VICI Properties Inc (VICI) — Q4 2021 Earnings Call Transcript

Thank you, operator, and good morning. Everyone should have access to the company's fourth quarter 2021 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the VICI Properties' website at www.viciproperties.com. Some of our comments today will be forward-looking statements within the meaning of the Federal Securities laws. Forward-looking statements, which are usually identified by the use of words such as will, believe, expect, should, guidance, intend, outlook, 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, we will discuss certain 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 on our website, in our fourth quarter 2021 earnings release and our supplemental information. For additional information with respect to non-GAAP measures of certain tenants and our counterparties described during the call, please refer to the respective company's public filings with the SEC. Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Danny Valoy, Vice President of Finance. Ed and the team will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Ed.

Thank you, Samantha, and good morning, everyone. Before I start, let me just say on behalf of VICI that our hearts very much go out this morning to the people of Ukraine. Today, I want to begin the call by addressing two topics: VICI's growth and total return over our first four years, and our closing of our Venetian acquisition and what it signifies about VICI and our asset class. I'll then turn the call over to John, who will talk about our ongoing growth initiatives; and to David, who will talk about our 2021 results and our financing activities. The year we just completed, 2021, constituted VICI's fourth full year of operations and growth. If measured from our emergence date in October 2017, a bit more than four years ago, we've accomplished the following. We have announced $29 billion of acquisitions, establishing VICI as one of the most dynamic growth platforms in American REIT management. We have raised more than $12 billion of common equity, more than any other REIT in America over that period. Pro forma for our announced acquisitions, we will have grown our portfolio NOI by more than 4x. We have lowered our leverage from 8.5x adjusted EBITDA at emergence to 3.1x at the end of 2021, and moreover, transformed the right side of our balance sheet from entirely secured to substantially unsecured debt. By transforming the magnitude and composition of our debt, we have put ourselves, we believe, on the cusp of investment-grade ratings. We've demonstrated the resilience of our assets and of our tenants through 100% on-time payments to date. Most importantly, for VICI's stockholders, we generated from October 18, 2017, through December 31, 2021, a total return of 100.5%. This compares to the S&P 500 total return of 100.7% over that period and a total return for the RMZ of 58.9%, meaning VICI outperformed the RMZ over that period by 41.6 percentage points. Here is a simpler way of looking at it: $1 invested into VICI at the beginning of that period became $2, while $1 invested into the RMZ over the same period became $1.59. An integral part of VICI's superior total return has been VICI's dividend growth over the period, with aggregate dividend per share growth of 37.1% since our first full quarter dividend payment in Q2 2018. We're proud of the value we've created over our first four years, but here's what we're really excited about today. We just closed yesterday on the acquisition of one of the most magnificent Class A assets in American commercial real estate, The Venetian. Let me reiterate the features we cited when we announced The Venetian transaction nearly a year ago. The Venetian is the single largest hotel complex in America with nearly 7,100 rooms. The Venetian is the largest private sector meeting and convention trade show facility in America. At 13 million square feet of Class A quality, finding another building in America with more marble, we have brought The Venetian at a price per square foot of approximately $300, 82 acres of land that included an estimated 62% discount to replacement cost. When we announced The Venetian acquisition in early March 2021, the COVID-19 pandemic was still heavily and negatively impacting Las Vegas visitation and resort performance. Apollo, our new Venetian operating partner, and VICI were both mindful of that. And in a period when most potential Venetian buyers were not willing or able to come out into the heavy weather, VICI and Apollo were able to craft a transaction that protected against continuing uncertainty but was fundamentally based in the belief that Las Vegas and moreover The Venetian would eventually return to 2019 levels of performance. What VICI and Apollo did not assume when we announced this transaction in March 2021 is that Las Vegas and The Venetian would over the ensuing 12 months stage a roaring comeback, achieving run rate profitability levels that are beyond 2019. Over the last 12 months, Rob Goldstein and Patrick Dumont's team at Las Vegas Sands, led by George Markantonis, have done a magnificent job of managing The Venetian. As LVS reported on January 26, The Venetian produced these impressive performance figures in Q4 2021, 100% occupancy of The Venetian's nearly 7,100 rooms, and doing so without the full return of meeting and convention trade show business. For the fourth quarter, The Venetian generated $154 million of adjusted property EBITDA and a margin of 34.5%. This amount of EBITDA annualized would mean over $600 million of run rate EBITDA before rent or nearly 2.5x coverage of our initial Venetian annual rent of $250 million. As for value, I just want to remind everyone that we have acquired The Venetian, again, one of the most magnificent and majestic Class A assets in American Commercial Real Estate at a cap rate of 6.25%, which we believe makes this one of the most compelling Class A single asset transactions in American REIT management in recent years. If it isn't, someone needs to explain to me what could possibly compete with it. And despite the amount of work I put into preparing these remarks, I actually need to quote one of your posts from last night, which I think sums up better than anything I could say what we accomplished in buying The Venetian. To quote simply, "VICI got a pretty sweet deal." By looking past the short-term disruption in Las Vegas created by COVID, VICI was able to acquire one of the most iconic real estate assets in the country for a cap rate that today couldn't even buy you a well-located Dollar General. Finally, not only did we buy Venetian at a 6.25% cap rate, we have leased the Class A real estate of The Venetian to Apollo on a triple net basis, with the superior economic transparency and integrity that the triple net lease model generally provides. That highlights the final point I want to make about our first four years at VICI. Over this period, one can say that we have brought gaming real estate into the triple net lease sector. But what's more important is that we have brought the superiority of the triple net lease model to Class A real estate. Triple net real estate is sometimes criticized for being commodity real estate in low barrier-to-entry locations bought at a premium to replacement cost. Here is what we've done in VICI in our first four years in real estate investment terms. We've built America's biggest and best portfolio of differentiated non-commodity Class A experiential real estate in high-barrier-to-entry locations bought at substantial discounts to replacement cost. Here may be the most important portfolio attribute of all. Our real estate is occupied by, we believe, the best experiential operators in the world, as evidenced by their market-leading resilience during the darkest days of the COVID-19 pandemic and their market-leading recovery to unprecedented levels of profitability. Thanks for bearing with me while I share my excitement for what we've done at VICI. And now I'll turn the call over to John Payne, who will share our excitement over what we're doing to continue to grow VICI.

Thanks, Ed. Good morning, everyone. 2021 was another successful and transformative year for VICI as we announced over $21 billion of transactions, solidifying our position as the number one experiential REIT in terms of acquisition volume, significantly increasing our scale and furthering our credibility as one of America's blue-chip REITs. As Ed said, we are very happy to announce that the acquisition of Venetian Las Vegas closed yesterday. Our acquisition of MGP remains on track to close in the first half of this year. Since we announced the acquisition of The Venetian, we witnessed cap rate compression in Las Vegas seemingly in real-time, with City Center trading at a 5.5% cap rate and The Cosmopolitan at a 4.97% cap. Additionally, since our announced acquisition of MGP, regional cap rates have continued to compress, with Encore Boston Harbor, a large-scale, high-quality urban asset, recently trading at a cap rate in the high 5s. We have been advocating for the quality of gaming real estate and its superior investment characteristics relative to many real estate asset classes since our formation. We believe that, in many ways, the most recent trading cap rates are directly applicable to the value of the assets in our portfolio. It is gratifying to see our thesis come to fruition. We believe there is much more to come as gaming real estate becomes a mainstream real estate asset class. Upon closing our MGP transaction, we believe we will have a portfolio of assets with quality unmatched by any other leisure real estate portfolio. Our rental streams and underlying asset cash flow durability have been proven through the pandemic. We have tenant relationships with industry-leading operators who utilize extensive CRM capabilities to engage with consumers. As many of you know, these capabilities, combined with our tenants' operational expertise, have led to record profitability in Las Vegas and across the region. Now, as we think about VICI's future growth prospects, we see a long runway for growth within gaming. Many operators continue to study and understand how VICI's capital can be utilized in their capital stack, and we have regular dialogue with several public and private operators that continue to own their real estate. Additionally, we've started allocating capital towards other leisure verticals, which we believe will round out our investments over time. We will approach additional leisure investments prudently by studying the opportunities and market dynamics in detail, and performing thorough diligence and risk-reward analysis prior to allocating capital on behalf of our shareholders. One of our fundamental goals as a company is to grow earnings per share accretively on behalf of our shareholders. We believe this aligns our success with the interests of our shareholders and we do not approach investments blindly in order to simply satisfy investment volumes or other arbitrary measurements. To that end, I will repeat the pillars that we believe will drive accretive growth for VICI and create value for our shareholders well into the future. We will strive to execute the compelling opportunities in our embedded growth pipeline. We will study and evaluate open-market gaming transactions in the United States and internationally. We will partner with existing tenants under our property growth fund, through which we will seek to fund high-return growth projects at our existing properties, and we will allocate resources towards studying leisure and experiential investments as well as large-scale M&A opportunities. Now I'll turn the call over to David, who will discuss our balance sheet and our financial results.

Thank you, John. I want to start with our balance sheet. 2021 continued the relentless focus we have maintained over our four plus years of existence on ensuring that we have a capital structure designed to weather all cycles and provide the safety and protection our equity and credit partners deserve. This disciplined focus was rewarded during 2021 by: first, the depth of the support from the equity capital markets to derisk the equity funding for our $21 billion of announced acquisitions; and second, from the culmination of one of our most important objectives since emergence, which is to finally transform our balance sheet into an unsecured borrower. As Ed mentioned, we believe we are on the cusp of achieving an investment-grade rating. To recap, looking back at 2021, in March, we raised $2 billion of equity through a $69 million share forward sale agreement. In September, we raised $3.4 billion of equity through a 65 million share regular way offering and a 50 million share forward sale agreement. Raising $5.4 billion of equity is not something we take for granted, and we greatly appreciate the support of our equity holders that enabled us to derisk the equity funding and take advantage of two unique opportunities that presented themselves during the year. The September offering was recognized by International Financing Review as the North America secondary equity issue of the year. We are thankful to our underwriters led by Morgan Stanley, as well as a full syndicate of banks, for the support in executing the largest common equity follow-on ever by a REIT. In September, we fully repaid our $2.1 billion secured term loan. This was a critical step on our path towards investment grade. Also in September, we announced the successful early participation in the exchange offer and consent solicitation for the $4.2 billion of outstanding MGP notes. As a result, upon closing of the MGP transaction, the covenants under the existing MGP indentures will be aligned with the covenants, restrictions, and events of default under the existing VICI indentures. In December, we entered into a forward-starting interest rate swap agreement with a notional amount of $500 million. Subsequent to year-end, we entered into three additional agreements with a notional amount of $1.5 billion. The interest rate swap transactions, totaling $2 billion, are intended to reduce the variability in the interest expense related to the debt we expect to incur with the closing of the MGP acquisition. In addition, subsequent to year-end, we closed on a new $2.5 billion unsecured revolving credit facility and a $1 billion delayed draw term loan, increasing our overall liquidity with highly efficient bank capital. The revolver maturity runs to March of 2026 before extension options with grid-based pricing. Based on the company's current credit ratings, the revolving credit facility bears interest at SOFR plus 132.5 basis points, an improvement in pricing from 200 basis points over LIBOR under our prior secured revolving credit facility. Now to recap The Venetian funding, which we closed yesterday: We settled the March and September outstanding forward sale agreements, bringing 119 million shares onto our balance sheet for total proceeds of approximately $3.2 billion. We drew $600 million on our revolver with the remaining proceeds coming from cash to close the $4 billion Venetian acquisition. I also want to highlight that the settlement of the two forward sale agreements will all but eliminate the outsized short interest that VICI has been subject to. As of January 31, we had approximately 85 million shares of short interest, the majority being from the mechanics of the forward sale agreements. To summarize 2021 and the events at the start of 2022, they highlighted our guiding principles on how we approach our balance sheet which are to maintain a long-term target leverage goal of 5 to 5.5 on a net debt-to-EBITDA basis; maintain an unsecured capital structure and an unencumbered asset pool; pursue a disciplined composition and laddering of fixed-rate debt, safeguarding the company's balance sheet against future market volatility; opportunistically access the capital markets to lock in funding certainty for all transactions, and ultimately achieve an investment-grade rating. We have been relentless in our drive towards an investment-grade rating and we believe the actions we took during 2021 and at the start of 2022 should position VICI to be able to access the investment-grade market when we seek to raise the $4.4 billion of permitted debt required to redeem the MGM OP units at the time of closing the MGP transactions, all while continuing to maintain ample liquidity, flexibility, and optionality to grow accretively. Turning to the income statement, AFFO for the fourth quarter was $278.9 million, or $0.44 per share, bringing full year 2021 AFFO to $1.0474 billion, or $1.82 per share. Total AFFO in 2021 increased 25.3% year-over-year, while AFFO per share increased approximately 11% over the prior year. The disparity between overall AFFO growth and AFFO per share growth is due to an increase in our share count and resulting temporary dilution from the March and September forward equity offerings. Our fully diluted share count increased approximately 12.9% primarily as a result of the settlements of the June 2020 forward sale agreement and the September regular way offering. We refer you to our press release where we've added two tables detailing our outstanding common shares and a reconciliation of the weighted average shares of common stock used in the calculation of earnings per share. These tables are on Page 5 of our release that was posted to our website last night. Our results once again highlight our highly efficient triple net model given the significant increase in adjusted EBITDA as a proportion of the corresponding increase in revenue, and our margins continue to run strong in the high 90% range when eliminating non-cash items. Our G&A was $9 million for the quarter and as a percentage of total revenue was only 2.4%, in line with our full-year expectations and one of the lowest ratios in the triple net sector. Finally, I want to touch on our leverage. We ended 2021 with net debt-to-EBITDA of 3.1x and pro forma for The Venetian closing, our net debt-to-EBITDA is 3x. This highlights the fact that we have significantly over-equitized the balance sheet ahead of the closing of the MGP acquisition, positioning our balance sheet to raise the incremental debt required to complete the funding and bringing on the associated income with that transaction. As I touch on guidance, this will be important. We are initiating AFFO guidance for 2022 in both absolute dollars as well as on a per-share basis. As a reminder, our guidance does not include the impact on operating results from any pending or possible future acquisitions, specifically the pending acquisition of MGP or dispositions, capital markets activity, or other nonrecurring transactions. As we have discussed, we record a non-cash CECL charge on a quarterly basis, which is due to its inherent unpredictability leaves us unable to forecast net income and FFO with accuracy. Accordingly, our guidance is AFFO-focused as we believe AFFO represents the best way of measuring the productivity of our equity investments in evaluating our financial performance and ability to pay dividends. Our guidance incorporates the recently closed Venetian acquisition and the settlement of the 119 million shares that were subject to the March and September forward sale agreements. We expect AFFO for the year ending December 31, 2022, will be between $1.317 billion and $1.347 billion, or between $1.80 and $1.84 per diluted share. The midpoint of our total AFFO guidance represents an increase of 27.2% versus our 2021 actual AFFO. On a per-share basis, guidance reflects all of the equity raise to close the transactions we announced in 2021, and thus, the corresponding increase in VICI's share count without the benefit of the corresponding income from the pending MGP transaction. Accordingly, we expect to update guidance in the future to reflect the impact of the MGP transaction when we are in a position to do so. With that, operator, please open the line for questions.

Good morning, everyone. I wanted to ask a bigger picture question, Ed. What do you think of Realty Income's entry into the gaming asset class? What does that mean for VICI? Obviously, it adds more competition. But you have a new operator embracing the sale-leaseback model. Pricing sort of implies that your stock is undervalued, but maybe lower cap rates hurt spreads in the future. How do you think about those different puts and takes?

Yes. RJ, always good to chat with you. Net-net, it is unqualifiedly positive to have an institution of the quality and stature of Realty Income come in and validate our category. Realty Income goes back to 1969. They've built an amazing company. Samit has obviously continued to drive excellence at that company and the judicious allocation of capital, both categorically and geographically. So we've been saying, as John spoke of in his remarks, RJ, we’ve maintained since the beginning that this is an asset class that we believe is the next great institutionalization story in American commercial real estate. Well, institutionalization does not happen if institutions don't come into the category. The more institutions that come into the category, the further institutionalized it becomes. There are pros and cons. You're absolutely right. When there's more competition, we have to work hard every single day to make sure that our cost of capital over the longer term, leaving aside the volatility we face in the current situation, but over time, we're improving the cost of capital on both an absolute and/or a relative basis at a velocity equal to the rate of cap rate compression. So again, net-net, we see it as very positive. I think in this case, especially validating of regional assets, with the MGP transaction, we will become the very proud owners of assets like National Harbor right on the Potomac River in D.C. We will become owners of the Borgata, of MGM Detroit, of Beau Rivage. These are assets that are absolutely in the same class as Encore Boston. And as John also alluded to in his remarks, if you look through the cap rate of Wynn Boston and what we are acquiring in MGP in terms of preeminent regional assets, we're obviously very happy with the revaluation that we believe our shareholders deserve.

Thanks for those comments. My second question is just, can you be a little more specific on the expected timing of the closing of the MGP transaction? And then maybe, David, what you're seeing out there in the debt markets and expected pricing for the debt that’s going to be issued?

Samantha, do you want to take timing and then David can talk financing?

Sure. Just on timing, I'll mention that we continue to work through the process with all the applicable jurisdictions and regulatory requirements.

Thanks, RJ. Regarding the debt markets, as I mentioned in my remarks, we've built a $2 billion hedge portfolio to start to minimize the volatility that we're witnessing, obviously, in real-time today. We underwrote The Venetian as well as MGP transactions in the high-yield markets. With the work that our team has done with the agencies and as we mentioned, we feel confident that we'll be issuing debt into the investment-grade market when we can do so, once we're positioned through regulatory approval, which Samantha just alluded to. Our underwriting remains in line with what we underwrote originally even with the uptick in rates. Today is a unique day with the volatility going on in the markets, but for 10-year pricing, we're getting quotes in the high 100s, low 200s over treasury for 10-year paper. So on a blended basis, we still feel good about our overall accretion and everything that we laid out for you back in August of last year.

Thanks a lot.

Thank you, RJ.

Hey, good morning, everyone. Could you talk about your appetite to buy more assets while MGP is still pending and you currently have a little bit higher cost of capital? I believe Caesars mentioned on their call that they were going to be looking to sell an asset over the near term.

Yes. I'll take the last part of that, and I'll turn it over to John in terms of our ongoing energy around growth activities. Yes, you did see Tom Reeg announce last week his intentions to bring an asset to market. We will take full advantage of the opportunity we have to get that very full first look and to see what possible advantages the addition of another asset could have, along with other relationships. But I just want to emphasize the fact that, given the volatility in the market, the hallmark practices of great capital allocators are essential. As a good real estate capital allocator, you never want the answer to the question of why did you buy that to be, "Well, it was for sale," right? I want to focus on something that matters. So whatever the opportunities may be, we will only allocate capital if we feel it is the best use of capital at a given time. And then in terms of our ongoing growth activities, I'll turn it over to John.

Yes, good morning, Wes. As you know, these deals don't happen overnight. We are very active, continuing to speak to operators on the gaming side as we have since we started the company. We're spending, as I said in my remarks, a significant amount of time in the hospitality or experiential space, actively talking to C-suite executives of certain companies and explaining how our capital could help them grow, and we could be partners over time. As Ed said, we will be very prudent in how we deploy our capital.

Okay. And then there is a strong bid for the regional assets. Would you entertain recycling assets, selling some assets if that opportunity presents itself? Or would you look to lean in with a little bit of leverage, perhaps going over your stated leverage target? How would you fund it if you found something?

Yes. Wes, we're going to look at alternatives that are in front of us. As it relates to recycling assets, I mean, we have recycled an asset in Atlantic City, an asset in Reno, and we just in our release discussed selling Louisiana Downs. So potentially, there could be that opportunity. There could be joint venture opportunities too, as you've seen MGP jointly venture some assets in the past. And the attractiveness of a REIT allows us to issue OP units, as we are doing directly to MGM, similar to what GLPI is doing to Cordis. So there are other avenues for equity. As it relates to taking leverage up, we're pretty disciplined with our dialogue with the agencies on our goal. We've gotten a path to take leverage up to six times. When you take leverage up, that's just financial engineering to drive accretion, and that's something we strive to do. There are other tools in the toolbox that we can bring to the table, as John said, to pursue opportunities that we're discussing.

Okay. Thanks, everyone, for the time.

Thanks, Wes.

Hey, good morning. So just curious, it sounds like Realty Income was able to get the Encore Boston deal without any competing offers. So, had you previously tried to acquire this asset? Any thoughts as to why Wynn did not run a bidding process on that location? And do you think you would have been competitive at the 5.9% cap with no CapEx minimums?

I'll turn it over to John in a moment, Greg. But you will need to ask Wynn why they did not run a process. Sumit Roy in Realty Income's earnings call stated there was no process. Beyond that, I don't know how much more we can or should say about the asset, given that we were not part of the process. But John, you might have something to add.

I think we've already said it. Look, it's a great validation of the value of our real estate. If you take National Harbor, that's an asset of equal quality. The cap rate that is being applied really just validates what we've been discussing for four years since we started this company.

Okay. I have two follow-ups on potential investments. Thinking about the partner property growth fund, how are you viewing the likelihood of those transactions occurring? Or perhaps the potential to reach the $1 billion and separately $1.5 billion max amounts?

John?

We're having active conversations with all our tenants about opportunities where they can use our capital to grow, which can gain us incremental rent over time. I'm not one to predict exactly what we're going to do. But this fund has been well received by our tenants. I believe there are some large growth projects in the future that we can be a part of. It'll be exciting to help them grow, which will excite us too.

Regarding our partner property growth fund, when projects achieve the needed return hurdle, our investments will be contingent upon them demonstrating that they can reach that hurdle. We provide an extremely attractive source of capital for our partners based on the cost of our capital. When their investments reach the necessary hurdles, the cost of our capital is generally quite compelling.

Okay. Just the final piece on the pipeline. You mentioned the potential ROFR, which you said you'll evaluate whether that's within the portfolio, but also the Caesars asset in Indiana that you could potentially call this year. Can you remind us how the pricing is determined there and whether that investment could affect your desire to get something done in the near term?

John?

First, they're just great assets. They are big and growing. As you touched on, Caesars recently rebranded the asset in Indianapolis to Horseshoe. They are investing significant capital into both businesses now that table games are legalized at these casinos. So they have not only grown under Caesars' leadership, but they will continue to grow as these assets stabilize with capital investment. We're closely monitoring these assets and believe they would be fantastic additions to our portfolio. David can touch on the structure and how it will fit into our master lease.

As you referenced, the call started January 1 of this year and runs to December 31, 2024. We can call those two assets at a 7.7% cap, or Tom and team can put them to us at an 8% cap. It's an LTM coverage ratio that was set at 1.3 times. Part of the reason we agreed to that is that those assets will go into the regional master lease. They are very attractive, as John mentioned, and we will assess how we sequence that into our growth and the cadence we have internally while everything is in motion. Given where cap rates have gone, we’re excited about potentially owning these assets.

Regarding the 1.3 coverage ratio that David referenced, we got comfortable with that level when Tom Reeg closed the deal based on our confidence that Caesars, under Tom's leadership, would achieve corporate profitability levels that would provide strong corporate rent coverage. The new Caesars has greatly exceeded our expectations in terms of corporate profitability, which justifies our confidence in that coverage structure.

Just one last point about what David highlighted. We can call this asset at a 7.7% cap, and remember, there's a recent transaction in the regional market at a 5.9% cap.

Okay. Thank you.

Great. Thank you for taking my questions. You guys obviously have and will have the largest portfolio in gaming right now. I'm curious if there are any geographies or segments of the market you're less inclined to expand on at this point?

John?

I'll phrase it this way: there are areas of opportunity where we want to own real estate. Looking at the Las Vegas market, there are substantial regional performers there that have shown strong resilience both before and after the pandemic. Currently, we do not own any real estate in Downtown Las Vegas, where the Circa has made significant impacts on that market. If there's potential in that area, we would seriously consider it. There remain numerous games markets without our assets. We remain open to exploration if high-quality opportunities arise.

That's really helpful. Just as a follow-up, given the current macro environment we're seeing, I'm curious if that's impacted the timing or pace of any M&A discussions you may be having?

Barry, it’s been a pretty wild four years. I wouldn't bother naming the ballpark, but we've had the interest rate spike in the spring of 2018. We dealt with December of 2018, which no one hopes to go through again anytime soon. We've obviously had March 2020. We've learned to live with and deal with volatility at VICI. One key lesson is not to stop developing relationships during volatile periods because they will eventually come to an end. To be honest, we shut out the noise and keep doing what we’re doing. Obviously, we have to be mindful of our cost of capital and know where the funds are coming from and what they're costing us. But periods of volatility cannot lead to inactivity in our fundamental activities, which is work to develop relationships, ultimately leading to deal flow.

That’s great. Thanks, Ed. Thanks, guys.

Thanks, Barry.

Hi. Thank you, and good morning, everyone. Just to follow up on Realty Income’s deal for Encore Boston. I'm curious whether you think this sub-6% cap rate marks a turning point or the dawn of a new normal for regional asset valuations in general, or do you view that as more of a one-off given the quality and location of Encore?

Yes. Daniel, always good to hear from you. One of the things I am struck by within gaming, specifically in gaming real estate, is we have not yet come up with a universally accepted hierarchy of quality classification for our assets. Many of you know I used to work in the hotel sector, where there are clearly accepted hierarchies of quality, whether based on star ratings or luxury classifications. However, such categorization does not exist in gaming, particularly not on the strip, and certainly not in regional gaming. So if you were to impose a hierarchy of quality on regional gaming, there exists a highest tier of regional gaming asset quality that would include assets like Encore Boston, National Harbor, MGM Detroit, Borgata, Beau Rivage, Caesars New Orleans, especially after the capital investment by Caesars. Encore Boston has set a new benchmark cap rate for the highest tier regional assets. Generally, when the top category in an asset class establishes a new benchmark in terms of lower cap rates, there is a ripple effect on lower-quality categories. So to answer your implicit question, does Encore Boston create a ripple effect? We believe it does for both the highest-end regional properties, which we are the market leader in owning, and also for the lower quality regional assets, due to the demonstrated resilience and the undeniable value metrics we see, indicating that they are undervalued.

That makes a ton of sense. I appreciate that. As a follow-up, I think in the prepared remarks, you mentioned evaluating deals outside of the U.S. Are there markets in particular that you're focused on internationally?

David, do you want to take that?

Sure. Dan, nice to talk to you. As we look outside the U.S., we consider what's reasonable and what constitutes good real estate while also considering tax jurisdictions. Thus far, we've identified Canada, Australia, Singapore, Japan, and possibly parts of Europe and the UK. While we may be less inclined to pursue gaming in Europe and the UK due to segmentation, we've watched Realty Income enter gaming in Spain and other jurisdictions. Some REITs like Simon have gone abroad. We'll evaluate those opportunities further and seek to develop them into our portfolio over time.

Okay. Great. Thanks so much, guys.

Thank you, Daniel.

It's Michael Bilerman here with Smedes. Ed, I wanted to return to your opening comments. You spent some time discussing the last four years since emerging as a new public entity and the successes that have been achieved including total return and dividend growth, which have been quite strong. I'd like to get your insight into how you think about issuing equity in the future, as there appears to be a bit of a lackluster performance since last summer, partly due to the overhang created with equity issuances, along with forward commitments and leverage levels nearing the upper threshold. Comparing your current valuation to just before the pandemic, which is notably widening relative to REITs, it seems there’s been stronger performance from those REITs. Although you've highlighted many positives since pre-pandemic, including the reliability of rent payments, which was generally unforeseen at the onset of any recession, can you share how you plan for outperformance going forward while addressing this lingering overhang?

Yes. Michael, it is a profound and extremely important question. It is one David and I especially have been wrestling with since last fall, soon after we raised the equity for MGP, which we used for The Venetian. Our strategy moving forward, having done the transformative deals we've done, especially MGP, is to develop more of a flow model, achieving sustained deal flow in both gaming and non-gaming opportunities. We're aware that our fundraising activities have been gargantuan. Since the late summer period has indeed been a slog and we recognize the market impact associated with raising $5.5 billion in equity in 2021 has impacted our stock performance. We're grateful to our shareholders who have shown patience during the turbulence of Q4. Our intention going forward is to create a sustainable and more manageable fundraising model to facilitate our growth strategy, where capital works dynamically rather than creating a constant cycle of large equity raises.

Yes. Taking a step further, it still feels there remains an overhang on the shares given the positive developments and the accretive nature of your transactions. Despite estimates moving higher, the multiple has contracted. I think this raises concerns regarding another potential large equity raise to remedy the funding for the MGP transaction, alongside ongoing discussions about the right of first refusal. Does this tension suggest you need to look into joint ventures or asset recycling? How might you alleviate the perceived overhang surrounding your shares?

To clarify, we do not need to raise any further equity for MGP. We've raised all necessary equity and will only need to raise debt. We have a share exchange on a fixed exchange ratio with MGP shareholders. When it comes to a ROFR or any other opportunity, we are prioritizing every possible way to fund compelling opportunities if they demonstrate clear accretion for our shareholders. Our goal is to avoid further raises of significant equity to support acquisition opportunities, allowing our shareholders to benefit from the revaluation that they deserve. Lowering the perceived overhang will enhance our strategy for long-term growth.

Are you having discussions today regarding joint ventures or selling incremental land parcels or assets outright to position yourself for funding these potential transactions?

Yes, we are actively considering those strategies. Perhaps I will turn it over to David so he can elaborate on the strategy for the retained cash we will build up due to our payout ratios.

Yes, thanks, Ed and Michael. Always great to talk to you. When we entered the MGP transaction in June, July, August, we assessed multiple options for navigating the significant capital need, which was a $3.4 billion equity raise. We had numerous other levers to pull and executed it well with everyone's support. As we move beyond MGP and leverage shifts closer to a run rate of roughly $2 billion in AFFO, reducing the payout by about 75% will generate around $500 million in free cash flow. That's free cash flow so fairly straightforward. Our G&A remains relatively fixed and thus not a significant factor, ensuring cash flow remains clear for funding growth.

Great. Lastly, regarding Encore and Wynn, the consummation appears to have required significant negotiations to match the desire of both parties. What are your non-negotiables when entering such discussions? Do capex requirements and growth rates given your lease duration rank among your priorities? If so, could you share other factors that are important as you grow in gaming real estate?

Realty Income and VICI operate fairly differently as companies running distinct rent roles and risk profiles. For example, Realty Income stated their weighted average lease term is around 14 years while ours is 43.5 years, reflecting the different considerations. While different elements might matter differently between our companies, for us, critical terms such as rent escalation magnitude and CapEx impact the decision-making process. As it stands, a measure of CPI protection in our leases is increasingly vital, especially as we secure CPI protection in our MGM lease, which will apply to 90% of our leases. We have actively focused on CPI protection as an essential priority for the future.

You mentioned having caps on the inflation protection. Is that correct?

Correct. We have caps in some leases but uncapped structures in others, such as with Caesars leases, which has seen significant rent increases this past November.

Alright. Thank you all.

Yes, indeed. We look forward to our next call. Operator, we'll take one more question.

Hi, thank you. Good morning. I appreciate the comments on the timing of the closing, being on track for the first half of the year, with regards to MGP. But what are the primary hurdles that remain before closing? David, what's your understanding of the timeline to achieve an investment-grade rating?

Yes, happy to. It's good to talk to you, Todd. We're in regular contact with the agencies, starting our discussions at the end of June and continuing weekly or bi-weekly with updates. We have provided them updates on the revolving credit facility and ongoing interactions. They want some assurance that the closing will move forward. We feel confident it will close, but the agencies require that final approval process. So it’s somewhat of a catch-22, but the signals so far have been positive. The timeline for acting will be contingent upon the closing of MGP as well as ongoing debt market movements.

Okay. That clarifies it. Regarding future capital initiatives, with the $4.4 billion of permanent debt expected to be raised, could you remind us where you expect to be regarding leverage on a net debt-to-EBITDA basis once the transactions close? Additionally, if a Caesars asset or any other opportunities arise in the near term, can you pursue those ahead of obtaining an investment-grade rating and closing MGP, or should we assume that until that transaction closes, there will not be any potential investment activity?

The pro forma leverage for The Venetian and the MGP transaction will be approximately 5.8x net debt-to-EBITDA based on a targeted top end leverage of 6x to secure the rating agencies' confidence for upgrades. Regarding the possibility of pursuing ROFR or other opportunities, we will evaluate every option if it makes sense and proves accretive for our shareholders. It’s not a case of choosing one over the other; we have the capability to manage both.

Okay, thank you.

Thank you, Amber. In closing, we want to thank all of you for your engagement with us this morning. As you can tell, we're excited about our present situation, our near-term opportunities, and our long-term prospects. We look forward to chatting with you again when we report our first quarter results. Thank you, everyone. Bye for now.