VICI Properties Inc (VICI) — Q3 2023 Earnings Call Transcript

Thank you, operator, and good morning. Everyone should have access to the company's third quarter 2023 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 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 conditions. 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 third quarter 2023 earnings release, our supplemental information and our filings with the SEC. For additional information with respect to non-GAAP measures of certain tenants and or counterparties discussed on this call, please refer to the respective company's public filings with the SEC. Hosting the call today is Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Louie McCluskey, Senior Vice President of Capital Markets. 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. The third quarter of 2023 is a quarter most REITs are happy to be done with. The REIT Index in Q3 2023 was down 8%, swinging negative for the year after not a great year last year, and October has only continued a negative trend. But while the REIT stock marketplace didn't have a great quarter in Q3 2023, the key question to ask is what a given REIT did in Q3 and now in October to improve its business for the future. At VICI, our answer to this question has a number of elements to it. We played offense selectively. We played defense. We capitalized on certain current conditions. We prepared for potential future conditions. We increased our dividend effective with Q3 2023 and an annualized rate that well exceeds forward inflation expectations and continued rate of dividend growth since 2019 that is three times greater than the largest net lease REIT over the same period. And if there has ever been a period in which one should value a solidly covered and solidly growing dividend, that currently exceeds the 10-year rate, this is it. Finally, in a year in which REIT earnings growth has generally been difficult to come by, VICI's AFFO per share earnings in Q3 grew 10.7% year-over-year. VICI announced within and subsequent to quarter-end about $1.1 billion of new capital commitments. While most of you have seen the strategic and economic merits of these investments, we know there are some of you who feel that we should have left that capital in a stockpile. Some of you feel understandably that volatility is too high and visibility is too low. We agree volatility is high and visibility is low. And with the market movements of especially the last few weeks, we are sober and cautious about what the market conditions for capital allocation could be from here; for how long, no one knows. But I can tell you that we continue to have high conviction about the commitments we've recently made with Century, with Canyon Ranch, and now with Valero. These commitments represented immediately accretive investments in real estate that should have positive impacts on 2024 earnings. These commitments also represent investments in relationships that can and will be the answer in future years to 'Okay, now that things are back to normal, how are you going to grow, VICI?' Again, none of us know when the all-clear signal will sound, but it will in some way, and REITs that continue to invest in relationships will be best positioned to resume growing when market conditions and values have stabilized. That's what we at VICI did in the recovery out of COVID. Our situational readiness put us in the position to acquire the Venetian and MGP, investments that are a key driver of our 2023 earnings growth, and we made these investments and many other would have been made if they hadn’t been fully readying themselves for recovery. We have been able to undertake our recent investments because of the astute and agile work of Moira McCloskey and the VICI Capital Markets team. Going back to our nearly $1 billion overnight equity raise in early January 2023, VICI has opportunistically raised a total of approximately $1.3 billion of forward equity in 2023, giving VICI a cost of funds for our recent investments to drive the immediate accretion of which we've spoken. We also made defense this past quarter. During Q3 and subsequent to quarter-end, we played defense by using close to $1 billion of equity in cash and only about $55 million of debt to fund our new capital commitments, demonstrating our commitment to our long-range leverage targets. David Kieske and the VICI Finance team also played defense by adding a further $200 million of swap protection since Q2 in anticipation of our 2024 refinancing of $1.05 billion of the legacy MGP 5.625 notes giving us a total of $450 million of swap protection. And while we did all this, our tenants continue to demonstrate the vitality of their businesses, as John will speak of momentarily. I'm very proud of the work the entire VICI team did this quarter against a volatile and difficult backdrop, the VICI team working within one of the lightest G&A loads of any S&P 500 REIT continue to create a culture of excellence and resilience that I'm confident will serve VICI's stakeholders well for years to come, no matter what those years bring. With that, I'll turn the call over to John Payne for an operating and transaction marketplace update, and John will then pass the mic to David Kieske, who will give our financial and guidance update. John?

Thanks, Ed. While 2023 has been a volatile year in the real estate sector, as Ed just highlighted, we at VICI have put ourselves in the position on both a capital and relationship basis to not only continue our business but to expand it into new sectors, new relationships and new geographies. In the third quarter, we continued to grow with our partners at Century Casinos by closing our Rocky Gap Casino Resort acquisition in Maryland, and our sale-leaseback of four gaming assets in Alberta, Canada, growing our international footprint. Subsequent to quarter-end, we were very excited to announce our entry into the family entertainment sector, through our acquisition of 38 bowling entertainment centers with our new partners at Valero, led by Tom Shannon and Brett Parker. The Valero team is a perfect example of a talented, growth-minded operator that has a deep understanding of their consumer recreational trends and the value that a VICI relationship and our capital can bring to their growth strategies. VICI's tenants are not only continuing to show strong operating results, but are also continuing to invest in capital improvements all over the United States. Caesars is investing over $400 million into just one asset, Harrah's New Orleans. The Venetian just announced a $1 billion plan to further enhance our asset, including almost $200 million in just convention center space. MGM spends hundreds of millions of dollars in CapEx each year on assets throughout Las Vegas and the regional markets. And even our smallest operators are investing millions of dollars each year on growth projects, thereby enhancing the quality of our assets and the productivity of their operating businesses. These reinvestment commitments add to our conviction that we are continuing to construct a high-quality portfolio of assets with the best experiential operators for our investors. This high-quality classification comes from not only the quality of the real estate itself, but also from the outsized productivity of these assets, productivity that is hard to come by in almost any other real estate sector. No place highlights the health and productivity of our tenants better than Las Vegas. After meeting with Caesars' CEO, Tom Reeg at G2E, which is the largest gaming conference in the United States, one analyst noted that Caesars is on pace for its best October ever. And this is against the backdrop of current macroeconomic uncertainty. Even during these tough times, Las Vegas continues to open new world-class attractions while diversifying its revenue stream and customer base. The opening of the must-see entertainment venue, the Sphere, world-famous events like Formula 1 and the 2024 Super Bowl, and a diverse and robust convention and conference schedule all helped showcase that there's no city performing like Las Vegas, which has clearly become the entertainment epicenter of the world. Outside of Las Vegas, regional performance has continued to be resilient, while many operators in our discussions have cited increased expenses related to items such as insurance or unrated play normalizing against tough comps, regional operations continue to run at very strong profit levels supported by loyal consumers with their respective databases. Strategically, we continue to be focused on all fronts: gaming, non-gaming, domestic, and international to grow our pipeline for VICI's future. In gaming, Danny Valoy and I are in constant dialogue with new potential partners domestically and internationally, and we are just as excited by the ways we can potentially help our current tenants grow through additional tuck-in acquisitions or by utilizing our partner property growth fund in which we seek to fund our tenants' high ROI opportunities at our existing assets. Meanwhile, Kellen Floral has been cultivating invaluable connections and relationships across the family entertainment, sports, wellness, leisure and recreation sectors as we continue pursuing our mission to be the real estate capital partner of choice to best-in-class, growth-minded operators of unique social infrastructure properties. During this most challenging time of market volatility for everyone, it is more important than ever for our team to continue to grow and deepen our networks and to grow our breadth of opportunities to best position for the years to come. This work is intended to position us to continue to deliver the growth our shareholders have come to expect from the VICI team. Now I will turn the call over to David, who will discuss our financial results. David?

Thanks, John. It's great to speak with everyone today. The VICI team takes pride in what we've accomplished in 2023, acknowledging the year has not over, but the results we posted last night and last week's Bowlero announcement are exemplary of those accomplishments. As Ed said, we are improving the business which should benefit VICI and you as shareholders from 2024 and beyond. Highlighting the transaction we closed last week with Bowlero and we have spoken to many of you about, the deal was immediately accretive to our AFFO given we had prepared by raising forward equity for the transaction many months earlier, generating an attractive spread to that cost of capital. From an economic standpoint, the deal is very attractive. But as John mentioned, it also builds a partnership with a market leader that we and the Bowlero team believe will grow together in the future. Subsequent to funding this transaction, we have approximately $3 billion in total liquidity, comprised of approximately $430 million in cash, $250 million of estimated net proceeds available under our forward sale agreements and $2.3 billion of availability under the revolving credit facility. In terms of net leverage, net debt to annualized Q3 adjusted EBITDA is approximately 5.7 times. We have a weighted average interest rate of 4.35%, accounting for our hedge portfolio, and a weighted average of 6.1 years to maturity. Then as we prepare for our first bond refinancing in early 2024, we have entered into forward starting interest rate swap agreements with an aggregate notional amount of $450 million to date. Touching on the income statement, AFFO per share was $0.54 for the quarter, an increase of nearly 11% compared to $0.49 for the quarter ended September 30, 2022. Our results once again highlight our highly efficient triple net model, the 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 $14.4 million for the quarter and as a percentage of total revenues was only 1.6%, one of the lowest ratios in the triple-net sector. During the quarter, we increased our quarterly cash dividend of $0.415 per share or $1.66 on an annualized basis, representing a 6.4% year-over-year increase. Then turning to guidance. We are updating and increasing AFFO guidance for 2023 in both absolute dollars as well as on a per share basis. Year ending December 31, 2023, is now expected to be between $2.17 billion and $2.18 billion or between $2.14 and $2.15 per diluted common share. Based on the midpoint of our updated guidance, VICI expects to deliver year-over-year AFFO per share growth of 11%, one of the highest expected growth rates across all REITs. As a reminder, our guidance does not include the impact on operating results from any but unclosed transactions, interest income from any loans that do not yet have final draw structures, possible future acquisitions or dispositions, capital markets activity or other non-recurring transaction items. And as a reminder, we do record a non-cash CECL allowance on a quarterly basis, which 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 and evaluating our financial performance and ability to pay dividends. With that, Elliott, please open the line for questions.

All right. Thank you, and good morning. My first question is we all could see kind of how your capital costs have changed over the last few months. But maybe can you give us a sense as to how you see your operators' capital costs changing and whether or not sale-leaseback has become more or less competitive over the last few months.

I'd say generally, Tony, it has become more competitive. I think as you look at, obviously, the stock trading values of the operators, but also the yield to worst on much of their credit or our capital has the potential to be very compelling in 2024, 2025, 2026. But that, of course, assumes that our cost of capital is in a place where we can generate positive spreads and accretion against that. And our confidence level in predicting or projecting our cost of capital a year from now is not high. If anyone does have my confidence in their projections, please call us immediately and let us know what we're missing.

Okay. Thanks. And then just a follow-up. You'd mentioned your operators putting a lot of capital into the assets. And I know you have the property growth fund to help with that if they so choose to participate. But would you all reinvest post this if they decided they wanted to pull some of their capital out? Or do you see yourselves just limiting it to being involved in the projects as they're happening?

John?

Yes. Tony, just to level set here, the capital that I went through in my opening remarks is being put in by the tenant, not by VICI at this time, just to - and I think that's what you were asking. The other point of the question is if there's opportunities for us to help them with larger projects in this property growth fund would we do that? We would be thoughtful in our analytics behind an investment, and we talk to our partners all the time about how they're thinking about growing their businesses and is there an opportunity for us to deploy incremental capital for incremental rent. And we do that on an ongoing basis.

Tony, if I understand your question correctly, I think you're asking us well, could there be opportunities downstream for us to buy incremental rent, if the operators' capital went into the creation of incremental real property. And yes, that could be an opportunity down the road should they want to monetize the value of the real property they created through their capital investments because it's all predicated, of course, on making sure we're buying good REIT income that is tied to the creation of incremental real property.

Got it. Yes, that's what I was asking. So I understood, John, that those items you were listing those capital costs were being funded by the operators already. And so yes, it was a question of if you would go in later if they decided, hey, look, we put this in, and we may want some of that back. Would you help us with that?

Exactly right, Tony.

Good morning, everyone. Thanks for taking our questions. Ed or John, maybe we could talk a little bit about the Bowlero transaction and the cap rate that you've got there. It's a little tighter than what we've seen in some of the last regional gaming cap rates show up that. I'm wondering if you could kind of speak to how you're looking at caps for family entertainment versus gaming and maybe more regional gaming than Vegas realizing Vegas is a bit of a different animal and other experiential real estate that you're looking at as well.

Yes. I'll start, John, and then turn it over to John Payne. So when you look at our Bowlero transaction, it represents a number of different strategic initiatives. It obviously does, as you've already said, represent our initiation into a new category. In that new category, we significantly expand our TAM, and we do so by investing behind a highly superior business model that Tom Shannon and the Bowlero team have created and the growth opportunity they have to consolidate a very fragmented sector is very compelling to us. It is also a sector that obviously other REITs have invested in and could continue to invest in. So it is a somewhat more competitive marketplace with a consequent impact on cap rates than you might see in regional gaming. So it - there are times when gaming investments and non-gaming investments can be a bit apple and orange-ish, if you will, given that they do represent different marketplaces with different characteristics. I do think the point of emphasis needs to be that the 7.3% cap rate was immediately accretive and a very positive spread to the cost of capital. David Moore and the team have raised over the course of 2023, and we're very excited about the growth opportunity going forward. John, do you have anything to add?

Yes, John, I just mentioned you asked about other categories that we're looking at. Obviously, we've already placed investments in indoor water parks, wellness with Canyon Ranch, Pilgrimage Golf, we made an investment in family entertainment center, as you said, with Bowlero. But we continue to spend some time looking for opportunities to develop long-term partnerships in wellness, leisure, recreation, some entertainment sectors and some sports sectors as well. And I think it's important. The final thing I'll just add is it's not an either-or; it's not a pay, you're looking at gaming, and that's what we're just focused on. And you're looking at wellness, and that's what you've spoken on. We've got the capacity now to constantly look for these unique opportunities to place investments over time, as Ed mentioned in his opening remarks.

That's helpful. I think that made a good point about the capital raised previously for this transaction. So I appreciate the additional color. Maybe for a follow-up, John, you've kind of alluded on sports and other categories of entertainment, I guess, in the context of the MSG Sphere opening in Las Vegas and has certainly rave reviews and kind of looks like the epitome of experiential entertainment to us. So curious if that changes your thinking about the category, stadium, entertainment, mixed-use, and maybe the bigger kind of business models that rely on ticket sales perhaps more than anything else. I'm not sure if your thoughts or thinking in that category has changed at all?

It has not changed, but you hit on the Sphere with what an amazing entertainment venue that was added to Las Vegas and sits on our land. It is truly - there's no entertainment venue like it, not only in the United States but probably the world. But this is a category that we have looked at. We continue to study. We clearly have not made an investment, and we're trying to better understand the long-term economics and viability of certain projects. But boy, the Sphere is amazing, John; if you get the opportunity, you should go to an event there.

Yes, absolutely. Thanks, John. Thanks, everyone.

Hi there. Good morning. Thanks for taking my question. I wanted to follow up on the questions on Bowlero, but more from me how you're thinking about value creation and capital allocation and risk holistically in the current environment. In the past, you talked about seeking a minimum 100, 150 basis points spread as an investment hurdle. I guess I'm curious if that's still the case in today's environment, or would you perhaps want to seek more?

Haendel, it's David. Good to talk to you. Yes, that is still true in this environment. As we mentioned, we were fortunate to raise capital for the Bowlero transaction earlier this year while it was in our pipeline. These things take time to come together, but we are not in a difficult position as we sit here today. Looking at our tenure and stock price, we continue to achieve those 100 to 150 basis point spreads over our cost of capital. When considering our next dollar of cost of capital, we think about how to price things to ensure they are accretive based on the current market conditions and the capital we have available.

I'll just add, Haendel. We've had a few questions along the lines of, well, geez, could you have used that money to buy 9 and 10 cap assets? And our answer to that would be today and especially during the period in which you were gestating the Bowlero deal, we don't see any really good real estate occupied by really good operators trading at 9 and 10 caps right now. The day could come when they do, but that day is not here right now. And in the meantime, with this capital volatility that we see, we will be very, very careful in recognizing that not only is the cost of capital volatile on a day-by-day basis, that has implications for any deals that have long gestation periods. So we will have to particularly take care any kind of deal making that requires longer gestation periods to account for the fact we do not have capital cost certainty by any means and won't necessarily have it until the day we decide to do a deal, which means we will take great care in deciding to do anything against these market conditions.

Got it. Got it understood. And one more something else that was unique about Bowlero. It marked the first direct equity ownership in nongaming real estate on your part. I guess I'm curious if that's something you can expect more of going forward? And I know that deal is still a relatively small piece of ABR, about 1%, but you do have a ROFO for eight years. So curious how you see there with either that partner and/or within that space going forward. Thanks.

Yes. So you're right. These do represent our first direct investments, immediate ownership of nongaming real estate. What we should point out, of course, is that through our ventures with Cabot and Canyon Ranch, we have contracted for call rights that give us a direct path to real estate ownership in the future. So it happens to just be a difference between the nature of our acquisition of real estate potential acquisition of real estate with Cabot and Canyon Ranch versus the immediate acquisition with Bowlero. And certainly, in this case, you had an operator with a very compelling opportunity to grow, a very compelling opportunity to put sale-leaseback capital to work, which led to our immediate acquisition of the real estate itself.

Hi. Just two quick ones for me. Just going back to sort of the Bowlero transaction, and I appreciate all the details that you provided there in the partnership and so forth. But as you're thinking about sort of the family entertainment sort of space, Bowling is sort of an interesting one. Maybe a little bit more color on how the deal came about and what other sort of avenues or verticals in family entertainment that you entertain?

Yes. I'll turn it over to John in a moment, Ron, and good to hear from you. I do think one of the key characteristics of bowling is that it is a low barrier to entry experience, but it is an experience that you can get better at. And that's in contrast to some other experiences that can take place within the family entertainment sector, where people might do it once or twice, and they go, 'Okay, fun. I've done that. I don't need to do it again.' Bowling is, at its very heart, recreation. And if you want to get philosophical about it, you can say it goes back to our most ancient human urges to aim at a target and strike a target. People tend to get pretty excited when they strike targets. That energy exists within bowling. It's a recreational energy and not a passive energy. So we think that, that has resiliency aspects to it that are at the heart of why bowling has endured in various forms for literally hundreds of years, whether outdoor on lands or indoors and buildings. But I'll now turn it over to John, who can give you more color on how we develop that relationship. John?

Yes, Ron, I was just going to add that you've heard me speak about times that relationships take time. And this is one that I think I looked at my notes in my first meeting was years ago with one of the top executives at Bowlero. And we just studied the business for this long. It's got scale. It's a business that has great margin with growth potential. The one other thing I'll add to Ed's remarks, as we continue to study the Bowlero business, was the diversification of its revenue streams. It has many cash registers how the business can get into the consumer's wallet. It gets revenues from food and beverage. It gets a large percentage from bowling, it gets business revenues from amusement. So we like that diversification as we dug into the business and dug into the team. So we really took time years in this case to understand the business. And then I think your final part was are there other operators over time that we could buy real estate and be partners with? And we're going to continue to study the family entertainment center space. There are many good operators, but we think we started our journey in the family entertainment center with one of the best.

Hi, good morning. Looking at the future opportunities with Canyon Ranch or Bowlero, is finding the incremental investment contingent upon the operator? Or is your team working with them to help find some opportunities? And then also for any potential ROFOs or investments, those cap rates will be negotiated in real time. So can we assume maybe those would be 50, 100 basis points higher than where you've invested previously?

Yes, Greg, that's a great question. In response to the first part of your inquiry, we actively collaborate with partners like Canyon Ranch to develop investment criteria and apply them to the marketplace to identify the best opportunities. When we announced the expansion of our Canyon Ranch partnership in late July, I mentioned that John Goff and I believe that the upcoming years—2024, 2025, 2026 and beyond—could present opportunities similar to what John Goff and Richard Rainwater experienced during the Resolution Trust days in the early '90s. There may be compelling acquisition opportunities arising not necessarily from operational distress, but possibly from some financing stress. We're looking forward to that, remaining patient and prepared for the right opportunities to emerge. Regarding pricing, ROFOs, and call rights, our focus is increasingly on the necessary flexibility between us as a buyer and any potential seller to address the unpredictability of capital costs and their impact on values. We want to ensure we don't commit to a cap rate for future acquisitions that could ultimately be dilutive.

Greg, it's David, good to talk again. Thanks for joining the call. For our Canyon Ranch, it's somewhere around 120 to maybe 150 rooms, which is the ideal size. They want to ensure asset utilization. If you look at Lenox and Tucson, the room counts are around there, and what they are developing in Austin will be similar. As we consider potential locations for future developments, whether ski, beach, or even international someday, we need to focus on assets of that size. The economic potential that comes from this business allows us to take a conventional hotel with similar room sizes and greatly enhance the economics compared to a traditional hotel. This is part of the excitement and opportunity we see for the future, especially given some of the challenges that may be affecting that sector.

All right. Thank you.

Good morning. Thanks for taking my question. Just one for me this morning. Different markets and countries are obviously going through different phases of economic cycles. And I know in the past, you've talked about growing outside of the U.S., understanding that these relationships take time - has anything changed in terms of how you're thinking about non-U.S. versus U.S. opportunities with respect to current cap rates, multiples relationships? Thanks.

Yes. And I will point out as someone who carries both the Canadian Passport as well as U.S. passport, we have expanded internationally. Canada is another country and we're very proud to be invested there. And John and Kelyn and the business development team continue to research international markets as overall real estate marketplaces and then the categories of interest, the experiential categories of interest within those markets. And again, those are situations where we will make sure to take the time and take great care to make wise investments given that they need to be based on deep knowledge of the market before we ever commit capital.

Yes. Thank you, Elliot. Thanks, everybody, on the call today. We really appreciate you being with us, and we wish all of you the best during this very, very volatile time. It is a time we will get through. And again, we thank you for your time today.