Caesar's Got Left Holding the Bag
VICI conquered and kept Caesar alive to pay rent
This is the second article in my series about Caesar’s Entertainment to provide context on VICI properties. The first article is here.
Caesars Entertainment (NASDAQ: CZR) was drowning. Not in chips and cocktails, but in $18 billion of bankruptcy debt. The solution? Split the company in two: VICI Properties would own the real estate, and Caesars would run the casinos while renting them back. Caesars ended up with the short end of the stick—stuck maintaining, improving, and servicing properties they no longer own, all while paying over $1 billion in annual rent that keeps climbing.
Bankruptcy
It’s a cruel twist of fate when a casino finds itself chasing too much leverage and going bankrupt. Caesars Entertainment Operating Company filed for Chapter 11 in January of 2015, it’s creditors needed a creative way to extract value. The answer was to carve out a real estate investment trust that would own the casinos and lease them back to Caesars under long-term triple-net agreements. VICI launched in October 2017 with 19 casinos including Caesars Palace Las Vegas, generating $630 million in initial annual rent. VICI’s founders were a mix of firms the likes of Apollo Global Management, TPG Capital, and leading hedge funds with major banks such as Wells Fargo, JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs. The goal was to utilize CZR’s assets to make the aforementioned creditors whole via the lease back agreement.
VICI comes from the end of Julius Caesar’s famous phrase “Veni, vidi, vici”—I came, I saw, I conquered. Which may be a cruel twist of irony in the sense that the creditors chose the final word of the phase, as much as they were the literal conquerors.
The Triple-Net Trap
Under the triple-net lease agreements, Caesars is responsible for everything: property taxes, insurance, all maintenance and repairs, and capital expenditures to keep the properties competitive.
In Vegas, where customers expect the latest and greatest, this is brutal. Caesars is forced to constantly refresh rooms, upgrade pools, renovate towers, and add new attractions because they’re contractually required to.
The VICI leases mandate minimum capital spending: at least 1% of net revenues annually, with floors above $107 million for certain properties. If Caesars misses these targets they risk default. A reprieve on these requirements was granted during COVID but has long since expired.
So Caesars pays rent, pays for upkeep, pays for improvements, and gets zero upside if property values rise. VICI collects rent and watches the properties appreciate while bearing virtually no risk.
The bags keep taking on water
As of late, Caesars is carrying roughly $25 billion in total debt when you include lease obligations, with $12.3 billion in principal debt alone. They’re paying $1.3 billion a year to VICI, and that rent steps up annually. Meanwhile, their interest coverage ratio is just 0.97x - meaning they barely generate enough operating profit to cover interest expenses.
Free cash flow is practically nonexistent. Over the last three years, Caesars converted just 8.4% of EBIT into free cash. There’s almost nothing left for property improvements, debt paydowns, or shareholder returns.
CZR management projects $600 million in capital expenditures for 2025, but much of that is just meeting the minimum requirements under VICI leases. There’s little room for the kind of transformative investments that competitors like MGM and Wynn are making.
Falling Behind the Competition
While Caesars scrapes by, competitors are investing aggressively. Wynn is dropping $2.4 billion on a new UAE resort. MGM, despite having its own sale-leaseback arrangement, maintains more flexibility and is pushing into digital gaming and new markets.
Caesars managed to invest about $1 billion in Las Vegas Strip renovations post-COVID, but observers have noted that even flagship properties like Caesars Palace show their age in sections like the Nobu and Julius Towers. When you’re paying over a billion in rent and servicing $12 billion in debt, the carpet isn’t going to be replaced as frequently.
VICI’s Ace-In-The-Hole
From VICI’s perspective, this deal is a masterpiece. They generate roughly $4 billion in annual revenue at a 75% net profit margin. The triple-net structure means tenants pay for everything, VICI just collects checks. Their portfolio is 100% occupied, rents escalate annually, and regulatory hurdles make it nearly impossible for tenants to relocate.
Management’s Opaque Optimism
Caesars CEO Tom Reeg talks about being in “free cash flow harvesting mode” and points to strong forward bookings. The company recently sold the World Series of Poker brand for $250 million and the LINQ Promenade for $275 million, using proceeds to pay down debt.
But these asset sales reveal the problem: Caesars is selling valuable pieces just to service debt and rent. Standard & Poor’s rates their debt below investment grade, with leverage expected to stay above 6x through 2025.
The VICI spin-off helped Caesars escape “real” bankruptcy and gave creditors value. But it left the casino operator in a structurally disadvantaged position that constrains competitiveness and financial flexibility.
Caesars must maintain and upgrade properties it doesn’t own, pay escalating rent regardless of performance, service massive debt, and compete against rivals with more flexible capital structures—all while barely covering interest expenses. The company is literally holding the bag on real estate obligations with no ownership upside but severe downside risk.