VICI Properties Inc (VICI) — Q1 2018 Earnings Call Transcript

Thank you, operator, and good morning. Everyone should have access to the Company's first quarter 2018 earnings release. The release can be found in the Investors Section of the VICI Properties’ website at www.viciproperties.com. Some of management's comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by their use of words such as will, expect, should or other similar phrases, are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. I refer you to the Company's SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition. During the call, management will discuss non-GAAP measures, which we believe can be useful in evaluating the Company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. The reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2018 earnings release. Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; and David Kieske, Chief Financial Officer of the Company. Management will provide some opening remarks, and then we'll open the call to questions. With that, I'll turn the call over to Ed.

Thank you, Jacques, and good morning, everyone. Welcome to our second earnings call as a Publicly Traded Company and the first earnings call reporting a full calendar quarter. Today is day 210 since our emergence on October 6, 2017, and we continue to execute on our mission to be America's most dynamic leisure and hospitality experiential real estate company. The highlight of our first quarter was our successful IPO on January 31, in which we raised $1.4 billion, deleveraging our balance sheet, improving our liquidity, and greatly expanding our shareholder base. We were also pleased to announce our first dividend in March, and we look forward to continuing to deliver these distributions as a key part of our total return package to investors. David will provide more details on the results, but we ended the quarter with just about $1.3 billion in dry powder available for growth initiatives. We remain hard at work, focused on prospects to advance our strategy around our four key pillars of value: portfolio, tenant, capital stewardship, and our governance and independence. Our pipeline of growth opportunities is healthy. We have three call option properties, which we can take down at our discretion at a 10% cap at any time between now and October 2022. Our relationship with Caesars remains very strong, and we continue to work on mutually beneficial opportunities together. And with John leading the charge, we are hard at work developing relationships with other asset operators in the industry. We do not expect that our dry powder will sit idle for any extended period of time and we remain confident in our ability to deploy your capital strategically and in a timely manner. We're often asked what inning we are in. We can have a healthy debate about what inning the overall REIT sector may be in, but what about gaming REITs? What inning are REITs in? Let’s start with the fact that the gaming REIT sector is still less than five years old. During that period, there have been two major portfolio trades and five single-asset trades that were not renegotiated or otherwise contractually dropped down from the tenants. But what we should all know is that in recent months, the pace of activity has picked up. Market participants, both buyers and sellers, are gaining more confidence that the liquid market is truly developing. We believe this confidence will be key to generating further deal flow as would be the case in any sector. Turning values may trend higher or, against the current backdrop of rising interest rates, they may not. In either case, when it comes to the issue of trading values being higher or not, we ask the question, compared to what? When we purchased Harrah's Las Vegas in December, that is $87 million of NOI; we brought that income at a 7.7% cap rate. We know of no other real estate sector in which that kind of quality, scale, and durability of income can be brought in anywhere near that kind of cap rate. At VICI, we're very confident that we are establishing a real estate transactional practice of truly institutional quality. We worked hard to develop our growth strategy, our acquisition criteria, and our relationships with asset controllers and transaction advisors. And thanks to our successful IPO, we have established cool capital to fund our growth activities for the foreseeable future. That growth capital belongs, of course, to our shareholders, and we will deploy it with great care and great discipline. As a REIT management team, we will be judged as we should be by the quality of our capital allocation. When I answered the original question of what inning are we in, being less than five years old, we say the gaming REIT sector is no later than its third inning, and we, VICI, being barely 200 days old, are, by definition, in our first inning. We are very excited to be in the batter's box. With that, I would like to turn the call over to John to provide more details on the current market environment.

Thanks, Ed, and good morning to everyone. As many of you are aware, the market environment for gaming transactions is quite active. The announced trades in the sector by us and our peers over the last six months are a testament to the growing confidence in the gaming REIT model. At VICI, the opportunities that we are currently assessing and the conversations that we're having continue to indicate that our growth trajectory is not going to slow down. We believe the key ingredients to this have been our governance, our keen understanding of the tenant's underlying business, and our focus on executing what we consider fair deals—deals that are mutually beneficial to both the OpCo and VICI. We are very active on several opportunities and ask that you stay tuned as we look forward to providing updates in the future. With that, I will turn the call over to David, who will discuss our financial results.

Thanks, John. Yesterday, we reported AFFO of $0.36 per share for the first quarter. Our earnings for the quarter reflect revenue of $218.3 million, which was comprised of $211.5 million from our real property business and $6.8 million from our golf business. Real property business revenue was comprised of $182 million of earned income from direct financing leases, $4.2 million of rental income from operating leases, and $17.2 million of property taxes paid by our tenants on the leased properties. Our earned income from direct financing leases for the quarter includes a $12.9 million net change to our investment and direct financing leases, which is a non-cash item. On the cost side, our general and administrative costs were $7.3 million for the quarter. As we mentioned on our last earnings call, we continue to incur start-up and transition related costs, which we expect to continue for the next quarter or two as we work towards the steady state run rate for G&A. Our first quarter G&A includes three items to note. First, $500,000 of severance costs related to the relocation of our corporate headquarters from Las Vegas to New York. Second, approximately $600,000 in one-time legal, professional, and consulting costs associated with non-recurring board advisory work. And finally, $300,000 in recruiting costs as we continue to build out our team. Our adjusted funds from operations include these items and for the quarter was $125 million and $0.36 per share. Turning to our balance sheet. With the completion of our IPO on February 5, we ended the quarter with just over $980 million of cash, including $13.8 million of restricted cash. Our outstanding debt at quarter end was $4.1 billion, with a weighted average interest rate of 4.6% and a weighted average maturity of approximately six years. We have no debt maturity until 2022. Based on annualized first quarter results, our gross leverage to adjusted EBITDA is 5.9 times and our net leverage to adjusted EBITDA is 4.6 times. Our cash balance along with $400 million of availability under our revolving credit facility gives us approximately $1.3 billion of dry powder to execute on our growth strategy. Subsequent to quarter end, we entered into interest rate swap transactions with a syndicate of financial institutions and counterparties. The transactions have an aggregate notional amount of $1.5 billion, with an effective date of May 22, 2018, and a termination date of April 22, 2023. These transactions served to fix the LIBOR portion of our Term Loan B at approximately 2.8% and bring our total fixed-rate debt to approximately 86% of our total debt, providing clarity to our interest expense over the next five years. Turning to guidance, we expect 2018 AFFO per diluted share on a same-store basis to be between $1.39 and $1.41 per share. We assume a fully diluted weighted-average share count of 364 million shares outstanding at year-end, which reflects the impact of our IPO in February. On March 15, we announced our first quarterly cash dividend of $0.16 per share; the dividend was prorated for the period commencing upon the closing of our IPO on February 5 and ending on March 31, based on an annual distribution rate of $1.5 per share. The dividend was paid on April 13. With that, we’d be happy to answer any questions that you might have. Operator, please open the line for questions.

Hi, guys. Thank you. Just to clarify a couple of comments that you made. Ed, earlier, and maybe to go back to your baseball analogy, you said that you guys are very active on several opportunities, and I'm wondering, should we think of those in terms of singles or doubles or something maybe of larger scale?

Yes. It’s a great question, Mike, and good morning. We always want to grow in a sustainable way over time, and as we deliver total return to our shareholders made up of dividends, same-store growth, and accretive acquisition growth, we believe we can be very successful knocking out singles and doubles. If those are accretive, if they're going to give us really good risk-adjusted returns. The thing we probably emphasize, and maybe goes without saying, especially for a triple-net REIT, our deals need to be accretive going in. This is not like the hotel sector where you could underwrite a dilutive yield asset and manage your way to accretion. So, we’re going to be careful, disciplined, and diligent. Where there are straightforward singles and doubles to be achieved, we’re going to achieve those, and we see opportunities of greater magnitude. As long as they’re accretive and risk-adjusted returns over time are good, we will certainly focus on those as well.

And then also you said it would be unlikely that you would sit on cash for an extended period of time. I'm just wondering, what is an extended period of time for you guys, and maybe just in the context of should we expect that cash balance to be there at year-end?

I would say, Mike, we would hope, it certainly would not be at year-end, and yes, we're going to take the time to do the best deals we can for our investors. Again, given the fact that they need to be accretive going in. When you look across the marketplace, there are really two types of deals that are happening and will happen in the future. One is deals in which the owner of the asset, both the owner and the operator of the asset is looking to exit, right, and those may be marketed or non-marketed processes. The chances are they will look for the highest price. The other category is sale-leaseback, where the owner-operator will stay in as the operator on a sale-leaseback basis. Those relationships take time to develop; we think they can and should form the core of our strategy going forward. We will obviously look at both, and we're looking at both at this time, and again working very hard to execute deals that will provide very good outcomes with that cash available to us.

Thanks guys. Appreciate the color.

Hi. This is Bill filling in for Stephen. You mentioned before a deliberate approach to acquiring those call option properties that you have - can you just remind us of the puts and takes around exercising those contracts either in the near future or over time?

Yes, this is John speaking. So we have three call options; there are five years, and we have five years from the date of emergence in October of 2017. They are at a 10% cap and 1.67 rent coverage, and we need to give Caesars roughly 60 days notice before we take them there.

As long as we have opportunities that are not going to be available over the next five years, we are obviously going to prioritize those opportunities to deploy both our management time and our capital.

Great. That’s helpful. And then just a quick follow-up, your competitors doing deals with different tenants; has the competitive dynamics for VICI as an independent REIT shifted at all?

No, I mean we think – what we think is happening is that the overall gaming REIT model is being validated by virtue of these deals. We congratulate our colleagues in the sector for getting these deals done. We know that at least one of those deals has long been suggested and it’s not surprising that it did with the big complex deal. What we really do – again point to the fact that that’s finally over; I would say over the last six to nine months, there’s a growing recognition of the role that gaming REIT can play in helping either finance exits or, moreover, finance growth. What’s exciting to us is that we are in a period now where, among other things, you're seeing the emergence of what we call super regionals, who are focused on growing their portfolios, their operating portfolios, growing their footprints across the U.S., and we believe gaming REITs generally, and we would hope VICI specifically can be a provider of long-term growth capital to them as they pursue their growth ambitions.

Great. Thank you.

Hi, thanks for the question. So following up on potential M&A, given your infancy in the REIT market, would you be more focused on markets that have a more established track record, or would newer markets such as Massachusetts or even international be an option for you as well?

I think that markets that have good fundamentals are going to be interesting to us wherever they are. I do think for the time being, though, we're excited about the magnitude of opportunities that exist for us within the existing gaming states. Again, we have to ensure the deals we do are accretive going in. The triple net model in and of itself requires that and as far as we can under the accretion will come in the future. These are going to come at the beginning or frankly – probably wouldn’t come at all. So we will evaluate markets carefully, then evaluate the assets in the market, and make sure they are good assets that have good fundamental real estate investment characteristics—the exact location, the quality of the buildings, the quality of the building systems, and the quality of the operator and its competitiveness and market share. Again, we believe we've got a good pipeline of opportunity in the well-established gaming states, and that’s where we believe we’ll get the highest return on management time for the time being.

Okay. Thanks. End of Q&A.

Thank you, everyone. In closing, we at VICI are excited about the rapid progress we continue to make in executing our strategy, and we have no plans of slowing down. Our growth pipeline continues to be robust and we believe we are well-positioned to grow our portfolio and drive superior shareholder value. Thanks again for your time today. We look forward to providing an update on our continued progress when we report our second quarter results. Again, thank you and goodbye.