VICI Properties Inc (VICI) — Q2 2018 Earnings Call Transcript

Thank you, Operator, and good morning. Everyone should have access to the company's second quarter 2018 earnings release and the supplemental information. The release and the supplemental information 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, guidance, intend, projects, 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. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2018 earnings release and our supplemental information. Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; and David Kieske, Chief Financial Officer; and Gabe Wasserman, Chief Accounting Officer of the company. Management will provide some opening remarks, and then we'll open the call to questions. With that, I turn the call over to Ed.

Thank you, Jacques, and good morning, everyone, and thank you all for joining our second quarter earnings call. Yesterday VICI marked its 300th day since emerging on October 6, 2017. These have been 300 days in which we have worked very hard to live up to our mission of being America's most dynamic experiential REIT. In these first 300 days, we raised $2.4 billion of equity through our $1 billion equity private placement and our $1.4 billion IPO. We refinanced nearly $2 billion of debt from LIBOR plus 350 to LIBOR plus 200. We eliminated over $1.3 billion of debt that bore a weighted average interest of approximately 6.5%. We de-leveraged from 8.4x debt to EBITDA at emergence to net 4.6x debt to EBITDA at quarter-end. We announced nearly $2 billion of acquisitions yielding us $166 million of incremental rent at a net blended cap rate of 8.4%. We grew our last Las Vegas exposure by $122 million of annual rent. We announced our agreement to significantly improve our foundational leases to the benefit of both our tenants and ourselves, which will yield us, among other things, a 100 basis point improvement in our same-store AFFO annual growth rate. We achieved tenant diversity in record time for our gaming REIT with our recent announcement of partnering with Penn Gaming on the Margaritaville acquisition. We announced our first intended dividend increase of 9.5% in just our third quarter of being a dividend paying REIT. And with the additions of Liz Holland and Diana Cantor, we built an independent board which we believe to be one of the strongest and most diversified in the sector. Lastly, as you know, we're always striving to improve upon and increase our level of disclosures to match those expected of the best-in-class REIT. Towards that goal, this quarter we have introduced our quarterly supplemental. We hope you will find it useful as we continue to update it and improve it in the quarters to come. With this, looked at as a body of work after 300 days, the dynamism our mission calls for. And this dynamism ultimately is about relentlessly creating shareholder value. All our growth these first 300 days is the result of the best-in-class transaction practice that John Payne, our President and COO, is building. I'll now turn things over to John so that you can hear from him about the great work he and his team are doing.

Thanks, Ed, and good morning to everyone. As you can tell by the number of transactions announced by us in the gaming REIT sector more broadly over the past few months, the market environment for gaming transactions continues to be quite active. We view these transactions and the accretive value they've created for shareholders as a testament to the growing confidence in the gaming REIT model. As Ed touched on, we announced three asset acquisitions this quarter. We reconsolidated all of Caesars Palace real estate by acquiring the 668-room Octavius Tower, which had been carved out from the rest of the property many years back in a financing related transaction. This acquisition represented a logical step for us not only in that it consolidates our ownership of Caesars Palace, but it also increased our exposure on the center of the Las Vegas Strip. The Las Vegas Strip holds some of the most valuable, sought-after real estate in the world, and we have managed to increase our Strip exposure significantly, adding $122 million in rent since formation with the acquisition of Harrah's Las Vegas and the Octavius Tower. We also announced the acquisition of Harrah's Philadelphia and with it our entrance into the Philadelphia market, the seventh largest gaming market in the U.S. We continue to expect that transaction to close during the fourth quarter of 2018 and when it does, we will diversify our rental income geographically by adding $21 million in rent from that asset and executing on the agreed upon lease modifications associated with the Philadelphia and Octavius acquisitions as Ed already highlighted. Upon closing these transactions, we'll collectively add $56 million of NOI to our portfolio at an attractive net cap rate of 9.5%. Also during the quarter on June 19th, we announced our partnership with Penn National to acquire Margaritaville Resort Casino in Bossier City, Louisiana, for an implied cap rate of 8.9%. We continue to expect that transaction to close during the second half of 2018. And when it does, VICI will lease to Penn the operations of the property for an initial annual rent of approximately $23 million. As the newest gaming property to open in the Bossier Street market in over a decade, Margaritaville complements VICI's existing footprint in the region. In addition, and as importantly, with this transaction, we've added Penn National to our tenant roster. Penn is a very high-quality tenant that is set to become the largest regional gaming operator in the U.S. following the completion of the announced acquisition of Pinnacle Entertainment for $2.8 billion. We look forward to working with Penn and expanding our relationship in the quarters and years ahead. As you have heard, this has been a very active quarter for us in putting your capital to work. What has been and continues to be a principal key to our success is our understanding of the tenant's underlying business, and our focus on executing what we consider fair deals, meaning deals that are mutually beneficial to both the OpCo and VICI. We continue to be active in discussions and scouting for opportunities and we look forward to providing more 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 total AFFO of $128.8 million or $0.35 per share for the second quarter. Our earnings for the quarter reflect revenue of $221 million which was comprised of $213.5 million from our real property business and $7.5 million from our golf business. Real property business revenue was comprised of $182.3 million of income from direct financing leases, $12.2 million of income from operating leases, and $18.9 million of property taxes paid by our tenants. Our income from direct financing leases includes a $13.2 million net change to our investments in direct financing leases, which is a non-cash item. After adjusting for the non-controlling interest attributable to Joliet, our portion of the DFL that is deducted from net income to calculate AFFO is $12.9 million. On the cost side, our general administrative costs were $7.2 million for the quarter. As we mentioned on our last earnings call, we continue to incur startup and transition-related costs, which we expect to continue into the third quarter as we work towards a steady state run rate for G&A. During the second quarter, we had two nonrecurring items that totaled approximately $1 million related to recruiting and relocation costs associated with the transition from Las Vegas to New York, as well as legal and advisory costs associated with the S-11 we filed in May in connection with the December private placement. Our AFFO does include these one-time items in the quarter. Turning to our balance sheet, we ended the quarter with just over $980 million of cash in short-term investments, excluding $13.8 million of restricted cash. Subsequent to quarter end, we closed the acquisition of Octavius Tower for $507.5 million using cash on the balance sheet. In addition, we expect to use cash on the balance sheet to fund the remaining transactions in our pipeline. We expect a total net cash outflow for Margaritaville, Harrah's Philadelphia, and the $159 million reduction associated with the agreed upon lease modification with Caesars to be $851 million. And as we have mentioned, we expect these transactions to close in the second half of 2018. During the quarter, we entered into a five-year interest rate swap with a notional amount of $1.5 billion. This serves to effectively fix the LIBOR component on a portion of our term loan B facility at approximately 2.8% and brings our total fixed-rate debt to 86%, providing certainty to our interest expense over the next five years. Our outstanding debt at quarter end was $4.1 billion with a weighted average interest rate, including the impact of our interest rate swap of 4.93% and a weighted maturity of approximately six years. We have no debt maturing until 2022. Based on annualized second quarter adjusted EBITDA, our net leverage is 4.6x. As we looked upon any potential future growth opportunities, we will continue to remain disciplined and opportunistic in how we use our capital using a balanced approach to capital allocation to maintain our low leverage profile. This quarter, we have overseen the smooth transition of all of our accounting functions from Las Vegas to New York and as part of this initiative, we have added some exceptional new hires to our internal accounting and legal teams. And as Ed mentioned, we have enhanced our disclosures and added the supplemental to our IR site as we feel transparency is an attribute of best-in-class REITs. We welcome your feedback on the information as we are always looking to improve and help you understand the durability and consistency of our business. Turning to guidance, we are raising our 2018 guidance expectations to reflect the close of Octavius Tower in the current interest rate environment. Note, our revised guidance does not account for the Harrah's Philadelphia or Margaritaville transactions which we have announced but not yet closed. For 2018, we now expect AFFO per diluted share on a same-store basis to be between $1.43 and $1.44 per share. Finally, regarding the company's dividend policy, with the closing of Octavius Tower, we expect to increase our annual dividend to $1.15 per share from the current annual amount of $1.05. This represents a 9.5% increase in an applied annual dividend rate of $0.2875. This increase is expected to be reflected in our next quarterly dividend declaration for the third quarter.

Thanks, David. Before we open up the lines to Q&A, we would like to address what we expect may be on the minds of some, and that's the issue of what the second half of 2018 may look like for Las Vegas Strip properties. In the starting point and at the risk of stating the boldly obvious, we are a triple net REIT with rent streams that are fixed for now and grow in the years to come thanks to preordained escalators. We will collect the same amount of rent from our Strip properties in Q3 and Q4 2018 whether our tenant is up, down, or sideways over the short-term period. Over the long-term, we believe very strongly in the health of the Las Vegas Strip given economic health, cultural trends, the outlook for low supply growth, and continuing innovations in destination marketing and destination experiences from a great operator like Caesars. We would note that regional gaming markets posted growth in June of 5.7%, one of the highest year-over-year growth percentages in recent regional gaming history, and we see a growing regional propensity to game as a longer-term positive for Las Vegas. At the same time, because of the relative current outperformance of regional gaming versus Las Vegas, it's a good time to be geographically diversified and that's true of both VICI and our tenant Caesars. Finally, we would also point, by comparison, to the reaction of the debt markets to this recent gaming sector news flow. It’s pretty safe to say the gaming debt investors have shrugged this off as a short-term issue in a gaming sector that otherwise has very strong balance sheets and operating prospects. To sum up, as a triple net REIT with irreplaceable beachfront properties and a market leading tenant, we are very excited about being invested in a sector that for a long time to come will produce strong free cash flows for both the tenant and the landlord. And with that, Operator, we will open up the lines to questions.

Good morning, guys, and thanks for taking the question. Ed, can you just talk about your pipeline for acquisitions away from Caesars? I'm curious about the depth and maybe pricing of the opportunities you're seeing out there?

Yes, thank you, Jeff, and I will actually turn that question over to John.

Yes, good morning. It's been a very active time, as we mentioned in our results, and it continues to be active as we look ahead to the rest of 2018, exploring opportunities throughout the market, both regionally and nationally. It's been a positive experience. We are actively introducing ourselves to other operating companies, and as Ed noted, we've been in operation for about 300 days. We've already completed our first deal with Penn, and we aim to further diversify our tenant base as we seek additional asset acquisition opportunities.

Jeff, I was just going to add to that, that as with any transaction marketplace, the more active a marketplace becomes and the more data points get established, the greater confidence that the market participants tend to have in transacting. We would just point to the fact that the last six months have obviously involved more transaction activity than the sector had seen in pretty much the prior four years.

And beyond casinos, maybe you're not at that point yet, but are you seeing other opportunities maybe outside of the gaming space such as play space entertainment or have you not really looked closely at that yet?

To be honest with you, Jeff, we haven't looked closely at it yet, but we have positioned ourselves from the beginning as an experiential leisure and hospitality REIT. We're obviously paying attention to where the culture is going and how people are spending leisure time and leisure spending. We're looking certainly at all of those areas that have the attributes that we like most about gaming, which starts with experiential complexity, giving the operator more leverage to pull in incremental guest experiences. So we're certainly investigating those areas, but for the time being, we are very, very excited about the growth opportunities within gaming.

And just one last one for me. They say always in the hotel sector that more supply is ultimately a negative for all price points in a given hotel market. How do you think about the deregulation of sports gambling? How does that change your perception of the value of the existing regional gaming facilities? Do you think it ultimately has an impact or do you think it's kind of a non-event?

We actually think it has a positive impact. And John can add some more color around what we believe will be the benefit to brick-and-mortar.

Yes, we really like it. We think it's going to be a great attractor of new guests to the facility that we have. Depending on how each state passes the laws, as you can see as states come online, each state is kind of implementing or is implementing a different way of bringing sports betting to life. But we're being positive on this that it's going to be good for the bricks-and-mortar casinos that we have in the regional markets.

Great. Thanks, guys.

Yes, thank you.

Thanks, Jeff.

Hi, thanks. Can you comment on the progress Caesars is making in New Orleans?

I can take that, Ed. Was the question, you broke up a little bit, regarding New Orleans and the operating contract extension?

Yes.

Yes, to clarify, we have an option on that property that is valid for five years from our formation date in October 2017. This means we have about four more years remaining on that option. As you may know, Caesars has been trying to secure a deal with the State of Louisiana to extend their operating contract, but they have not reached an agreement yet. I believe that during the time our option is valid, there will be a chance for us to acquire that asset as the operating contract is extended. There is still work to be done, and it's crucial for both the tenant and Caesars to progress on this. We will provide updates as more information becomes available.

Okay, thanks. And then can you give us some details on the acquisition process for the Margaritaville, Bossier, and how competitive that process was?

Sure. It was a competitive process. We obviously studied that asset. We know the market well as a team having personally operated in that market for over a decade where the asset is. We really like the real estate where it's at with the ability to expand. We also have been clear, since the beginning of formation of our company, that we were going to work to diversify our tenant. This was an opportunity to diversify and do a deal with Penn. We've known Penn and Tim Wilmott and Jay Snowden for decades as we worked together back in the day of Harrah's. We think they're great operators, and this was an opportunity to acquire the real estate of Margaritaville and do a partnership with Penn as our tenant. It was quite competitive. We had a competitive bid. I think the sellers thought we put together a great team, and we were able to transact on that.

Great. Thank you.

Hey, everyone. Good morning. John, this one's probably best for you. If you think about where you are today as you debate the call option properties relative to the environment that you're seeing out there for M&A outside of Caesars, how would you say that that dynamic has changed since, call it, three to six months ago?

Yes, a very good question. I'll touch on it, and if David and Ed want to jump in they can. I think we've been clear with our call option since the day we were formed that we see it as a kind of back-of-the-pocket growth opportunities that we'll execute if there's a time where there aren't a lot of other opportunities to acquire assets in the market. I would tell you, I'm busier than I've ever been and out on the road, and again, as a little bit as the new team in town, I'm out on the road making sure everyone knows who we are and how we think about deals differently than the other two in the space. That takes up some time. But there are active deals going on. We want to be involved, particularly as we look to diversify where our properties are, and it's quite active. Now, compared to the last six months, I think it's been pretty consistent, which we've been pretty vocal that it's been active. So it hasn’t decreased one bit, or it hasn’t decelerated, I guess the way I would say. It’s been consistently good.

John, I would just add, and good morning Carlo. I would just add that obviously when it comes to the call properties, Carlo, we've got another four-and-a-half years. We can control the timing of when we execute on those very accretive opportunities at the preordained tenant caps, which we can call them. On the other hand, obviously we cannot control the timing of assets that come to market, whether in auction format or in perhaps a direct approach to us. So we will prioritize acting on those that are right in front of us, and leave the call properties uncalled if there are those compelling opportunities right in front of us.

That's super helpful, guys. Thank you very much.

Hey, it's Stephen. You called out the very strong regional trends at a moment when Vegas commentary has been a bit lighter. How do you generally think about crossover and customer bases across the regional and Las Vegas properties, or asked more directly, are regionals gaining share at the expense of Las Vegas?

Great question, Stephen. John is best equipped, with his 23 years in the business, to answer that one.

That's a great question. While John would be the best person to handle this, I'll share my perspective. If we look back to when Las Vegas started to thrive or when regional markets began expanding, there was a concern that these regional venues would draw customers away from Las Vegas. In reality, the opposite has occurred; as regional markets grew, they actually contributed to more people taking trips to Las Vegas. Las Vegas has done an excellent job of offering attractions that appeal to these regional customers. Major operators like MGM and Caesars have effectively developed a system that connects their loyalty programs, and it's proven successful. Regarding the regional market, it's an exciting time. Having spent most of my career overseeing regional operations, I haven't seen a time when, midway through the year, the business was up nearly 5%, which is thrilling. As we discussed earlier, adding sports betting to many of these regions will likely draw in new and more customers to the venues. In my view, the increase in regional business has not detracted from Las Vegas at all. As regional markets flourish, Las Vegas remains a destination that these customers will want to visit. Companies like Caesars, with their robust hub and spoke system, will continue to see customer traffic into their destination markets. We have two properties in Las Vegas and locations in Lake Tahoe that also benefit from the growth of regional businesses. It's encouraging to witness the top-line growth in the regions, and we are also seeing positive growth in Las Vegas.

And John, maybe you could just add that the way in which a total rewards customers' increased activity in the regionals is seen will obviously improve their status in ways that may lead to Vegas trips, correct?

Yes, absolutely. And Stephen is probably aware of the connectivity of the loyalty programs, that when you're a top customer in these regional markets, you're a top customer when you walk in the doors of Caesars Palace. And that's a big deal, and it continues to flow back and forth. Again, I think it's a big part of why we're so confident, and our tenant continuing to grow in both the regions and also long-term in Las Vegas.

Thanks. And maybe as a follow-up, how do you generally think about the impact of digital or online gaming, if that follows sports betting in a bigger way as the next leg of regulation?

Yes, we continue to study this area. I believe that as gambling becomes more accepted, we see significant changes, like when a gaming company partners with the NBA. A decade ago, that would have seemed unlikely. The growing acceptance of gaming in all its forms is likely to benefit various sectors, not just online businesses but also physical establishments, as history has shown. The customer base is also evolving, and while we don't need to delve deeply into that, I believe everything is interconnected. We'll see how this develops in the states.

Awesome. Thanks so much.

You're welcome.

Hi everyone, good morning. I wanted to ask about the dividend increase to confirm if I heard correctly that it was raised by 9.5%. I understand that a significant portion of this is due to the acquisition activity, but does this also involve any changes to your targeted payout ratio?

Shaun, no, you're spot on. We increased our ramp by $35 million on an annual basis. We are buying all cash, and cash was obviously raised in the IPO. So we're essentially giving the full increase back to our shareholders by increasing the targeted annual dividend. It does not change any of our payouts, still is in line with where we were before, and in line with kind of how we've modeled out the company going forward.

Great. That's all I have. Thank you very much.

Hi, everyone. Good morning. Most of my questions have already been covered, but I have one for David. Earlier, you mentioned a leverage figure of 4.6 times. Could you clarify if that number is net and if it's fully adjusted for the cash that will exit the system in the second half along with the incoming EBITDA? Also, I understand you plan to maintain a balance sheet leverage slightly higher in the range of five to five-and-a-half times over the long term, so please correct me if I'm wrong. Would that mean future acquisitions are likely to be financed more through debt rather than equity? Thank you.

Hey, Mike, good to hear from you. The 4.6 net number is as of 6.30, that includes also the cash on the balance sheet at that time. We did close Octavius on July 11th, so cash left the system, and cash will level the system, the net $851 million in total for the three assets that we acquired, offset by the lease modification payment. So the pro forma for that, we remain in the low to mid 5 after utilizing that cash. Our leverage profile and our leverage target do not change going forward. We still intend to run the balance sheet in kind of mid to low fives. And as we assessed each acquisition, it will have to be based on market conditions, and kind of a balance between equity and debt-financed, and market dependent to some extent.

Good morning everyone. Thank you for taking my question. I have a general question or observation that I’d like to get your thoughts on, Ed or perhaps John. We have discussed the heightened M&A activity in the sector. This is occurring from both sides – the REITs, like yourselves, and the operators looking to expand. As we consider consolidation and the potential decrease in the number of operators in the sector, how do you view the need to find more operators, similar to what you did with Penn, as the industry likely becomes less fragmented?

Sorry, just so we make sure we understand your question correctly, John, are you asking if we're concerned that operator count will decline, and it will make it harder to achieve tenant diversity or…

That's part of the question, as well as just partnering with the OpCos, has there become less of them? Is it important to get a foot in the door with more and more OpCos as you go forward?

Yes, absolutely. That is their aim. And we certainly believe they've got a strategy to develop more relationships. We certainly believe that we have an ability to develop the relationships that we believe will yield to deal flow and ultimately to tenant diversity. Now, I'll turn it over to John to add more color on that.

Yes, John, great observation. And it's exactly what we've been executing our game plan since we started 300 days ago, is getting out to make sure all the OpCos in the space, no matter the size, location, where their assets are, understand who we are. Should they look to be doing transactions to make sure VICI is top of mind, and we get in the door and talking to them. So obviously you know this well, the Penn and Pinnacle transaction is most likely going to close by the end of the year to create the U.S.'s largest regional gaming company, and we're out there, not only meeting with them, obviously when we did the Margaritaville deal. But everyone else that's out there to understand us and over time diversify our tenant mix.

And John, if I could just add, John, as you know, I have worked across multiple leisure and hospitality sectors. I've worked in ski resorts, beach resorts, desert resorts; I've worked in urban hotels, suburban, and airports. Every category you can imagine, with all kinds of different operators and management companies. I get really excited about doing more and more business with more and more gaming operators because I firmly believe, as some of you've heard me talk about, the gaming operators are the best leisure and hospitality operators on earth. When it comes to managing ultimately what the guest experiences, which is the guest experience of time and space. Nobody, but nobody on earth, I believe, is more innovative and rigorous and expert at managing the guest experience, time, and space than gaming operators are. The more business we can do with more operators, the more excited we get.

Thanks, everyone, that's helpful. Just a quick follow-up to get your thoughts on whether smaller or single-asset sellers are aiming for a complete exit to achieve the best valuation. Are they looking to exit entirely, or do some prefer to remain as smaller operating companies?

Yes, John, we're seeing both actually in this space right now. We've communicated to most OpCos we're quite flexible in the type of deals that we can do, assuring that they’re fair, that they work for that OpCo and they work for us. But we are seeing both. We're seeing operators that want to exit and have discussions about that, and operators that are looking to monetize their real estate to use for future growth and remain as the operator.

Hey guys, how are you doing?

Good, James. Good to hear from you.

Good. I have a quick follow-up on the balance sheet. You don't have any upcoming credit maturities, and the 8% bonds won't be callable until 2020. Is there any consideration or analysis regarding whether it might be beneficial to refinance those sooner to take advantage of potentially lower rates? Also, how are you approaching that possibility?

Yes, James, it's a fair question and something that we look at regularly. They're trading, you've probably got a screen in front of you, that they're trading $1.10, $1.11, $1.12, somewhere in that area. So right now the MPV analysis just doesn't make sense for us to take that earlier, but it is something we monitor because we know that's a lever we can pull to reduce our cost of capital here something we're highly focused on.

Hi, thanks for the question. Just really quickly, have you heard any conversations recently with the rating agencies? You've certainly shown growth and an ability to get some deal done since the initial ratings came out, especially with the start of diversifying your operators with the Penn deal, which I think is kind of an important part to the ratings as well, so, just any update or conversations reflecting your recent action?

Hi, Komal. That's a good question. We spoke to the agencies in the spring and we will update them here in the fall in kind of our latest events and transactions once we get closer to closing the Margaritaville and diversifying our tenant base with Penn.

Okay. So, no update at the moment?

No, nothing at the moment. Thank you. In closing, we at VICI have made tremendous progress during the second quarter as we continue to execute on our strategy. We have no plans of slowing down. I believe we remain well-positioned to grow our portfolio and drive superior shareholder value. Thank you again for your time today. We look forward to providing an update on our continued progress when we report our third quarter results. Thank you, Operator.