Casino landlord and Chelsea Piers owner Vici Properties refinanced $1 billion in debt last week, a normally unremarkable transaction but one that a growing number of commercial landlords struggle to pull off nowadays.
Vici is a good bet because its two biggest tenants, paying 75% of the rent, are Caesars Palace and the MGM Grand on the Last Vegas strip. Not only is tourism exploding in Vegas, but the casinos’ annual rent hikes are linked to CPI data, Fitch Ratings said, so inflation doesn’t erode Vici’s rental income. Thanks to this customer base, Vici was able to borrow money that doesn’t come due for 30 years, a remarkably long time for debt that isn’t secured by property.
“If you’ve got the right balance sheet, the market is accommodating,” said James Kammert, an analyst at Evercore ISI.
On the same night of Vici’s debt refinancing, California-based Essex Property Trust did the same, borrowing $350 million unsecured at a 5.5% rate. Essex owns 62,000 apartments and benefits from continued strong demand for housing on the west coast.
The ability of these two real estate investment trusts to borrow shows markets are thawing after last year’s deep-freeze – if you’re the right kind of landlord. Conditions remain hostile for office buildings and the owners of some prominent Midtown towers are struggling to refinance loans made when interest rates were ultra-low and the supply of new tenants seemed unending.
The list of buildings facing debt-refinancing challenges include 280 Park Ave., whose $1.2 billion mortgage matures in September and has been transferred to special servicing, the financial world’s intensive-care ward. 731 Lexington Ave.’s $500 million mortgage comes due in June and Fitch recently lowered its outlook to “negative” in recognition a deal might not get done and kick off a “prolonged” struggle.
Commercial real estate investment fell in half last year to about $200 billion, the lowest sum since 2012, according to research firm Altus Group. But at the end of last year markets started to reopen as yields on the benchmark 10-year bond used to set mortgage rates fell from a peak of 5% to about 4%. Landlords with stable cash flows are refinancing obligations at advantageous rates.
30-year loans aren’t unusual in the residential mortgage market, because lenders can seize the property if a borrower defaults, but in commercial real estate they are much less common. Vici was able to borrow for 30 years without ponying up any collateral because investors believe tourists will continue spending vast sums in Las Vegas for a long time to come. The blended interest rate on Vici’s new debt package is only slightly higher than the 5.625% rate of the previous deal that matured in 10 years.
Vici has bet $22 billion it has judged the market right, that’s how much it owes investors in long-term obligations. The firm is moving to distance its fortunes a bit from Las Vegas by acquiring other “experiential” businesses, such as bowling alleys and, in December, Chelsea Piers. It was spun off seven years ago by Caesars Entertainment, the casino operator that emerged after a fierce bankruptcy battle told entertainingly by business journalist Sujeet Indap in The Caesars Palace Coup.
Aaron Elstein , 2024-03-11 17:10:08
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