VICI Properties Inc. (VICI) Earnings Call Transcript & Summary

[Audio Gap] John Payne and Danny Valoy, who will -- we're going to have a fireside chat here on the business and the state of the union, especially in these volatile times. So Ed, I don't know if you want to give any opening thoughts or we can just get right into the questions on the business.

Yes. I mean I would just say, R.J., first of all, thank you for hosting us here. We appreciate everybody who's on the line attending today. We wish we could be with you in person in New York and look forward to doing that next year, if not, this fall in Atlanta at the Fall NAREIT. We're excited to talk to you about VICI. We've been in business now for about 2.5 years, and we remain as convinced as ever that we're one of the next great institutionalization stories in American commercial real estate for the kind of reasons we'll talk about here over the next few minutes with R.J. And with that, R.J., I'll just turn it over to you to start going through the questions.

Yes. Ed, you mentioned you guys have been a public company for 2.5 years, and there are a couple of other gaming net lease REITs out there, but it is a relatively new asset class in a net lease wrapper. Can you talk about why you think -- the attractiveness of gaming assets and why you think it makes sense with a net lease wrapper?

Yes. So I think when you look at any category of net lease real estate, and it's obviously a very big category that can contain everything from convenience retail, gyms, movie theaters, industrial, office, indoor water parks, you name it, right, it can contain multitudes and even ski resorts. And I think for any given category of net lease real estate, the fundamental question to ask is does the occupant's business adequately fully support the rent that the landlord must charge in order to get a return on the investment they've made in the real estate. What is the nature of the operator's business? Is the real estate mission critical to them? Does the real estate constitute, in any way, certain barriers to entry? Is it expensive to build, difficult to build, challenging to build? And when you look at gaming real estate through all of those lenses, I think you end up very quickly coming to the determination, this is a category that can support net lease real estate very effectively. And it can be a very effective way, as in any other net lease category, for operators to recycle capital very accretively when they do sale leasebacks. If we can buy a very good asset for them at, let's say, a 7.7 cap or a 13x rent multiple, right, that may compare with their ability to redeploy that money very accretively at double the yield. We give them money at 7.7%. They reinvest it at a 15% hurdle rate, and they create a genuine value in their business. And we are certainly seeing that playing out as we go quarter by quarter through our first couple of years here. And I do think -- finally, just to end the answer to this question, R.J., I do think what we're going to see -- what we're very hopeful of seeing through the COVID-19 crisis is that gaming, among all triple net real estate categories, will show some of the very strongest rent collection of any category out there. You've certainly seen among the triple nets so far that rent collections in April and May have ranged from a high in the case of agri of about 87% to -- well, there's a low, I know, of 15% and there's a whole bunch that are scattered in the 50%, 60%, 70% range. We, again, have collected so far 100% of our rent from genuine third-party tenants. And we do believe that not only are we in the process of proving out gaming as a net lease category, I think we're in the process of proving out gaming real estate as a superior net lease category that deserves a superior valuation which heretofore, we haven't enjoyed as a sector and yet feel we're earning the right to.

I think it would be helpful to give some context on what the portfolio looked like when you guys came public and sort of the changes and the growth that you've seen up until today.

Yes. R.J., this is John. Thanks for having us this afternoon. To your question, VICI was started in October of 2017. At that point, we had 19 properties. We were formed out of a restructuring of Caesars Entertainment Operating Company. Today, we sit with 28 properties. So in about 2.5 years, we've done about $7.6 billion, $7.5 billion worth of acquisitions. We've added 9 assets to our portfolio. After the Caesars-Eldorado merger is completed, which we hope to have -- that they hope to have completed by late June, early July, we'll have 31 properties. We've been able to add accretively almost $600 million of incremental rent, while at the same time, under David Kieske's leadership as our CFO, we've been able to reduce our leverage from about 8.4x back in October 2017 until today. And our goal is in the low 5s. We've gone from 1 tenant, which was Caesars. Today, we have 5. So through the course of 2.5 years, we've been real active and excited to grow this sector as Ed talked about.

That's helpful. And for those of the folks that are on the line that know the net lease space but are relatively new to the gaming net lease space, can you just talk about the lease structure for these assets and how it might be different, and I can certainly add my comments, versus your more traditional net lease retail-focused leases?

R.J., it's David. And I can talk about our leases and I'd love any compare and contrast that you can provide to the broader sector. But as John said, we have 5 tenants today. With 3 of those tenants, we have what are called master leases, and the only reason we don't have master leases with 2 of the other tenants is, one is with Hard Rock, which is a single asset; and then we have 2 single leases with Penn. But with Caesars, with Century and JACK Entertainment, we have master leases that are cross collateralized by the assets in -- underneath those leases. And the way our leases work is they're 15-year base term with 4-, 5-year extensions; annual rent with annual escalators somewhere in the 1% to 2%. Our blended same-store rent growth year in, year out, it's about 1.6%, 1.7% as we sit here today. The leases all have parent guarantees. So the Caesars leases, which represent about 83% of our rent pro forma for the Eldorado transaction has a guarantee from the parent entity. We have a guarantee from the Seminole Tribe, which is an investment-grade entity. We have a guarantee from JACK Entertainment and then as well as Century and Penn. Gives us added protection in these leases and in the events like this as we're going through this COVID environment that we're in. And then there's some other -- the extension options, why they are at the tenant's option, the mission criticality nature of these assets makes us believe and we firmly believe and our accountants believe that these are 35-year leases by their nature. So with that, I'll stop, R.J. Thanks.

Yes. I think the one thing I'd highlight difference versus some of the more traditional retail-focused net lease peers is that the internal growth, David, that you pointed out of 1.6% or 1.7% is just about double what the internal growth is on average for your peers. And so as we were looking at the company before we picked up coverage, that's obviously something that we looked at and said was pretty attractive in terms of the lease structure. For those that aren't familiar, can you talk about, John, maybe this is a question for you, the mix in the portfolio between Vegas Strip assets and more regional casinos, sort of the differences between the 2? And if you have an opinion, which is better?

I don't have an opinion which is better. I think diversification is critical, and we've believed passionately about that. And just to level set, we get 71% of our rent from drive-to regional properties throughout the United States where gaming is legal. We get 29% of our rent from 2 Las Vegas Strip properties. They're quite different in their makeup. The drive-to portfolio caters to a customer that is within 15 to 30 to 60 miles, very high frequency. Most of the consumers think of those casinos as, what I'd say, as their country club or their social club where not only do they enjoy the entertainment, but it's also where their social life is. And then we have 2 large facilities in Las Vegas, Caesars Palace being our marquee asset, which caters to customers from all over the world, has many different layers -- levers of revenue to pull, whether that's international business, convention business, domestic gaming business, domestic gaming business that flies, hotel, entertainment, and I can go on and on. So what we really like about VICI's portfolio is the mix of regional business and Vegas business. And as I -- we talked earlier, we continue to add different tenants to our portfolio because they do have different operating models. I think you'll see us continue to invest, R.J., in both categories, Vegas assets as well as regional assets as well as different -- there is a local Vegas market that we really like long term, and I think you could see over our lifetime where we invest in that as well.

That's helpful. Can you talk about -- obviously, there's a planned merger, a big merger with Eldorado and Caesars. It's expected to close in the near term. What's your confidence in that deal closing? And how is -- how do you anticipate that? I mean it's obviously transformational for you guys. But can you maybe talk about why it's transformational and then the level of confidence in that deal closing?

David, do you want to take that?

Sure. I'm happy to. Yes. Just to level set, we agreed last June to acquire 3 assets from Caesars: Harrah's Atlantic City, Harrah's New Orleans, Harrah's Laughlin, which will add about $154 million of rent, and then we're going to add incremental rent from our asset, Caesars Palace Las Vegas and Harrah's Las Vegas, another $98 million of rent. So once the deal closes, on a run rate basis, we'll add $252 million of rent. That's a $3.2 billion transaction, which helps Eldorado fund its broader merger with Caesars, which ultimately, led by Tom Reeg and Bret and Anthony Carano's operating team, will create the best North American gaming company out there. We believe Tom and Bret and Anthony will bring the right strategic direction to the company and take it to new heights. It's been going through regulatory approval process. We're very confident that the deal will close. It's probably 30, 45 or so more days away. There are a few states that need to finalize their approval process. That's New Jersey, Nevada and Indiana. Our understanding is New Jersey and Nevada will call a special session once the FTC is done with their review, which should happen any day now. And then Indiana will likely approve it later this month or early July. We stand behind Tom and Bret. We settled the forward equity commitment that we had entered into last June as a way to fund our portion of the transaction. We closed that -- settled that out yesterday. So that brings $1.3 billion of cash onto our balance sheet, just getting our ducks in a row to be ready to be in a position to fund our portion of that transaction. That equity, along with $2 billion of notes that sit in escrow, gives us all the capital that we need for our portion of the transaction.

That's helpful, David. I think that that's sort of a good intro to the company and the growth you guys have seen. But obviously, the elephant in the room is the pandemic that we are going through and the unprecedented closing of most of -- or all of the casinos in the country and the slow reopening. How have you managed the company and balance sheet prior to the pandemic that sort of helped you through this unprecedented time and sort of be able to weather the storm?

Yes. I can talk about our balance sheet, R.J. I mean, as John alluded to, we emerged out of a Caesars bankruptcy in October 6, 2017. We had 8.4x net debt to EBITDA then. Since that date, we've been highly, highly focused on reducing leverage and terming out our maturities because, as a lot of people and a lot of companies saw in the great financial crisis, it wasn't the total quantum of debt, it was just the amount of debt due -- the amount of debt that comes due in 1 year that can ultimately get a company in trouble. So we've worked hard to reduce our leverage not only by reducing debt but also increasing the EBITDA. And as John alluded to, the $7.6 billion of acquisitions that we've added to the balance sheet and over equitizing those acquisitions along the way. So as we sit here today -- or let's talk about pro forma for the Eldorado-Caesars merger. We'll be about 5.2x net debt to EBITDA. Our goal has been to run the balance sheet between 5 and 5.5x net debt to EBITDA. And I think as we emerge from this pandemic, we'll probably work to even keep it at the lower end of that range, just maximizing optionality and flexibility of our balance sheet. And ultimately, the goal is to migrate towards an investment-grade borrower and issuer. We've done 2 unsecured high-yield note offerings, 1 last November and 1 this past January. And we have a term loan that's outstanding, a $2.1 billion term loan that comes due -- it's not due until 2024, but we will work to refi that and replace that secured debt with unsecured debt and ultimately, triggering the flip into investment grade over the next couple of years.

That's helpful, David. Ed, you mentioned that, in your opening remarks, there's been a wide range of rent collections through this pandemic for some of your peers, anywhere from 15% to, I think, ADC at 87%. VICI's collected 100% of the rents for April and May and expects to collect 100% in June. How are you feeling now as we've gone through these shutdowns and we're starting to see some of these open? How do you feel about the safety of the cash flows? And is there anything that you're doing to work with tenants as they try and manage through or operate through the shutdowns and reopenings?

Yes. So in a moment, R.J., I'll turn it over to John who can talk about how we've been working with our tenants to ensure that we collectively get through this crisis as best we can. And when you do -- when you look at our rent collection today, I think there's a few factors that would explain why we have been able to collect 100% of our rent when so many other triple net categories have struggled to do so. I think one of them obviously has to do with the fact that we only have 5 tenants. So our ability to create customized solutions for each tenant is obviously much more feasible than it would be for somebody who had 1,000 or more tenants as you would find in many of the bigger triple net REITs. But I think at the heart of it is the fact that our tenants, America's gaming companies, are economically strong companies with very strong balance sheets, very strong cash positions and a conviction that when they reopen, they would be in good shape as we're starting to see now and as we will talk about a little further later in this call. We are very sober about the fact that there is still a long period of time here before we're going to have absolute certainty as to how fully we've recovered to 2019 visitation, revenue, profit and cash flow levels, but the early signs are promising. And so much of it has to do with the fact that gaming operators have such a powerful relationship with their customers. We've benefited -- everybody's benefited, I think, from some of the key points that Jay Snowden, the CEO of Penn, one of our tenants, has made in the last couple of weeks. One of those key points is that 75% of Penn's revenue comes from 25% of its customers, so not far off the old 80-20 rule. He knows the names as -- and this would be true of our other tenants as well. You would see that same kind of stratification of customer value. These highest strata customer value, he knows everyone by name. He's got their email addresses. He's got their street addresses. But moreover, they are very devoted to his assets, and they are very motivated and inspired to return. And so if you only get 25% of that customer base back, that 25% back, you potentially have 75% of your revenue. And what we're seeing and hearing are operators saying I think I only need 75% to 80% of last year's revenue level to get to last year's EBITDA level given the efficiencies that have suddenly appeared to my cost structure by virtue of the fact that I'm not in a position of having to make costs go away at this point, I'm in a position of determining which costs come back given the furloughing that has taken place. So again, I think a number of positive factors that have driven that rent collection. But in terms of how we work with tenants, I'll now turn it over to John.

Yes. R.J., we've been working with our tenants, and as Ed said, we do have an advantage of only having 5 tenants. Also remember that our tenants came into this pandemic without preexisting conditions, and what I mean is they come into it with tremendous success in the months of January and February of 2020. In fact, some would say those are 2 best months ever in the history of gaming across the bricks-and-mortar facilities. But since the pandemic started, we've been talking to them constantly, really digging deep on their liquidity, understanding their burn rate, understanding their open plans, their projections. And we've been very clear from the start that we're here to listen and understand and ultimately if there needs to be a concession to help. But we've also been very clear to say paying rent is mission critical for us, and based on the visibility that we had in April and May and here in June, that, that is feasible for all our tenants. We'll continue to monitor. The assets are opening right now, and we'll continue to monitor the situation and stay in contact. And should there need to be a concession here or there to help our tenants, we'll have those discussions. But again, rent is mission critical to VICI and liquidity. Because of how strong the businesses are, 4 or 5 tenants, has not been a problem to pay that rent.

That's helpful. Go to a question from -- that was submitted from the audience, which sort of is similar to the question I was going to ask next. What's your forecast for demand coming back in Las Vegas given the pandemic and the impact that it's had? How do you think the reopening will play out? And what have you been hearing -- we talked about it yesterday. But what have you been hearing in terms of the casinos that have already opened in terms of demand?

Yes. So I'll start with the last part of the question and talk about the areas that have already opened in the United States. So the casinos in Louisiana and Mississippi opened about 2 weeks ago. The casinos in Missouri and Iowa opened on Monday. As you mentioned, Las Vegas will open tomorrow and as well as the rest of Nevada, and then West Virginia will open up. As it pertains to demand, it's been a very exciting time to see the consumer of bricks-and-mortar casinos come back. There have been -- it's very clear that during this pandemic, those consumers have not found a replacement for what the bricks-and-mortar casinos have to offer in forms of entertainment. As I said, with these regional casinos, it is their country club or social club, and we're seeing consumers come back at really good volumes. There are many areas and many properties that are seeing volumes even though there are restrictions, 50% occupancy restrictions in places like Louisiana and Mississippi. But even with those restrictions, volumes are exceeding prior year numbers. And that's exciting. And as Ed mentioned, these are operators that, if there's any silver lining from the pandemic is they've had a couple of months off to sit back and say how can we run these facilities in a better manner that can deliver better service and can be leaner. And so they're operating these businesses with a different structure. And so as revenues come in, more will flow to the bottom line, and we're seeing that. The question was about Las Vegas. Las Vegas is a little bit different in that there's no question in our minds that it will come back. It may take a little longer because it has 2 segments of business that the drive-to markets don't have. It has a large international business and a convention business. I shouldn't say that the regionals don't have that, but they don't get a majority of their business from those areas. So those are areas, the international and the convention business, that I do believe will come back over time. It'll just take longer. But I'm happy with our 2 properties, Caesars Palace and Harrah's Las Vegas, that will open 1 tomorrow and 1 the next day, that Caesars has Caesars Rewards program. They'll be able to supplement or drive more demand from the drive-in business or the fly-in domestic business to replace some of the business that they've lost from that international and convention business. So we'll just have to wait and see. We think both will come back. We're very encouraged by the early results on the regional markets. That's probably ahead of our -- although it's short time period, but they are ahead of our projections of how the businesses would rebound, and we'll just have to see how that ultimately plays out in the destination market of Las Vegas, R.J.

That's helpful. We just have a minute left. We did have one additional question, so if you could maybe spend just a few seconds on that. And the question is about looking to acquire, once you guys get back on offense, what's the prospect of you looking at adding other nongaming assets into the portfolio.

I mean the potential is there to do so, R.J., but what we are doing is we're obviously observing very closely how gaming comes through this crisis, and we're going to be looking at every other experiential sector that we've previously had an interest in to see how they come through this crisis. And I would say, based on early signs, we're thinking gaming is going to set a benchmark, and that's a good thing in multiple ways. And it also means we'll test anything else we look at against gaming. And frankly, we think, for the near term, our greatest focus can and should be on growing through gaming.

Understood. And Ed, any -- or team, any closing remarks before we conclude?

I would just reiterate what I think is the opportunity in VICI's stock, R.J. I think as you have well understood from the beginning, this is a process that takes time. And the process I'm talking about is the process of gaining understanding into a new real estate asset class, which is, R.J., you said at the beginning, gaming real estate is still a new commercial real estate asset class. And as understanding grows, if the understanding is positive, valuation grows. If the understanding the negative, obviously valuation declines. And I think what this crisis is doing is further highlighting and dramatizing the positive, very positive institutional characteristics of gaming real estate, and I think anybody who buys into VICI now will enjoy the benefits of the rest of the world waking up to the institutional quality of what we own.

Well, thanks so much for your time, and thanks for those that have dialed in. Appreciate it. And with that, we will conclude.

Thanks very much, R.J.

Thank you.

Thanks, NAREIT.