VICI Properties Inc (VICI) — Q2 2022 Earnings Call Transcript

Thank you, operator, and good morning. Everyone should have access to the company's second quarter 2022 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 the 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 and in our second quarter 2022 earnings release and our supplemental information. For additional information with respect to non-GAAP measures of certain tenants and/or counterparties described herein, 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 Acquisitions and Finance. Ed and 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. Q2, 2022 was a quintessentially VICI quarter. A lot happened, a lot of continuing transformation as we worked to build VICI into one of America's highest quality and larger scale REITs. Here's a quick recital of Q2's highlights. In late April, VICI was elevated to investment grade credit status by S&P and Fitch. In late April, we conducted our inaugural investment grade debt raise and that $5 billion raise was the largest debut and largest single IG debt raise by any REIT in history. It was a debt raise conducted in conjunction with the funding of our MGP acquisition that proved the continuing energy and agility of David Kieske and the VICI finance team. As the treasury swaps and locks that David and the team had put in place in late 2021 and early 2022 significantly reduced the net coupon of net debt. In late April, we closed on our acquisition of the real estate of 15 MGM assets, magnificent examples of Class A real estate, thereby adding about $1 billion of new portfolio income and initiating our new partnership with MGM, a partnership we believe can grow substantially in the years ahead. In early June, VICI was added to the S&P 500, making VICI the first American REIT in history to go from IPO to S&P 500 inclusion in less than five years. In June with Cabot Citrus Farms near Tampa, we announced what we believe will be the first of many capital and property partnerships with Cabot, a global leader in creating and operating pilgrimage resort golf experiences. In June, we also announced that Cherokee Nation entertainment gaming holdings will become in due course our new operating partner in Gold Strike in Tunica, giving us yet another dynamic partner to grow with. These accomplishments significantly strengthen VICI's growth resources, capabilities, and opportunities, but there's one other key Q2 accomplishment. In early June, we added two very talented senior officers. Kellan Florio became our new Chief Investment Officer, and Moira McCloskey became our new Vice President of Capital Markets. Kellan significantly adds to our ability to grow VICI's relationships and transactional activity with asset controllers, especially across non-gaming sectors. Additionally, in June, we established the VICI management committee to continue to broaden and deepen VICI strategic resources and reach. This committee of seven will play an integral role in developing and ensuring the execution of VICI's cultural ESG portfolio and total return goals and strategies in the years to come. I want to say a few words about our current strategic outlook. Our operating partners are delivering outstanding operating results, especially along the Las Vegas Strip, where we gather about 45% of our portfolio income, but you wouldn't know this from how the equity and debt of our public listed partners are trading right now. Trading values tend to be based on outlook rather than current performance and both the sell and the buy sides are understandably concerned about a possible recession in the quarters ahead. But I want to offer these three points. First, gaming consumer resiliency. The gaming customer has proven to be more resilient during both standard recessions and full-blown crises than just about any other discretionary consumer out there, as proven through both the great financial crisis and throughout the COVID-19 pandemic. Second, gaming operator resiliency. A couple of you on the sell side have produced well-reasoned analysis that show the gaming operators generally will be in very solid shape in terms of both free cash flow and balance sheet strength, even under fairly draconian recession scenarios in the year or so ahead. Our operators are responsible and agile in dealing with changing conditions. Both gaming consumer and operator resiliency give VICI confidence that a possible recession will not harm the credit quality of our operators. Third, I believe that the relative attractiveness of VICI's capital to both our current and potential operating partners in gaming and non-gaming has strengthened in the last few months. With our investment grade credit status and our S&P 500 inclusion, VICI's access to and cost of capital has strengthened on a relative basis at a time when most experiential operators have seen their access to capital severely curtailed. As we've proved with our Venetian acquisition, VICI has the capability to move quickly and decisively in market conditions that may cause others to pause. Current and prospective market conditions could yield highly attractive growth opportunities for VICI in the quarters ahead. With that, I'll turn the call over to John Payne.

Thanks, Ed and good morning, everyone. During the second quarter, we completed the acquisition of MGP, expanding our portfolio to 43 of the highest quality experiential real estate assets under our triple-net model with a combined 58,000 hotel rooms, hundreds of food and beverage and entertainment outlets, and millions of square feet of high-quality meeting and convention areas. Thanks to the tireless work of team VICI, we've completed over $29 billion of transactions since our company's formation, less than five years ago. We are very proud of these accomplishments and at the same time, we're excited that our work has only just started. One of our primary objectives as a company is to work with our existing tenants to provide capital solutions that help meet each operator's strategic objectives. Our development team remains active, expanding our relationships and sourcing opportunities that we believe will continue yielding accretive outcomes for VICI. During the second quarter, we entered into a long-term partnership with Cabot, a leading destination golf operator, where we provide funding for the redevelopment of Cabot Citrus Farms in Florida and convert a portion of our loan to real estate ownership under a long-term sale-leaseback. We're excited about this relationship and will look to potentially expand with Cabot over the coming years. While many of you enjoy asking questions about on-the-ground operating trends, I want to remind you that we are a triple-net lease landlord. We collect fixed rent streams with annual escalations over very long periods of time. Our income does not fluctuate based on monthly or quarterly trends. Now, with that said, the Las Vegas Strip continues to produce incredibly strong numbers. For example, gross gaming revenue in May was 41% above 2019 levels. Our record passenger traffic at Harry Reid International Airport this past June further underscores this momentum. While growth rates may become more difficult to surpass given the record activity levels, the gaming industry has proven its resilience over decades. We have developed a track record with stable, industry-leading tenants, and we will remain disciplined in evaluating opportunities to ensure future acquisitions satisfy our investment criteria. Thanks to our exceptional balance sheet, which David will discuss, we believe we are in a strong position as we evaluate growth opportunities.

Thanks, John. I want to start with our balance sheet and overall liquidity available to VICI to fund future growth. To recap the second quarter events, on April 18th, VICI was upgraded to investment grade by S&P and Fitch, greatly broadening our access to permanent debt capital. On April 20th, we priced $5 billion of investment grade senior unsecured notes, executing the largest REIT investment-grade bond offering ever. The blended cash interest rate for the notes was 5%, while the effective interest rate after taking into account our $3 billion hedge portfolio was 4.51%. On April 29th, we closed on the acquisition of MGP as well as the $5 billion bond offering. We used $4.4 billion of the proceeds to fund our redemption of a majority of MGM's MGP OP units. The remaining proceeds plus cash on hand were used to repay the outstanding balance on a revolving credit facility. We issued approximately $4.1 billion of aggregate principal amount of senior notes in exchange for notes originally issued by MGP. As of June 30th, we had approximately $4.5 billion in total liquidity comprised of $614 million in cash, $360 million in estimated net proceeds from our forward sale agreement, $2.5 billion from our revolving credit facility, and $1 billion from our delayed draw facility. In July, the revolving credit facility was amended to permit borrowings in certain foreign currencies. AFFO for the second quarter was $430.1 million or $0.48 per share, marking a 67.9% year-over-year increase. We are reaffirming our AFFO guidance for 2022. The year ending December 31st, 2022 is expected to be between $1.66 billion and $1.69 billion, or between $1.89 and $1.92 per diluted common share. With that operator, please open the line for questions.

Great. Thank you and good morning. My first question relates to your efforts outside of gaming. So, you have four of these experiential relationships going. Can you comment on where you might see some of these convert into property acquisitions and do you see more of these growing over the next 12 to 18 months?

Yeah. Tony, good to talk to you. This is Ed. I want to thank you for your analysis regarding the potential impact of CPI on VICI's rollout. To answer your question, I think the Cabot transaction is representative of the sort of transaction we wish to duplicate in many of our non-gaming transactions. Our approach in non-gaming often requires pioneering, which we are very happily doing.

Hey, Tony, it's David. It's really an opportunistic use of the ATM. We saw elevated volumes and a share price that we thought made sense to raise a little equity just for the current state of the environment and enhance our overall liquidity.

You can take it, Tony, as a sign of our confidence that we're going to have opportunities to deploy capital.

Yes. Thanks. Good morning. Ed, I wanted to circle back to your comments. You talked about the downturn and how that affects you, but it does impact the operators. I am wondering if a pending recession or weakening fundamentals might actually spur more transactions in the near term.

What we do not fear is a recession having a harmful effect on our operator's results and their overall credit quality. But I think we need to be sober about the outlook for refinancing in 2023 and beyond. The yields to worst of many experiential credits are at levels that, if they had to be refinanced, would make it more difficult for them. We see attractive opportunities to support strong operators who may face refinancing challenges.

Thanks. And just to follow up on the densification opportunities along the Strip, would you consider using a lending structure similar to the non-gaming opportunities?

We are excited about the densification opportunities we have along the Strip. We're going to be mapping 660 acres to identify opportunities for incremental investments.

So, security and investment grade rating, plenty of liquidity, stock is now trading near an all-time high. Do you think it's time to get more aggressive on the acquisition front?

I'll turn it over to John, but I think we should be mindful of finding opportunities that meet our investment criteria. We’ve been at a strong pace with significant transactions.

RJ, your observations are good, but we need to remain disciplined in our approach to evaluating opportunities. We've added resources to the development team and are out there seeking opportunities.

We feel great about Caesars under the leadership of Tom Reeg. They have executed their business plan in a disciplined way. We hope to find opportunities to work together.

With regards to the billion dollars of funding commitments that you mentioned in your Q, do you feel like your existing tenants may be more likely to pull back on those commitments?

If you look at Las Vegas right now, there could be tremendous growth. The consumer continues to visit, driving opportunities for capital deployment creatively.

The gross from the ATM was approximately $367.4 million and the net was $360 million. These were market fees.

What does Kellan see in terms of the biggest untapped segment with the most potential for execution over the next 12 to 24 months?

We love the indoor water park business, theme parks, family entertainment centers, parts of sports, and fitness. We're working on different structures that will eventually turn into real estate ownership.

We need to help investors understand this new category while continuing to build our credibility in the different channels we're investing in.

How should we think about the trajectory of deploying capital through the VICI property growth fund? Do you have a maximum exposure for the segment?

It depends on the project. We want to be cognizant of development risk, and we are excited to leverage the growth fund as we help our tenants.

We need to communicate the nature of the real estate we own in Las Vegas. It's not just gaming real estate; it's complex with significant development potential.

What percentage of the portfolio would you guys like to see non-gaming longer-term?

There isn't a specific number for non-gaming transactions, but we are excited about exploring various areas of experiential real estate.

How do you see the growth opportunities internationally? Are there specific markets you are focused on?

We've had a good time understanding international opportunities in markets like Europe and Australia. Our funnel is widening with new resources on our development team.

How has this changed the education process with investors about non-gaming opportunities?

We own the responsibility to educate investors and help them understand the nature of the businesses we are investing in, particularly non-gaming.

How does the current marketplace affect your willingness to acquire Las Vegas real estate? Do you see opportunities?

It needs to be accretive to us, and we are in a unique period where potential sellers may not fully realize the change in the marketplace.

Thank you, operator. And thanks to all of you. We're sorry to keep you a little long, but it's great to engage with all of you and we look forward very much to talking with you again next quarter. Goodbye for now.