee the lease payment obligations of the properties leased from us. Caesars has a market capitalization in excess of $9 billion as of the date of this prospectus.

For the year ended December 31, 2016, Caesars had net loss attributable to Caesars of approximately $3.6 billion and Adjusted EBITDA of approximately $1.1 billion and CEOC had net income of approximately $337 million and Adjusted EBITDA of approximately $1.1 billion. For the twelve months ended September 30, 2017, Caesars had net loss attributable to Caesars of approximately $3.0 billion and Adjusted EBITDA of approximately $1.1 billion and CEOC had net income of approximately $425 million and Adjusted EBITDA of approximately $1.1 billion.

We use Adjusted EBITDA of Caesars and CEOC to evaluate the capacity of Caesars and CEOC to meet their respective obligations under the Formation Lease Agreements. Such information is not publicly available for the applicable tenant under the HLV Lease Agreement or its guarantor, CRC.

Please see Annex I for reconciliations of net income/(loss) of Caesars and CEOC to Adjusted EBITDA of Caesars and CEOC, respectively, all as reported by Caesars in its publicly available filings with the SEC.

Caesars has diverse sources of revenue, with revenues coming from gaming, food and beverage, hotel operations and from other sources, including entertainment and retail. Caesars has invested significant resources in updating its hotels, with over 50% of its rooms being renovated during the past two years. Caesars’ properties have been rewarded with 25 TripAdvisor Certificates of Excellence in 2017. Caesars’ pioneering Total Rewards® program is the gaming industry’s first, largest and most preferred loyalty program. Additionally, Caesars’ entertainment offerings have made it the number three live entertainment promoter worldwide.



 

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The historical audited and unaudited financial statements of Caesars (which are not included or incorporated by reference in this prospectus), as the parent and guarantor of CEOC, our significant lessee, have been filed with the SEC. Caesars files annual, quarterly and current reports and other information with the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Caesars’ SEC filings are also 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 that is contained in this prospectus, which is obtained from Caesars’ publicly available information, or that is available through the SEC’s website or otherwise made available by Caesars, and none of such publicly available Caesars’ information is incorporated by reference in this prospectus.

Overview of Our Lease Agreements with Caesars

We derive substantially all of our revenues from rental revenue from the leases of our properties to certain subsidiaries of Caesars pursuant to the Lease Agreements, each of which are “triple-net” leases with an initial term of 15 years, followed by four 5-year renewal options exercisable by the tenants, provided that for certain facilities the aggregate lease term, including renewals, may be cut back to the extent it would otherwise exceed 80% of the remaining useful life of the applicable leased property, solely at the option of the tenants. Caesars will not have any purchase option under the Lease Agreements, except with respect to the HLV Lease Agreement if we engage in certain transactions with entities deemed to be competitors, or the landlord under the lease otherwise becomes a competitor of Caesars. Under the CPLV Lease Agreement, rent is $165.0 million for the first seven years, subject to an annual escalator commencing in the second year of the lease term. Beginning in the eighth year, a portion of the rent amount will be designated as variable rent and will be adjusted periodically, with the balance of the rent amount designated as base rent and continuing to be subject to the annual escalator. At each renewal term, the base rent amount will be set at fair market value for the rent but will not be less than the amount of base rent due from the tenant in the immediately preceding year nor will the base rent increase by more than 10% compared to the immediately preceding year. Under each of the Non-CPLV Lease Agreement and Joliet Lease Agreement, rent is $433.3 million and $39.6 million, respectively, for the first seven years, subject to an annual escalator commencing in the sixth year of the lease term. With respect to the Joliet Lease Agreement, we are entitled to receive 80% of the rent thereunder pursuant to the operating agreement of our joint venture, Harrah’s Joliet Landco LLC. Beginning in the eighth year, a portion of each rent amount will be designated as variable rent and will be adjusted periodically, with the balance of the rent amount designated as lease rent and continuing to be subject to the annual escalator. At each renewal term, each base rent amount will be set at fair market value for the rent but will not be less than the amount of base rent due from the applicable tenant in the immediately preceding year nor will such base rent increase by more than 10% compared to the immediately preceding year. Under the HLV Lease Agreement, rent is $87.4 million for each of the first seven years of the lease term, subject to an annual escalator commencing in the second year of the lease term (subject to satisfaction of an EBITDAR to rent ratio commencing in the sixth year of the lease term). Beginning in the eighth year, a portion of the rent amount will be designated as variable rent and will be adjusted periodically. At each renewal term, the base rent amount will be set at fair market value for the rent but will not be less than the amount of base rent due from the tenant in the immediately preceding year nor will the base rent increase by more than 10% compared to the immediately preceding year. The Lease Agreements provide for portions of the rent to be designated as variable rent with periodic variable rent resets following the seventh year and tenth year of the leases and at the commencement of each renewal term based on the tenant’s net revenue from the facilities at such time. See “Business—Our Relationship with Caesars” for additional information on the Lease Agreements.



 

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Our Properties

 

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The following table summarizes the properties that we own as of the date of this prospectus:

 

Major MSAs Served

  

Location

   Approx. Structure
Sq. Ft. (000’s)
     Hotel Rooms  

Las Vegas—Destination Gaming

        

Caesars Palace Las Vegas

   Las Vegas, NV      8,579        3,980  

Harrah’s Las Vegas

   Las Vegas, NV      4,100        2,530  

Cascata Golf Course

   Boulder City, NV      37        N/A  

Rio Secco Golf Course

   Henderson, NV      30        N/A  

San Francisco / Sacramento

        

Harvey’s Lake Tahoe

   Lake Tahoe, NV      1,670        740  

Harrah’s Reno

   Reno, NV      1,371        930  

Harrah’s Lake Tahoe

   Stateline, NV      1,057        510  

Philadelphia

        

Caesars Atlantic City

   Atlantic City, NJ      3,632        1,140  

Bally’s Atlantic City

   Atlantic City, NJ      2,547        1,250  

Chicago

        

Horseshoe Hammond

   Hammond, IN      1,716        N/A  

Harrah’s Joliet(1)

   Joliet, IL      1,011        200  

Dallas

        

Horseshoe Bossier City

   Bossier City, LA      1,419        600  

Harrah’s Louisiana Downs

   Bossier City, LA      1,118        N/A  

Kansas City

        

Harrah’s North Kansas City

   North Kansas City, MO      1,435        390  

Memphis

        

Horseshoe Tunica

   Robinsonville, MS      1,008        510  

Tunica Roadhouse

   Tunica Resorts, MS      225        130  

Omaha

        

Harrah’s Council Bluffs

   Council Bluffs, IA      790        250  

Horseshoe Council Bluffs

   Council Bluffs, IA      632        N/A  

Nashville

        

Harrah’s Metropolis

   Metropolis, IL      474        260  

New Orleans

        

Harrah’s Gulf Coast

   Biloxi, MS      1,031        500  

Grand Bear Golf Course

   Saucier, MS      5        N/A  

Louisville, KY

        

Horseshoe Southern Indiana

   Elizabeth, IN      2,510        500  

Bluegrass Downs

   Paducah, KY      184        N/A  

Chariot Run Golf Course

   Laconia, IN      5        N/A  
  

 

  

 

 

    

 

 

 

Total

   24      36,586        14,420  
  

 

  

 

 

    

 

 

 

 

(1) Owned by Harrah’s Joliet Landco LLC, a joint venture of which we are the 80% owner and the managing member.


 

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Our Competitive Strengths

We believe the following strengths effectively position us to execute our business and growth strategies:

Leading portfolio of high-quality experiential gaming, hospitality, entertainment and leisure assets.

Our portfolio features Caesars Palace Las Vegas and Harrah’s Las Vegas and market-leading regional properties with significant scale. Our properties are well-maintained and leased to leading brands, such as Caesars, Horseshoe, Harrah’s and Bally’s. These brands seek to drive loyalty and value with guests through superior service and products and continuous innovation. Our portfolio benefits from its strong mix of demand generators, including casinos, guest rooms, restaurants, entertainment facilities, bars and nightclubs and convention space. We believe our properties are well-insulated from incremental competition as a result of high replacement costs, as well as regulatory restrictions and long-lead times for new development. The high quality of our properties appeals to a broad base of customers, stimulating traffic and visitation.

Our portfolio is anchored by our Las Vegas properties, Caesars Palace Las Vegas and Harrah’s Las Vegas, which are located at the center of the Strip. We believe Las Vegas is one of the most attractive travel destinations in the United States, with a record 42.9 million visitors in 2016, according to the Las Vegas Convention and Visitors Authority. We believe Las Vegas is a market characterized by steady economic growth and high consumer and business demand with limited new supply. Our Las Vegas properties, which are two of the most iconic entertainment facilities in Las Vegas, feature gaming entertainment, large-scale hotels, extensive food and beverage options, state-of-the-art convention facilities, retail outlets and entertainment showrooms. Our Las Vegas properties continue to benefit from positive macroeconomic trends, including, according to Caesars’ publicly available information, record visitation levels in 2016 and strong convention attendance, hotel occupancy and average daily rates, among other key indicators.

Our portfolio also includes market-leading regional resorts that we believe are benefitting from significant invested capital over recent years. The regional properties we own include award-winning land-based and dockside casinos, hotels and entertainment facilities that are market leaders within their respective regions. The properties operate primarily under the Caesars, Harrah’s, Horseshoe and Bally’s trademark and brand names, which, in many instances, have market-leading brand recognition.

Under the terms of the Lease Agreements, the tenants are required to continue to invest in the properties, which we believe will enhance the value of our properties.

Formation Lease Agreements. The Formation Lease Agreements provide that CEOC is required to continue to invest in the properties subject to such Lease Agreements as follows (subject to decrease in the event a property is no longer subject to a Formation Lease Agreement):

 

    annually, in a minimum amount of (a) with respect to the Non-CPLV Lease Agreement and the Joliet Lease Agreement, collectively, (x) $100.0 million in capital expenditures (which may include certain expenditures incurred by a certain CEOC affiliate or with respect to certain other CEOC assets not leased from us pursuant to the applicable Lease Agreement), and (y) 1% of the actual net revenue generated during the immediately prior year by the properties leased from us pursuant to the Non-CPLV Lease Agreement and Joliet Lease Agreement, and (b) with respect to the CPLV Lease Agreement, 1% of the actual net revenue generated during the immediately prior year by the property leased pursuant to the CPLV Lease Agreement, and

 

    during every period of three calendar years, in a minimum amount of (a) with respect to the Non-CPLV Lease Agreement and the Joliet Lease Agreement, collectively, $495.0 million in capital expenditures (which may include certain expenditures incurred by a certain CEOC affiliate or with respect to other CEOC assets not leased from us), and (b) $350.0 million in capital expenditures across the properties leased from us pursuant to the Formation Lease Agreements, and allocated amongst our properties as described under “Business—Our Relationship with Caesars—Lease Agreements.”


 

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HLV Lease Agreement. The HLV Lease Agreement provides that the tenant is required to invest in the property subject to such Lease Agreement as follows:

 

    $171 million in capital expenditures for the period commencing January 1, 2017 and ending December 31, 2021, and

 

    annually thereafter, 1% of the actual net revenue generated during the immediately prior year from such property.

Our properties feature diversified sources of revenue on both a business and geographic basis.

Our portfolio includes 20 geographically diverse casino resorts that serve numerous MSAs nationally. This diversity reduces our exposure to adverse events that may affect any single market. This also allows our tenants to derive revenue from an economically diverse set of customers who work in a variety of industries. Additionally, although the Lease Agreements are with subsidiaries of Caesars, Caesars generates revenue from a diverse set of services that it offers its customers. These include gaming, food and beverage, entertainment, hospitality and other sources of revenue. We believe that this geographic diversity and the diversity of revenue sources that our tenants derive from our leased properties improves the stability of rental revenue.

The following charts illustrate the geographic diversity of our properties leased to Caesars’ subsidiaries as of the date of this prospectus and, according to Caesars’ publicly available information, the sources of revenue that Caesars derives from its operations.

 

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(1) Includes entertainment revenues, rental income, and parking revenues.

Our long-term Lease Agreements provide a highly predictable base level of rent with embedded growth potential.

Our properties are 100% occupied pursuant to our long-term triple-net Lease Agreements with subsidiaries of Caesars, providing us with a predictable level of rental revenue to support future cash distributions to our stockholders. In October 2017, we entered into the CPLV Lease Agreement, the Non-CPLV Lease Agreement for our regional properties (other than for the Joliet facilities), and the Joliet Lease Agreement, and in December 2017, we entered into the HLV Lease Agreement.

Caesars is generally not permitted to remove individual properties from the Non-CPLV Lease Agreement and has the right, following certain casualty events or condemnations, to terminate the respective Lease Agreement with respect to affected properties. Nearly all of our properties are established assets with extensive operating histories. Based on historical performance of the properties, we expect that the properties will generate sufficient revenues for Caesars’ subsidiaries to pay to us all rent due under the Lease Agreements.



 

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Under the terms of the Lease Agreements, the tenants are responsible for ongoing costs relating to our properties thereunder, including property taxes, insurance, and maintenance and repair costs. Each Lease Agreement provides for a fixed base rent for the first seven years of the lease term, contributing to the expected stability of rental revenue. In addition, each Lease Agreement contains a fixed annual rent escalator on the base rent equal to (a) with respect to the Lease Agreements other than the HLV Lease Agreement, the greater of 2% and the increase in the Consumer Price Index commencing in the second year of the lease with respect to the CPLV Lease Agreement and in the sixth year of the lease with respect to the Non-CPLV Lease Agreement and the Joliet Lease Agreement, and (b)(i) with respect to the HLV Lease Agreement, 1% commencing in the second year of the lease term and (ii) the greater of 2% and the increase in the Consumer Price Index commencing in the sixth lease year subject to such increase not resulting in the EBITDAR to rent ratio being less than 1.6 to 1, in which event the increase will be such reduced percentage provided that such reduction shall not result in the base rent being less than the prior year’s rent. The Lease Agreements provide for portions of the rent to be designated as variable rent with periodic variable rent resets following the seventh year and tenth year of the leases and at the commencement of each renewal term based on the tenant’s net revenue from the facilities at such time. See “Business—Our Relationship with Caesars.” As further described below, the tenants’ payment obligations under the Lease Agreements are guaranteed by Caesars with respect to the Formation Lease Agreements and CRC with respect to the HLV Lease Agreement, which provides additional credit support.

We believe our relationship with Caesars, including our contractual agreements with it and its applicable subsidiaries, will continue to drive significant benefits and mutual alignment of strategic interests in the future.

Caesars or CRC guarantees the payment obligations of our tenants under the Lease Agreements.

All of our existing properties are leased to subsidiaries of Caesars. Caesars guarantees the payment obligations of our tenants under the Formation Lease Agreements and CRC, a subsidiary of Caesars, guarantees the payment obligations of our tenant under the HLV Lease Agreement. Caesars operates a nationally-recognized portfolio of brands, including Caesars, Harrah’s, Horseshoe and Bally’s, and operates its portfolio of properties (including the properties that are leased from us) using the Total Rewards® customer loyalty program. Core to Caesars’ cross-market strategy, the Total Rewards® program is designed to encourage Caesars’ customers to direct a larger share of their entertainment spending to Caesars. See “—Overview of Caesars” above regarding information of Caesars referred to in this prospectus.

We intend to maintain a strong balance sheet with significant financial flexibility.

On a pro forma basis, we had debt of $4,148.5 million ($4,117.6 million, net of deferred financing cost and original issue discount) as of September 30, 2017, and $862.5 million of revenue, $582.5 million of net income and $724.0 million of Adjusted EBITDA for the year ended December 31, 2016. In December 2017, we completed a multi-billion dollar refinancing of certain of our outstanding indebtedness. See “—Recent Developments—VICI PropCo Credit Facility and Debt Refinancing.” As a result, the Revolving Credit Facility is available to us to fund acquisitions and for general corporate purposes, and our $498.5 million aggregate principal amount of our Second Lien Notes after giving effect to this offering become due in 2023, which we believe provides us with financial flexibility to grow our business. Over time, we intend to operate with a prudent financial strategy by growing cash flow through internal, built-in lease escalations and external acquisitions and repaying indebtedness using cash flow from operations.

Experienced management team and independent board of directors with robust corporate governance

We have an experienced management team that has been actively engaged in the leadership, acquisition and investment aspects of the hospitality, gaming, entertainment and real estate industries throughout their careers. Our Chief Executive Officer, Edward Pitoniak, and President and Chief Operating Officer, John Payne, are



 

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industry veterans with an average of 30 years of experience in the REIT industry and experiential real estate companies, during which time they were able to drive controlled growth and diversification of significant real estate and gaming portfolios. Mr. Pitoniak’s service as an independent board member of public companies provides him with a unique and meaningful management perspective and will enable him to work as a trusted steward with our independent board of directors as a trusted steward of our extensive portfolio. Our independent board of directors, which is made of highly skilled and seasoned real estate, gaming and corporate professionals, was established to ensure that there was no overlap between our tenants and the companies with which our directors are affiliated. In addition, our board of directors is not staggered, with each of our directors subject to re-election annually. Robust corporate governance in the best interests of our stockholders is of central importance to the management of our company, as we have a separate Chairman of the Board and Chief Executive Officer and all members of our audit and finance committee qualify as an “audit committee financial expert” as defined by the SEC. Directors are elected in uncontested elections by the affirmative vote of a majority of the votes cast, and stockholder approval is required prior to, or in certain circumstances within twelve months following, the adoption by our board of a stockholder rights plan.

Business and Growth Strategies

We intend to establish our company as a leading REIT, creating long term total returns for our stockholders through the payment of consistent cash distributions and the growth of our cash flow and asset base. The strategies we intend to execute to achieve this goal include:

Producing stable income with an internal growth profile.

We derive our revenues from long-term contractual cash flows pursuant to the Lease Agreements, which include annual rent escalators. We expect these escalators to provide the opportunity for stable long-term growth, which will increase the rent we receive under the Lease Agreements from an aggregate of $630.0 million in the first year of the Formation Lease Agreements and $87.4 million in the first year of the HLV Lease Agreement to an aggregate of approximately $669.6 million in the seventh year of the Formation Lease Agreements and $94.6 million in the seventh year of the HLV Lease Agreement. In addition, the Lease Agreements include periodic variable rent resets after year seven and year ten, based on the tenant’s net revenue generated from the facilities at such time, enabling us to benefit from future revenue growth at the properties. See “Business—Our Relationship with Caesars.”

Pursuing opportunities to acquire additional properties from Caesars.

Option Properties. We have an option to acquire three properties from Caesars pursuant to the Call Right Agreements. These agreements allow us to exercise our call rights at any time up to October 6, 2022, and apply to the following properties:

 

    Harrah’s Atlantic City. Harrah’s Atlantic City is an integrated hotel and resort located in the Marina district of Atlantic City, New Jersey. Harrah’s Atlantic City has approximately 155,000 square feet of gaming space, approximately 2,600 hotel rooms and suites, and 12 major food and beverage and nightlife outlets. Additionally, it has approximately 125,000 square feet of meeting and event space that opened in 2015.

 

    Harrah’s New Orleans. Harrah’s New Orleans is an integrated destination hotel and casino located in downtown New Orleans near the French Quarter, Mississippi Riverfront, Superdome and New Orleans convention center. It has approximately 125,000 square feet of gaming space, approximately 450 hotel rooms and suites, and 10 major food and beverage and nightlife outlets. Additionally, it has approximately 15,000 square feet of meeting and event space.

 



 

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    Harrah’s Laughlin. Harrah’s Laughlin is an integrated hotel and resort located on the banks of the Colorado River in Laughlin, Nevada. It has approximately 56,000 square feet of gaming space, approximately 1,500 hotel rooms and suites, and 11 major food and beverage and nightlife outlets.

Right of First Refusal. We have a right of first refusal pursuant to which we have the right, subject to certain exclusions, to (i) acquire (and lease to Caesars) any domestic gaming facilities located outside of the Gaming Enterprise District of Clark County, Nevada, proposed to be acquired or developed by Caesars, and (ii) acquire (and lease to Caesars) any of the properties that Caesars has recently agreed to acquire from Centaur Holdings, LLC, should Caesars determine to sell any such properties.

Caesars has agreed to acquire certain properties from Centaur, which include two gaming properties located in Indiana—the Hoosier Park Racing & Casino and Indiana Grand Racing & Casino—that contain approximately 400,000 square feet and have more than 2,000 slot machines and table games, as well as dining outlets and horse racing tracks. Each property also has its own horse racing course.

Potential Future Convention Center and Put-Call Agreement. In connection with our recent acquisition of Harrah’s Las Vegas from Caesars, we sold to Caesars approximately 18.4 acres of undeveloped land located behind the LINQ Hotel & Casino and Harrah’s Las Vegas. We expect that Caesars will use this land, together with certain other land, to construct a convention center of approximately 300,000 square feet adjacent to Harrah’s Las Vegas. Upon closing of our acquisition of Harrah’s Las Vegas, we entered into the Put-Call Agreement with Caesars that includes rights that we or Caesars may exercise at a specified time after the opening of the planned convention center, which, among other things, provides us the opportunity to acquire the convention center and lease it back to Caesars, subject to certain exclusions.

Other Caesars Owned Properties. We may seek to purchase additional Caesars properties, similar to our recent acquisition of Harrah’s Las Vegas. Additional owned properties of Caesars include: Octavius Tower, Las Vegas, NV; Paris Las Vegas, Las Vegas, NV; Bally’s Las Vegas, Las Vegas, NV; The Cromwell, Las Vegas, NV; Flamingo Las Vegas, Las Vegas, NV; The LINQ Hotel & Casino, Las Vegas, NV; Planet Hollywood Resort & Casino, Las Vegas, NV; Rio All Suites Hotel and Casino, Las Vegas, NV; Horseshoe Baltimore, Baltimore, MD; and Harrah’s Philadelphia, Philadelphia, PA. These properties collectively represent approximately 724,000 square feet of gaming space and have over 17,000 hotel rooms.

We will actively seek to further diversify and grow our portfolio through acquisitions of experiential real estate in dynamic markets spanning hospitality, entertainment, leisure and gaming properties.

We will actively seek to acquire additional hospitality, entertainment, leisure, and gaming-related properties from, or in partnership with, third-party owners under attractive triple-net lease and other REIT-permissible structures. We believe we are uniquely positioned to execute on this strategy, currently being one of the largest, independently-owned REITs whose board of directors and management team have direct operational and executive leadership and experience across these core industries.

Focus industries

 

    Our focus is on those gaming, hospitality, entertainment, and leisure-related sectors we believe benefit from long-term demographic, economic, geographic and cultural dynamics and that deliver destination experiences to consumers.

 

    The sale-leaseback market in the gaming space is of considerable size but has historically seen limited appetite to purchase large assets. We believe that the advent of large gaming REITs, like VICI, will drive the additional bifurcation of gaming operations from their real estate and fuel gaming REIT industry growth.

 



 

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    We believe the hospitality, entertainment and leisure sectors offer comparable sizable opportunities not harnessed to-date, and that our scale, experience and partnership approach can naturally aid in the facilitation of industry transactions not previously undertaken.

Asset characteristics

 

    Our current real estate portfolio is differentiated by virtue of advantageous geographic market location and real estate qualities such as physical features and amenities, age, and opportunity for future value enhancement. Furthermore, our assets are of mixed-use, with casino, hospitality, retail, dining, live entertainment, convention and other components. As a result, our real estate assets attract and cater to patrons seeking business, recreational and entertainment experiences across both short social gatherings and destination-stay environments. This breadth of usage enhances our tenants’ revenue generation and provides us with unmatched lease income and stability. We will seek to replicate these attractive dynamics in our future acquisitions.

Financial characteristics

 

    Our future acquisitions will be selected based on an adherence to a strict financial discipline consistent with our founding principles, including but not limited to: an established operating history, high income quality, attractive expected financial performance and sustainability of cash flows, and financially attractive purchase price and overall yield.

Lease Structure

 

    We will seek to replicate our current long term, built-in escalator triple-net leases that are in place with our current tenants in our future acquisitions.

Market Overview

 

 

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Las Vegas Overview

Las Vegas is one of the world’s premier entertainment, gaming, tourist, and meeting and convention destinations. With a uniquely dense concentration of approximately 40 casinos, approximately 150,000 hotel rooms, extensive convention and meeting facilities, and world-class retail, dining, and entertainment offerings, Las Vegas has broad appeal to a wide audience and attracted a record 42.9 million visitors from around the world in 2016. Total annual visitation to Las Vegas has doubled over the last 25 years, reflecting the Las Vegas market’s increasing long-term significance as a major destination for U.S. and international visitors.

Limited new supply. Limited availability of desirable land and high ongoing capital expenditure needs limit the ability of potential competitors to build new large-scale casino resorts on the Strip, a vibrant four-mile stretch of Las Vegas Boulevard South. As a result, over the next several years few lodging or gaming real estate developments of significance are expected to open along the Strip despite a rebounding Las Vegas economy.

 

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This limited new supply, coupled with strong and growing visitation levels, has already driven improved performance in Las Vegas, as evidenced by hotel occupancy levels of nearly 90% for the twelve months ending September 30, 2017 and a compound annual growth rate in average daily hotel room rates of 4% since 2010, according to the Las Vegas Convention and Visitors Authority.

Growing mix of revenue sources provides the market with continued diversification. The Strip has historically been dependent on commercial gaming for the majority of its revenues. However, over the last 15 years the Strip’s revenue mix has diversified, as property owners have invested heavily in non-gaming entertainment options and amenities to satisfy changes in consumer demand and increase the durability of revenues. As a result of these investments, the Strip has solidified its position as a premier destination for conventions and meetings as well as leisure travelers who are increasingly drawn to Las Vegas’ unique mix of entertainment offerings. For the year ended December 31, 2016, non-gaming revenues accounted for approximately 65% of all casino resort revenues in Las Vegas, up from just 42% in 1990.

Regional Market Overview

We own regional properties located in ten diverse and distinct markets across 9 states, many of which comprise the major U.S. regional gaming jurisdictions. Total nationwide regional gaming revenues were approximately $64 billion in 2016, equal to annual gaming revenues of approximately $320 per U.S. adult. The industry, and our regional properties, have proven to exhibit particularly attractive characteristics:

 

   

Attractive competitive dynamics. We believe the gaming markets in which our current tenants operate present an attractive and predictable real estate environment. The number of casinos is



 

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limited either directly through regulatory statutes (several states such as Indiana and Louisiana have limited the total number of gaming licenses) or through local level factors such as demand dynamics or geographic location constraints. While the inter and intra-state competitive environment is subject to change, we continue to believe that, as a whole, our properties are unlikely to face material incremental competition. We believe that where this may happen, it is likely to be subject to lengthy lead time construction development cycles.

 

    Strategically located in proximity to a large percentage of the U.S. population. Our regional properties collectively have access to 59 million total individuals within their MSAs (18% of the U.S. population), according to the U.S. Census Bureau, and these MSAs generated $4.4 trillion of the United States’ annual gross domestic product, according to the Bureau of Economic Analysis. Our properties are also in close proximity to major U.S. population centers, with 14 of our regional properties within a three hour drive of a major U.S. population center such as Chicago, Dallas, Kansas City, Louisville, Memphis, New Orleans, Southern New York and Philadelphia.

 

    Historically stable gaming revenues. According to the American Gaming Association, UNLV Center for Gaming Research and the NIGC, over the five years ending 2016 total nationwide regional gaming revenues grew by an average of 2.4% per year.

Distribution Policy

We intend to make regular quarterly distributions to holders of shares of our common stock. We expect our quarterly distribution rate to be $0.2625 per share. On an annualized basis, this would be $1.05 per share, or an annual distribution rate of approximately 5.25% at the initial public offering price. The actual distributions paid to shareholders with respect to the period commencing upon the completion of this offering and ending on March 31, 2018 will be pro-rated, calculated from the closing of this offering through March 31, 2018. For the twelve months ending on September 30, 2018, we expect to pay distributions in cash in an amount equal to approximately 75.1% of cash available for distribution for such period. Our ability and determination to pay regular quarterly distributions is subject to various restrictions and other factors described in more detail under “Distribution Policy.”

Recent Developments

Acquisition of Harrah’s Las Vegas and Sale of Eastside Property

Purchase of Harrah’s Las Vegas Real Estate

In December 2017, we acquired all of the land and real property improvements associated with Harrah’s Las Vegas Hotel & Casino from a subsidiary of Caesars, for a purchase price of approximately $1.14 billion.

On the closing date, we entered into the HLV Lease Agreement with a subsidiary of Caesars, as tenant, pursuant to which we lease back Harrah’s Las Vegas to Caesars, and CRC guarantees the tenant’s payment obligations under the HLV Lease Agreement.

Sale of Eastside Property

In December 2017, we sold approximately 18.4 acres of certain parcels located in Las Vegas, Nevada, east of Harrah’s Las Vegas, to a subsidiary of Caesars, for a purchase price of $73.6 million.

After the closing, subsidiaries of Caesars are the owners of certain parcels of real property located adjacent to Harrah’s Las Vegas (including the Eastside Property) (collectively, the “Designated Property”), all or a portion



 

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of which Designated Property may in the future be improved by a convention center (in such case, the “Eastside Convention Center Property”). At the closing, we entered into the Put-Call Agreement with certain subsidiaries of Caesars, which provides Caesars and us with certain rights and obligations in connection with: (i) the sale by subsidiaries of Caesars to us and simultaneous leaseback by us to subsidiaries of Caesars of the Eastside Convention Center Property; and (ii) in the event the transactions described in item (i) are triggered by Caesars and such transactions do not close for reasons other than a default by Caesars or failure to obtain any required regulatory approvals (among other things), and Caesars so elects, the sale by us to Caesars of Harrah’s Las Vegas, all on and subject to the terms and conditions set forth in the Put-Call Agreement. At the closing, VICI PropCo delivered a Guaranty, in which VICI PropCo guaranteed to certain subsidiaries of Caesars the payment in full of any Seller Liquidated Damages Amount (as defined in the Purchase Agreement) and the payment of losses resulting from our breach of certain warranties under the Sale Agreement.

Amended and Restated Right of First Refusal Agreement

On the closing date, the Operating Partnership and Caesars entered into an Amended and Restated Right of First Refusal Agreement pursuant to which we also have a right of first refusal on any sale-leaseback by Caesars of the gaming facilities of Centaur Holdings, LLC, which are proposed to be acquired by Caesars, and certain income-producing improvements if built by Caesars in lieu of a large-scale convention center on the Eastside Property, subject to certain exclusions.

$2.6 Billion Senior Secured VICI PropCo Credit Facility and Debt Refinancing

On December 22, 2017, VICI PropCo entered into a new $2.6 billion senior secured VICI PropCo Credit Facility, comprised of a $2.2 billion Term Loan B Facility and a $400 million Revolving Credit Facility, and refinanced all of the outstanding indebtedness under the Prior Term Loans and purchased all of the then outstanding Prior CPLV Mezzanine Debt. The proceeds of the Term Loan B Facility, together with $300 million of borrowings under the Revolving Credit Facility, provided a portion of the proceeds used to purchase the Harrah’s Las Vegas property, to repay in full the Prior Term Loans, to repurchase in full the then outstanding Prior CPLV Mezzanine Debt and to discharge in full its obligations under the Prior First Lien Notes.

Unsolicited Proposal

On January 5, 2018 we received an unsolicited non-binding, written proposal from MGM Growth Properties LLC (NYSE:MGP) (“MGP”) for MGP to acquire all of the outstanding shares of common stock of our company for $19.50 per share in the form of MGP shares, which was publicly announced by MGP on January 16, 2018. On January 17, 2018, we issued a press release announcing that our board of directors has unanimously rejected the unsolicited proposal announced by MGP on January 16, 2018.

Private Equity Placement

In December 2017, we sold, contemporaneously with the consummation of the previously disclosed acquisition of the Harrah’s Las Vegas property, 54,054,053 shares of our common stock at a price of $18.50 per share in a private placement transaction, for net proceeds of approximately $963.9 million. The net proceeds from the transaction were used to partially fund the purchase price for the Harrah’s Las Vegas property and for working capital and general corporate purposes. At closing, we entered into a registration rights agreement with the investors, which provides, among other things, for us to file a shelf registration statement for the benefit of the investors party to the agreement within 75 days following the closing. See “Certain Relationships and Related Party Transactions—Registration Rights Agreements.”



 

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UPREIT—Operating Partnership Structure

We operate through an UPREIT structure. We own all the common units of our Operating Partnership. Our wholly-owned subsidiary, VICI Properties GP LLC, is the sole general partner of our Operating Partnership. As the sole general partner of our Operating Partnership, we have the exclusive power under the limited partnership agreement to manage and conduct our business and affairs. Substantially all of our assets are held by, and substantially all of our operations are conducted through, our Operating Partnership and its subsidiaries. The only portion of our assets and operations not held by, or conducted through, our Operating Partnership are our golf course operations, consisting of four golf courses, which are held by our wholly-owned subsidiary, VICI Golf, a TRS. In the future, our Operating Partnership may form other subsidiaries, which would be sister companies of VICI PropCo, to hold other assets and such subsidiaries may arrange for independent financing.

While limited partners of the Operating Partnership will not have a direct or indirect ownership interest in the VICI Golf, limited partners holding common units in the Operating Partnership will be entitled to receive additional distributions from the Operating Partnership on a pro rata basis and in preference to VICI equal to an amount that is proportional to the distributions paid by VICI to its stockholders from distributions that VICI has received from VICI Golf. As a result, limited partners of the Operating Partnership would receive the same distribution per common unit as the distribution per share of common stock of VICI. Using this structure may give us an advantage in acquiring real estate properties from persons who may not otherwise be willing to sell their properties to us because of unfavorable tax consequences. Generally, a sale or contribution of property directly to a REIT is a taxable transaction to the selling property owner. Given our Operating Partnership structure, a property owner who desires to defer taxable gain on the transfer of the owner’s property may contribute the property to our Operating Partnership in exchange for common and/or preferred units in our Operating Partnership which may, subject to the terms of the operating partnership agreement, be exchanged, at the option of the Operating Partnership, for cash or shares of our common stock or preferred stock, as applicable on a one-for-one basis on or after the date that is the later of (x) the twelve-month anniversary of a limited partner first becoming a holder of common units of the Operating Partnership, and (y) October 6, 2018.



 

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The following diagram depicts our ownership structure as of the date of this prospectus on a pro forma basis.

 

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Restrictions on Ownership and Transfer of our Common Stock

Subject to certain exceptions, our charter provides that no person may own, or be deemed to own by virtue of applicable attribution provisions of the Code, with respect to any class or series of our capital stock, more than 9.8% (in value or by number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of such class or series of our capital stock, which we refer to as the “ownership limit,” and imposes certain other restrictions on ownership and transfer of our stock. An exemption from the 9.8% ownership limit was granted to certain stockholders, and our board may in the future provide exceptions to the ownership limit for other stockholders, subject to certain initial and ongoing conditions designed to protect our status as a REIT. Any attempted transfer of our stock that, if effective, would result in a violation of the above limitations or the ownership limit (except for a transfer which results in shares being owned by fewer than 100 persons, in which case such transfer will be void ab initio and the intended transferee shall acquire no rights in such shares) will cause the number of shares causing the violation, rounded up to the nearest whole share, to be automatically transferred to a trustee, appointed by us, as trustee of a trust for the exclusive benefit of one or more charitable beneficiaries designated by the trustee, and the intended transferee will not acquire any rights in the shares. These restrictions are intended to protect our REIT status.

In addition to the restrictions set forth above, our outstanding shares of capital stock are held subject to applicable gaming laws. Any person owning or controlling at least 5% of the outstanding shares of any class of our capital stock is required to promptly notify us of such person’s identity. Our charter provides that any shares of our capital stock that are owned or controlled by an unsuitable person (as defined in the charter) or an affiliate of an unsuitable person are redeemable by us, out of funds legally available for that redemption, to the extent required by the gaming authorities making the determination of unsuitability or to the extent determined to be necessary or advisable by our board of directors.



 

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The aforementioned ownership limits, restrictions and notice requirements may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets), that might provide a premium price for our stockholders or otherwise be in their best interest. See “Description of Capital Stock—Restrictions on Ownership and Transfer” and “—Redemption of Securities Owned or Controlled by an Unsuitable Person or Affiliate.”

Our Tax Status

We intend to elect and qualify to be taxed as a REIT for U.S. Federal income tax purposes commencing with our taxable year ending December 31, 2017, and expect to continue to operate in a manner that will allow us to continue to be classified as such. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Code, relating to, among other things, the sources of our gross income, the composition and value of our assets, our distribution levels and the diversity of ownership of our shares. Further, in order to qualify as a REIT, we must distribute any “earnings and profits,” as defined in the Code, that are allocated from CEOC to us in connection with the spin-off transaction by the end of the first taxable year in which we elect REIT status (the “purging distribution”). Based on analysis of CEOC’s earnings and profits, we currently do not believe any earnings and profits were allocated to us in connection with the spin-off and therefore do not currently expect to be required to make a purging distribution. We believe that, at the time of such election, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Code and that our intended manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

The Internal Revenue Service issued a private letter ruling with respect to certain issues relevant to our separation from CEOC and our qualification as a REIT. Although we may generally rely upon the ruling, subject to the completeness and accuracy of the representations made to the IRS, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or facts outside the scope of the ruling.

So long as we qualify to be taxed as a REIT, we generally will not be subject to U.S. Federal income tax on our REIT taxable income that we distribute currently to our stockholders. If we fail to qualify to be taxed as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we would be subject to U.S. Federal income tax at regular corporate rates and would be precluded from re-electing to be taxed as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Even if we qualify to be taxed as a REIT, we may be subject to certain U.S. Federal, state and local taxes on our income or property, and the income of VICI Golf and any other TRS of ours will be subject to taxation at regular corporate rates. See “Material U.S. Federal Income Tax Considerations.”

Corporate Information

We were initially organized as a limited liability company in the State of Delaware on July 5, 2016 as a wholly owned subsidiary of CEOC. On May 5, 2017, we subsequently converted to a corporation under the laws of the State of Maryland and issued shares of common stock to CEOC as part of our Formation Transactions, which shares were subsequently transferred by CEOC to its creditors as part of the Plan of Reorganization. See “Formation of Our Company.” Our principal executive offices are located at 8329 W. Sunset Road, Suite 210, Las Vegas, NV 89113 and our main telephone number at that location is (702) 820-3800. Our website address is www.viciproperties.com. None of the information on, or accessible through, our website or any other website identified herein is incorporated in or constitutes a part of, this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.



 

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Summary Risk Factors

An investment in our common stock involves a high degree of risk. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business and growth strategies. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock. Among these important risks are the following:

 

    our dependence on subsidiaries of Caesars as tenant of all of our properties and Caesars or CRC as guarantor of the lease payments and the consequences any material adverse effect on their business could have on us;

 

    our dependence on the gaming industry;

 

    our ability to pursue our business and growth strategies may be limited by our substantial debt service requirements and by the requirement that we distribute 90% of our REIT taxable income in order to qualify for taxation as a REIT and that we distribute 100% of our REIT taxable income in order to avoid current entity level U.S. Federal income taxes;

 

    the impact of extensive regulation from gaming and other regulatory authorities;

 

    the ability of our tenants to obtain and maintain regulatory approvals in connection with the operation of our properties;

 

    the possibility that the tenants may choose not to renew the Lease Agreements following the initial or subsequent terms of the leases;

 

    restrictions on our ability to sell our properties subject to the Lease Agreements;

 

    Caesars’ historical results may not be a reliable indicator of its future results;

 

    our substantial amount of indebtedness and ability to service and refinance such indebtedness;

 

    our historical and pro forma financial information may not be reliable indicators of our future results of operations and financial condition;

 

    our inability to operate as a stand-alone company;

 

    our inability to achieve the expected benefits from operating as a company independent of Caesars;

 

    the possibility our separation from CEOC fails to qualify as a tax-free spin-off, which could subject us to significant tax liabilities;

 

    our inability to qualify or maintain our qualification for taxation as a REIT;

 

    the impact of changes to the U.S. Federal income tax laws; and

 

    our reliance on distributions received from our Operating Partnership to make distributions to our stockholders due to our being a holding company.


 

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This Offering

 

Common stock offered by us

60,500,000 shares

 

Overallotment option

9,075,000 shares

 

Common stock to be outstanding upon completion of this offering

360,778,938 shares

 

Use of proceeds

We will contribute the net proceeds from this offering to the Operating Partnership, which we estimate will be $1.14 billion (or $1.31 billion if the underwriters’ overallotment option is exercised in full). Our Operating Partnership will use the net proceeds to: (a) pay down $300.0 million of the indebtedness outstanding under the Revolving Credit Facility; (b) redeem $268.4 million in aggregate principal amount of the Second Lien Notes at a redemption price of 108% plus accrued and unpaid interest to the date of redemption; (c) repay $100.0 million of the Term Loan B Facility; and (d) pay fees and expenses related to this offering; the remainder of the net proceeds will be used for general business purposes. Any proceeds received in connection with the exercise by the underwriters of their overallotment option will be used by the Operating Partnership for general business purposes. See “Use of Proceeds.”

 

Directed share program

At our request, the underwriters have reserved up to five percent of the shares of our common stock offered by this prospectus for sale, at the initial public offering price, to certain of our directors, officers, employees, business associates and related persons. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction described in the “Underwriting” section of this prospectus. The number of shares of our common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

 

NYSE symbol

“VICI”

 

Ownership and transfer restrictions

To assist us in qualifying to be taxed as a REIT, among other purposes, our charter contains certain restrictions relating to the ownership and transfer of our shares and a provision generally restricting stockholders from owning more than 9.8% in value or in number, whichever is more restrictive, of any class or series of our shares, including if repurchases by us cause a person’s holdings to exceed such limitations. An exemption from the 9.8% ownership limit was granted to certain stockholders, and our board may in the future provide exceptions to the ownership limit for other stockholders, subject to certain initial and ongoing conditions designed to protect our status as a REIT. In addition to the restrictions set forth above, our outstanding shares of capital stock are held subject to applicable



 

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gaming laws. Any person owning or controlling at least 5% of the outstanding shares of any class of our capital stock is required to promptly notify us of such person’s identity. See “Description of Capital Stock—Restrictions on Ownership and Transfer” and “—Redemption of Securities Owned or Controlled by an Unsuitable Person or Affiliate.”

 

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk Factors” beginning on page 23 and all other information in this prospectus before making a decision to invest in our common stock.

 

Material U.S. Federal income tax consequences

For a discussion of other material U.S. Federal income tax consequences that may be relevant to prospective stockholders, please read “Material U.S. Federal Income Tax Considerations.”

Unless otherwise indicated, the information contained in this prospectus assumes that the underwriters’ overallotment option is not exercised, and excludes 12,750,000 shares that are reserved for future issuance under our equity incentive plan.



 

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Summary Pro Forma Financial Data

The following unaudited summary pro forma combined condensed balance sheet data of VICI REIT as of September 30, 2017, gives effect to the pro forma adjustments described in “Selected Historical and Pro Forma Financial Data—Unaudited Pro Forma Combined Condensed Financial Information,” as if they had occurred on September 30, 2017, and the following unaudited summary pro forma combined condensed statements of operations for the nine months ended September 30, 2017, and for the year ended December 31, 2016, give effect to above transactions, as if they had occurred on January 1, 2016.

The following summary financial data does not reflect the financial condition or results of operations of VICI REIT for the periods indicated. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and in many cases are based on estimates and preliminary information. We believe such assumptions are reasonable under the circumstances and reflect the best currently available estimates and judgments. However, the pro forma financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had the transactions to which the pro forma adjustments relate actually occurred at the beginning of the period presented.

The following table should be read in conjunction with “Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical combined condensed financial statements of Caesars Entertainment Outdoor, our predecessor, our balance sheet, the combined statements of investments of real estate assets to be contributed to us and our pro forma combined condensed financial statements, and in each case, the related notes thereto, included elsewhere in this prospectus.

 

     Nine Months Ended
September 30, 2017
    Year Ended
December 31, 2016
 
     (in thousands, except per share data)  

Income statement data:

    

Net revenues

   $ 648,879     $ 862,508  

Total operating expenses

     (67,443     (89,926
  

 

 

   

 

 

 

Operating income

     581,436       772,582  

Interest expense, net

     (141,412     (188,549
  

 

 

   

 

 

 

Income before income taxes

     440,024       584,033  

Provision for income taxes

     (907     (1,523
  

 

 

   

 

 

 

Net income

   $ 439,117     $ 582,510  
  

 

 

   

 

 

 

Weighted average number of shares of common stock and potentially dilutive securities

    

Basic and diluted

     360,778,938       360,778,938  

Basic and diluted earnings per common share

   $ 1.22     $ 1.61  

Other operating data:

    

FFO(1)

   $ 439,117     $ 582,510  

AFFO(1)

     402,304       533,974  

Adjusted EBITDA(1)

     544,623       724,046  

Balance sheet data (as of period end):

    

Cash and cash equivalents

   $ 457,592    

Total assets

     9,902,094    

Long-term debt

     4,117,588    

Stockholders’ equity

     5,706,134    


 

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(1) FFO, AFFO and Adjusted EBITDA are not required by, or presented in accordance with, GAAP. These are non-GAAP financial measures and should not be construed as alternatives to net income or as an indicator of operating performance (as determined in accordance with GAAP). We believe FFO, AFFO and Adjusted EBITDA provide a meaningful perspective of the underlying operating performance of our business.

 

   FFO is a non-GAAP financial measure that is considered a supplemental measure for the real estate industry and a supplement to GAAP measures. Consistent with the definition used by NAREIT, we define FFO as net income (or loss) (computed in accordance with GAAP) excluding gains (or losses) from sales of property plus real estate depreciation. We define AFFO as FFO adjusted for direct financing lease adjustments and other depreciation (which is comprised of the depreciation related to our golf course operations). We define Adjusted EBITDA as net income as adjusted for gains (or losses) from sales of property, real estate depreciation, direct financing lease adjustments, other depreciation (which is comprised of the depreciation related to our golf course operations), provision for income taxes and interest expense, net.

 

   Because not all companies calculate FFO, AFFO and Adjusted EBITDA in the same way as we do and other companies may not perform such calculations, those measures as used by other companies may not be consistent with the way we calculate such measures and should not be considered as alternative measures of operating income or net income. Our presentation of these measures does not replace the presentation of our financial results in accordance with GAAP.

 

   The following table reconciles pro forma net income to FFO, AFFO and Adjusted EBITDA, in each case on a pro forma basis, for the periods presented:

 

     Nine Months
Ended
September 30, 2017
    Year Ended
December 31, 2016
 
     (in thousands)  

Net income

   $ 439,117     $ 582,510  

Real estate depreciation

     —         —    
  

 

 

   

 

 

 

FFO

     439,117       582,510  
  

 

 

   

 

 

 

Direct financing lease adjustments

     (43,100     (56,919

Amortization of debt issuance costs and original issue discount

     4,433       5,910  

Other depreciation

     1,854       2,473  
  

 

 

   

 

 

 

AFFO

     402,304       533,974  
  

 

 

   

 

 

 

Interest expense, net

     141,412       188,549  

Provision for income taxes

     907       1,523  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 544,623     $ 724,046  
  

 

 

   

 

 

 

 

  (a) Represents the non-cash adjustment to recognize fixed amounts due under the Lease Agreements on an effective interest basis at a constant rate of return over the terms of the leases.
  (b) Represents depreciation related to our golf course operations.


 

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RISK FACTORS

An investment in our common stock involves a high degree of risk and uncertainty. You should carefully consider the following risks, as well as the other information contained in this prospectus, before making an investment in our common stock. If any of the following risks actually occur, our business, results of operations, financial condition, cash flows and prospects, the market price of our common stock and our ability to make distributions to our stockholders and to satisfy any debt service obligations may be materially and adversely affected. This could cause the value of our common stock to decline and you could lose part or all of your investment. The risks and uncertainties described below are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that as of the date of this prospectus we deem immaterial may also have a material adverse effect on us. Some statements included in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Operations

We are dependent on Caesars for the foreseeable future, and an event that has a material adverse effect on Caesars’ business, financial condition, liquidity, results of operations or prospects would have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Subsidiaries of Caesars are the lessees of all of our properties pursuant to the Lease Agreements and Caesars or CRC guarantees the obligations of the applicable tenants under the Lease Agreements. The Lease Agreements account for a significant majority of all of our revenues. Additionally, because the Lease Agreements are triple-net leases, we depend on the tenants to pay all insurance, taxes, utilities, and maintenance and repair expenses in connection with these leased properties and to indemnify, defend, and hold us harmless from and against various claims, litigation, and liabilities arising in connection with our businesses. See “Business.” There can be no assurance that the tenants will have sufficient assets, income, and access to financing to enable them to satisfy their payment obligations on account of the Lease Agreements, or that Caesars or its CRC will be able to satisfy its guarantee of the applicable tenant’s obligations under the Lease Agreements. The tenants and the applicable guarantor rely on the properties they or their subsidiaries own and/or operate for income to satisfy their obligations, including their debt service requirements and lease payments due to us under the Lease Agreements and the guarantees. If income from these properties were to decline for any reason, if any tenant’s or the applicable guarantor or their subsidiaries’ debt service requirements were to increase (whether due to an increase in interest rates or otherwise), or if Caesars’ subsidiaries were prevented from making distributions to Caesars or CRC (whether due to restrictions in their financing arrangements or otherwise), a tenant may become unable or unwilling to satisfy its payment obligations under the Lease Agreements and the applicable guarantor may become unable or unwilling to make payments under its guarantee of the Lease Agreements.

The inability or unwillingness of a tenant or the applicable guarantor to meet their rent and other obligations to us under the Lease Agreements and the related guarantee would materially and adversely affect our business, financial condition, liquidity, results of operations and prospects, including our ability to make distributions to our stockholders as required to maintain our status as a REIT. For these reasons, if any tenant and/or the applicable guarantor were to experience a material adverse effect on its business, financial condition, liquidity, results of operations or prospects, we would also be materially and adversely affected.

In addition, due to our dependence on rental payments from Caesars as a primary source of revenues, we may be limited in our ability to enforce our rights under the Lease Agreements or to terminate the applicable lease with respect to a particular property. Failure by the tenants to comply with the terms of the Lease Agreements or to comply with the gaming regulations to which the leased properties are subject could require us to find another lessee for such leased property, to the extent possible, and there could be a decrease or cessation of rental payments by the tenants. In such event, we may be unable to locate a suitable, credit-worthy lessee at similar rental rates or at all, which could have a material and adverse effect on us.

 

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Because several of our major gaming casinos are concentrated on the Strip, we are subject to greater risks than a company that is more geographically diversified.

On a pro forma basis, our two properties on the Strip generated approximately 36% of our revenue for the nine months ended September 30, 2017. Therefore, our business may be significantly affected by risks common to the Las Vegas tourism industry. For example, the cost and availability of air services and the impact of any events that disrupt air travel to and from Las Vegas can adversely affect the business of our tenants. We cannot control the number or frequency of flights to or from Las Vegas, but the tenants rely on air traffic for a significant portion of their visitors. Reductions in flights by major airlines as a result of higher fuel prices or lower demand can impact the number of visitors to our properties. Additionally, there is one principal interstate highway between Las Vegas and Southern California, where a large number of the customers that frequent our properties reside. Capacity constraints of that highway or any other traffic disruptions may also affect the number of customers who visit our facilities. Moreover, due to the importance of our two properties on the Strip, we may be disproportionately affected by general risks such as acts of terrorism, natural disasters, including major fires, floods and earthquakes, and severe or inclement weather, should such developments occur in or nearby Las Vegas.

Caesars and its subsidiaries are party to certain leasing and financial commitments with us, which may have a negative impact on Caesars’ business and operating condition.

Caesars and/or its subsidiaries entered into certain leasing and financial commitments, evidenced by agreements, with us. See “Business—Our Relationship with Caesars” for additional information regarding such agreements.

As disclosed in Caesars’ quarterly report on Form 10-Q for the nine months ended September 30, 2017, (i) CEOC is obligated to pay us in the aggregate approximately $640 million in fixed annual rents for the first seven lease years, subject to certain escalators and adjustments, (ii) Caesars issued approximately $1.1 billion of Convertible Notes at 5.00% per annum that will mature in 2024, and CEOC entered a new credit agreement providing for funded debt obligations of approximately $1.2 billion, and (iii) Caesars and its subsidiaries expect to have aggregate annual cash outflows of approximately $1.3 billion in 2018 (including its rental payment obligation to us and expected debt service costs). If Caesars’ businesses and properties fail to generate sufficient earnings, the applicable tenants, Caesars and/or CRC may be unable to satisfy their respective obligations under the Lease Agreements or the related guarantees, respectively. Additionally, these obligations may limit their ability to make investments to maintain and grow their portfolio of businesses and properties, which may adversely affect their competitiveness and ability to satisfy their obligations to us. See “—We are dependent on Caesars for the foreseeable future, and an event that has a material adverse effect on Caesars’ business, financial condition, liquidity results of operations or prospects would have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects” above.

Subsidiaries of Caesars are required to pay a significant portion of their cash flow from operations to us pursuant to, and subject to the terms and conditions of, the Lease Agreements, which could adversely affect Caesars’ ability to fund their operations or development projects, raise capital, make acquisitions, and otherwise respond to competitive and economic changes and its ability to satisfy its payment obligations to us under the Lease Agreements and the related guarantees.

Subsidiaries of Caesars are required to pay a significant portion of their cash flow from operations to us pursuant to, and subject to the terms and conditions of, the Lease Agreements. See “Business—Our Relationship with Caesars.” As a result of this commitment, Caesars’ ability to fund its operations or development projects, raise capital, make acquisitions and otherwise respond to competitive and economic changes may be adversely affected, which could adversely affect the ability of the applicable tenants to satisfy their obligations to us under the Lease Agreements and the ability of Caesars and/or CRC to satisfy their respective obligations to us under the related guarantees.

 

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In addition, the annual rent escalations under the Lease Agreements will continue to apply regardless of the amount of cash flows generated by the properties that are subject to the Lease Agreements. Accordingly, if the cash flows generated by such properties decrease, or do not increase at the same rate as the rent escalations, the rents payable under the Lease Agreements will comprise a higher percentage of the cash flows generated by the subsidiaries of Caesars, which could make it more difficult for the applicable subsidiaries to make their payment obligations to us under the Lease Agreements and ultimately could adversely affect Caesars’ and/or CRC’s ability to satisfy their respective obligations to us under the related guarantees.

Caesars’ substantial indebtedness and the fact that a significant portion of its cash flow is used to make interest payments could adversely affect its ability to satisfy its obligations under the Lease Agreements.

As disclosed in its quarterly report on Form 10-Q for the nine months ended September 30, 2017, Caesars’ consolidated estimated debt service (including principal and interest) for the remainder of 2017 was $189 million and $8.1 billion thereafter to maturity. On October 16, 2017, two wholly-owned subsidiaries of Caesars issued $1.7 billion aggregate principal amount of 5.25% senior notes due 2025; on or about December 22, 2017, the proceeds of the senior notes were released from escrow, and CRC assumed the obligations of one of the original issuer entities pursuant to a supplement to the original indenture governing the senior notes. On December 22, 2017, CRC entered into new $5.7 billion senior secured credit facilities, comprised of a $1 billion revolving credit facility maturing in 2022 and a $4.7 billion first lien term loan facility maturing in 2024, which amortizes at 0.25% per quarter. As a result, a significant portion of Caesars’ liquidity needs are for debt service, including significant interest payments. Such substantial indebtedness and the restrictive covenants under the agreements governing such indebtedness could limit the ability of the applicable tenants to satisfy their obligations to us under the Lease Agreements and the ability of Caesars’ and/or CRC to satisfy their respective obligations under the related guarantees.

We are dependent on the gaming industry and may be susceptible to the risks associated with it, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.

As the landlord of gaming facilities, we are impacted by the risks associated with the gaming industry. Therefore, so long as our investments are concentrated in gaming-related assets, our success is dependent on the gaming industry, which could be adversely affected by economic conditions in general, changes in consumer trends and preferences and other factors over which we and our tenants have no control. As we are subject to risks inherent in substantial investments in a single industry, a decrease in the gaming business would likely have a greater adverse effect on us than if we owned a more diversified real estate portfolio, particularly because a component of the rent under the Lease Agreements will be based, over time, on the performance of the gaming facilities operated by Caesars on our properties and such effect could be material and adverse to our business, financial condition, liquidity, results of operations and prospects.

The gaming industry is characterized by a high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, video lottery, sweepstakes and poker machines not located in casinos, Native American gaming, internet lotteries and other internet wagering gaming services and, in a broader sense, gaming operators face competition from all manner of leisure and entertainment activities. Gaming competition is intense in most of the markets where our facilities are located. Recently, there has been additional significant competition in the gaming industry as a result of the upgrading or expansion of facilities by existing market participants, the entrance of new gaming participants into a market or legislative changes. As competing properties and new markets are opened, we may be negatively impacted. Additionally, decreases in discretionary consumer spending brought about by weakened general economic conditions such as, but not limited to, lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, cultural and demographic changes and increased stock market volatility may negatively impact our revenues and operating cash flows.

 

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We face extensive regulation from gaming and other regulatory authorities, and our charter provides that any of our shares held by investors who are found to be unsuitable by state gaming regulatory authorities are subject to redemption.

The ownership, operation, and management of gaming and racing facilities are subject to pervasive regulation. These gaming and racing regulations impact our gaming and racing tenants and persons associated with our gaming and racing facilities, which in many jurisdictions include us as the landlord and owner of the real estate. Certain gaming authorities in the jurisdictions in which we hold properties may require us and/or our affiliates to maintain a license as a key business entity or supplier because of our status as landlord. Gaming authorities also retain great discretion to require us to be found suitable as a landlord, and certain of our stockholders, officers and directors may be required to be found suitable as well.

In many jurisdictions, gaming laws can require certain of our stockholders to file an application, be investigated, and qualify or have his, her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition, restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered or found suitable or approved, for any cause deemed reasonable by the gaming authorities.

Gaming authorities may conduct investigations into the conduct or associations of our directors, officers, key employees or investors to ensure compliance with applicable standards. If we are required to be found suitable and are found suitable as a landlord, we will be registered as a public company with the gaming authorities and will be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a stockholder or to have any other relationship with us, we:

 

    pay that person any distribution or interest upon any of our voting securities;

 

    allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person;

 

    pay remuneration in any form to that person for services rendered or otherwise; or

 

    fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities, including, if necessary, the immediate purchase of the voting securities for cash at fair market value.

Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming company and, in some jurisdictions, non-voting securities, typically 5% of a publicly-traded company, to report the acquisition to gaming authorities, and gaming authorities may require such holders to apply for qualification, licensure or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting securities for passive investment purposes only. Our outstanding shares of capital stock are held subject to applicable gaming laws. Any person owning or controlling at least 5% of the outstanding shares of any class of our capital stock is required to promptly notify us of such person’s identity. See “Description of Capital Stock—Restrictions on Ownership and Transfer” and “—Redemption of Securities Owned or Controlled by an Unsuitable Person or Affiliate.” Some jurisdictions may also limit the number of gaming licenses in which a person may hold an ownership or a controlling interest.

Further, our directors, officers, key employees and investors in our shares must meet approval standards of certain gaming regulatory authorities. If such gaming regulatory authorities were to find such a person or investor unsuitable, we may be required to sever our relationship with that person or the investor may be required to dispose of his, her or its interest in us. Our charter provides that all of our shares held by investors who are found to be unsuitable by regulatory authorities are subject to redemption upon our receipt of notice of such finding.

Additionally, the loss of our gaming licenses could result in an event of default under our certain of our indebtedness, and cross-default provisions in our debt agreements could cause an event of default under one debt

 

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agreement to trigger an event of default under our other debt agreements. See “—Covenants in our debt agreements limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.”

Finally, substantially all material loans, significant acquisitions, leases, sales of securities and similar financing transactions by us and our subsidiaries must be reported to, and in some cases approved by, gaming authorities in advance of the transaction. Neither we nor any of our subsidiaries may make a public offering of securities without the prior approval of certain gaming authorities. Changes in control through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or otherwise may be subject to receipt of prior approval of certain gaming authorities. Entities seeking to acquire control of us or one of our subsidiaries (and certain of our affiliates) must satisfy gaming authorities with respect to a variety of stringent standards prior to assuming control. Failure to satisfy the stringent licensing standards may preclude entities from acquiring control of us or one of our subsidiaries (and certain of our affiliates) and/or require the entities to divest such control.

Required regulatory approvals can delay or prohibit transfers of our gaming properties, which could result in periods in which we are unable to receive rent for such properties and have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Our tenants are (and any future tenants of our gaming properties will be) required to be licensed under applicable law in order to operate any of our properties as gaming facilities. If the Lease Agreements, or any future lease agreements we will enter into, are terminated (which could be required by a regulatory agency) or expire, any new tenant must be licensed and receive other regulatory approvals to operate our properties as gaming facilities. Any delay in, or inability of, the new tenant to receive required licenses and other regulatory approvals from the applicable state and county government agencies may prolong the period during which we are unable to collect the applicable rent. Further, in the event that the Lease Agreements or future lease agreements are terminated or expire and a new tenant is not licensed or fails to receive other regulatory approvals, the properties may not be operated as gaming facilities and we will not be able to collect the applicable rent. Moreover, we may be unable to transfer or sell the affected properties as gaming facilities, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.

Tenants may choose not to renew the Lease Agreements.

The Lease Agreements each have an initial lease term of 15 years with the potential to extend the term for up to four additional five-year terms thereafter, provided that for certain facilities the aggregate lease term, including renewals, is cutback to the extent it would otherwise exceed 80% of the remaining useful life of the applicable leased property, solely at the option of the tenants. At the expiration of the initial lease term or of any additional renewal term thereafter, a tenant may choose not to renew the Lease Agreements. If the Lease Agreements expire without renewal and we are not able to find suitable, credit-worthy tenants to replace a tenant on the same or more attractive terms, our business, financial condition, liquidity, results of operations and prospects may be materially and adversely affected, including our ability to make distributions to our stockholders at the then current level, or at all. This risk would be exacerbated if Caesars determined not to renew, or was prohibited from renewing due to the remaining useful life of the leased property, all Lease Agreements at any one time.

Net leases may not result in fair market lease rates over time, which could negatively impact our results of operations and cash flows and reduce the amount of funds available to make distributions to stockholders.

All of our rental revenue is generated from the Lease Agreements, which are triple-net leases, and provide greater flexibility to the respective tenants related to the use of the applicable leased property than would be the case with ordinary property leases, such as the right to freely sublease portions of each leased property, to make

 

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alterations in the leased premises and to terminate the lease prior to its expiration under specified circumstances. Furthermore, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years. As a result, our results of operations and cash flows and distributions to our stockholders could be lower than they would otherwise be if we did not enter into a net lease.

The Lease Agreements may restrict our ability to sell the properties.

Our ability to sell or dispose of our properties may be hindered by the fact that such properties are subject to the Lease Agreements, as the terms of the Lease Agreements require that a purchaser assume the Lease Agreements or enter into a severance lease with the tenants for the sold property on substantially the same terms as contained in the applicable Lease Agreement, which may make our properties less attractive to a potential buyer than alternative properties that may be for sale.

Properties within our portfolio are, and properties that we may acquire in the future are likely to be, operated and promoted under certain trademarks and brand names that we do not own.

Most of the properties within our portfolio are currently operated and promoted under trademarks and brand names not owned by us, including Caesars Palace, Horseshoe, Harrah’s and Bally’s. In addition, properties that we may acquire in the future may be operated and promoted under these same trademarks and brand names, or under different trademarks and brand names we do not, or will not, own. During the term that our properties are managed by Caesars, we will be reliant on Caesars to maintain and protect the trademarks, brand names and other licensed intellectual property used in the operation or promotion of the leased properties. Operation of the leased properties, as well as our business and financial condition, could be adversely impacted by infringement, invalidation, unauthorized use or litigation affecting any such intellectual property. Moreover, if any of our properties are rebranded unsuccessfully, it could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects, as we may not enjoy comparable recognition or status under a new brand. A transition of management away from a Caesars entity could also have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

A substantial portion of our cash is used to satisfy our debt service obligations and our distribution obligations to maintain our status as a REIT and avoid or otherwise minimize current entity level U.S. Federal income taxes, which may expose us to interest rate fluctuation risk, expose us to the risk of default under our debt obligations and limit our ability to pursue our business and growth strategies.

We have a substantial amount of indebtedness outstanding. On a pro forma basis, as of September 30, 2017, we would have had an aggregate of $4,148.5 million of outstanding indebtedness ($4,117.6 million, net of deferred financing cost and original issue discount), requiring us to make debt service payments of approximately $198.4 million in 2018.

Our indebtedness is collateralized by substantially all of our properties. Payments of principal and interest under this indebtedness, or any other instruments governing debt we may incur in the future, may leave us with insufficient cash resources to pursue our business and growth strategies or to pay the distributions currently contemplated or necessary to qualify or maintain qualification as a REIT. Our substantial outstanding indebtedness or future indebtedness, and the limitations imposed on us by our debt agreements, could have other significant adverse consequences, including the following:

 

    our cash flow may be insufficient to meet our required principal and interest payments;

 

    we may be unable to borrow additional funds as needed or on favorable terms, which could, among other things, adversely affect our ability to capitalize upon emerging acquisition opportunities, including exercising our rights of first refusal and call rights described herein, or meet operational needs;

 

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    we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness;

 

    we may be forced to dispose of one or more of our properties if permitted under the Lease Agreements, possibly on disadvantageous terms at a loss;

 

    we may fail to comply with the payment and restrictive covenants in our loan documents, which would entitle the lenders to accelerate payment of outstanding loans and foreclose on any properties servicing such loans; and

 

    we may be unable to hedge floating rate debt, counterparties may fail to honor their obligations under our hedge agreements and these agreements may not effectively hedge interest rate fluctuation risk.

If any one of these events were to occur, our financial condition, results of operations, cash flows, the market price of our common stock and our ability to satisfy our debt service obligations and to pay distributions to our stockholders could be materially and adversely affected. In addition, the foreclosure on our properties could create taxable income without accompanying cash proceeds, which could result in entity level taxes to us or could adversely affect our ability to meet the distribution requirements necessary to qualify or maintain qualification as a REIT.

In addition, the Code generally requires that a REIT distribute annually to its stockholders at least 90% of its REIT taxable income (with certain adjustments), determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it distributes annually less than 100% of its REIT taxable income, including capital gains. VICI Golf is also subject to U.S. Federal income tax at regular corporate rates on any of its taxable income. In order to maintain our status as a REIT and avoid or otherwise minimize current entity-level U.S. Federal income taxes, a substantial portion of our cash flow after operating expenses and debt service will be required to be distributed to our stockholders.

Because of the limitations on the amount of cash available to us after satisfying our debt service obligations and our distribution obligations to maintain our status as a REIT and avoid or otherwise minimize current entity- level U.S. Federal income taxes, our ability to pursue our business and growth strategies will be limited.

Any mechanic’s liens or similar liens incurred by the tenants under the Lease Agreements may attach to, and constitute liens on, our interests in the properties.

To the extent the tenants under the Lease Agreements make any improvements, these improvements could cause mechanic’s liens or similar liens to attach to, and constitute liens on, our interests in the properties. To the extent that mechanic’s liens or similar liens are recorded against any of the properties or any properties we may acquire in the future, the holders of such mechanic’s liens or similar liens may enforce them by court action and courts may cause the applicable properties or future properties to be sold to satisfy such liens, which could negatively impact our revenues, results of operations, cash flows and distributions to our stockholders. Further, holders of such liens could have priority over our stockholders in the event of bankruptcy or liquidation, and as a result, a trustee in bankruptcy may have difficulty realizing or foreclosing on such properties in any such bankruptcy or liquidation, and the amount of distributions our stockholders could receive in such bankruptcy or liquidation could be reduced.

Adverse changes in our credit rating may affect our borrowing capacity and borrowing terms.

Our outstanding debt is periodically rated by nationally recognized credit rating agencies. The credit ratings are based upon our operating performance, liquidity and leverage ratios, overall financial condition, and other factors viewed by the credit rating agencies as relevant to both our industry and the economic outlook. Our credit rating may affect the amount of capital we can access, as well as the terms of any financing we obtain. Because we rely in part on debt financing to fund growth, the absence of an investment grade credit rating or any credit rating downgrade or negative outlook may have a negative effect on our future growth.

 

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We will have future capital needs and may not be able to obtain additional financing on acceptable terms.

We may incur additional indebtedness in the future to refinance our existing indebtedness or to finance newly acquired properties or for general corporate or other purposes. Any significant additional indebtedness could require a substantial portion of our cash flow to make interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay distributions, make capital expenditures and acquisitions, or carry out other aspects of our business and growth strategies. Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational and financial flexibility. Further, to the extent we were required to incur indebtedness, our future interest costs would increase, thereby reducing our earnings and cash flows from what they otherwise would have been.

Moreover, our ability to obtain additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon our future operating performance, which is subject to then prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening of current credit market conditions would have a material adverse effect on our ability to obtain financing on favorable terms, if at all.

We may be unable to obtain additional financing or financing on favorable terms or our operating cash flow may be insufficient to satisfy our financial obligations under indebtedness outstanding from time to time (if any). Among other things, the absence of an investment grade credit rating or any credit rating downgrade or negative outlook could increase our financing costs and could limit our access to financing sources. If financing is not available when needed, or is available on unfavorable terms, we may be unable to pursue our business and growth strategies or otherwise take advantage of new business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. We may raise additional funds in the future through the issuance of equity securities and, as a result, our stockholders may experience significant dilution, which may adversely affect the market price of our common stock and make it more difficult for our stockholders to sell our shares at a time and price that they deem appropriate and could impair our future ability to raise capital through an offering of our equity securities.

Our ability to refinance our indebtedness as it becomes due depends on many factors, some of which are beyond our control.

Our ability to refinance our existing indebtedness and any future indebtedness will depend, in part, on our current and projected financial condition, liquidity and results of operations and economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot assure you that we will be able to refinance any of our indebtedness as it becomes due, on commercially reasonable terms or at all. If we are not able to refinance our indebtedness as it becomes due, we will be obligated to pay such indebtedness with cash from our operations and we may not have sufficient cash to do so, which would have a material and adverse effect on us.

Covenants in our debt agreements limit our operational flexibility, and a covenant breach or default could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.

The agreements governing our indebtedness contain customary covenants, including restrictions on our ability to grant liens on our assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations and pay certain dividends and other restricted payments. These covenants could impair

 

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our ability to pursue our business and growth strategies, take advantage of new business opportunities or successfully compete. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our properties, and our assets may not be sufficient to repay such debt in full. Covenants that limit our operational flexibility as well as defaults under our debt instruments could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

A rise in interest rates may increase our overall interest rate expense and could adversely affect our stock price.

Our Revolving Credit Facility and Term Loan B Facility are subject to variable interest rates. A rise in interest rates may increase our overall interest rate expense and have an adverse impact on our ability to pay distributions to our stockholders. The risk presented by holding variable rate indebtedness can be managed or mitigated by utilizing interest rate protection products. However, there is no assurance that we will utilize any of these products or that such products will be available to us. In addition, in the event of a rise in interest rates, new debt, whether fixed or variable, is likely to be more expensive and we may be unable to replace maturing debt with new debt at equal or better interest rates.

Further, the dividend yield on our common stock, as a percentage of the price of such common stock, will influence the market price of such common stock. Thus, an increase in market interest rates may lead prospective purchasers of our common stock to expect a higher dividend yield, which would adversely affect the market price of our common stock.

We may not be able to purchase the properties subject to the Call Right Agreements, the Amended and Restated Right of First Refusal Agreement or the Put-Call Agreement if we are unable to obtain additional financing. In addition, we may be forced to dispose of Harrah’s Las Vegas to Caesars, possibly on disadvantageous terms.

The Call Right Agreements provide for our right for up to five years after the Formation Date to enter into binding agreements to purchase the real property interest and all improvements associated with Harrah’s Atlantic City, Harrah’s Laughlin, and/or Harrah’s New Orleans from Caesars. The Put Call Agreement that we entered into with Caesars, among other things, provides us with the opportunity or the obligation to acquire the Eastside Convention Center Property and lease it back to Caesars. The Amended and Restated Right of First Refusal Agreement provides us the right, subject to certain exclusions, to (i) acquire (and lease to Caesars) any domestic gaming facilities located outside of the Gaming Enterprise District of Clark County, Nevada, proposed to be acquired or developed by Caesars, and (ii) acquire (and lease to Caesars) any of the properties that Caesars has recently agreed to acquire from Centaur Holdings, LLC, in each case, should Caesars determine to sell any such properties. In order to exercise these rights, we would likely be required to secure additional financing and our substantial level of indebtedness following the Formation Date or other factors could limit our ability to do so on attractive terms or at all. If we are unable to obtain financing on terms acceptable to us, we may not be able to exercise these rights and acquire these properties. Even if financing with acceptable terms is available to us, there can be no assurance that we will exercise any of these rights.

The Put-Call Agreement, among other things, grants Caesars the right to sell to (and simultaneously lease back from) us the Eastside Convention Center Property. If Caesars exercises the right to sell to (and lease from) us the Eastside Convention Center Property and the transactions do not close for reasons other than a default by Caesars or a failure to obtain any required regulatory approvals, Caesars will have the right to acquire Harrah’s Las Vegas from us, all on and subject to the terms and conditions set forth in the Put-Call Agreement. In

 

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addition, the HLV Lease Agreement grants Caesars the right to purchase Harrah’s Las Vegas from us if we engage in certain transactions with entities deemed to be competitors of Caesars or if the landlord under the lease otherwise becomes a competitor of Caesars. The disposition of Harrah’s Las Vegas to Caesars pursuant to the Put-Call Agreement or the HLV Lease Agreement may be at disadvantageous terms and could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

The bankruptcy or insolvency of any tenant or guarantor could result in the termination of the Lease Agreements and the related guarantees and material losses to us.

Although the tenants’ performance and payments under the Lease Agreements are guaranteed by Caesars or CRC, as the case may be, a default by the applicable tenant under the Lease Agreement, or by Caesars or CRC with regard to its guarantee, may cause a default under certain circumstances with regard to the entire portfolio covered by the Lease Agreements. In event of a bankruptcy, there can be no assurances that the tenants, Caesars or CRC would assume the Lease Agreements or the related guarantees, and if the Lease Agreements or guarantees were rejected, the tenant, Caesars or CRC, as applicable, may not have sufficient funds to pay the damages that would be owed to us a result of the rejection and we might not be able to find a replacement tenant on the same or better terms. Similarly, in the event of a bankruptcy of Caesars or CRC, any claim for damages under the guarantee may not be paid in full. For these and other reasons, the bankruptcy of one or more tenants, Caesars or CRC would have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Our pursuit of investments in, and acquisitions or development of, additional properties may be unsuccessful or fail to meet our expectations.

We intend to pursue acquisitions of additional properties and seek acquisitions and other strategic opportunities. Accordingly, we may often be engaged in evaluating potential transactions and other strategic alternatives. In addition, from time to time, we may engage in discussions that may result in one or more transactions. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transaction, we may devote a significant amount of our management resources to such a transaction, which could negatively impact our operations. We may incur significant costs in connection with seeking acquisitions or other strategic opportunities regardless of whether the transaction is completed and in combining our operations if such a transaction is completed.

We operate in a highly competitive industry and face competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, lenders, gaming companies and other investors, some of whom are significantly larger and have greater resources, access to capital and lower costs of capital. Increased competition will make it more challenging to identify and successfully capitalize on acquisition opportunities that meet our investment objectives. If we cannot identify and purchase a sufficient quantity of gaming properties and other properties at favorable prices or if we are unable to finance acquisitions on commercially favorable terms, our business, financial condition, liquidity, results of operations and prospects could be materially and adversely affected. Additionally, the fact that we must distribute 90% of our REIT taxable income in order to maintain our qualification as a REIT may limit our ability to rely upon rental payments from our leased properties or subsequently acquired properties in order to finance acquisitions. As a result, if debt or equity financing is not available on acceptable terms, further acquisitions might be limited or curtailed.

Investments in and acquisitions of gaming properties and other properties we might seek to acquire entail risks associated with real estate investments generally, including that the investment’s performance will fail to meet expectations, that the cost estimates for necessary property improvements will prove inaccurate or the operator or manager will underperform. Real estate development projects present other risks, including construction delays or cost overruns that increase expenses, the inability to obtain required zoning, occupancy and other governmental approvals and permits on a timely basis, and the incurrence of significant development costs prior to completion of the project.

 

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Further, even if we were able to acquire additional properties in the future, there is no guarantee that such properties would be able to maintain their historical performance. In addition, our financing of these acquisitions could negatively impact our cash flows and liquidity, require us to incur substantial debt or involve the issuance of substantial new equity, which would be dilutive to existing stockholders. We have a substantial amount of indebtedness outstanding, which may affect our ability to pay distributions, may expose us to interest rate fluctuation risk and may expose us to the risk of default under our debt obligations. In addition, we cannot assure you that we will be successful in implementing our business and growth strategies or that any expansion will improve operating results. The failure to identify and acquire new properties effectively, or the failure of any acquired properties to perform as expected, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects and our ability to make distributions to our stockholders.

We may sell or divest different properties or assets after an evaluation of our portfolio of businesses. Such sales or divestitures would affect our costs, revenues, results of operations, financial condition and liquidity.

From time to time, we may evaluate our properties and may, as a result, sell or attempt to sell, divest, or spin-off different properties or assets, subject to the terms of the Lease Agreements. These sales or divestitures would affect our costs, revenues, results of operations, financial condition, liquidity and our ability to comply with financial covenants. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, and potential post-closing claims for indemnification. In addition, current economic conditions and relatively illiquid real estate markets may result in fewer potential bidders and unsuccessful sales efforts.

Our properties are subject to risks from natural disasters such as earthquakes, hurricanes, severe weather and terrorism.

Our properties are located in areas that may be subject to natural disasters, such as earthquakes, and extreme weather conditions, including, but not limited to, hurricanes. Such natural disasters or extreme weather conditions may interrupt operations at the casinos, damage our properties, and reduce the number of customers who visit our facilities in such areas. A severe earthquake could damage or destroy our properties. In addition, our operations could be adversely impacted by a drought or other cause of water shortage. A severe drought of extensive duration experienced in Las Vegas or in the other regions in which we operate could adversely affect the business and financial results at our properties. Although the tenants are required to maintain both property and business interruption insurance coverage, such coverage is subject to deductibles and limits on maximum benefits, including limitation on the coverage period for business interruption, and we cannot assure you that we or the tenants will be able to fully insure such losses or fully collect, if at all, on claims resulting from such natural disasters. While the Lease Agreements require, and new lease agreements are expected to require, that comprehensive insurance and hazard insurance be maintained by the tenants, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, that may be uninsurable or not economically insurable. Insurance coverage may not be sufficient to pay the full current market value or current replacement cost of a loss. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it infeasible to use insurance proceeds to replace the property after such property has been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the economic position with respect to such property. If we experience a loss that is uninsured or that exceeds our policy coverage limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties.

Terrorist attacks or other acts of violence may result in declining economic activity, which could harm the demand for goods and services offered by our tenants and the value of our properties and might adversely affect the value of an investment in our common stock. Such a resulting decrease in retail demand could make it difficult for us to renew or re-lease our properties to suitable, credit-worthy tenants at lease rates equal to or

 

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above historical rates. Terrorist activities or violence also could directly affect the value of our properties through damage, destruction or loss, and the availability of insurance for such acts, or of insurance generally, might be lower or cost more, which could increase our operating expenses and adversely affect our results of operations and cash flows. To the extent that any of our tenants is affected by future terrorist attacks or violence, its business similarly could be adversely affected, including the ability of our tenants to continue to meet their obligations to us. These events might erode business and consumer confidence and spending and might result in increased volatility in national and international financial markets and economies. Any one of these events might decrease demand for real estate, decrease or delay the occupancy of our new or redeveloped properties, and limit our access to capital or increase our cost of raising capital.

In addition, the Lease Agreements, as applicable, allow the tenants to remove a property from the Non-CPLV Lease Agreement and to terminate the CPLV Lease Agreement, the Joliet Lease Agreement or the HLV Lease Agreement, as the case may be, during the final two years of the lease terms if the cost to rebuild or restore a property in connection with a casualty event exceeds 25% of total property fair market value. Similarly, if a condemnation event occurs that renders a facility unsuitable for its primary intended use, the applicable tenants may remove the property from the Non-CPLV Lease Agreement and may terminate the CPLV Lease Agreement, the Joliet Lease Agreement or the HLV Lease Agreement, as the case may be. If a property is removed from the Non-CPLV Lease Agreement or if the CPLV Lease Agreement, the Joliet Lease Agreement or the HLV Lease Agreement, as the case may be, is terminated, we will lose the rent associated with the related facility, which would have a negative impact on our financial results. In this event, following termination of the lease of a property, even if we are able to restore the affected property, we could be limited to selling or leasing such property to a new tenant in order to obtain an alternate source of revenue, which may not happen on comparable terms or at all.

Changes in building and/or zoning laws may require us to update a property in the event of recapture or prevent us from fully restoring a property in the event of a substantial casualty loss and/or require us to meet additional or more stringent construction requirements.

Due to changes, among other things, in applicable building and zoning laws, ordinances and codes that may affect certain of our properties that have come into effect after the initial construction of the properties, certain properties may not comply fully with current building and/or zoning laws, including electrical, fire, health and safety codes and regulations, use, lot coverage, parking and setback requirements, but may qualify as permitted non-conforming uses. Although the Lease Agreements require our tenants to pay for and ensure continued compliance with applicable law, there is no assurance that future leases will be negotiated on the same basis or that our tenants will make any changes required by the terms of the Lease Agreements and/or any future leases we may enter into. In addition, such changes may limit a tenant’s ability to restore the premises of a property to its previous condition in the event of a substantial casualty loss with respect to the property or the ability to refurbish, expand or renovate such property to remain compliant, or increase the cost of construction in order to comply with changes in building or zoning codes and regulations. If a tenant is unable to restore a property to its prior use after a substantial casualty loss or is required to comply with more stringent building or zoning codes and regulations, we may be unable to re-lease the space at a comparable effective rent or sell the property at an acceptable price, which may materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.

Certain properties are subject to restrictions pursuant to reciprocal easement agreements, operating agreements or similar agreements.

Many of the properties that we own are, and properties that we may acquire in the future may be, subject to use restrictions and/or operational requirements imposed pursuant to ground leases, restrictive covenants or conditions, reciprocal easement agreements or operating agreements or other instruments (collectively, “Property Restrictions”) that could, among other things, adversely affect our ability to lease space to third parties. Such Property Restrictions could include: limitations on alterations, changes, expansions, or reconfiguration of

 

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properties; limitations on use of properties; limitations affecting parking requirements; or restrictions on exterior or interior signage or facades. In certain cases, consent of the other party or parties to such agreements may be required when altering, reconfiguring, expanding or redeveloping. Failure to secure such consents when necessary may harm our ability to execute leasing strategies, which could adversely affect us.

The loss of the services of key personnel could have a material adverse effect on our business.

Our success and ability to grow depends, in large part, upon the leadership and performance of our executive management team, particularly our chief executive officer, our president and chief operating officer, and our chief financial officer. Any unforeseen loss of our executive officers’ services, or any negative market or industry perception with respect to them or arising from their loss, could have a material adverse effect on our business. We do not have key man or similar life insurance policies covering members of our senior management. We have employment agreements with our executive officers, but these agreements do not guarantee that any given executive will remain with us, and there can be no assurance that any such officers will remain with us. The appointment of certain key members of our executive management team will be subject to regulatory approvals based upon suitability determinations by gaming regulatory authorities in the jurisdictions where our properties are located. If any of our executive officers is found unsuitable by any such gaming regulatory authorities, or if we otherwise lose their services, we would have to find alternative candidates and may not be able to successfully manage our business or achieve our business objectives.

If we cannot attract, retain and motivate employees, we may be unable to compete effectively and lose the ability to improve and expand our businesses.

Our success and ability to grow depend, in part, on our ability to hire, retain and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve clients and expand our business. We face intense competition for highly qualified, specialized technical, managerial, and consulting personnel. Recruiting, training, retention and benefit costs place significant demands on our resources. Additionally, CEOC’s bankruptcy proceedings and our recent formation may make recruiting executives to our business more difficult. The inability to attract qualified employees in sufficient numbers to meet particular demands or the loss of a significant number of our employees could have an adverse effect on us.

We may become involved in legal proceedings that, if adversely adjudicated or settled, could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

The nature of our business subjects us to the risk of lawsuits related to matters incidental to our business filed by our tenants, customers, employees, competitors, business partners and others. As with all legal proceedings, no assurance can be provided as to the outcome of these matters and, in general, legal proceedings can be expensive and time consuming. We may not be successful in the defense or prosecution of these lawsuits, which could result in settlements or damages that could have a material adverse effect on us.

Environmental compliance costs and liabilities associated with real estate properties owned by us may materially impair the value of those investments.

As an owner of real property, we are subject to various Federal, state and local environmental and health and safety laws and regulations. Although we do not operate or manage most of our properties, we may be held primarily or jointly and severally liable for costs relating to the investigation and clean-up of any property from which there has been a release or threatened release of a regulated material as well as other affected properties, regardless of whether we knew of or caused the release, and to preserve claims for damages. Further, some environmental laws create a lien on a contaminated site in favor of the government for damages and the costs the government incurs in connection with such contamination.

Although under the Lease Agreements the tenants are required to indemnify us for certain environmental liabilities, including environmental liabilities it causes, the amount of such liabilities could exceed the financial

 

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ability of the applicable tenants to indemnify us. In addition, the presence of contamination or the failure to remediate contamination may adversely affect our ability to sell or lease our properties or to borrow using our properties as collateral.

We may be required to contribute insurance proceeds with respect to casualty events at our properties to the lenders under our debt financing agreements.

In the event that we were to receive insurance proceeds with respect to a casualty event at any of our properties, we may be required under the terms of our debt financing agreements to contribute all or a portion of those proceeds to the repayment of such debt, which may prevent us from restoring such properties to their prior state. If the remainder of the proceeds (after any such required repayment) were insufficient to make the repairs necessary to restore the damaged properties to a condition substantially equivalent to its state immediately prior to the casualty, we may not have sufficient liquidity to otherwise fund these repairs and may be required to obtain additional financing, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects.

If we fail to establish and maintain an effective system of integrated internal controls, we may not be able to report our financial results accurately, which could have a material adverse effect on us.

As a reporting company, we are required to develop and implement substantial control systems, policies and procedures in order to qualify and maintain our qualification as a REIT and satisfy our periodic SEC reporting requirements. We cannot assure you that we will be able to successfully develop and implement these systems, policies and procedures and to operate our company or that any such development and implementation will be effective. Failure to do so could jeopardize our status as a REIT or as a reporting company, and the loss of such statuses would materially and adversely affect us. If we fail to develop, implement or maintain proper overall business controls, including as required to support our growth, our operating and financial results could be harmed or we could fail to meet our reporting obligations. In addition, the existence of a material weakness or significant deficiency could result in errors in our financial statements that could require a restatement, cause us to fail to meet our SEC reporting obligations and cause investors to lose confidence in our reported financial information, which could have a material adverse effect on us and on the market price of our common stock.

Risk Factors Relating to the Formation Transactions

We may be unable to make, on a timely or cost-effective basis, the changes necessary to operate as a stand-alone company primarily focused on owning a portfolio of gaming properties.

We have limited historical operations as an independent company. As a stand-alone entity, we are subject to, and responsible for, regulatory compliance, including periodic public filings with the SEC, and compliance with the listing requirements of the New York Stock Exchange, where our common stock has been approved for listing, and with applicable state gaming rules and regulations, as well as compliance with generally applicable tax and accounting rules. Because our business did not operate as a stand-alone company until the Formation Date, we cannot ensure that we will be able to successfully implement the infrastructure or retain the personnel necessary to operate as a stand-alone company or that we will not incur costs in excess of anticipated costs to establish such infrastructure and retain such personnel.

The historical and pro forma financial information included in this prospectus may not be a reliable indicator of future results.

We are a newly organized company with limited operating history and did not operate as a REIT or otherwise as a stand-alone business prior to the Formation Date. Therefore, our growth prospects must be considered in light of the risks, expenses and difficulties frequently encountered when any new business is formed. We cannot assure you that we will be able to successfully operate our business profitably or implement our operating policies and business and growth strategies as described in this prospectus. We urge you to carefully consider the information included in this prospectus concerning us in making an investment decision.

 

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The financial statements and the pro forma financial information included herein may not reflect what our business, financial condition, cash flows or results of operations will be in the future now that we are a separate public company. The properties acquired by our Operating Partnership from subsidiaries of Caesars were historically operated by subsidiaries of Caesars as part of its larger corporate organization and not as a stand-alone business or independent company. The pro forma financial information that we have included in this prospectus may not reflect what our financial condition or results of operations would have been had we existed as a stand-alone business or independent entity, or had we operated as a REIT, during the periods presented. Significant changes have occurred in our cost structure, financing and business operations as a result of our operation as a stand-alone company and the entry into transactions with Caesars that have not existed historically, including the Lease Agreements and the related guarantees.

The pro forma financial information included in this prospectus was prepared on the basis of assumptions derived from available information that we believe to be reasonable. However, these assumptions may change or may be incorrect, and actual results may differ, perhaps significantly. Therefore, the pro forma financial information we have included in this prospectus may not necessarily be indicative of what our financial condition or results of operations will be in the future. For additional information about the basis of presentation of the financial information included in this prospectus, see “Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the historical combined condensed financial statements of Caesars Entertainment Outdoor, our predecessor, the balance sheet of VICI REIT and the combined statements of investments of real estate assets to be contributed to VICI REIT, and in each case, the related notes thereto, included elsewhere in this prospectus.

Our actual financial results may vary significantly from the financial projections filed with the Bankruptcy Court.

In connection with the Plan of Reorganization, the Debtors were required to file projected financial information with the Bankruptcy Court to demonstrate the feasibility of the Plan of Reorganization and the ability of the Debtors to continue operations upon emergence from bankruptcy. These projections were prepared for the specific purpose of satisfying statutory requirements in connection with confirmation of the Plan of Reorganization, not for purposes of this offering, and are neither included nor incorporated by reference in this prospectus and should not be relied upon in connection with the purchase of our common stock in this offering. At the time they were filed, the projections reflected numerous assumptions concerning anticipated future performance and market and economic conditions that were and remain beyond our and the Debtors’ control and that may not materialize. Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks. Our actual results will vary from those contemplated by the projections and the variations may be material.

We may be unable to achieve the expected benefits from operating as a company independent of Caesars.

We believe that as a company independent from Caesars, we will have the ability, subject to the Amended and Restated Right of First Refusal Agreement and the Lease Agreements, to pursue transactions with other gaming operators, to fund acquisitions with equity on significantly more favorable terms than those that would be available to Caesars, to diversify into different businesses in which Caesars, as a practical matter, could not diversify, and to pursue certain transactions that Caesars otherwise would be disadvantaged by or precluded from pursuing due to regulatory constraints. However, we may not be able to achieve some or all of the benefits from operating as a company independent from Caesars in a timely manner, if at all.

Some members of our management team may have limited experience operating as part of a REIT structure.

The requirements for qualifying as a REIT are highly technical and complex. We did not operate as a REIT prior to the Formation Date, and some members of our management team may have limited experience in

 

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complying with the income, asset, and other limitations imposed by the real estate investment provisions of the Code. Any failure to comply with those provisions in a timely manner could prevent us from qualifying as a REIT or could force us to pay unexpected taxes and penalties, which could materially harm our business, financial condition, liquidity, results of operations and prospects. In addition, there is no assurance that any past experience with the acquisition, development, and disposition of gaming facilities will be sufficient to enable us to successfully manage our portfolio of properties as required by our business plan or the REIT provisions of the Code.

We cannot be certain that the bankruptcy proceedings will not adversely affect our operations going forward.

Our properties operated in bankruptcy for over two years and we cannot assure you that having been subject to bankruptcy will not adversely affect our operations going forward. For example, we may be subject to claims that were not discharged in the bankruptcy proceedings. Substantially all, if not all, of the material claims against the Debtors that arose prior to the date of the bankruptcy filing were addressed during the bankruptcy proceedings. In addition, the Bankruptcy Code provides that the confirmation of a plan of reorganization discharges a debtor from substantially all debts arising prior to confirmation and certain debts arising afterwards. Circumstances in which claims and other obligations that arose prior to the bankruptcy filing were not discharged primarily relate to certain actions by governmental units under police power authority, where CEOC agreed to preserve a claimant’s claims, as well as, potentially, instances where a claimant had inadequate notice of the bankruptcy filing. If any such claims remain and can be asserted against us, the ultimate resolution of such claims and other obligations may have a material adverse effect on our results of operations and profitability.

Our separation from subsidiaries of Caesars could give rise to disputes or other unfavorable effects, which could have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects.

Disputes with third parties could arise out of our separation from subsidiaries of Caesars, and we could experience unfavorable reactions to the separation from employees, ratings agencies, regulators, or other interested parties. For example, The City Of Hammond, Indiana, The City of Hammond Department of Redevelopment, Department of Waterworks of The City Of Hammond, and Hammond Port (collectively, the “Hammond Entities”) filed an objection with the Bankruptcy Court in November 2017 to the assignment of the respective leases, licenses and contracts to which they are counterparties relating to Horseshoe Hammond property. The Objection alleges that given the prohibition terms of the various leases, licenses, contracts and the Hammond agreements, the Debtors had no authority or power to make the assignments to VICI and, at the present, the Hammond Entities do not consent and do object to the property assignments. These disputes and reactions of third parties could have a material adverse effect on our business, financial condition, liquidity results of operations and prospects. In addition, disputes between us and Caesars could arise in connection with any of the Lease Agreements, the Management and Lease Support Agreements, the Amended and Restated Right of First Refusal Agreement, the Call Right Agreements, the Put-Call Agreement, the Tax Matters Agreement or other agreements.

If our separation from CEOC, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. Federal income tax purposes, CEOC could be subject to significant tax liabilities and, in certain circumstances, we could be required to indemnify CEOC for material taxes pursuant to indemnification obligations under the Tax Matters Agreement.

The IRS issued a private letter ruling with respect to certain issues relevant to our separation from CEOC, including relating to the separation and certain related transactions as tax-free for U.S. Federal income tax purposes under certain provisions of the Code. The IRS ruling does not address certain requirements for tax-free treatment of the separation. CEOC received from its tax advisors a tax opinion substantially to the effect that, with respect to such requirements on which the IRS did not rule, such requirements should be satisfied. The IRS

 

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ruling and the tax opinion that CEOC received, relied on (among other things) certain representations, assumptions and undertakings, including those relating to the past and future conduct of our business, and the IRS ruling and the opinion would not be valid if such representations, assumptions and undertakings were incorrect in any material respect.

Notwithstanding the IRS ruling and the tax opinion, the IRS could determine the separation should be treated as a taxable transaction for U.S. Federal income tax purposes if it determines any of the representations, assumptions or undertakings that were included in the request for the IRS ruling are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.

If the reorganization fails to qualify for tax-free treatment, in general, CEOC would be subject to tax as if it had sold our assets to us in a taxable sale for their fair market value, and CEOC’s creditors who received shares of our common stock pursuant to the Plan of Reorganization would be subject to tax as if they had received a taxable distribution in respect of their claims equal to the fair market value of such shares.

Under the Tax Matters Agreement that we entered into with Caesars, we generally are required to indemnify Caesars against any tax resulting from the separation to the extent that such tax resulted from certain of our representations or undertakings being incorrect or violated. Our indemnification obligations to Caesars are not limited by any maximum amount. As a result, if we are required to indemnify Caesars or such other persons under the circumstances set forth in the Tax Matters Agreement, we may be subject to substantial liabilities.

We may not be able to engage in desirable strategic or capital-raising transactions following the spin-off. In addition, we could be liable for adverse tax consequences resulting from engaging in significant strategic or capital-raising transactions.

To preserve the tax-free treatment to CEOC of the spin-off, for the two-year period following the spin-off, we may be prohibited, except in specific circumstances, from: (1) entering into any transaction pursuant to which all or a portion of our stock would be acquired, whether by merger or otherwise, (2) issuing equity securities beyond certain thresholds, (3) repurchasing our common stock, (4) ceasing to actively conduct the business of operating VICI Golf, or (5) taking or failing to take any other action that prevents the spin-off and related transactions from being tax-free. These restrictions may limit our ability to pursue strategic transactions or engage in new business or other transactions that may maximize the value of our business.

Risks Related to our Status as a REIT

We may not qualify or maintain our qualification as a REIT.

We intend to elect and qualify to be taxed as a REIT for U.S. Federal income tax purposes commencing with our taxable year ending December 31, 2017, and expect to operate in a manner that will allow us to continue to be classified as such. Once an entity is qualified as a REIT, the Code generally requires that such entity distribute annually to its stockholders at least 90% of its REIT taxable income (with certain adjustments), determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it distributes annually less than 100% of its REIT taxable income, including capital gains. In addition, a REIT is required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. As a result, in order to avoid current entity level U.S. Federal income taxes, a substantial portion of our cash flow after operating expenses and debt service will be required to be distributed to our stockholders.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. Federal income tax on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our REIT taxable income. Any resulting corporate tax liability could be substantial and

 

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would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the market price of our common stock. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify as a REIT. As a result, the amount available for distribution to holders of equity securities that would otherwise receive dividends would be reduced for the year or years involved. Furthermore, the U.S. Federal income tax consequences of distributions and sales of our shares to certain of our stockholders could be adversely impacted if we were to fail to qualify as a REIT.

Qualification to be taxed as a REIT involves highly technical and complex provision of the Code, and violations of these provisions could jeopardize our REIT qualification.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT may depend in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. Federal income tax purposes.

The opinion we will receive regarding our status as a REIT does not guarantee our ability to qualify as a REIT.

We intend to operate in a manner that will allow us to qualify to be taxed as a REIT for U.S. Federal income tax purposes. We expect that we will receive an opinion of Kramer Levin Naftalis & Frankel LLP (“REIT Tax Counsel”) that, commencing with our taxable year ending December 31, 2017, we are organized in conformity with the requirements for qualification and taxation as a REIT under the U.S. Federal income tax laws and our proposed method of operations will enable us to satisfy the requirements for qualification and taxation as a REIT under the U.S. Federal income tax laws for our taxable year ending December 31, 2017 and subsequent taxable years. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of REIT Tax Counsel represents only the view of REIT Tax Counsel, based on its review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets and the sources of our income. The opinion is expressed as of the date of this offering. REIT Tax Counsel will have no obligation to advise us or the holders of shares of our common stock of any subsequent change in the matters stated, represented or assumed or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of REIT Tax Counsel and our qualification to be taxed as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by REIT Tax Counsel. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Any failure to qualify to be taxed as a REIT, or failure to remain to be qualified to be taxed as a REIT, would have a material and adverse effect on us.

We may in the future choose to pay dividends in the form of our own common stock, in which case stockholders may be required to pay income taxes in excess of the cash dividends they receive.

We may seek in the future to distribute taxable dividends that are payable in cash or our common stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. Federal income tax purposes as to which non-corporate stockholders will generally be eligible for a deduction equal to 20% of such distributions. As a result, stockholders receiving dividends in the form of common stock may be required to pay income taxes with respect to such dividends in excess of the cash dividends received, if any. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than

 

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the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. In addition, in such case, a U.S. stockholder could have a capital loss with respect to the common stock sold that could not be used to offset such dividend income. Moreover, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. Federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. Furthermore, such a taxable share dividend could be viewed as equivalent to a reduction in our cash distributions, and that factor, as well as the possibility that a significant number of our stockholders determine to sell our common stock in order to pay taxes owed on dividends, may put downward pressure on the market price of our common stock.

Changes to the U.S. Federal income tax laws, including the recent enactment of certain tax reform measures, could have a material and adverse effect on us.

U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be issued. Prospective investors are urged to consult their tax advisors regarding the effect of potential changes to the U.S. Federal tax laws on an investment in our common stock.

Recently enacted changes to the U.S. federal income tax laws could have a material and adverse effect on us. For example, certain changes in law pursuant to the Tax Cuts and Jobs Act could reduce the relative competitive advantage of operating as a REIT as compared with operating as a C corporation, including by:

 

    reducing the rate of tax applicable to individuals and C corporations, which could reduce the relative attractiveness of the generally single level of taxation on REIT distributions;

 

    permitting immediate expensing of capital expenditures, which could likewise reduce the relative attractiveness of the REIT taxation regime; and

 

    limiting the deductibility of interest expense, which could increase the distribution requirement of REITs (though such limitations under the tax bills currently under consideration should not affect REITs).

We could fail to qualify to be taxed as a REIT if income we receive from Caesars or its subsidiaries is not treated as qualifying income.

Under applicable provisions of the Code, we will not be treated as a REIT unless we satisfy various requirements, including requirements relating to the sources of our gross income. See “Material U.S. Federal Income Tax Considerations.” Rents received or accrued by us from Caesars or its subsidiaries will not be treated as qualifying rent for purposes of these requirements if the leases are not respected as true leases for U.S. federal income tax purposes and instead are treated as service contracts, joint ventures or some other type of arrangement. If some or all of our leases are not respected as true leases for U.S. Federal income tax purposes, we may fail to qualify to be taxed as a REIT. Furthermore, our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we may not obtain independent appraisals.

In addition, subject to certain exceptions, rents received or accrued by us from Caesars or its subsidiaries will not be treated as qualifying rent for purposes of these requirements if we or an actual or constructive owner of 10% or more of our stock actually or constructively owns 10% or more of the total combined voting power of all classes of Caesars stock entitled to vote or 10% or more of the total value of all classes of Caesars stock. Our charter provides for restrictions on ownership and transfer of our shares of stock, including restrictions on such ownership or transfer that would cause the rents received or accrued by us from Caesars or its subsidiaries to be

 

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treated as non-qualifying rent for purposes of the REIT gross income requirements. The provisions of our charter that restrict the ownership and transfer of our stock are described in “Description of Capital Stock—Restrictions on Ownership and Transfer.” Nevertheless, there can be no assurance that such restrictions will be effective in ensuring that rents received or accrued by us from Caesars or its subsidiaries will not be treated as qualifying rent for purposes of REIT qualification requirements.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually to our stockholders at least 90% of our REIT taxable income (with certain adjustments), determined without regard to the dividends paid deduction and excluding any net capital gains, in order for us to qualify as a REIT so that U.S. Federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. Federal corporate income tax on any undistributed portion of such taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under U.S. Federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code and to avoid or otherwise minimize paying entity level Federal or excise tax (other than at any TRS of ours). We may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP. In particular, during the first several years of the leases, under the terms of the Lease Agreements, rental income will be allocated for tax purposes generally in an amount greater than cash rents. Further, we may generate taxable income greater than our cash flow from operations after operating expenses and debt service as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. In order to avoid or otherwise minimize current entity level U.S. Federal income taxes, we will generally be required to distribute sufficient cash flow after operating expenses and debt service payments to satisfy the REIT distribution requirements. While we intend to make distributions to our stockholders to comply with the REIT requirements of the Code, we may not have sufficient liquidity to meet the REIT distribution requirements. If our cash flow is insufficient to satisfy the REIT distribution requirements, we could be required to raise capital on unfavorable terms, sell assets at disadvantageous prices, distribute amounts that would otherwise be invested in future acquisitions or issue dividends in the form of shares of our common stock to make distributions sufficient to enable us to pay out enough of our REIT taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or change the value of our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the market price of our common stock.

Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. Federal, state and local taxes on our income and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. For example, in order to meet the REIT qualification requirements, we currently hold and expect in the future to hold some of our assets and conduct certain of our activities through one or more taxable REIT subsidiaries or other subsidiary corporations that will be subject to Federal, state, and local corporate-level income taxes as regular C corporations (i.e., corporations generally subject to corporate-level income tax under Subchapter C of Chapter 1 the Code). In addition, we may incur a 100% excise tax on transactions with a taxable REIT subsidiary if they are not conducted on an arm’s length basis. Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to liquidate or forgo otherwise attractive opportunities.

To qualify as a REIT, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and “real estate assets” (as defined in the Code),

 

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including certain mortgage loans and securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a taxable REIT subsidiary) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a taxable REIT subsidiary) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries (20% for taxable years beginning after December 31, 2017). If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. In addition to the asset tests set forth above, to qualify as a REIT we must continually satisfy tests concerning, among other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

We may be subject to built-in gains tax on the disposition of certain of our properties.

If we acquire certain properties in tax-deferred transactions, which properties were held by one or more C corporations before they were held by us, we may be subject to a built-in gain tax on future disposition of such properties. This is the case with respect to all or substantially all of the properties acquired from CEOC pursuant to the Formation Transactions. If we dispose of any such properties during the five-year period following acquisition of the properties from the respective C corporation (i.e., during the five-year period following ownership of such properties by a REIT), we will be subject to U.S. Federal income tax (and applicable state and local taxes) at the highest corporate tax rates on any gain recognized from the disposition of such properties to the extent of the excess of the fair market value of the properties on the date that they were contributed to or acquired by us in a tax-deferred transaction over the adjusted tax basis of such properties on such date, which are referred to as built-in gains. Similarly, if we recognize certain other income considered to be built-in income during the five-year period following the property acquisitions described above, we could be subject to U.S. Federal tax under the built-in gains tax rules. We would be subject to this corporate-level tax liability (without the benefit of the deduction for dividends paid) even if we qualify and maintain our status as a REIT. Any recognized built-in gain will retain its character as ordinary income or capital gain and will be taken into account in determining REIT taxable income and the REIT distribution requirements. Any tax on the recognized built-in gain will reduce REIT taxable income. We may choose to forego otherwise attractive opportunities to sell assets in a taxable transaction during the five-year built-in gain recognition period in order to avoid this built-in gain tax. However, there can be no assurance that such a taxable transaction will not occur. The amount of any such built-in gain tax could be material and the resulting tax liability could have a negative effect on our cash flow and limit our ability to pay distributions required to qualify and maintain our status as a REIT.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Income from certain hedging transactions that we may enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets or from transactions to manage risk of currency fluctuations with respect to any item of income or gain that satisfy the REIT gross income tests (including gain from the termination of such a transaction) does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs, provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of both of the gross income tests.

 

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As a result of these rules, we may be required to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. This could increase the cost of our hedging activities because the taxable REIT subsidiary may be subject to tax on gains or expose us to greater risks associated with changes in interest rates that we would otherwise want to bear. In addition, losses in the taxable REIT subsidiary will generally not provide any tax benefit, except that such losses could theoretically be carried back or forward against past or future taxable income of the taxable REIT subsidiary.

We may pay a purging distribution, if any, in common stock and cash.

In order to qualify as a REIT, we must distribute any “earnings and profits,” as defined in the Code, that are allocated from CEOC to us in connection with the Formation Transactions by the end of the first taxable year in which we elect REIT status. Based on analysis of CEOC’s earnings and profits, we currently do not believe that any earnings and profits were allocated to us in connection with the Formation Transactions and therefore do not currently expect to be required to make a purging distribution. If notwithstanding this expectation we are required to make a purging distribution, we may pay the purging distribution to our stockholders in a combination of cash and shares of our common stock. Each of our stockholders will be permitted to elect to receive the stockholder’s entire entitlement under the purging distribution in either cash or shares of our common stock, subject to a cash limitation. If our stockholders elect to receive a portion of cash in excess of the cash limitation, each such electing stockholder will receive a pro rata portion of cash corresponding to the stockholder’s respective entitlement under the purging distribution declaration. The IRS issued a private letter ruling with respect to certain issues relevant to the separation from Caesars providing generally that, subject to the terms and conditions contained therein, the amount of any shares of our common stock received by any of our stockholders as part of a purging distribution, if any, will be considered to equal the amount of cash that could have been received instead. Although we may generally rely upon the ruling, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or facts outside the scope of the ruling. Furthermore, the IRS has issued a revenue procedure that provides that, so long as a REIT complied with certain provisions therein, certain distributions that are paid partly in cash and partly in stock will be treated as taxable dividends that would satisfy the REIT distribution requirements and qualify for the dividends paid deduction for U.S. Federal income tax purposes. In a purging distribution, if any, a stockholder of our common stock will be required to report dividend income equal to the amount of cash and common stock received as a result of the purging distribution even though we may distribute no cash or only nominal amounts of cash to such stockholder.

Risks Related to Our Organizational Structure

Our rights and the rights of our stockholders to take action against our directors and officers are limited.

The MGCL provides that a director has no liability in any action based on an act of the director if he or she has acted in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, our charter limits the liability of our directors and officers to our company and our stockholders for money damages, to the maximum extent permitted by Maryland law. Under Maryland law, our present directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from:

 

    actual receipt of an improper benefit or profit in money, property or services; or

 

    a final judgment based upon a finding that his or her action or failure to act was the result of active and deliberate dishonesty by the director or officer and was material to the cause of action adjudicated.

Our charter provides that we have the power to obligate ourselves, and our amended and restated bylaws obligate us, to indemnify our directors and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent

 

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permitted by Maryland law. In addition, we have entered into indemnification agreements with our directors and executive officers that provide for indemnification and advance expenses to the maximum extent permitted by Maryland law. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law.

Our board of directors may change our major corporate policies without stockholder approval and those changes may materially and adversely affect us.

Our board of directors will determine and may eliminate or otherwise change our major corporate policies, including our acquisition, investment, financing, growth, operations and distribution policies. While our stockholders have the power to elect or remove directors, changes in our major corporate policies may be made by our board of directors without stockholder approval and those changes could adversely affect our business, financial condition, liquidity, results of operations and prospects, the market price of our common stock and our ability to make distributions to our stockholders and to satisfy our debt service requirements.

The ability of our board of directors to revoke or otherwise terminate our REIT qualification, with stockholder approval, may cause adverse consequences to our stockholders.

Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, only with the affirmative vote of stockholders entitled to cast a majority of all votes entitled to be cast on the matter, if the board determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to be a REIT, we would become subject to Federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.

Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control.

Our charter and bylaws contain provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including the following:

Our charter contains restrictions on the ownership and transfer of our stock.

In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals (or certain other persons) at any time during the last half of each taxable year (“closely held”). Subject to certain exceptions, our charter prohibits any stockholder from owning beneficially or constructively, with respect to any class or series of our capital stock, more than 9.8% (in value or by number of shares, whichever is more restrictive) of the aggregate of the outstanding shares of such class or series of our capital stock.

The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of 9.8% or less of the outstanding shares of a class or series of our stock by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits.

Among other restrictions on ownership and transfer of shares, our charter also prohibits any person from owning shares of our stock that would result in our being “closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void.

 

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Our charter provides that our board may grant exceptions to the 9.8% ownership limit, subject in each case to certain initial and ongoing conditions designed to protect our status as a REIT. These ownership limits may prevent a third-party from acquiring control of us if our board of directors does not grant an exemption from the ownership limits, even if our stockholders believe the change in control is in their best interests. An exemption from the 9.8% ownership limit was granted to certain stockholders, and our board may in the future provide exceptions to the ownership limit for other stockholders, subject to certain initial and ongoing conditions designed to protect our status as a REIT.

Our board of directors has the power to cause us to issue and authorize additional shares of our capital stock without stockholder approval.

Our charter authorizes us to issue authorized but unissued shares of common or preferred stock in addition to the shares of common stock issued and outstanding as of the date of this prospectus. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interests of our stockholders. See “Description of Capital Stock—Power to Reclassify and Issue Stock.”

Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.

Certain provisions of the MGCL may have the effect of inhibiting a third party from acquiring us or of impeding a change of control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then prevailing market price of such shares, including:

 

    “business combination” provisions that, subject to limitations, (a) prohibit certain business combinations between an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then outstanding shares of our common stock) or an affiliate of any interested stockholder and us for five years after the most recent date on which the stockholder becomes an interested stockholder, and (b) thereafter impose two super-majority stockholder voting requirements on these combinations; and

 

    “control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights with respect to “control shares” except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all votes entitled to be cast by the acquirer of control shares, and by any of our officers and employees who are also our directors.

Our charter provides that, notwithstanding any other provision of our charter or our bylaws, the Maryland Business Combination Act (Title 3, Subtitle 6 of the MGCL) does not apply to any business combination between us and any interested stockholder or any affiliate of any interested stockholder of ours and that we expressly elect not to be governed by the provisions of Section 3-602 of the MGCL in whole or in part. Any amendment to such provision of our charter must be approved by the affirmative vote of stockholders entitled to cast a majority of all votes entitled to be cast on the matter. Pursuant to the MGCL, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of

 

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shares of our stock. This provision of our bylaws may not be altered, amended or repealed except by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter. There can be no assurance that this exemption contained in our bylaws will not be amended or eliminated at any time in the future.

Additionally, provisions of Title 3, Subtitle 8 of the MGCL permit a Maryland corporation such as the Company, by action of its board of directors and without stockholder approval and regardless of what is provided in the charter or bylaws, to elect to avail itself of certain takeover defenses, such as a classified board, unless the charter or a resolution adopted by the board of directors prohibits such election. Our charter provides that we are prohibited from making any such election unless first approved by our stockholders by the affirmative vote of a majority of all votes entitled to be cast on the matter. See “Description of Capital Stock—Certain Provisions of Maryland Law and Our Charter and Bylaws—Business Combinations,” “—Control Share Acquisitions” and “—Subtitle 8.”

A small number of our stockholders could significantly influence our business and affairs.

As of the date of this prospectus, a few stockholders own substantial amounts of our outstanding voting stock. Large holders may be able to affect matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

Risks Related to Our Common Stock

The cash available for distribution to stockholders may not be sufficient to pay dividends at expected levels, nor can we assure you of our ability to make distributions in the future. We may use borrowed funds to make distributions.

If cash available for distribution is less than the amount necessary to make cash distributions, our inability to make the expected distributions could result in a decrease in the market price of our common stock. All distributions will be made at the discretion of our board of directors and will depend upon various factors, including, but not limited to: our historical and projected financial condition, cash flows, results of operations and REIT taxable income, limitations contained in financing instruments, debt service requirements, operating cash inflows and outflows, including capital expenditures and acquisitions, limitations on our ability to use cash generated in one or more taxable REIT subsidiaries, if any, to fund distributions and applicable law. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated earnings and profits in the future, such distributions would generally be considered a return of capital for Federal income tax purposes to the extent of the holder’s adjusted tax basis in their shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in our common stock. To the extent that such distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

For purposes of satisfying the minimum distribution requirement to qualify for and maintain REIT status, our REIT taxable income will be calculated without reference to our cash flow. Consequently, under certain circumstances, we may not have available cash to make our required distributions, and we may need to raise additional equity or debt in order to fund our intended distributions, or we may distribute a portion of our distributions in the form of our common stock or debt instruments, which could result in significant stockholder dilution or higher leverage. While the IRS has issued a revenue procedure indicating that certain distributions that are made partly in cash and partly in stock will be treated as taxable dividends that would satisfy that REIT annual distribution requirement and qualify for the dividends paid deduction for U.S. Federal income tax purposes, no assurance can be provided that we will be able to satisfy the requirements of the revenue procedure. Therefore it is unclear whether and to what extent we will be able to make taxable dividends payable in-kind. In

 

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addition, to the extent we were to make distributions that include our common stock or debt instruments, a stockholder of ours will be required to report dividend income as a result of such distributions even though we distributed no cash or only nominal amounts of cash to such stockholder.

VICI REIT is a holding company with no direct operations and will rely on distributions received from the Operating Partnership to make distributions to its stockholders.

VICI REIT is a holding company and conducts its operations through subsidiaries, including the Operating Partnership and VICI Golf. VICI REIT does not have, apart from the units that it owns in the Operating Partnership and VICI Golf, any independent operations. As a result, VICI REIT relies on distributions from its Operating Partnership to make any distributions to its stockholders it might declare on its common stock and to meet any of its obligations, including any tax liability on taxable income allocated to it from the Operating Partnership (which might not be able to make distributions to VICI REIT equal to the tax on such allocated taxable income). In turn, the ability of subsidiaries of the Operating Partnership to make distributions to the Operating Partnership, and therefore, the ability of the Operating Partnership to make distributions to VICI REIT, depends on the operating results of these subsidiaries and the Operating Partnership and on the terms of any financing arrangements they have entered into. In addition, because VICI REIT is a holding company, claims of common stockholders of VICI REIT are structurally subordinated to all existing and future liabilities and other obligations (whether or not for borrowed money) and any preferred equity of the Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, VICI REIT’s assets and those of the Operating Partnership and its subsidiaries will be available to satisfy the claims of VICI REIT common stockholders only after all of VICI REIT’s, the Operating Partnership’s and its subsidiaries’ liabilities and other obligations and any preferred equity of any of them have been paid in full.

The Operating Partnership may, in connection with its acquisition of additional properties or otherwise, issue additional common units or preferred units to third parties. Such issuances would reduce VICI REIT’s ownership in the Operating Partnership. Because stockholders of VICI REIT do not directly own common units or preferred units of the Operating Partnership, they do not have any voting rights with respect to any such issuances or other partnership level activities of the Operating Partnership.

Conflicts of interest could arise between the interests of our stockholders and the interests of holders of Operating Partnership units which may impede business decisions that could benefit our stockholders.

Conflicts of interest could arise as a result of the relationships between us, on the one hand, and our Operating Partnership or any limited partner thereof, if any, on the other. Our directors and officers have duties to us under applicable Maryland law. At the same time, we, as general partner of our Operating Partnership, have fiduciary duties and obligations to our Operating Partnership and its limited partners under Delaware law and the partnership agreement of our Operating Partnership in connection with the management of our Operating Partnership. Our duties as general partner to our Operating Partnership and its limited partners may come into conflict with the duties of our directors and officers to VICI REIT. These conflicts may be resolved in a manner that is not in the best interests of our stockholders.

Risks Related to this Offering

There is currently no public market for our shares. An active, liquid and orderly trading market for our common stock may not develop or be sustained, and you may be unable to sell your shares at a price above the initial public offering price or at all.

Prior to this offering, our common stock was quoted on the OTC Markets Group, Inc.’s “Grey Market” under the symbol “VICI.” In connection with this offering, our common stock has been approved for listing on the NYSE under the symbol “VICI.” However, we cannot assure you that an active, liquid and orderly trading market for shares of our common stock will develop after this offering or, if one develops, be sustained. Active,

 

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liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. In the absence of such a market, you may be unable to liquidate an investment in shares. The initial public offering price of our common stock will be determined by negotiations between us and the underwriters. The initial public offering price will not necessarily bear any relationship to our book value, assets or financial condition or any other established criteria of value and may not be indicative of the market price for our common stock after this offering. The price at which our common stock trade after the completion of this offering may be lower than the price at which the underwriters sell them in this offering.

The market price and trading volume of shares of our common stock may be volatile following this offering.

The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines, you may be unable to resell your shares at or above the public offering price or at all. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Some of the factors, many of which are beyond our control, that could negatively affect the market price of our common stock or result in fluctuations in the price or trading volume of our common stock include:

 

    actual or anticipated variations in our quarterly results of operations or distributions;

 

    changes in our earnings, FFO, AFFO or Adjusted EBITDA estimates;

 

    publication of research reports about us, Caesars or the real estate or gaming industries;

 

    adverse developments involving Caesars;

 

    changes in market interest rates that may cause purchasers of our shares to demand a different yield;

 

    changes in market valuations of similar companies;

 

    market reaction to any additional capital we raise in the future;

 

    additions or departures of key personnel;

 

    actions by institutional stockholders;

 

    speculation in the press or investment community about our company or industry or the economy in general;

 

    the occurrence of any of the other risk factors presented in this prospectus; and

 

    general market and economic conditions.

An increase in market interest rates could cause potential investors to seek higher returns and therefore reduce demand for our common stock and result in a decline in our share price.

One of the factors that may influence the price of shares of our common stock is the return on our shares (i.e., the amount of distributions as a percentage of the price of shares of our common stock) relative to market interest rates. An increase in market interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a return which we may be unable or choose not to provide. Higher interest rates would likely increase our borrowing costs and potentially decrease the cash available for distribution. Thus, higher market interest rates could cause the market price of shares of our common stock to decline.

Future offerings of debt, which would be senior to our shares upon liquidation, and/or preferred equity securities, which may be senior to our shares for purposes of distributions or upon liquidation, could adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes

 

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and preferred shares. If a liquidation event were to occur, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our shares. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of shares of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred shares, if issued, could have a preference on liquidating distributions or a preference on distribution payments that could limit our ability to make a distribution to the holders of shares of our common stock. Since our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of shares of our common stock and diluting their shareholdings in us.

The number of shares available for future sale could adversely affect the market price of shares of our common stock.

We cannot predict whether future issuances of our shares or the availability of shares of our common stock for resale in the open market will decrease the market price per share of shares of our common stock. Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could adversely affect the market price of shares of our common stock. In addition, we and all of our executive officers and directors have agreed, and certain of our stockholders have agreed with respect to an aggregate of approximately 98.0 million shares of our common stock, with the underwriters not to offer, pledge, sell, contract to sell or otherwise transfer or dispose of any shares or securities convertible into or exercisable or exchangeable for shares of our common stock for a period of 180 days, after the date of this prospectus; however, these lock-up agreements are subject to numerous exceptions and Morgan Stanley & Co. LLC, in its sole discretion, may waive these lock-up provisions without notice. If any of our stockholders cause, or there is a perception that they may cause, a large number of their shares to be sold in the public market, the sales could reduce the trading price of shares of our common stock and could impede our ability to raise future capital. In addition, the exercise of the underwriters’ overallotment option or other future issuances of our shares would be dilutive to existing stockholders.

Our earnings and cash distributions could affect the market price of shares of our common stock.

Our common stock may trade at prices that are higher or lower than the net asset value per share. To the extent that we retain operating cash flow for investment purposes, working capital reserves or other purposes rather than distributing the cash flows to stockholders, these retained funds, while increasing the value of our underlying assets, may negatively impact the market price of shares of our common stock. Our failure to meet market expectations with regard to future earnings and cash distributions could adversely affect the market price of shares of our common stock.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this prospectus, including statements such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions, constitute “forward-looking statements” within the meaning of the federal securities law. Forward-looking statements are based on our current plans, expectations and projections about future events. We caution you therefore against relying on any of these forward-looking statements. They give our expectations about the future and are not guarantees. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed in or implied by such forward-looking statements.

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results, performance and achievements could differ materially from those expressed in or by the forward-looking statements and may be affected by a variety of risks and other factors, including, among others:

 

    our dependence on subsidiaries of Caesars as tenant of all of our properties and Caesars or CRC as guarantor of the lease payments and the consequences any material adverse effect on their business could have on us;

 

    our dependence on the gaming industry;

 

    our ability to pursue our business and growth strategies may be limited by our substantial debt service requirements and by the requirement that we distribute 90% of our REIT taxable income in order to qualify for taxation as a REIT and that we distribute 100% of our REIT taxable income in order to avoid current entity level U.S. Federal income taxes;

 

    the impact of extensive regulation from gaming and other regulatory authorities;

 

    the ability of our tenants to obtain and maintain regulatory approvals in connection with the operation of our properties;

 

    the possibility that the tenants may choose not to renew the Lease Agreements following the initial or subsequent terms of the leases;

 

    restrictions on our ability to sell our properties subject to the Lease Agreements;

 

    Caesars’ historical results may not be a reliable indicator of its future results;

 

    our substantial amount of indebtedness and ability to service and refinance such indebtedness;

 

    our historical and pro forma financial information may not be reliable indicators of our future results of operations and financial condition;

 

    our inability to achieve the expected benefits from operating as a company independent of Caesars;

 

    limits on our operational and financial flexibility imposed by our debt agreements;

 

    the possibility our separation from CEOC fails to qualify as a tax-free spin-off, which could subject us to significant tax liabilities;

 

    the impact of changes to the U.S. Federal income tax laws;

 

    the possibility of foreclosure on our properties if we are unable to meet required debt service payments;

 

    the impact of a rise in interest rates on us;

 

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    our inability to successfully pursue investments in, and acquisitions or development of, additional properties;

 

    the impact of natural disasters or terrorism on our properties;

 

    the loss of the services of key personnel;

 

    the inability to attract, retain and motivate employees;

 

    the costs and liabilities associated with environmental compliance;

 

    failure to establish and maintain an effective system of integrated internal controls;

 

    the costs of operating as a public company;

 

    our inability to operate as a stand-alone company ;

 

    our inability to qualify or maintain our qualification for taxation as a REIT;

 

    our reliance on distributions received from our Operating Partnership to make distributions to our stockholders due to our being a holding company;

 

    our management team’s limited experience operating as a company that intends to qualify for taxation as a REIT;

 

    competition for acquisition opportunities from other REITs and gaming companies that may have greater resources and access to capital and a lower cost of capital than us;

 

    uncertainties regarding future actions that may be taken by MGP in furtherance of its unsolicited proposal; and

 

    additional factors discussed herein under “Risk Factors.”

Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results, performance and achievements will differ materially from the expectations expressed in or referenced by this prospectus will increase with the passage of time. Except as otherwise required by the Federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this prospectus, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this prospectus, the inclusion of such forward-looking statements should not be regarded as a representation by us, the underwriters or any other person that the objectives and strategies set forth in this prospectus will be achieved.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $1.14 billion, or approximately $1.31 billion if the underwriters exercise their overallotment option in full, after deducting the underwriting discounts and commissions related to this offering and estimated offering expenses. We will contribute the net proceeds from this offering to the Operating Partnership, which will use the net proceeds to: (a) pay down $300.0 million of the indebtedness outstanding under the Revolving Credit Facility; (b) redeem $268.4 million in aggregate principal amount of the Second Lien Notes at a redemption price of 108% plus accrued and unpaid interest to the date of redemption; (c) repay $100.0 million of the Term Loan B Facility; and (d) pay fees and expenses related to this offering; the remainder of the net proceeds will be used for general business purposes. Any proceeds received in connection with the exercise by the underwriters of their overallotment option will be used by the Operating Partnership for general business purposes.

The $766.9 million in aggregate principal amount of 8.0% Second Lien Notes bear interest at an annual rate of 8.0% per annum and mature on October 15, 2023. We expect to redeem the $268.4 million in aggregate principal amount of the Second Lien Notes on or about February 21, 2018. The Second Lien Notes were issued in October 2017 to certain creditors of CEOC. As of January 1, 2018, $2,200.0 million of indebtedness was outstanding under the Term Loan B Facility and $300.0 million of indebtedness was outstanding under the Revolving Credit Facility. The Term Loan B Facility matures on December 22, 2024 or the date that is three months prior to the maturity date of the Second Lien Notes, whichever is earlier (or if the maturity is extended pursuant to the terms of the agreement, such extended maturity date as determined pursuant thereto), and the Revolving Credit Facility matures on December 22, 2022. Borrowings under the Term Loan B Facility and the Revolving Credit Facility initially bear interest at LIBOR plus 2.25% (approximately 3.76% as of January 1, 2018), provided that following completion of this offering, the interest rate will be LIBOR plus 2.00%. The Term Loan B Facility and the Revolving Credit Facility were entered into in December 2017, and we used the proceeds from the Term Loan B Facility and drawings under the Revolving Credit Facility to refinance a portion of our outstanding long-term debt.

Certain of the underwriters and/or their respective affiliates own a portion of the Second Lien Notes for their own account and/or for the accounts of customers, and therefore will receive a portion of the net proceeds of this offering. In addition, certain of the underwriters and/or their respective affiliates are acting as agents, arrangers and/or lenders under the Term Loan B Facility and the Revolving Credit Facility, and therefore will receive an additional portion of the net proceeds of this offering. Please read “Underwriting—Other Relationships.”

 

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MARKET PRICES

Our common stock is quoted on the OTC Markets Group, Inc.’s “Grey Market” under the symbol “VICI.” These quotations are not considered particularly relevant in determining the initial public offering price because there has historically been low volume resulting in a relative illiquid trading market. The following table sets forth the per share high and low closing prices for our common stock as quoted on the OTC Market for the period presented.

 

     Share Price  
     Low      High  

2018

     

January 1, 2018 to January 31, 2018

   $ 19.98      $ 22.99  

2017

     

October 18, 2017 to December 31, 2017

   $ 18.00      $ 21.00  

As of January 19, 2018, the closing price of our common stock as reported on the OTC U.S. market was $20.75 per share. As of January 19, 2018, there were approximately 216 stockholders of record of our common stock, not including beneficial owners of shares registered in nominee or street name.

In connection with this offering, our common stock has been approved for listing on the NYSE, under the symbol “VICI”.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2017:

 

    on a historical basis;

 

    on a pro forma basis to give effect to the adjustments described in “Selected Historical and Pro Forma Financial Data—Unaudited Pro Forma Combined Condensed Financial Information,” and

 

    on a pro forma as adjusted basis to give further effect for the issuance of 60,500,000 shares of our common stock in this offering, after deducting the underwriting discounts and commissions related to this offering, estimated offering expenses and the use of proceeds from the offering as described herein in “Use of Proceeds.”

This table should be read in conjunction with “Use of Proceeds,” “Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical combined condensed financial statements of Caesars Entertainment Outdoor, our predecessor, our balance sheet, the combined statements of investments of real estate assets to be contributed to VICI REIT and our pro forma combined condensed financial statements, and in each case, the related notes thereto, included elsewhere in this prospectus.

The pro forma information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial offering price and other terms of this offering determined at pricing.

 

     As of September 30, 2017  
     Historical      Pro Forma     Pro Forma As
Adjusted
 
     (in thousands, except per share amounts)  

Cash and cash equivalents

   $         —      $ 11,555     $ 457,592  
  

 

 

    

 

 

   

 

 

 

Debt:(1)

       

Term Loan B Facility

            2,200,000       2,100,000  

Revolving Credit Facility(2)

            300,000        

Second Lien Notes

            766,900       498,485  

CPLV CMBS Debt

            1,550,000       1,550,000  

Debt issuance costs

            (30,897     (30,897
  

 

 

    

 

 

   

 

 

 
            4,786,003       4,117,588  
  

 

 

    

 

 

   

 

 

 

Total debt, net

            4,774,448       3,659,996  
  

 

 

    

 

 

   

 

 

 

Equity:

       

Preferred stock, $0.01 par value, 50,000,000 shares authorized and no shares to be issued and outstanding on a pro forma as adjusted basis(3)

                   

Common stock, $0.01 par value, 700,000,000 shares authorized and 300,278,938 shares issued and outstanding on a pro forma basis and 360,778,938 shares issued and outstanding on a pro forma as adjusted basis

            3,003       3,608  

Additional paid-in capital

            4,588,679       5,702,526  
  

 

 

    

 

 

   

 

 

 

Total equity

            4,591,682       5,706,134  
  

 

 

    

 

 

   

 

 

 

Total capitalization

   $      $ 9,366,130     $ 9,366,130  
  

 

 

    

 

 

   

 

 

 

 

(1)

On December 22, 2017, in connection with the acquisition of Harrah’s Las Vegas and the entry into of the Term Loan B Facility and the Revolving Credit Facility, we repaid in full the Prior Term Loans and we

 

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  caused VICI PropCo to purchase all of the then outstanding Prior CPLV Mezzanine Debt from the originating mezzanine lenders (such that VICI PropCo is now the holder of 100% of the outstanding Prior CPLV Mezzanine Debt). In addition, in December 2017, we repaid in full all of the then outstanding Prior First Lien Notes. We will use $268.4 million and $100.0 million of the proceeds from this offering to redeem a portion of the Second Lien Notes and repay a portion of the Term B Loan Facility, respectively.
(2) As of January 16, 2018, we had approximately $300.0 million in borrowings outstanding under our Revolving Credit Facility. On December 22, 2017, we borrowed $300.0 million under our Revolving Credit Facility in connection with the closing of the acquisition of Harrah’s Las Vegas and the concurrent refinancing of certain of our long-term debt. We will use $300.0 million of the proceeds from this offering to pay down $300.0 million of the Revolving Credit Facility.
(3) Of the 50,000,000 shares of preferred stock, $0.01 par value, authorized, 12,000,000 shares are classified as Series A preferred stock, all of which were issued on the Formation Date and automatically converted on November 6, 2017 in accordance with the terms of the Series A preferred stock into 51,433,692 shares of Company common stock. Accordingly, none of the authorized shares of Series A preferred stock are currently issued or outstanding.

 

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DISTRIBUTION POLICY

We intend to make regular quarterly distributions to holders of shares of our common stock. We expect our quarterly distribution rate to be $0.2625 per share. On an annualized basis, this would be $1.05 per share, or an annual distribution rate of approximately 5.25%, at the initial public offering price. The actual distributions paid to shareholders with respect to the period commencing upon the completion of this offering and ending on March 31, 2018 will be pro-rated, calculated from the closing of this offering through March 31, 2018. For the twelve months ending on September 30, 2018, we expect to make distributions in cash in an amount equal to approximately 75.1% of cash available for distribution.

Federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income (with certain adjustments), determined without regard to the dividends paid deduction and excluding any net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income, determined without regard to the dividends paid deduction and including any net capital gains. In addition, a REIT will be required to pay a 4% nondeductible excise tax on the amount, if any, by which the distributions it makes in a calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. For more information, see “Material U.S. Federal Income Tax Considerations.”

We intend to make distributions to our stockholders to comply with the REIT requirements of the Code and to avoid or otherwise minimize paying entity level Federal or excise tax (other than at any TRS of ours). We may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP. In particular, during the first several years of the leases, under the terms of the Lease Agreements, rental income will be allocated for tax purposes generally in an amount greater than cash rents. Further, we may generate REIT taxable income greater than our cash flow from operations after operating expenses and debt service as a result of differences in timing between the recognition of REIT taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments.

In order to avoid or otherwise minimize current entity level U.S. Federal income taxes, we will generally be required to distribute sufficient cash flow after operating expenses and debt service payments to satisfy the REIT distribution requirements. We anticipate that our estimated cash available for distribution will be sufficient to enable us to meet the annual distribution requirements applicable to REITs and to avoid or minimize the imposition of corporate and excise taxes. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements or to avoid or minimize the imposition of tax, and we may need to raise capital to make certain distributions and/or make a portion of our distributions with shares of our common stock. The IRS issued a private letter ruling with respect to certain issues relevant to our separation from Caesars providing generally that, subject to the terms and conditions contained therein, the amount of any shares of our common stock received by any of our stockholders as part of a distribution will be considered to equal the amount of cash that could have been received instead. Although we may generally rely upon the ruling, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or facts outside the scope of the ruling. Furthermore, the IRS has issued a revenue procedure that provides that, so long as a REIT complied with certain provisions therein, certain distributions that are paid partly in cash and partly in stock will be treated as taxable dividends that would satisfy the REIT distribution requirements and qualify for the dividends paid deduction for U.S. Federal income tax purposes. In a distribution that consists in part of shares of our common stock, a stockholder of our common stock will be required to report dividend income equal to the amount of cash and common stock received as a result of the distribution even though we may distribute no cash or only nominal amounts of cash to such stockholder. For more information, see “Material U.S. Federal Income Tax Considerations—Annual Distribution Requirements.” We currently believe that we will have sufficient available cash to pay our required distribution for 2018 in cash but there can be no assurance that this will be the case.

 

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All distributions will be made by us at the discretion of our board of directors and will depend on our historical and projected financial condition, cash flows, results of operations and REIT taxable income, our capital requirements, financing covenants (which are expected to include limits on distributions by us), applicable law and other factors as our board of directors deems relevant. Our board of directors has not yet determined when any distributions will be declared or paid.

We presently anticipate that acquisitions will be financed through borrowings under our existing debt agreements, other debt financings or the issuance of equity securities. To the extent that those sources of funds are insufficient to meet all such cash needs, or the cost of such financings exceeds the cash flow generated by the acquired properties for any period, cash available for distribution could be reduced. In that event, we may also borrow funds, liquidate or sell a portion of our properties, issue equity securities or find another source of funds in order to make our required distributions.

We anticipate that our distributions generally will be taxable to our stockholders as ordinary income as to which non-corporate stockholders will generally be eligible for a deduction equal to 20% of such distributions, although a portion of the distributions may be designated by us as qualified dividend income or a capital gain dividend or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For a more complete discussion of the U.S. federal income tax treatment of distributions to our shareholders, See “Material U.S. Federal Income Tax Considerations—Taxation of Shareholders—Taxation of Taxable U.S. Shareholders.”

We have included below our estimated cash available for distribution for the twelve months ending September 30, 2018. We have presented estimated cash available for distribution for the twelve months ending September 30, 2018, because we intend to report this data on a calendar year basis after the conclusion of this offering. Our estimated cash available for distribution is a forward-looking statement and reflects our judgment as of the date of this prospectus of the conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2018. It should be read together with the historical consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We believe that we have a reasonable basis for these estimates and that our actual results of operations will approximate those reflected in our estimated cash available for distribution, but we can give no assurance that our estimated results will be achieved. The assumptions underlying our estimated cash available for distribution are inherently uncertain and, although we consider them reasonable as of the date of this prospectus, they are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from estimated results, including, among others, the risks and uncertainties described in “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they occur, could cause actual results of operations to vary significantly from those presented below. Accordingly, there can be no assurance that our estimated cash available for distribution will be indicative of our future performance or that actual results will not differ materially from those presented in our estimated cash available for distribution. If our estimated results are not achieved, we may not be able to make a regular quarterly distribution at our initial distribution rate or at all. Inclusion of our estimated cash available for distribution in this prospectus should not be regarded as a representation by us, the underwriters or any other person that the results contained in our estimated cash available for distribution will be achieved. Therefore, you are cautioned not to put undue reliance on this information.

The accompanying table was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to our estimated cash available for distribution, nor have they expressed any opinion or any other form of assurance on our estimated cash available for distribution or its achievability, and our

 

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independent auditors assume no responsibility for, and disclaim any association with, our estimated cash available for distribution.

We do not undertake any obligation to release publicly any revisions or updates that we may make to our estimated cash available for distribution or the assumptions used to prepare our estimated cash available for distribution to reflect events or circumstances after the date of this prospectus other than as required by law.

The following table describes our pro forma net income for the twelve months ended December 31, 2016, and the adjustments we have made to calculate our estimated cash available for distribution for the twelve months ending on September 30, 2018, as adjusted (amounts in thousands, except share amounts, per share amounts and percentages):

 

Pro forma net income for the year ended December 31, 2016

   $ 582,510  

Less: pro forma net income for the nine months ended September 30, 2016

     (436,883

Add: pro forma net income for the nine months ended September 30, 2017

     436,883  
  

 

 

 

Pro forma net income for the twelve months ended September 30, 2017

   $ 582,510  

Add: depreciation expense

     2,473  

Add: amortization of deferred financing costs and original issue discount

     5,910  

Less: additional general and administrative expenses as a result of being a public company

     (13,000

Less: direct financing lease adjustments

     (56,919
  

 

 

 

Estimated cash flows from operating activities for the twelve months ended September 30, 2018

   $ 520,974  
  

 

 

 

Estimated cash flows used in investing activities

   $ (1,000

Estimated cash flows used in financing activities—scheduled principal amortization payments

   $ (15,750
  

 

 

 

Estimated cash flow available for distribution for the year ending September 30, 2018

   $ 504,224  
  

 

 

 

Total estimated initial annual distributions to shareholders

   $ 378,818  
  

 

 

 

Estimated initial annual distributions per share

   $ 1.05  
  

 

 

 

Payout ratio based on our share of estimated cash available for distribution

     75.1
  

 

 

 

Assumptions and Considerations

Set forth below are the material assumptions that we have made to demonstrate our ability to generate our estimated cash available for distribution for the twelve months ending September 30, 2018. The estimate has been prepared by, and is the responsibility of, our management. Our estimate reflects our judgment of the conditions we expect to exist and the course of action we expect to take during the estimate periods. The assumptions we disclose are those we believe are material to our estimated results of operations. We believe we have a reasonable basis for these assumptions. However, we can give no assurance that our estimated results will be achieved. There will likely be differences between our estimated and our actual results, and those differences may be material. If our estimate is not achieved, we may not be able to make cash distributions on our shares of common stock at our initial distribution rate or at all. For more information regarding the factors that may cause our estimates to prove inaccurate and the risks that could materially and adversely affect our ability to make distributions to our shareholders, please see “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

The estimate assumes that on September 30, 2017 we raised net proceeds of $1,135.9 million in this offering (after deducting the underwriting discount and expenses) through the issuance of 60,500,000 shares of our common stock. The estimate also assumes, as described in “Use of Proceeds” elsewhere in this prospectus, that the net proceeds of this offering will be used to: (a) pay down $300.0 million of indebtedness outstanding under the Revolving Credit Facility; (b) redeem $268.4 million in aggregate principal amount of the Second Lien Notes

 

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at a redemption price of 108% plus accrued and unpaid interest to the date of redemption; (c) repay $100.0 million of the Term Loan B Facility; and (d) pay fees and expenses related to this offering; the remainder of the net proceeds will be used for general business purposes.

We estimate that our general and administrative costs on a consolidated basis, including costs of operating as an independent company, could result in general and administrative expenses of $12 million to $14 million per year in addition to the $11 million of general and administrative expenses reflected in our unaudited pro forma combined condensed statement of operations for the year ended December 31, 2016.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

Selected Historical Combined Financial Data

The following table sets forth the selected historical combined financial data of Caesars Entertainment Outdoor as our predecessor, the operations of which were contributed to VICI Golf on October 6, 2017 as part of our Formation Transactions. These operations are comprised of: the Rio Secco golf course in Henderson, Nevada; the Cascata golf course in Boulder City, Nevada; the Grand Bear golf course in Saucier, Mississippi; and the Chariot Run golf course in Laconia, Indiana. The following selected historical combined financial data of Caesars Entertainment Outdoor for the nine month periods ended September 30, 2017 and 2016 and the selected historical combined balance sheet data as of September 30, 2017 have been derived from the unaudited combined financial statements of Caesars Entertainment Outdoor included elsewhere in this prospectus. The following selected historical combined financial data of Caesars Entertainment Outdoor for the three years in the period ended December 31, 2016 and the selected historical combined balance sheet data as of December 31, 2016 and 2015 have been derived from the audited combined financial statements of Caesars Entertainment Outdoor included elsewhere in this prospectus.

The following selected historical combined financial data of Caesars Entertainment Outdoors does not reflect the financial condition or results of operations of VICI REIT for the periods indicated. This historical financial data only reflects the historical operations of the golf course properties, which comprise a small portion of our total operations. The following table should be read in conjunction with “—Unaudited Pro Forma Combined Condensed Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical combined condensed financial statements of Caesars Entertainment Outdoor, our predecessor, the balance sheet of VICI REIT, the combined statements of investments of real estate assets to be contributed to VICI REIT and the pro forma combined condensed financial statements of VICI REIT, and in each case, the related notes thereto, included elsewhere in this prospectus.

 

     Nine Months Ended
September 30,
    Year Ended
December 31,
 
     2017     2016     2016     2015     2014  
    

(in thousands)

 

Income statement data:

          

Net revenues

   $ 13,827     $ 13,962     $ 18,785     $ 18,077     $ 18,908  

Total operating expenses

     13,827       13,956       18,778       18,059       18,869  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

           6       7       18       39  

Interest expense, net

           (6     (7     (18     (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

                              

Income tax benefit

                       3       4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $     $     $     $ 3     $ 4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

          

Net cash provided by operating activities

   $ 2,244     $ 2,386     $ 2,721     $ 2,888     $ 3,073  

Net cash used in investing activities

     (1,918     (793     (869     (732     (11

Net cash used in financing activities

     (1,162     (1,108     (1,283     (2,026     (2,968

Depreciation

     2,402       2,227       3,030       2,882       2,904  

Capital expenditures

     1,918       793       869       798       17  

Balance sheet data (as of period end):

          

Cash and cash equivalents

   $ 84       $ 920     $ 351    

Total assets

     89,250         90,475       92,034    

Long-term debt

                   14    

Liabilities subject to compromise

     249         265       267    

Stockholders’ equity

     82,995         84,143       85,375    

 

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Unaudited Pro Forma Combined Condensed Financial Information

The following unaudited pro forma combined condensed balance sheet of VICI REIT as of September 30, 2017 gives effect to (i) the Formation Transactions, (ii) the Mandatory Conversions, (iii) the Acquisition of Harrah’s Las Vegas, (iv) the Capital Transactions, and (v) the consummation of this offering, as if they had occurred on September 30, 2017, and the following unaudited pro forma combined condensed statements of operations for the nine months ended September 30, 2017 and for the year ended December 31, 2016 give effect to such transactions as if they had occurred on January 1, 2016. See “Prospectus Summary—Recent Developments” and “Formation of Our Company.” The unaudited pro forma combined condensed financial statements have been prepared in accordance with Article 11 of Regulation S-X.

The following unaudited pro forma combined condensed financial information does not reflect the financial condition at the date or results of operations of VICI REIT for the periods indicated. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information, and in many cases are based on estimates and preliminary information. The assumptions underlying the pro forma adjustments are described in the accompanying notes to the unaudited pro forma combined condensed financial statements. We believe such assumptions are reasonable under the circumstances and reflect the best currently available estimates and judgments. However, the pro forma financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had the transactions to which the pro forma adjustments relate actually occurred on the dates indicated above.

The unaudited pro forma combined condensed financial statements should be read in conjunction with “—Selected Historical and Pro Forma Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the historical combined condensed financial statements of Caesars Entertainment Outdoor, our predecessor, the balance sheet of VICI REIT and the combined statements of investments of real estate assets to be contributed to VICI REIT, and in each case, the related notes, included elsewhere in this prospectus.

The following unaudited pro forma combined condensed financial statements give effect to this offering and the following transactions, including:

Formation Transactions

 

    the transfer of CEOC’s real property assets to VICI REIT and its subsidiaries;

 

    the execution of the Lease Agreements on the Formation Date;

 

    the incurrence by subsidiaries of VICI REIT of approximately $4.917 billion of indebtedness on the Formation Date and use of proceeds therefrom;

 

    the transfer of Caesars Entertainment Outdoor to VICI Golf;

 

    the entry into the Golf Course Use Agreement;

 

    the issuance of 177,160,494 shares of VICI REIT common stock to certain of CEOC’s creditors on October 6, 2017; and

 

    the issuance of 12,000,000 shares of Series A preferred stock with an aggregate liquidation preference of $300.0 million to certain of CEOC’s creditors and backstop investors on October 6, 2017 (debt issuance costs incurred on the Formation Date were paid by CEOC and did not offset the gross amounts of the debt reflected in the pro forma financial statements).

Mandatory Conversions

 

    the mandatory conversion on November 6, 2017 of all of the Series A preferred stock into 51,433,692 shares of the Company’s common stock for no additional consideration; and

 

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    the mandatory conversion on November 6, 2017 of $250.0 million of a junior tranche of Prior CPLV Mezzanine Debt into an aggregate of 17,630,700 shares of the Company’s common stock.

Acquisition of Harrah’s Las Vegas

 

    the acquisition of Harrah’s Las Vegas for a purchase price of approximately $1.14 billion; and

 

    the sale of approximately 18.4 acres of certain undeveloped land parcels located in Las Vegas, Nevada for $73.6 million.

Capital Transactions

 

    the sale in December 2017 of 54,054,053 shares of common stock at a price of $18.50 per share in a private placement, for net proceeds of approximately $963.9 million;

 

    the purchase in December 2017 of the remaining $400 million of Prior CPLV Mezzanine Debt at an aggregate purchase price of $438 million (plus certain transaction costs); and

 

    the refinancing of certain outstanding indebtedness as further described in “Prospectus Summary—Recent Developments.”

The unaudited pro forma combined condensed financial statements give effect to the application of “fresh start” reporting in accordance with ASC 852—Reorganizations (“ASC 852”). The pro forma adjustments related to the Formation Transactions are based on an assumed fair value of approximately $8.3 billion of the assets of VICI REIT. Fair values of assets and liabilities, including leases, on the pro forma combined condensed balance sheet are based on preliminary valuations, have been made solely for purposes of developing the unaudited pro forma combined condensed financial information and are subject to further revisions and adjustments. Updates to such preliminary valuations will be completed in the periods subsequent to those reported in this prospectus and will be calculated as of the Formation Date and, to the extent such updates reflect a valuation different than those used in these unaudited pro forma combined condensed financial statements, there may be adjustments in the carrying values of certain assets and liabilities and related deferred taxes and such adjustments may also affect the revenues and expenses that would be recognized in the combined condensed statement of operations of VICI REIT following the Formation Date. As such, the following unaudited pro forma combined condensed financial information is not intended to represent our actual post-Formation Date financial condition and results of operations, and any differences could be material.

 

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Unaudited Pro Forma Combined Condensed Balance Sheet

As of September 30, 2017

(in thousands)

 

          Formation     Pro Forma Adjustments        
    VICI
REIT
(a)
    Caesars
Entertainment
Outdoor

(b)
    Real Estate
Assets to be
Contributed
(c)
    Pro Forma
Adjustments
    Subtotal     Mandatory
Conversions

(m)
    Acquisition
of
Harrah’s
Las Vegas
Real Estate
(n)
    Capital
Transactions
(o)
    This
Offering
(r)
    Total Pro
Forma
 

Assets

                   

Real Estate Investments:

                   

Accounted for using the operating method

  $     $     $     $ 1,184,760  (d)    $ 1,184,760     $     $ (73,600   $     $     $ 1,111,160  

Accounted for using the direct financing method

                      7,040,240  (d)      7,040,240         1,136,200               8,176,440 (p) 

Property, net

                4,831,000       (4,831,000 )(d)              73,600               73,600  

Property and equipment, used in operations, net

          88,347             (13,347 )(e)      75,000                       75,000  

Cash and cash equivalents

          84             55,725  (f)      55,809         (1,069,205     1,024,951       446,037       457,592  

Other assets

          819                   819               7,483         8,302  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $     $ 89,250     $ 4,831,000     $ 3,436,378     $ 8,356,628     $     $ 66,995     $ 1,032,434     $ 446,037     $ 9,902,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                   

Long-term debt

  $     $     $     $ 4,917,000  (g)    $ 4,917,000     $ (250,000   $     $ (180,997     (368,415   $ 4,117,588 (q) 

Deposit Liability

               
73,600
 
   

 
     
73,600
 

Short-term debt

                                  300,000       (300,000      

Accounts payable

          194             (194 )(h)                             

Accrued expenses

          769             (769 )(h)                             

Deferred income taxes

          5,043             4,400  (i)      9,443                       4,772  
                  (4,671 )(e)      (4,671                  

Other liabilities

          249             (249 )(h)                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

          6,255             4,915,517       4,921,772       (250,000     73,600       119,003       (668,415     4,195,960  

Redeemable preferred stock

                      758,814  (j)      758,814       (758,814                        

Equity

                   

Net investments

          82,943       4,831,000       3,394,000  (d)                             
                  (8,676 )(e)             
          (4,400 )(i)             
                  55,725  (f)             
                  (1,772 )(k)             
                  (4,917,000 )(g)             
                  194  (h)             
                  769  (h)             
                  249  (h)             
                  (758,814 )(j)             
                  52  (l)             
                  (2,674,270            

Common stock

                      1,772  (k)      1,772       690             541       605       3,608  

Additional paid in capital

                      2,674,270       2,674,270       1,008,124       (6,605     912,890       1,113,847       5,702,526  

Retained earnings

          52             (52 )(l)                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

          82,995       4,831,000       (2,237,953     2,676,042       1,008,814       (6,605     913,431       1,114,452       5,706,134  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $     $ 89,250     $ 4,831,000     $ 3,436,378     $ 8,356,628     $     $ 66,995     $ 1,032,434     $ 446,037     $ 9,902,094  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of and should be read together with, this unaudited pro forma combined condensed financial information.

 

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Unaudited Pro Forma Combined Condensed Statement of Operations

For the Nine Months Ended September 30, 2017

(in thousands, except share and per share amounts)

 

          Formation     Pro Forma Adjustments  
    VICI
REIT

(aa)
    Caesars
Entertainment
Outdoor(bb)
    Pro Forma
Adjustments
    Subtotal     Acquisition
of Harrah’s
Las Vegas

Real Estate
    Capital
Transactions
    This
Offering
    Total Pro
Forma
 

Revenues

               

Earned income from direct financing leases

  $     $     $ 477,941 (cc)    $ 477,941     $ 69,712 (ll)    $     $     $ 547,653  

Rental income from operating leases

                36,375 (dd)      36,375             36,375  

Golf course

          13,827       5,460 (ee)      19,287             19,287  

Property taxes reimbursed

                43,254 (ff)      43,254       2,310 (ff)          45,564  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

          13,827       563,030       576,857       72,022                   648,879  

Operating Expenses

               

Depreciation

          2,402       (548 )(gg)      1,854             1,854  

Golf course

          10,084       1,691 (hh)      11,775             11,775  

General and administrative

          1,341       6,909 (hh)      8,250             8,250  

Property taxes

                43,254 (ff)      43,254       2,310 (ff)          45,564  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

          13,827       51,306       65,133       2,310                   67,443  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

                511,724       511,724       69,712                   581,436  

Interest expense

                193,025 (ii)      193,025         (20,135 )(nn)      (31,478 )(oo)      141,412 (mm) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

                318,699       318,699       69,712       20,135       31,478       440,024  

Provision for income taxes

                907 (jj)      907                         907  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $     $     $ 317,792     $ 317,792     $ 69,712     $ 20,135     $ 31,478     $ 439,117  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               

Weighted average number of common and potentially dilutive securities outstanding

               

Basic

          246,224,886 (kk)            360,778,938 (kk) 

Diluted

          246,224,886             360,778,938  

Basic earnings per common share

        $ 1.29           $ 1.22  
       

 

 

         

 

 

 

Diluted earnings per common share

        $ 1.29           $
1.22
 
       

 

 

         

 

 

 

The accompanying notes are an integral part of and should be read together with, this unaudited pro forma combined condensed financial information.

 

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Unaudited Pro Forma Combined Condensed Statement of Operations

For the Year Ended December 31, 2016

(in thousands, except share and per share amounts)

          Formation     Pro Forma Adjustments  
   

VICI
REIT(aa)

   

Caesars
Entertainment
Outdoor(bb)

   

Pro Forma
Adjustments

   

Subtotal

   

Acquisition of
Harrah’s
Las Vegas
Real Estate

   

Capital

Transactions

   

This
Offering

   

Total
Pro Forma

 

Revenues

               

Earned income from direct financing leases

  $         —     $     $ 633,223  (cc)    $ 633,223     $ 92,596 (ll)    $     $     $ 725,819  

Rental income from operating leases

                48,500  (dd)      48,500             48,500  

Golf course

          18,785       8,651  (ee)      27,436             27,436  

Property taxes
reimbursed

                57,672  (ff)      57,672       3,081 (ff)          60,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

          18,785       748,046       766,831       95,677                   862,508  

Operating expenses

               

Depreciation

          3,030       (557 )(gg)      2,473             2,473  

Golf course

          13,739       1,961  (hh)      15,700             15,700  

General and administrative

          2,009       8,991  (hh)      11,000             11,000  

Property taxes

                57,672  (ff)      57,672       3,081 (ff)          60,753  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

          18,778       68,067       86,845       3,081                   89,926  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

          7       679,979       679,986       92,596               772,582  

Interest expense

          7       257,367  (ii)      257,374           (26,855 )(nn)      (41,970 )(oo)      188,549 (mm) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

                422,612       422,612       92,596       26,855       41,970       584,033  

Provision for income taxes

                1,523  (jj)      1,523                         1,523  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $     $     $ 421,089     $ 421,089     $ 92,596     $ 26,855     $ 41,970     $ 582,510  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common and potentially dilutive securities
outstanding

               

Basic

          242,440,536  (kk)            360,778,938 (kk) 

Diluted

          242,440,536             360,778,938  

Basic earnings per common share

        $ 1.74           $ 1.61  
       

 

 

         

 

 

 

Diluted earnings per common share

        $ 1.74           $ 1.61  
       

 

 

         

 

 

 

The accompanying notes are an integral part of and should be read together with, this unaudited pro forma combined condensed financial information.

Note 1—Balance Sheet Pro Forma Adjustments

 

  (a)   VICI REIT was formed as Rubicon Controlled LLC, a Delaware limited liability company, on July 5, 2016, and was renamed VICI Properties Inc., referred to herein as VICI REIT, and converted into a Maryland corporation on May 5, 2017. VICI REIT had no assets and no operating activity prior to the Formation Date.

 

  (b)   Represents the balance sheet derived from the historical unaudited combined financial statements of Caesars Entertainment Outdoor, included elsewhere in this prospectus. Caesars Entertainment Outdoor was transferred to VICI Golf on the Formation Date.

 

  (c)   Represents amounts derived from the historical unaudited combined statement of investments of real estate assets to be contributed to VICI REIT from CEOC, which is included elsewhere in this prospectus.

 

  (d)   Represents the adjustment to the real estate assets to fair value on the Formation Date under ASC 852 for real estate assets under lease through the Formation Lease Agreements and the reclassification of such real estate assets as investments in direct financing leases and operating leases.

 

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The real estate assets are valued using an income approach and, more specifically, the discounted cash flow (“DCF”) technique. Future lease payments for the properties are modeled according to the terms contained in the Lease Agreements. Although management believes the length of the leases with CEOC will extend to the full thirty-five year lease term (assuming the exercise of tenant renewal options) per the Lease Agreements, the real property valuation analysis contemplates typical market participant oriented nine and 14 year hold periods as a best methodology to estimate the value of the cash flow during the full term lease. Appropriate expenses are estimated and deducted from the future contract rent to derive expected future cash flows. Terminal or reversion values are calculated for both hold period scenarios based on estimated market terminal capitalization rates. The DCF technique estimates value by discounting back to present value the anticipated future cash flows for the interim periods in the DCF model plus the present value of the terminal values using an appropriate discount rate. The discount rate was derived based upon a weighted average cost of capital (“WACC”). The WACC was estimated based upon observations of a peer group of guideline companies whose stock was publicly traded on recognized exchanges as such guideline companies were considered comparable to VICI REIT. Factors considered in deriving a WACC included general market rates of return at the valuation date, business risks associated with the industry in which VICI REIT operates, and other specific risk factors deemed appropriate. An estimated discount rate of 9.0% was selected as a base rate for all properties. Individual property discount rates were then adjusted based on the specific additional aforementioned risk factors and, once adjusted, ranged from 7.5% to 17.5%.

Under guidance in ASC 840—Leases (“ASC 840”), the Lease Agreements are bifurcated between operating leases and direct financing leases. The fair value assigned to certain portions of the land qualify for operating lease treatment while the fair value assigned to the buildings is classified as a direct financing lease, and the portion of the land which was not bifurcated is also classified as part of direct financing lease.

Land accounted for under the operating method has an indefinite useful life and is not depreciated.

 

  (e)   Represents the adjustment to fair value of $75.0 million for the Caesars Entertainment Outdoor assets and liabilities based on a preliminary purchase price allocation and the related impact to historical deferred tax liability relating to the assets adjusted. The assets and liabilities contributed will be reported in accordance with fresh start reporting.

 

  (f)   Represents cash contributed by CEOC on the Formation Date pursuant to the Plan of Reorganization.

 

  (g)   Represents the gross amounts of indebtedness incurred by subsidiaries of VICI REIT on the Formation Date described below. The respective financing and issuance costs incurred for debt issued on the Formation Date were paid by CEOC.

 

         Pro forma debt of VICI REIT on the Formation Date includes: (1) Term Loans with a variable interest rate per annum of LIBOR plus 3.5%, maturing in 2022; (2) First Lien Notes with variable interest rate per annum based on the sum of (A) the greater of (i) LIBOR and (ii) 1.0% plus (B) 3.5%, maturing in 2022; (3) Second Lien Notes with a fixed interest rate per annum of 8.0%, maturing in 2023; (4) Prior CPLV CMBS Debt with a fixed interest rate per annum of 4.36%, maturing in October 2022; and (5) CPLV Mezzanine Debt with a fixed interest rate per annum of 6.75% (with respect to the senior tranche) and 7.45% (with respect to the intermediate tranche).

 

         The table below shows the amount of debt outstanding on the Formation Date.

 

(in millions)       

CPLV CMBS Debt

   $ 2,200.0  

Term Loans and First Lien Notes

     1,950.1  

Second Lien Notes

     766.9  
  

 

 

 

Total Debt

   $ 4,917.0  
  

 

 

 

 

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Table of Contents
  (h)   Represents reversal of accounts payable and accrued expenses and other liabilities recorded on the historical Caesars Entertainment Outdoor financial statements that were not transferred to VICI REIT in connection with the Formation Transactions.

 

  (i)   Represents the reversal of the historical deferred tax liability associated with property and equipment that was retained by CEOC. The pro forma combined condensed financial information has been prepared based on the assumption that VICI REIT qualifies for taxation as a REIT under the Code. As such, VICI REIT generally will not be subject to Federal corporate income tax to the extent it distributes its REIT taxable income to its stockholders. In order to qualify for taxation as a REIT, we will be required to distribute 90% of our REIT taxable income. To the extent that we satisfy this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, we will be subject to U.S. Federal corporate income tax on any undistributed portion of such REIT taxable income. REITs are subject to a number of other organizational and operational requirements. We may still be subject to (i) certain state and local taxes on our income and property and (ii) federal corporate income and excise taxes on our undistributed REIT taxable income.

 

  (j)   Represents the fair value of the Series A preferred stock issued pursuant to the Plan of Reorganization giving effect to the Mandatory Conversions, which collectively resulted in the issuance of an aggregate of 246,224,886 shares of common stock. Due to the redemption and repayment provisions of the Series A preferred stock, it was classified as mezzanine equity in accordance with ASC 480 prior to the Mandatory Preferred Conversion. See “Description of Capital Stock—Preferred Stock.”

 

  (k)   Represents the par value of 177,160,494 shares of common stock issued pursuant to the Plan of Reorganization prior to the Mandatory Conversions.

 

  (l)   Represents retained earnings of Caesars Entertainment Outdoor that were not transferred to VICI REIT on adoption of “fresh start” reporting.

 

  (m)    Represents the mandatory conversion on November 6, 2017 of all of the Series A preferred stock with a fair value of $758.8 million into 51,433,692 shares (par value of $514,336) of common stock for no additional consideration and the mandatory conversion of $250.0 million of a junior tranche of Prior CPLV Mezzanine Debt into an aggregate of 17,630,700 shares (par value of $176,207) of common stock for no additional consideration.

 

  (n)   Represents the acquisition of the land and real property associated with Harrah’s Las Vegas for a purchase price of approximately $1.14 billion and the sale of approximately 18.4 acres of certain undeveloped land parcels located in Las Vegas, Nevada for $73.6 million. Due to the put/call option on these land parcels, the transaction does not meet the requirements of a completed sale for accounting purposes. As a result, the company will reclassify $73.6 million from Real estate assets accounted for using the operating method to Property, net in its combined condensed balance sheet. Additionally, the company will record a $73.6 million Deposit liability in its combined condensed balance sheet.

Cash and cash equivalents includes the following cash inflows and cash outflows (in thousands):

 

Inflows

       

Outflows

 
Proceeds from land sale   $ 73,600.0     Acquisition of Harrah’s Las Vegas real estate   $ 1,136,200.0  
Pro rated rent for December 2017     2,349.0     Transaction fees     8,954.0  
 

 

 

     

 

 

 
  $ 75,949.0       $ 1,145,154.0  
 

 

 

     

 

 

 

Additional paid in capital represents the following (in thousands):

 

Transaction fees   $(8,954.0)            
Pro rated rent for December 2017     2,349.0      
 

 

 

     
  $ (6,605.0    
 

 

 

     

 

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Table of Contents
  (o)   Represents adjustments related to certain capital transactions on December 22, 2017, including

 

  (i) The private placement of 54,054,053 shares (par value of $541,054) of common stock to existing shareholders at $18.50 per share for gross proceeds of $1,000.0 million (net proceeds of $963.9 million).

 

  (ii) The issuance of $2,200.0 million aggregate principal amount ($2,169.1 million, net of deferred financing cost and original issue discount) of senior secured first lien Term Loan B Facility initially bearing interest at LIBOR plus 2.25%, provided that following this offering, such interest rate will be reduced by 0.25%. The Term Loan B Facility is subject to amortization of 1.0% of outstanding principal per annum payable in equal quarterly installments.

 

  (iii) The borrowing of $300.0 million ($292.5 million, net of deferred financing cost and original issue discount) of the Company’s $400.0 million senior secured Revolving Credit Facility initially bearing interest at LIBOR plus 2.25%, provided that following an underwritten public offering of the equity interest of any parent entity of VICI PropCo which results in such equity interests being listed on a national securities exchange and generates gross cash proceeds of at least $500.0 million to such parent entity, such interest rate will be reduced by 0.25%.

 

  (iv) The refinancing of $1,638.4 million aggregate principal amount of senior secured Prior Term Loans and redemption of $311.7 million aggregate principal amount of first-priority Prior First Lien Notes.

 

  (v) The repurchase of $400.0 million aggregate principal amount of Prior CPLV Mezzanine Debt at a purchase rate of 109.5% plus accrued and unpaid interest from the existing holders of such debt.

 

  (vi) Cash and cash equivalents includes the following cash inflows and cash outflows (in thousands)

 

Inflows

       

Outflows

     

Proceeds from private placement

  $ 1,000,000.0    

Private placement costs

  $ 36,097.0  

Proceeds from the Term Loan B Facility

    2,200,000.0    

Repayment of senior secured Prior Term Loans

    1,638,400.0  

Proceeds from the Revolving Credit Facility

    300,000.0    

Repayment of first-priority Prior First Lien Notes

    311,700.0  
   

Repurchase of Prior CPLV Mezzanine Debt

    400,000.0  
   

Premium on repurchase of Prior CPLV Mezzanine Debt

    38,000.0  
   

Fees related to repurchase of Prior CPLV Mezzanine Debt

    367.0  
   

Debt issuance costs—Term Loan B Facility

    30,167.0  
   

Debt issuance costs—Revolving Credit Facility

    5,483.0  
   

Original issue discount—Term Loan B Facility

    5,500.0  
   

Original issue discount—Revolving Credit Facility

    2,000.0  
   

Accrued interest paid in connection with the refinancing

    7,335.0  
 

 

 

     

 

 

 
  $ 3,500,000.0       $ 2,475,049.0  
 

 

 

     

 

 

 

 

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Other assets represents capitalized deferred financing costs and original issue discount related to the Revolving Credit Facility.

 

 

Long term debt, net represents the following (in thousands):

 

Proceeds from the Term Loan B Facility

  $ 2,200,000.0  

Capitalized debt issuance costs—Term Loan B Facility

    (25,584.0

Capitalized original issue discount—Revolving Credit Facility

    (5,313.0

Repayment of senior secured Prior Term Loans

    (1,638,400.0

Repayment of first-priority Prior First Lien Notes

    (311,700.0

Repurchase of Prior CPLV Mezzanine Debt

    (400,000.0
 

 

 

 
  $ (180,997.0
 

 

 

 

Additional paid in capital represents the following (in thousands):

 

Private placement (net proceeds of $963,903 less $541 par value of shares issued)

  $ 963,362.0  

Premium on repurchase of Prior CPLV Mezzanine Debt

    (38,000.0

Accrued interest paid in connection with the refinancing

    (7,335.0

Expensed debt issuance costs and original issue discount

    (4,769.0

Fees related to repurchase of Prior CPLV Mezzanine Debt

    (368.0
 

 

 

 
  $ 912,890.0  
 

 

 

 

 

(p) The Company’s pro forma investment in direct financing leases consisted of the following as of September 30, 2017:

 

(in thousands)       

Minimum lease payments receivable(i)

   $ 29,390,697  

Estimated residual values of leased property (unguaranteed)

     1,987,651  
  

 

 

 

Gross investment in direct financing leases

     31,378,348  

Unamortized initial direct costs

     —    

Less: Unearned income

     (23,201,908
  

 

 

 

Net investment in direct financing leases

   $ 8,176,440  
  

 

 

 

 

(i) Minimum lease payments do not include contingent rent that may be received under the Lease Agreements. Contingent rent amounted to $0 for the nine months ended September 30, 2017 and the year ended December 31, 2016.

At September 30, 2017, pro forma minimum lease payments for each of the five succeeding fiscal years were as follows:

 

(in thousands)       

2017

   $ 180,394  

2018

     725,823  

2019

     730,148  

2020

     734,550  

2021

     748,332  

 

(q) The table below shows the amount of pro forma debt outstanding on September 30, 2017:

 

(in millions)       

Term Loan B Facility

   $ 2,100.0  

CPLV CMBS Debt

     1,550.0  

Second Lien Notes

     498.5  

Revolving Credit Facility

     —    
  

 

 

 

Total Face Value Debt

     4,148.5  

Deferred financing cost

     (25.6

Original issue discount

     (5.3
  

 

 

 

Total Book Value Debt

   $ 4,117.6  
  

 

 

 

 

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     The pro forma combined condensed statements of operations assumes that the weighted average yield on the Term Loan B Facility, CPLV CMBS Debt and Second Lien Notes outstanding on September 30, 2017 will require annual cash interest payments of $182.6 million, based upon the rates provided in the respective loan agreements.

 

(r) Represents the net proceeds from this offering as well as the repayment of certain indebtedness as described below. We expect to raise net proceeds of $1,135.9 million in this offering (after deducting underwriting discounts and expenses) through the issuance of 60,500,000 shares of our common stock.

 

     We will use the proceeds from this offering to: (a) pay down $300.0 million of indebtedness outstanding under the Revolving Credit Facility; (b) redeem $268.4 million in aggregate principal amount of the Second Lien Notes at a redemption price of 108% plus accrued and unpaid interest to the date of redemption; (c) repay $100.0 million of the Term Loan B Facility; and (d) pay fees and expenses related to this offering; the remainder of the net proceeds will be used for general business purposes.

 

     For purposes of this pro forma presentation, the net issuance proceeds from this offering and the use of proceeds described above have been applied to the pro forma combined condensed consolidated balance sheet assuming they occurred on September 30, 2017.

Cash and cash equivalents includes the following cash inflows and cash outflows (in thousands):

 

Inflows

         

Outflows

      

Proceeds from this offering

   $ 1,210,000.0     

Equity offering costs

   $ 74,075.0  
     

Pay down of Revolving Credit Facility

     300,000.0  
     

Pay down of Second Lien Notes

     268,415.0  
     

Pay down of Term Loan B Facility

     100,000.0  
     

Fees related to pay down of Second Lien Notes

     21,473.0  
  

 

 

       

 

 

 
   $ 1,210,000.0         $ 763,963.0  
  

 

 

       

 

 

 

Long term debt, net represents the following (in thousands):

 

Pay down of Second Lien Notes

   $ 268,415.0  

Pay down of Term Loan B Facility

     100,000.0  
  

 

 

 
   $ 368,415.0  
  

 

 

 

Short term debt represents the pay down of the Revolving Credit Facility.

Additional paid in capital represents the following (in thousands):

 

This offering (net proceeds of $1,135,925 less $605 par value of shares issued)

   $ 1,135,320.0  

Fees related to pay down of Second Lien Notes

     (21,473.0
  

 

 

 
   $ 1,113,847.0  
  

 

 

 

 

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Note 2—Statement of Operations Pro Forma Adjustments

 

  (aa) VICI REIT was formed as Rubicon Controlled LLC, a Delaware limited liability company, on July 5, 2016, and was renamed VICI Properties Inc., referred to herein as VICI REIT, and converted into a Maryland corporation on May 5, 2017. VICI REIT had no assets and had no operating activity prior to the Formation Date.

 

  (bb) Represents the results of operations derived from the historical unaudited and audited combined financial statements of Caesars Entertainment Outdoor, included elsewhere in this prospectus. Caesars Entertainment Outdoor was transferred to VICI Golf on the Formation Date, including the historical expenses directly associated with the assets contributed by CEOC, comprised of depreciation, property taxes, insurance, operating expenses and payroll costs.

 

  (cc) Represents lease income associated with the rent from the Formation Lease Agreements which are accounted for as direct financing leases. Under the CPLV Lease Agreement, base rent is $165.0 million for the first seven years with an annual increase of the greater of 2% and the increase in the Consumer Price Index commencing in the second year. Beginning in the eighth year, a portion of the rent amount will be designated as variable rent and will be adjusted periodically to reflect changes in net revenue for the property through the end of the lease term. At each renewal term, the base rent amount will be set at the fair market value for the rent but will not be less than the amount of rent due from CEOC in the immediately preceding year nor will the rent increase by more than 10% compared to the immediately preceding year. The portion of the overall rent amount attributable to any facility for which the renewal term extends beyond 80% of its useful life will be adjusted to fair market value for that facility.

 

       Under each of the Non-CPLV Lease Agreement and Joliet Lease Agreement, base rent is equal to $433.3 million and $39.6 million, respectively, for the first seven years with an annual increase of the greater of 2% and the increase in the Consumer Price Index commencing in the sixth year. With respect to the Joliet Lease Agreement, we are entitled to receive 80% of the rent pursuant to the operating agreement of our joint venture, Harrah’s Joliet Landco LLC. Beginning in the eighth year, a portion of each rent amount will be designated as variable rent and will be adjusted periodically to reflect changes in net revenue for the respective properties through the end of the lease term. At each renewal term, each base rent amount will be set at the fair market value for the rent but will not be less than the amount of rent due from CEOC in the immediately preceding year nor will such rent increase by more than 10% compared to the immediately preceding year.

Base rent and variable rent that are known at the lease commencement date will be recorded on an effective interest method basis over the thirty-five year lease term, which includes the initial fifteen-year non-cancelable lease term and all four five-year tenant optional renewal terms under the Formation Lease Agreements, as such renewal terms have been determined to be reasonably assured.

For the nine months ended September 30, 2017 and the year ended December 31, 2016, pro forma rent payments under the Formation Lease Agreements accounted for under the direct financing lease method total $438.3 million and $581.5 million, respectively. Pro forma earned income from those direct financing leases is $477.9 million and $633.2 million, respectively.

The difference of $39.6 million and $51.7 million, respectively, represents the adjustment to recognize fixed amounts due under the Formation Lease Agreements on an effective interest basis at a constant rate of return over the lease term.

 

  (dd) Represents the portion of lease income associated with the rent from the Formation Lease Agreements that is accounted for under the operating lease method. Rental income was allocated to operating lease assets based on CEOC’s incremental borrowing rate in accordance with ASC 840.

 

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  (ee) Represents the increase in revenues resulting from the Golf Course Use Agreement by and among subsidiaries of VICI Golf, CEOC, and Caesars Enterprise Services, LLC (among others). Revenues under this agreement are comprised of a membership fee, use fee and minimum rounds fee.

 

  (ff) Represents reimbursements from our tenants for the property taxes paid by our tenants under the Formation Lease Agreements and the HLV Lease Agreement with offsetting expenses recorded in operating expenses, as one of our subsidiaries is the primary obligor.

 

  (gg) Represents the change in depreciation expense for the assets of Caesar Entertainment Outdoor due to recording the assets at fair value under ASC 852. The depreciation expense is recorded over the estimated useful lives of the respective assets using the straight-line method.

 

  (hh) Represents additional general and administrative costs, including payroll costs, information technology costs, rent expense and external audit fees incurred independently to operate VICI REIT as an independent company. This adjustment represents the costs which were determined to be factually supportable, directly attributable to and, with respect to the pro forma statement of operations, expected to have a continuing impact.

We also expect to incur other additional costs, including but not limited to salaries, director’s and officer’s insurance, tax advisory, and legal fees. Additionally, we have incremental costs as a result of becoming a publicly traded company. As these amounts are not directly attributable to the Formation Transactions, an adjustment for such additional general and administrative costs has been excluded.

We estimate that our general and administrative costs for VICI REIT on a consolidated basis, including costs of operating as an independent company, could result in additional general and administrative expenses of $12 million to $14 million per year.

 

  (ii) Represents interest expense related to borrowings incurred by our subsidiaries in connection with the Formation Transactions. See note (g) for additional details regarding this debt.

 

  (jj) Reflects the income tax expense expected to be incurred by Caesars Entertainment Outdoor as a taxable REIT subsidiary based on an estimated effective income tax rate of 21% in accordance with the tax reform bill signed into law at the end of 2017.

 

  (kk) Diluted earnings per share is computed using the weighted-average number of common shares and the effect of potentially dilutive securities outstanding during the period.

 

  (ll) Represents lease income associated with the rent from the HLV Lease Agreement which is accounted for as a direct financing. Under the HLV Lease Agreement, base rent is $87.4 million for the first seven years with an annual increase of 1% for the first five years and an annual increase of the greater of 2% and the increase in the Consumer Price Index commencing in the sixth year. Beginning in the eighth year, a portion of the rent amount will be designated as variable rent and will be adjusted periodically to reflect changes in net revenue for the property through the end of the lease term. At each renewal term, the base rent amount will be set at the fair market value for the rent but will not be less than the amount of rent due from the tenant in the immediately preceding year nor will the rent increase by more than 10% compared to the immediately preceding year. The portion of the overall rent amount attributable to any facility for which the renewal term extends beyond 80% of its useful life will be adjusted to fair market value for that facility.

Base rent and variable rent that are known at the lease commencement date will be recorded on an effective interest method basis over the thirty-five year lease term, which includes the initial fifteen- year non-cancelable lease term and all four five-year tenant optional renewal terms under the HLV Lease Agreement, as such renewal terms have been determined to be reasonably assured.

For the nine months ended September 30, 2017 and the year ended December 31, 2016, pro forma rent payments under the HLV Lease Agreement accounted for under the direct financing lease method total $66.2 million and $87.4 million, respectively. Pro forma earned income from those direct financing leases is $69.7 million and $92.6 million, respectively.

 

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The difference of $3.5 million and $5.2 million, respectively, represents the adjustment to recognize fixed amounts due under the HLV Lease Agreement on an effective interest basis at a constant rate of return over the lease term.

 

  (mm) Represents interest expense related to pro forma borrowings incurred by our subsidiaries as of September 30, 2017. It is estimated that a 1% increase or decrease in the annual interest rate on our variable rate obligations would increase or decrease our annual cash interest expense by approximately $21.0 million on an annual basis. See note (q) for additional details regarding this debt.

 

  (nn) Assuming LIBOR of 1.5%, this adjustment represents the net reduction of interest expense resulting from the Capital Transactions, including (a) the buy down of $1,638.4 million and $311.7 million aggregate principal amount of senior secured Prior Term Loans and first-priority Prior First Lien Notes, respectively, with interest rates of 5.0% (LIBOR plus 3.5%), (b) the buy down of $400.0 million aggregate principal amount of Prior CPLV Mezzanine Debt with a weighted average fixed interest rate of 7.1%, partially offset by (c) the issuance of $2,200.0 million and $300.0 million aggregate principal amount of Term Loan B Facility and Revolving Credit Facility, respectively, with a weighted average interest rate of 3.75% (LIBOR plus 2.25%) and (d) amortization of debt issuance cost and original issue discount of $4.4 million and $5.9 million for the nine months ended September 30, 2017 and for the year ended December 31, 2016, respectively.

 

  (oo) Assuming LIBOR of 1.5%, this adjustment represents the reduction in interest expense resulting from the company using the net proceeds from this offering to (a) pay down $300.0 million of indebtedness outstanding under the Revolving Credit Facility with an interest rate of 3.75% (LIBOR plus 2.25%); (b) redeem $268.4 million in aggregate principal amount of the Second Lien Notes with a fixed interest rate of 8.0%; and (c) repay $100.0 million of the Term Loan B Facility with an interest rate of 3.75% (LIBOR plus 2.25%). Additionally, this adjustment includes a 0.25% interest rate reduction from LIBOR plus 2.25% to LIBOR plus 2.00% on the remaining $2,100.0 million pro forma aggregate principal amount of Term Loan B Facility indebtedness outstanding following the consummation of this offering. For purposes of this pro forma presentation, the reduction in indebtedness from the use of the net proceeds from this offering have been applied to the pro forma combined condensed statements of operations assuming they occurred on January 1, 2016.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the historical combined condensed financial statements of Caesars Entertainment Outdoors, our predecessor, the balance sheet of VICI REIT, the combined statements of investments of real estate assets to be contributed to VICI REIT and the pro forma combined condensed financial statements of VICI REIT, and in each case, the related notes thereto, included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our business and growth strategies, statements regarding the industry outlook, our expectations regarding the future performance of our business and the other non-historical statements contained herein are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” You should also review the “Risk Factors” section of this prospectus 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.

Overview

VICI REIT is a Maryland corporation. On the Formation Date, in connection with the Plan of Reorganization, subsidiaries of CEOC transferred certain real estate assets and four golf course businesses to VICI REIT in exchange for 100% of VICI REIT’s common stock, series A convertible preferred stock (“Series A preferred stock”) and other consideration, including debt issued by other subsidiaries of VICI REIT and the proceeds of mortgage backed debt issued by other subsidiaries of VICI REIT, for distribution to CEOC’s creditors.

VICI REIT contributed the real property assets to VICI PropCo and the Caesars Entertainment Outdoor operations to VICI Golf, VICI REIT’s wholly-owned subsidiary. VICI REIT intends to elect on its U.S. Federal income tax return for our taxable year ending December 31, 2017, to be treated as a REIT and has elected for VICI Golf to be treated as a TRS.

Following the Formation Date, VICI REIT is a stand-alone entity initially owned by certain former creditors of CEOC.

VICI REIT is primarily engaged in the business of owning, acquiring and developing gaming, hospitality and entertainment destinations. Subsidiaries of VICI REIT lease the properties to certain subsidiaries of Caesars under the Lease Agreements.

Key Trends That May Affect Our Business

The following discussion includes forward-looking statements based on our management’s current beliefs, expectations and estimations. Forward-looking statements involve inherent risks and uncertainties. Our future operating and financial performance may differ materially from these forward-looking statements, including due to many factors outside of our control. We do not undertake any obligation to update forward-looking statements in the event of changed circumstances or otherwise. For more information, see “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

Subsidiaries of Caesars are the lessees of all of our properties pursuant to the Lease Agreements, and Caesars or CRC guarantees the obligations of the tenants under the Lease Agreements. The Lease Agreements account for substantially all of our revenues. Additionally, we expect to experience organic growth in rental revenue through annual rent escalators in our Lease Agreements. Accordingly, we are dependent on Caesars, 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 Caesars’ business, financial condition, liquidity, results of operations or prospects would have a material adverse effect on our business, financial condition, liquidity, results of operations and prospects. See “Risk Factors—Risks Related to Our Business and Operations.”

 

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Additionally, we expect to grow our portfolio through acquisitions by pursuing opportunities to execute sale leaseback transactions with Caesars, pursuant to: (i) the Call Right Agreements, relating to three properties; (ii) rights of first refusal relating to certain domestic gaming facilities proposed to be acquired or developed by Caesars located outside the Gaming Enterprise District of Clark County, Nevada and the properties that Caesars recently agreed to acquire from Centaur Holdings, LLC; and (iii) the Put-Call Agreement, which includes rights relating to the Eastside Convention Center Property in Las Vegas. Additionally, we will actively seek to grow our portfolio through acquisitions of experiential real estate in dynamic markets spanning hospitality, entertainment, leisure and gaming properties. Finally, we believe the approximately 34 acres (after giving effect to the sale of approximately 18.4 acres to Caesars in December 2017) of undeveloped land adjacent to the Las Vegas Strip that we own will provide attractive opportunities for potential future expansion and development. See “Business—Business and Growth Strategies.” In pursuing external growth initiatives, we will generally seek to acquire properties that can generate stable rental revenue through long-term, triple-net leases with tenants with established operating histories, and we will consider various factors when evaluating acquisitions, including the ability to diversify our tenant base, by potentially leasing properties to parties unaffiliated with Caesars, 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. We can provide no assurance that we will exercise any of our contractual rights to purchase one or more properties from Caesars or otherwise be successful in acquiring any properties.

Additionally, our ability to successfully implement our acquisition strategy will depend upon the availability and terms of financing, including debt and equity capital. Further, the pricing of any acquisitions we may consummate and the terms of any leases that we may enter into will significantly impact our future results. Competition to execute sale leaseback transactions with attractive properties and desirable tenants is intense, and we can provide no assurance that any future acquisitions or leases will be on terms as favorable to us as those relating to recent transactions. Should we exercise an option to purchase a property under a Call Right Agreement, the purchase price will be equal to ten times the property’s annual rent, which, in turn, will equal approximately 60% of the trailing property EBITDAR at the time of exercise. Accordingly, the purchase price and rent for any property we may acquire under a Call Right Agreement and lease to Caesars will depend upon the property’s EBITDAR at the time of exercise.

We anticipate that we would seek to finance these acquisitions with a majority of 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 market conditions or otherwise.

In addition to rent, our tenant is required 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. We estimate that our general and administrative costs on a consolidated basis, including costs of operating as an independent company, could result in general and administrative expenses of $12 million to $14 million per year in addition to the $11 million of general and administrative expenses reflected in our unaudited pro forma combined condensed statement of operations for the year ended December 31, 2016.

Discussion of the Historical Results of Operations of Caesars Entertainment Outdoor

The following discussion relates to the historical operations of Caesars Entertainment Outdoor, which, following the Formation Date, is owned by VICI Golf, our TRS. The golf courses include the Cascata golf course in Boulder City, Nevada, the Rio Secco golf course in Henderson, Nevada, the Grand Bear golf course in Biloxi, Mississippi and the Chariot Run golf course in Laconia, Indiana. The golf courses generate revenue through fees

 

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charged for general golf course usage (including green fees, golf club rentals, and cart charges), annual or corporate memberships (at Rio Secco, Grand Bear and Chariot Run), a school of golf (at Rio Secco), and food, beverage, and merchandise sales.

For financial reporting periods occurring after the Formation Date, the assets and liabilities of Caesars Entertainment Outdoor will be reflected on our consolidated balance sheet together with other real estate assets and liabilities acquired by us. Following the Formation Date, such assets and liabilities will not be comparable to the assets and liabilities of Caesars Entertainment Outdoor as reported at fair value, for periods prior to the Formation Date due to the application of fresh-start reporting.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

Net revenues for Caesars Entertainment Outdoor were $13.8 million and $14.0 million for nine months ended September 30, 2017 and 2016, respectively. Revenues for the nine months ended September 30, 2017 were comprised of golf revenues of $11.2 million, food and beverage revenues of $1.3 million and retail and other revenues of $1.3 million. Revenues for the nine months ended September 30, 2016 were comprised of golf revenues of $10.9 million, food and beverage revenues of $1.6 million and retail and other revenues of $1.5 million. The decrease in revenue for the nine months ended September 30, 2017 was primarily due to the planned closure of Rio Secco for planned renovations to the golf course beginning late May 2017 and continuing through early October 2017.

Operating expenses for Caesars Entertainment Outdoor decreased $0.2 million to $13.8 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily due to the closure of the Rio Secco golf course due to planned renovations beginning late May 2017 and continuing through early October 2017.

Year ended December 31, 2016 compared to year ended December 31, 2015

Net revenues for Caesars Entertainment Outdoor were $18.8 million and $18.1 million for the year ended December 31, 2016 and 2015, respectively. Revenues for the year ended December 31, 2016 were comprised of golf revenues of $14.6 million, food and beverage revenues of $2.1 million and retail and other revenues of $2.1 million. Revenues for the year ended December 31, 2015 were comprised of golf revenues of $14.1 million, food and beverage revenues of $2.1 million and retail and other revenues of $1.9 million.

Operating expenses for Caesars Entertainment Outdoor increased $0.7 million, or 4.0%, to $18.8 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to higher direct golf expenses associated with higher golf revenues.

Year ended December 31, 2015 compared to year ended December 31, 2014

Net revenues for Caesars Entertainment Outdoor were $18.1 million and $18.9 million for the year ended December 31, 2015 and 2014, respectively. Revenues for the year ended December 31, 2015 were comprised of golf revenues of $14.1 million, food and beverage revenues of $2.1 million and retail and other revenues of $1.9 million. Revenues for the year ended December 31, 2014 were comprised of golf revenues of $14.5 million, food and beverage revenues of $2.3 million and retail and other revenues of $2.1 million.

Operating expenses for Caesars Entertainment Outdoor decreased $0.8 million, or 4.3%, to $18.1 million in 2015 when compared to the year ended December 31, 2014, primarily due to lower direct golf expenses driven by lower golf revenues.

Revenues

Substantially all of our revenues are derived from our leased properties, with the balance derived from our golf course operations. Our Lease Agreements are comprised of the following: one with respect to the CPLV

 

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facilities, one with respect to all regional properties (other than the Joliet facilities), one with respect to the Joliet facilities and one with respect to HLV. Each of the Lease Agreements has an initial 15 year term, subject to four five-year renewal terms at the option of the respective tenant. The rent is comprised of base rent and variable rent components which are described below:

CPLV Lease Rent

Base Rent: CPLV Lease Agreement

The base rent is a fixed amount initially equal to $165.0 million annually during the first seven years of the CPLV Lease Agreement. The fixed amount includes an annual rent escalator for years two through seven of the lease that is equal to the greater of (i) 2% and (ii) the increase of the Consumer Price Index from the prior year. After year seven, base rent in year eight will be equal to 80% of the overall rent for year seven increased by the escalator. Base rent in subsequent years during the initial term will be equal to the base rent of the immediately preceding year plus the applicable escalator. Base rent during each renewal term will be, for the first year of each such renewal term, an amount equal to fair market value rent, but no less than the base rent in the prior year and no more than 110% of the base rent in the prior year, and for each year following such first year of such renewal term, an amount equal to the amount payable as base rent in the immediately prior year, subject to the annual escalator.

Variable Rent: CPLV Lease Agreement

The variable rent commences in year eight. During lease years eight through ten, the variable rent consists of a fixed annual amount of 20% of the rent for year seven increased or decreased, as applicable by 13% of the difference between the annual revenue of the CPLV facilities for year seven compared to the year prior to the first year of the lease term, as described in “Business—Our Relationship with Caesars.” Thereafter, the variable rent for years eleven through the initial stated expiration date will be a fixed annual amount equal to the variable rent in years eight through ten, increased or decreased, as applicable, by 13% of the difference between the annual revenue for the CPLV facilities for year ten compared to year seven, as described in “Business—Our Relationship with Caesars.” Variable rent during each renewal term will be equal to the variable rent in effect for the prior year, increased or decreased, as applicable, by 13% of the difference in annual revenue from the CPLV facilities (x) for the first renewal term, from year ten to year fifteen, and (y) for each subsequent renewal term, from the year prior to the first year of the immediately preceding renewal term to the last year of the immediately preceding renewal term.

Non-CPLV and Joliet Lease Rent

Base Rent: Non-CPLV Lease Agreement and Joliet Lease Agreement

The base rent of each of the Non-CPLV Lease Agreement and Joliet Lease Agreement is a fixed annual amount initially equal to $433.3 million and $39.6 million, respectively, during the first seven years of each such lease agreement. Each fixed amount includes an annual rent escalator beginning in the sixth lease year that is equal to the greater of (i) 2% and (ii) the increase of the Consumer Price Index from the prior year. After year seven, base rent in years eight through ten will be equal to (x) for year eight, 70% of the overall rent for year seven increased by the escalator, and (y) for years nine and ten, the amount of the base rent in the immediately preceding year increased by the annual escalator. Base rent in subsequent years of the initial term will be equal to (x) for year eleven, 80% of year ten overall rent increased by the annual escalator and (y) for each subsequent year, the amount of the base rent in the immediately preceding year increased by the annual escalator. Base rent during each renewal term will be equal to, for the first year of such renewal term, fair market value rent, but no less than the base rent in the prior year and no more than 110% of the base rent in the prior year, and for each year following such first year of such renewal term, an amount equal to the amount payable as base rent in the immediately prior year, subject to the annual escalator. With respect to the Joliet Lease Agreement, we are entitled to receive 80% of the rent pursuant to the operating agreement of our joint venture, Harrah’s Joliet Landco LLC.

 

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Variable Rent: Non-CPLV Lease Agreement and Joliet Lease Agreement

The variable rent commences in year eight. The variable rent consists of a fixed annual amount of 30% of the overall rent for year seven increased or decreased, as applicable, by (a) 19.5% of the difference between the annual revenue of Non-CPLV and Joliet facilities for year seven compared to the year prior to the first year of the lease term, as described in “Business—Our Relationship with Caesars.” Thereafter, the variable rent for years eleven through the initial stated expiration date will be equal to a fixed annual amount of 20% of the overall rent for the tenth lease year increased or decreased, as applicable, by 13% of the difference between annual revenue of Non-CPLV and Joliet facilities for year ten compared to year seven, as described in “Business—Our Relationship with Caesars.” Variable rent during each renewal term will be equal to the variable rent in effect for the prior year, increased or decreased, as applicable, by 13% of the difference in annual revenue from the Non-CPLV and Joliet facilities (x) for the first renewal term, from year ten to year fifteen, and (y) for each subsequent renewal term, from the year prior to the first year of the immediately preceding renewal term to the last year of the immediately preceding renewal term.

HLV Lease Rent

Base Rent: HLV Lease

The base rent for the first seven years of the HLV Lease term is $87.4 million per year, subject to an annual escalator equal to (a) 1% commencing in the second year of the lease term, and (b) the greater of 2% and the Consumer Price Index increase commencing in the sixth year of the lease term, provided, however, with respect to clause (b), in the event such escalation in rent will cause the EBITDAR to Rent Ratio (as more particularly defined in the HLV Lease Agreement) to be less than 1.6:1, the escalator will be reduced to an amount that would result in a 1.6:1 EBITDAR to Rent Ratio for such lease year (but in no event shall the escalator be less than zero). For the eighth year of the lease term through the tenth year of the lease term, base rent will be (i) for the eighth year, 80% of the overall rent for the seventh lease year, subject to the annual escalator and (ii) for each subsequent year, an amount equal to the base rent for the immediately prior year, subject to the annual escalator. From and after the commencement of the eleventh year of the lease term, base rent will be (i) for the eleventh year, 80% of the overall rent for the tenth year of the lease term, subject to the annual escalator and (ii) for each subsequent year, an amount equal to the base rent for the immediately prior year, subject to the annual escalator. Base rent in each renewal term will be, for the first year of each such renewal term, an amount equal to fair market value rent, but in no event less than the base rent payable during the year immediately preceding the commencement of such renewal term or greater than 110% of the prior year’s base rent and, for each year following such first year of such renewal term, an amount equal to the amount payable as base rent in the immediately prior year, subject to the annual escalator.

Variable Rent: HLV Lease

The variable rent commences in year eight. During lease years eight through ten, the variable rent consists of a fixed annual amount equal to 20% of the overall rent for the seventh lease year, increased or decreased, as applicable, by 4.0% of the difference in net revenue of the operations of HLV, from the year prior to the first year of the lease term to the seventh year of the lease term as described in “Business—Our Relationship with Caesars.” Thereafter, the variable rent for years eleven through the initial stated expiration date will be a fixed annual amount equal to 20% of the overall rent for the tenth year of the lease term, increased or decreased, as applicable, by 4.0% of the difference in net revenue from the operations of HLV from the seventh year of the lease term to the tenth year of the lease term. Annual variable rent during each renewal term will be an amount equal to the variable rent in effect for the year of the lease term immediately preceding the first year of such renewal term, with such variable rent increased or decreased, as applicable, by 4.0% of the difference in net revenue from the operations of HLV from year ten of the lease term to year 15 of the lease term (in the event of the first renewal period) or from the year prior to the first year of the immediately preceding renewal term to the last year of the immediately preceding renewal term (in the event of subsequent renewal periods).

 

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Revenue Recognition

The accounting treatment of the Lease Agreements is bifurcated between operating leases and direct financing leases. We recognize lease income with respect to the buildings and a portion of the land under the direct financing lease method, and rental revenue with respect to a certain portion of the land under the operating lease method.

For the nine months ended September 30, 2017 and the year ended December 31, 2016, pro forma cash received under our Lease Agreements was $540.9 million and $717.4 million, respectively, of which $36.4 million and $48.5 million, respectively, were accounted for under the operating lease method and $504.6 million and $668.9 million were accounted for under the direct financing lease method.

Rental income from operating leases was $36.4 million and $48.5 million in the nine months ended September 30, 2017 and in 2016, respectively, on a pro forma basis. Pro forma earned income from direct financing leases for the nine months ended September 30, 2017 and the year 2016 was $547.7 million and $725.8 million, respectively. On a pro forma basis, earned income from direct financing leases exceeded cash payments accounted for using the direct financing lease method due to the adjustment to recognize fixed amounts due on an effective interest basis at a constant rate of return over the lease term.

Golf Course Revenue

Revenue generated by Caesars Entertainment Outdoor is derived primarily from our golf course operations. As part of the Formation Transactions, we entered into the Golf Course Use Agreement with Caesars whereby we will receive a $10 million annual membership fee as consideration for providing discounted green fees for individuals and events and preferred blocked tee times. The membership fee will be subject to increase or decrease, as applicable, whenever rent under the Non-CPLV Lease Agreement is adjusted in accordance with the terms of the Non-CPLV Lease Agreement. The adjusted membership fee will be calculated based on the proportionate increase or decrease, as applicable, in rent under the Non-CPLV Lease Agreement. In addition to the annual membership fee, we will also receive use fees and minimum round fees, which will be subject to an annual escalator equal to the greater of 2% and the increase in the Consumer Price Index from the prior year beginning at the times provided under the Golf Course Use Agreement.

General and Administrative Expenses

General and administrative costs are expected for items such as compensation costs (including stock based compensation awards), professional services, office costs, and other costs associated with development activities. As of the date of this prospectus, we have approximately 140 employees at the Operating Partnership or VICI Golf or their respective subsidiaries. Compensation arrangements and equity grants have not yet been determined.

As a reporting company, we expect to incur incremental costs to support our business, including management personnel, legal expenses, finance, and human resources as well as certain costs associated with being a reporting company. We estimate that our general and administrative costs on a consolidated basis, including costs of operating as an independent company, could result in general and administrative expenses of $12 million to $14 million per year in addition to the $11 million of general and administrative expenses reflected in our unaudited pro forma combined condensed statement of operations for the year ended December 31, 2016.

Property Operating Expenses

Property operating expenses are expected for expenditures necessary to maintain the premises in reasonably good order and repair and will be paid by the tenants pursuant to the Lease Agreements. Property operating expenses will also include other expenses expected to be paid or reimbursed by the tenants such as property taxes. Pro forma property taxes were $45.6 million in the nine months ended September 30, 2017 and $60.8 million for the year ended December 31, 2016. All of such expenses would have been paid or reimbursed by the tenants had this transaction occurred on January 1, 2016.

 

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Interest Expense

We will incur interest expense from our borrowing obligations. As of September 30, 2017, on a pro forma basis, our debt totaled $4,148.5 million ($4,117.6 million, net of deferred financing cost and original issue discount). On a pro forma basis, we expect to have annual cash interest costs of approximately $182.6 million, based on an estimated weighted average interest rate of 4.36% per annum. See “—Liquidity and Capital Resources” below for more information.

Revenues and operating expenses of VICI Golf

VICI Golf holds the golf course properties, which include the operations of the Rio Secco golf course in Henderson, Nevada, the Cascata golf course in Boulder City, Nevada, the Grand Bear golf course in Saucier, Mississippi, and the Chariot Run golf course in Laconia, Indiana. Revenue generated by the golf course properties is derived from golf course operations, food and beverage and merchandise sales. On a pro forma basis, the golf course properties would have generated net revenues of $19.3 million and $27.4 million, respectively, and would have incurred total operating expenses (including direct golf course expenses, depreciation and general and administrative costs) of $13.6 million and $18.2 million for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Additionally, on a pro forma basis the tax rate for VICI Golf operations for the nine months ended September 30, 2017 and the year ended December 31, 2016 would have been 21.0%.

Liquidity and Capital Resources

Cash Flow Analysis

Cash Flows from Operating Activities

Net cash provided by operating activities for Caesars Entertainment Outdoor totaled $2.2 million and $2.4 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in net cash provided by operating activities of $0.2 million for the nine months ended September 30, 2017 compared to the corresponding period in the prior year was comprised primarily of lower cash receipts from customers due to the closure of Rio Secco due to renovations. This was partially offset by lower cash paid for operating expenses for the nine months ended September 30, 2017 compared to the corresponding period in the prior year.

Cash Flows from Investing Activities

Net cash used in investing activities for Caesars Entertainment Outdoor totaled $1.9 million and $0.8 million for the nine months ended September 30, 2017 and 2016, respectively, which was solely for expenditures for property and equipment, net of construction payables. Cash used in investing activities during 2017 was due primarily to the $1.8 million invested in the renovation of the Rio Secco course from late May to the end of September.

Cash Flows from Financing Activities

Net cash used in financing activities for Caesars Entertainment Outdoor totaled $1.2 million and $1.1 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in net cash used in financing activities of $0.1 million for the nine months ended September 30, 2017 compared to the corresponding period in the prior year was due to an increase of funding transactions with parent.

Debt

Prior Term Loans

On the Formation Date, our subsidiary VICI PropCo, as borrower, and certain of its subsidiaries entered into the senior secured credit facilities. The senior secured credit facilities provide for senior secured financing

 

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consisting of Prior Term Loans distributed to certain of CEOC’s creditors pursuant to the terms of the Plan of Reorganization in an aggregate principal amount of $1,638.4 million, which mature in 2022. The senior secured credit facilities have capacity to add incremental loans in an aggregate amount of: (a) $60 million plus (b) $1,450 million plus (c) additional amounts, subject, in the case of this clause (c), to the borrower and its restricted subsidiaries not exceeding certain leverage ratios.

The Prior Term Loans require scheduled quarterly payments in amounts equal to 0.25% of the original aggregate principal amount of the Prior Term Loans, with the balance due at maturity.

The borrower will pay interest quarterly on the Prior Term Loans at a rate per annum, reset quarterly, equal to (i) with respect to any ABR borrowings, the sum of ABR (as defined in the credit agreement) and 2.5% and (ii) with respect to any Eurocurrency borrowings, the sum of the Adjusted Eurocurrency Rate (as defined in the credit agreement) and 3.5%.

VICI PropCo is the borrower under the senior secured credit facilities and the material, domestic wholly-owned subsidiaries of VICI PropCo other than CPLV, CPLV’s subsidiaries and VICI FC Inc. (which is a co-issuer of our notes), are guarantors. The senior secured credit facilities are secured by a pledge of substantially all of the existing and future property and assets of VICI PropCo and the restricted subsidiary guarantors, including a pledge of the capital stock of the wholly-owned domestic subsidiaries held by VICI PropCo and the subsidiary guarantors and 65% of the capital stock of the first-tier foreign subsidiaries held by the VICI PropCo and the subsidiary guarantors, in each case subject to exceptions.

Under the senior secured credit facilities, VICI PropCo is also be required to meet specified leverage ratios in order to take certain actions, such as incurring certain debt. In addition, the senior secured credit facilities include covenants, subject to certain exceptions, restricting or limiting VICI PropCo’s ability and the ability of its restricted subsidiaries to, among other things: (i) incur additional debt; (ii) create liens on certain assets; (iii) enter into sale and lease-back transactions; (iv) make certain investments, loans and advances; (v) consolidate, merge, sell or otherwise dispose of all or any part of its assets; (vi) pay dividends or make distributions or make other restricted payments; (vii) enter into certain transactions with its affiliates; and (viii) amend or modify the articles or certificate of incorporation, by-laws and certain agreements or make certain payments or modifications of certain indebtedness.

The Prior Term Loans are prepayable at VICI PropCo’s option, in whole or in part, at any time, and from time to time, at a price equal to 100% of the principal amount of the Prior Term Loans redeemed plus accrued and unpaid interest to the redemption date plus (i) prior to the first anniversary of the issuance of such loans, a “make-whole” premium and (ii) thereafter, a prepayment premium equal to (a) 3% of the amount redeemed on and after the first anniversary of such issuance, (b) 2% of the amount redeemed on and after the second anniversary of such issuance, (c) 1% of the amount redeemed on and after the third anniversary of such issuance and (d) 0% on and after the fourth anniversary of such issuance; provided, however, that no “make-whole” or prepayment premium shall be payable in the event of any voluntary prepayment in cash of all Prior Term Loans prior to the six-month anniversary of the issuance of such loans.

The Prior Term Loans were repaid in full on December 22, 2017.

Prior First Lien Notes

On the Formation Date, our subsidiaries VICI PropCo and VICI FC Inc. (collectively, the “notes co-issuers”) issued $311.7 million in aggregate principal amount of Prior First Lien Notes to certain creditors pursuant to the terms of the Plan of Reorganization. The Prior First Lien Notes are due in 2022.

The notes co-issuers will pay interest quarterly on the Prior First Lien Notes at a rate per annum, reset quarterly, equal to the sum of LIBOR (as defined in the indenture), with a floor of 1.00%, and 3.5%.

 

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The Prior First Lien Notes are senior secured obligations of the notes co-issuers and rank equally and ratably in right of payment with all existing and future senior obligations and senior to all future subordinated indebtedness. The Prior First Lien Notes are guaranteed on a senior secured basis by the subsidiary guarantors that guarantee indebtedness under the senior secured credit facilities and secured by a first-priority security interest, subject to permitted liens, in the collateral that also secures the senior secured credit facilities. None of VICI REIT, our Operating Partnership or certain subsidiaries of VICI PropCo, including CPLV and its subsidiaries, are subject to the covenants of the indenture governing the Prior First Lien Notes or are guarantors of the Prior First Lien Notes.

The indenture governing the Prior First Lien Notes contains covenants that limit the notes co-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; (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.

The Prior First Lien Notes are redeemable at VICI PropCo’s option, in whole or in part, at any time, and from time to time, at a price equal to 100% of the principal amount of the Prior First Lien Notes so redeemed plus accrued and unpaid interest to the redemption date plus, (i) prior to the first anniversary of the issuance of such notes, a “make-whole” premium and (ii) thereafter, a prepayment premium equal to (a) 3% of the amount redeemed on and after the first anniversary of such issuance, (b) 2% of the amount redeemed on and after the second anniversary of such issuance, (c) 1% of the amount redeemed on and after the third anniversary of such issuance and (d) 0% on and after the fourth anniversary of such issuance; provided, however, that no “make-whole” or prepayment premium shall be payable in the event of any optional redemption in cash of all of the Prior First Lien Notes on or prior to April 15, 2018. In addition, prior to the first anniversary of such issuance, up to 35% of the original aggregate principal amount of the Prior First Lien Notes may be redeemed at VICI PropCo’s option with the net cash proceeds of certain issuances of common or preferred equity by VICI PropCo, VICI REIT or any parent entity of VICI PropCo, at a price equal to 100% of the principal amount of the Prior First Lien Notes redeemed plus a premium equal to the interest rate per annum on the Prior First Lien Notes in effect on the date on which notice of redemption is given plus accrued and unpaid interest to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the Prior First Lien Notes must remain outstanding after any such redemption.

The Prior First Lien Notes were discharged in full in December 2017.

Second Lien Notes

On the Formation Date, the notes co-issuers issued $766.9 million in aggregate principal amount of Second Lien Notes to certain creditors pursuant to the terms of the Plan of Reorganization. The Second Lien Notes are due in 2023.

The notes co-issuers will pay interest semi-annually on the Second Lien Notes at a rate per annum of 8.0%.

The Second Lien Notes are senior secured obligations of the notes co-issuers and rank equally and ratably in right of payment with all existing and future senior obligations and senior to all future subordinated indebtedness. The Second Lien Notes are guaranteed on a senior secured basis by each of the VICI PropCo existing and subsequently acquired direct and indirect wholly owned material domestic restricted subsidiaries, and secured by a second priority lien and security interest on substantially all of VICI PropCo and each such restricted subsidiaries’ material assets, including pledges of equity interests in their respective restricted subsidiaries and mortgages on their respective real estate (which mortgages are to be entered into within a certain period of time following the issuance of the Second Lien Notes), subject in each case to customary exceptions. Such guarantees

 

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are required to be provided by the same subsidiary guarantors that guarantee the indebtedness under the VICI PropCo Credit Facility or Prior First Lien Notes and such liens and security interests are required to be in the same collateral that secures the indebtedness under the VICI PropCo Credit Facility or Prior First Lien Notes. Neither VICI REIT or our Operating Partnership or certain subsidiaries of VICI PropCo, including CPLV and its subsidiaries, are subject to the covenants of the indenture governing the Second Lien Notes or are guarantors of the Second Lien Notes.

The indenture governing the Second Lien Notes contains covenants that limit the notes co-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.

The Second Lien Notes are redeemable at VICI PropCo’s option, in whole or in part, at any time, from time to time, at a price equal to 100% of the principal amount of the Second Lien Notes so redeemed and, (1) prior to the third anniversary of the issuance of such Notes, a “make-whole” premium and (2) thereafter, a prepayment premium equal to (y) 4% of the amount redeemed on and after the third anniversary of such issuance, and (z) 0% on and after the fourth anniversary of such issuance plus accrued and unpaid interest to the redemption date. In addition, prior to the third anniversary of such issuance, up to 35% of the original aggregate principal amount of the Second Lien Notes may be redeemed at VICI PropCo’s option with the net cash proceeds of certain issuances of common or preferred equity by VICI PropCo, VICI REIT or any parent entity of VICI PropCo, at a price equal to 108% of the principal amount of the Second Lien Notes redeemed plus accrued and unpaid interest to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the Second Lien Notes must remain outstanding after any such redemption.

CPLV Loans

CPLV CMBS Debt

On the Formation Date, CPLV Mortgage Borrower borrowed the CPLV CMBS Debt, which matures in October 2022 and consists of asset-level real estate mortgage financing from various third-party financial institutions. The proceeds of such financing were $1,550.0 million in cash, which were distributed to certain of CEOC’s creditors pursuant to the terms of the Plan of Reorganization.

The CPLV CMBS Debt has an interest rate of 4.36% per annum and is secured by, among other things, all of the assets of CPLV Mortgage Borrower, including, but not limited to, CPLV Mortgage Borrower’s (1) fee interest (except as provided in (2)) in and to CPLV, (2) leasehold interest with respect to Octavius Tower, and (3) interest in the CPLV Lease Agreement and all related agreements. The CPLV CMBS Debt is a first priority lien, subject only to permitted encumbrances (which are set forth in the loan documentation), and an obligation to repay a specified sum with interest. The CPLV CMBS Debt was evidenced by certain promissory notes and secured by a deed of trust that created a mortgage lien on the fee and/or leasehold interest of the CPLV Mortgage Borrower.

The Operating Partnership provided a customary non-recourse carve-out guaranty with respect to the CPLV CMBS Debt.

The loan documents governing the CPLV CMBS Debt contain covenants limiting CPLV Mortgage Borrower’s ability to, among other things: (i) incur additional debt; (ii) enter into certain transactions with its affiliates; (iii) consolidate, merge, sell or otherwise dispose of its assets; and (iv) allow transfers of its direct or indirect equity interests.

 

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Prior CPLV Mezzanine Debt

On the Formation Date, three direct and indirect special-purpose parent entities of CPLV Mortgage Borrower borrowed the Prior CPLV Mezzanine Debt from various third-party financial institutions. The Prior CPLV Mezzanine Debt matures in October 2022 and consists of three tranches: senior, intermediate and junior, in an amount of $200.0 million, $200.0 million and $250.0 million, respectively. The proceeds from such financing were distributed to certain of CEOC’s creditors pursuant to the terms of the Plan of Reorganization. On November 6, 2017, the junior tranche of the Prior CPLV Mezzanine Debt was subject to the Mandatory Mezzanine Conversion described under “Formation Transactions.” The senior and intermediate tranches have interest rates of 6.75% and 7.45%, respectively.

Each tranche of Prior CPLV Mezzanine Debt is secured by each borrower’s equity interests in its direct wholly-owned subsidiary. In particular, the senior tranche of the Prior CPLV Mezzanine Debt is secured by a pledge of the entirety of CPLV Mez 1 LLC’s 100% direct equity interest in CPLV Mortgage Borrower, the fee owner of CPLV and the direct borrower of the CPLV CMBS Debt. In turn, the intermediate tranche of the Prior CPLV Mezzanine Debt is secured by a pledge of the entirety of CPLV Mezz 2 LLC’s 100% direct equity interest in CPLV Mezz 1 LLC, and, prior to the Mandatory Mezzanine Conversion, the junior trance of the Prior CPLV Mezzanine Debt was secured by a pledge of the entirety of CPLV Mezz 3 LLC’s 100% direct equity interest in CPLV Mezz 2 LLC. CPLV Mezz 3 LLC is 100% owned by VICI PropCo.

The Operating Partnership provided a customary non-recourse carve-out guaranty with respect to the Prior CPLV Mezzanine Debt.

The loan documents governing the Prior CPLV Mezzanine Debt contain covenants limiting each borrower’s ability to, among other things: (i) incur additional debt; (ii) enter into certain transactions with its affiliates; (iii) consolidate, merge, sell or otherwise dispose of its assets; and (iv) allow transfers of its direct or indirect equity interests.

On December 22, 2017, VICI PropCo purchased from the originating mezzanine lenders the entirety of the outstanding Prior CPLV Mezzanine Debt (i.e., the senior and intermediate tranches) such that it is now the holder of 100% of the mezzanine lender’s interest in the same. Payments must continue to be made on account of such outstanding Prior CPLV Mezzanine Debt in accordance with the loan documents governing the Prior CPLV Mezzanine Debt and the loan documents governing the CPLV CMBS Debt (which call for, among other things, all income derived from CPLV by CPLV Mortgage Borrower to be paid into a blocked account under the control of the lenders’ agent under the CPLV CMBS Debt, which agent applies such income on a monthly basis in accordance with the waterfall provisions of the loan documents governing the CPLV CMBS Debt). Such waterfall provisions call for continued payment of, among other things, debt service on the outstanding Prior CPLV Mezzanine Debt, which is paid to the administrative agent of such Prior CPLV Mezzanine Debt and then released by such administrative agent to VICI PropCo, as the current mezzanine lender of such outstanding Prior CPLV Mezzanine Debt.

VICI PropCo Credit Facility

On December 22, 2017, VICI PropCo entered into the VICI PropCo Credit Facility, comprised of the $2.2 billion senior secured Term Loan B Facility and a $400.00 million senior secured Revolving Credit Facility. The Revolving Credit Facility and Term Loan B Facility will initially bear interest at LIBOR plus 2.25%. Following completion of this offering, the interest rate will be LIBOR plus 2.00%. The Revolving Credit Facility will mature on December 22, 2022 and the Term Loan B Facility will mature on December 22, 2024 or the date that is three months prior to the maturity date of the Second Lien Notes, whichever is earlier (or if the maturity is extended pursuant to the terms of the agreement, such extended maturity date as determined pursuant thereto). As of December 31, 2017, $300 million was drawn on the Revolving Credit Facility. If more than 30% of the Revolving Credit Facility is utilized at any quarter-end, VICI PropCo is required to maintain a maximum total net debt to adjusted total assets ratio.

 

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The VICI PropCo Credit Facility contains customary covenants that, among other things, limit the ability of VICI PropCo and its restricted subsidiaries to: (i) incur additional indebtedness; (ii) merge with a third party or engage in other fundamental changes; (iii) make restricted payments; (iv) enter into, create, incur or assume any liens; (v) make certain sales and other dispositions of assets; (vi) enter into certain transactions with affiliates; (vii) make certain payments on certain other indebtedness; (viii) make certain investments; and (ix) incur restrictions on the ability of restricted subsidiaries to make certain distributions, loans or transfers of assets to the VICI PropCo or any restricted-subsidiary. These covenants are subject to a number of important exceptions and qualifications, including, with respect to the restricted payments covenant, the ability to make unlimited restricted payments to maintain the REIT status of VICI.

The VICI PropCo Credit Facility also provides for customary events of default, including, without limitation, (i) payment defaults, (ii) inaccuracies of representations and warranties, (iii) covenant defaults, (iv) cross-defaults to certain other indebtedness in excess of specified amounts, (v) certain events of bankruptcy and insolvency, (vi) judgment defaults in excess of specified amounts, (vii) actual or asserted invalidity or impairment of any loan documentation, (viii) the security documents cease to create a valid and perfected first priority lien on any material portion of the collateral, (ix) ERISA defaults, (x) termination of the Non-CPLV Lease Agreement or the HLV Lease Agreement and (xi) change of control. The Term Loan B Facility is subject to amortization of principal in equal quarterly installments with 1.0% of the initial aggregate principal amount of the Term Loan B Facility to be payable each year. The Revolving Credit Facility and the Term Loan B Facility are both guaranteed by each of the VICI PropCo existing and subsequently acquired direct and indirect wholly owned material domestic restricted subsidiaries, and secured by a first priority lien and security interest on substantially all of VICI PropCo and such restricted subsidiaries’ material assets, including pledges of equity interests in their respective restricted subsidiaries and mortgages on their respective real estate (which mortgages are to be entered into within a certain period of time following the closing of such facility), subject in each case to customary exceptions.

Capital Expenditures

We may agree, at CEOC’s request, to fund the cost of certain capital improvements on arms-length terms and conditions, which may include an agreed upon increase in rent under the Lease Agreements. Otherwise, except as described below in connection with a deconsolidation event, capital expenditures for the properties leased under the Lease Agreements are the responsibility of the tenants. The Lease Agreements require the tenants to spend on an annual basis (A) with respect to the Non-CPLV Lease Agreement and the Joliet Lease Agreement, a minimum of $100.0 million in capital expenditures (which may include certain expenditures incurred by a certain CEOC affiliate or with respect to other CEOC assets) and (B) for each of the properties covered by the CPLV Lease Agreement and the properties covered by the Non-CPLV Lease Agreement and the Joliet Lease Agreement, in each case, an amount equal to at least 1% of actual revenue (from the prior year) generated, in the case of the CPLV Lease Agreement, by the CPLV facilities and in the case of the Non-CPLV Lease Agreement and the Joliet Lease Agreement, the other properties, as applicable, on capital expenditures that constitute installation or restoration and repair or other improvements of items with respect to the leased properties under the Formation Lease Agreements. In addition, the Formation Lease Agreements require the tenants to spend on a triennial basis (A) with respect to the Non-CPLV Lease Agreement and the Joliet Lease Agreement, a minimum of $495.0 million in capital expenditures (which may include certain expenditures incurred by a certain CEOC affiliate or with respect to other CEOC assets) and (B) across the properties leased from us a minimum of $350.0 million in capital expenditures and excluding capital expenditures for any services entity, foreign subsidiaries and unrestricted subsidiaries of CEOC, gaming equipment, corporate shared services and properties not included in the Formation Lease Agreements. These amounts, in each case, may be decreased under the same circumstances as with respect to the annual requirement. Further, with respect to the requirement to expend a minimum of $350.0 million in capital expenditures, such capital expenditures will be allocated as follows: (i) $84.0 million to the facilities covered by the CPLV Lease Agreement; (ii) $255.0 million to the facilities covered by the Non-CPLV Lease Agreement and the Joliet Lease Agreement; and (iii) the balance to facilities covered by any Formation Lease Agreement in such proportion as CEOC may elect. Lastly, the HLV Lease Agreement requires the tenant thereunder to spend (x) $171.0 million in capital

 

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expenditures for the period commencing January 1, 2017 and ending December 31, 2021, and, (y) commencing in 2022, annually, 1% of the actual net revenue generated during the immediately prior year from such property on capital expenditures that constitute installation, restoration, repair, maintenance or replacement of physical improvements or other physical items with respect to the leased property under the HLV Lease.

Contractual Obligations and Commitments

Information concerning our obligations and commitments to make future payments under contracts such as our indebtedness and future minimum lease commitments under operating leases is included in the following table on a pro forma basis as of September 30, 2017. This table does not include commitments related to operating lease obligations that are variable in nature and as such does not show the total anticipated payments that we will incur in connection with operating leases over five years following September 30, 2017.

 

     Payments Due by Period  
     (in millions)  
     Total      Within 1
Year
     1-3
Years
     4-5
Years
     After 5
Years
 

Long-term debt

     

Term Loan B Facility, principal(1)

   $ 2,100.0      $ 15.8      $ 42.0      $ 42.0      $ 2,000.2  

CPLV CMBS Debt, principal(2)

     1,550.0        —          —          1,550.0        —    

Second Lien Notes, principal(3)

     498.5        —          —          —          498.5  

Revolving Credit Facility, principal(4)

     —          —          —          —          —    

Estimated interest payments(5)

     1,125.7        182.6        363.0        360.1        220.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 5,274.2      $ 198.4      $ 405.0      $ 1,952.1      $ 2,718.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Term Loan B Facility requires scheduled quarterly payments in amounts equal to 0.25% of the original aggregate principal amount, with the balance due at maturity. The Term Loan B Facility will mature on December 22, 2024 or the date that is three months prior to the maturity date of the Second Lien Notes, whichever is earlier (or if the maturity is extended pursuant to the terms of the agreement, such extended maturity date as determined pursuant thereto).
(2) The CPLV CMBS Debt will mature on October 10, 2022.
(3) The Second Lien Notes will mature on October 15, 2023.
(4) The Revolving Credit Facility will mature on December 22, 2022.
(5) Estimated interest is based on an a LIBOR rate of 1.50%.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. We have identified certain accounting policies that we believe are the most critical to the presentation of our financial information over a period of time. These accounting policies may require our management to take decisions on subjective and/or complex matters relating to reported amounts of assets, liabilities, revenue, costs, expenses and related disclosures. These would further lead us to estimate the effect of matters that may inherently be uncertain.

Estimates are required in order to prepare the financial statements in conformity with U.S. GAAP. Significant estimates, judgments, and assumptions are required in a number of areas, including, but not limited to, the application of fresh start reporting, determining the useful lives of real estate properties, and evaluating the impairment of long-lived assets, and allocation of costs and deferred income taxes. The judgment on such estimates and underlying assumptions is based on our historical experience that we believe is reasonable under the circumstances. These form the basis of our judgment on matters that may not be apparent from other available sources of information. In many instances changes in the accounting estimates are likely to occur from period to period. Actual results may differ from the estimates. We believe the current assumptions and other considerations used to estimate amounts reflected in our financial statements are appropriate. However, if actual

 

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experience differs from the assumptions and other considerations used in estimating amounts reflected in our financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our financial condition.

Revenue Recognition

Leases

As a REIT, the majority of our revenues are derived from rent received from our tenants under long-term triple-net leases. The accounting guidance under ASC 840 is complex and requires the use of judgments and assumptions by management to determine the proper accounting treatment of a lease. We perform a lease classification upon lease inception, to determine if we will account for the lease as a capital or operating lease.

Under ASC 840, for leases of both building and land, if the fair value of the land is 25 percent or more of the total fair value of the leased property at lease inception we consider the land and building separately for lease classification. In these cases, if the building element of the lease meets the criteria to be classified as a capital lease, then we account for the building element as a capital lease and the land separately as an operating lease. If the building element does not meet the criteria to be classified as a capital lease, then we account for the building and land elements as a single operating lease.

To determine if the building portion of a lease triggers capital lease treatment we conduct the four lease tests in ASC 840 outlined below. If a lease meets any of the four criteria below, it is accounted for as a capital lease.

 

  (1)   Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title.

 

  (2)   Bargain purchase option. The lease contains a bargain purchase option, which is a provision allowing the lessee, at its option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable. In addition, the exercise of the option must be reasonably assured at lease inception.

 

  (3)   Lease term. The lease term is equal to 75% or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease. This test is conducted on a property by property basis.

 

  (4)   Minimum lease payments. The present value of the minimum lease payments at the beginning of the lease term, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90% of the fair value of the leased property to the lessor at lease inception less any related investment tax credit retained by the lessor and expected to be realized by the lessor. If the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.

The tests outlined above, as well as the resulting calculations, require subjective judgments, such as determining, at lease inception, the fair value of the assets, the residual value of the assets at the end of the lease term, the likelihood a tenant will exercise all renewal options (in order to determine the lease term), the estimated remaining economic life of the leased assets, the incremental borrowing rate of the lessee and the interest rate implicit in the lease. A change in estimate or judgment can result in a materially different financial statement presentation.

The revenue recognition model is different under capital leases and operating leases.

 

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Under the operating lease model, as the lessor, at lease inception the land is recorded as Real Estate Investments Accounted for Using the Operating Method in our Combined Condensed Balance Sheet and we record rental income from operating leases 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, is determined by applying our incremental borrowing rate to the value of the land. We record this lease income as Rental Income from Operating Leases in our Combined Condensed Statement of Operations.

Under the direct financing lease model, as lessor, at lease inception we record the lease receivable as Real Estate Investments Accounted for Using the Direct Financing Method in our Combined Condensed Balance Sheet. Under the direct financing lease method, we recognize fixed amounts due on an effective interest basis at a constant rate of return over the lease term. As a result, the cash payments accounted for under direct financing leases will not equal the earned income from direct financing leases as a portion of the cash rent we receive is recorded as Earned Income from Direct Financing Leases in our Combined Condensed Statement of Operations and a portion is recorded as a reduction to the Real Estate Investments Accounted for using the Direct Financing Method.

Real Estate Investments

For real estate investments accounted for using the operating method, we continually monitor events and circumstances that could indicate that the carrying amount of our real estate investments may not be recoverable or realized. When events or changes in circumstances indicate that a potential impairment has occurred or that the carrying value of a real estate investment may not be recoverable, we use an estimate of the undiscounted value of expected future operating cash flows to determine whether the real estate investment is impaired. If the undiscounted cash flows plus net proceeds expected from the disposition of the asset is less than the carrying value of the assets, we recognize an impairment charge equivalent to the amount required to reduce the carrying value of the asset to its estimated fair value. We group our real estate investments together by property, the lowest level for which identifiable cash flows are available, in evaluating impairment. In assessing the recoverability of the carrying value, we must make assumptions regarding future cash flows and other factors. Factors considered in performing this assessment include current operating results, market and other applicable trends and residual values, as well as the effect of obsolescence, demand, competition and other factors. If these estimates or the related assumptions change in the future, we may be required to record an impairment loss.

For real estate investments accounted for using the direct financing method, our net investment in the direct financing lease is evaluated for impairment as necessary, if indicators of impairment are present, to determine if there has been an-other-than-temporary decline in the residual value of the property or a change in the lessee’s credit worthiness.

Income Taxes—REIT Qualification

We intend to elect to be taxed and qualify as a REIT for U.S. Federal income tax purposes commencing with our taxable year ending December 31, 2017, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT beyond that taxable year end. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders (with certain adjustments), determined without regard to the dividends paid deduction and excluding any net capital gains. As a REIT, we generally will not be subject to Federal income tax on income that we pay as distributions to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. Federal income tax on our taxable income at regular corporate income tax rates, and distributions paid to our stockholders would not be deductible by us in computing taxable income. Additionally, any resulting corporate liability created if we fail to qualify as a REIT could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

 

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Quantitative and Qualitative Disclosures about Market Risk

We face market risk exposure in the form of interest rate ris