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

Hey, good afternoon, everyone. This is Thomas Allen, Morgan Stanley's U.S. gaming, lodging and leisure analyst, including coverage of the gaming REITs and lodging REITs. I'm here to host the experiential panel on real estate. I first have to read out a disclosure. So please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. And if you do have any questions and you are allowed on the phone and on the webcast, please put them in through the webcast link, and I will ask them. So with this panel, I'm really excited to have by an order alphabetically: We have Bart Blatstein, the CEO of Tower Investments and also the owner of the Showboat Hotel Atlantic City; we have Ed Pitoniak, who is the CEO of the Gaming REIT, VICI; and we have Shai Zelering, who's an MD in the Real Estate Group at Brookfield, who's in charge of hospitality and hotels. So thank you for the 3 of you for spending time with us today. We have 35 minutes, I'm going to get right into it.

All 3 of you clearly believe in experiential real estate. Why? Maybe start with Ed.

Yes. Sure, Thomas. So I've had to -- I suppose, both good fortune and curse to work across a number of real estate asset classes as well as a number of leisure, hospitality classes, ski resorts, hotel REITs, what have you. And I think one of the key cardinal principles in real estate investment management is really centered on the durability of the real estate. And one of the things we really love at VICI about experiential real estate is that real estate of the kind we own within the experiential space gaming is real estate that centers on an end-user experience that has proven its durability over decades. And ultimately, we believe that an experiential consumer discretionary real estate is the durability of the end-user experience, it ends up constituting the durability of the real estate. And as my colleagues on this call understand as well or better than I do, it is durability or it's opposite, obsolescence, that ultimately either substantiate or undermine real estate asset value. The other thing I think I would just add about experiential that we love at VICI is that it does not bear a high risk of getting Amazon. Experiential place-based real estate is built around experiences that need to be experienced in person. They can't be put in a box, ship to your house by Amazon, thereby making the real estate associated with those experiences obsolete.

Shai, Bart, any follow-up comments?

I would add to Ed's comments that prior to the COVID, we've also seen an ongoing shift, systemic shifts from purchases and focus on materialism to a focus on experiential and a shift into, specifically at the time was referred to on millennials, but we also believe that it applied to all generations from purchases to experiences. And now maybe we have a periodic pause on that, but we still believe it will come back. And if you start looking at some green shoots of recovery, you see that hotels that are in resort -- drive-in resort, beach destinations or even mountain destinations are recovering first. So overall, I think that people will continue to be eager to focus on experiences. I think that if you hold assets in the U.S., it actually works in your favor because people are not going to be in a rush to get on 8-hour or 12-hour flights. So we're going through a little bit of a pinch point, but I agree with Ed, this is something that cannot be boxed up and shipped, and therefore, will prove to be resilient over time.

Piggybacking on Ed and Shai, I totally agree with both of them, it's an experiential world or as I like to say, it's an ADD world. We're all addicted to screens, whether it's our phone or iPad, TV and so we need to modify and to adjust our experiences that we're providing for our tenants, for our guests, accordingly. And I'll go into it more later on, but 100% -- but there's always going to be a need for physical space. We'll always need stores, we'll always need space, public space and the like.

So Shai, you brought up the short-term impact that COVID's had on maybe a bit of a pause in the shift to leisure over material things, and now it's accelerated again. We've all been cramped up in our homes and we want something to do and you're seeing drive-through leisure destinations doing extremely well for hotels. How are you thinking about the structural changes that may have occurred because of COVID, if any? And how it's changing your kind of investment process?

Right. So look, majority of hotels are operating on negative EBITDA, right? And that's the reality. But we should keep our eye on the ball, we as long-term investors. This COVID is going to linger as long as we're waiting for the vaccine to show up. So everybody is trying to time the recovery, is it 2027, 2025? Well, nobody knows, but what we do know is the moment the vaccine and treatments are available, experts are estimating it at circa 18 months, I think people will become much more lenient, everybody will relax a little bit, and you're going to see a huge pent-up demand that is built over the course of a year, 1.5 years, 2 years by then. So when you're trying to underwrite to the downside risk, yes, you just try to time it and you might be looking at 5 years. I'll tell you that they cannot forecast 2 weeks out currently. So it's quite entertaining to read a lot of the papers. Let's agree that a lot of bright minds are focused on coming up with a vaccine. A lot of economies are reliant on that vaccine. And therefore, we will see some sort of a solution. And when that comes, it's going to be back to normal. I think that the stickers about stand here and 6 feet apart will be surprised on how short -- what kind of a short memory we and the consumer have, and I'm looking forward to that.

Ed and Bart, any change to your investment processes because of COVID?

Go ahead, Bart.

Well because -- yes. Thank you. Any changes in investment? Well, I get excited to see my American Express bill every month now. I never thought of that since I was single. What I do takes years. It takes 5, 7, 10 years to do what I do. So I worked through the last downturn. And look, the 3 of us have been through 5 or 6 downturns. They come at it differently. The credit markets get funky, people panic. We buy real estate cheap hopefully and/or buy our debt back cheap, and then we work through it. So I'm working through it at the beginning, middle and end. I think we're at the beginning of the end, and we'll get through it. We have a lot of very bright people working on a cure or a med that will alleviate a lot of the symptoms. So I'm very, very positive and bullish.

I would just add, Thomas, that I think over the course of this, with each passing week -- well, I'm going to say, with each passing week, we get a bit more intelligent. We get a bit more intelligent from a business perspective and investment perspective and from a public health perspective. Though, having said that, there was a period where I felt we got dumber week by week. As the initial shock of mid-March became reality, there was a period where each passing week, it seemed more uncertain as to when assets would reopen and what their reopening would look like once they did. But I would say, once we got into late April, especially into May, as we began to get clarity on when assets would reopen, and moreover now as assets have reopened as we get clarity on how they're going to perform, it obviously gives greater clarity and confidence to our investment practice. And I wouldn't say we're going to be rushing out to underwrite anything, even residual uncertainty around income and how to cap it, but we are definitely getting more hopeful and more optimistic.

I will add something else. In Atlantic City, we were allowed to open last weekend, so I have a hotel with a lot of rooms, The Showboat. And this week, Monday, Tuesday and Wednesday, we're up 60% from last year. Last weekend was our first weekend, so we took our time. But people do want to get out. They just want to get out, they want to experience.

Bart, you were saying that Monday through Wednesday, this past -- this week, you've been right up 60% of the levels you were running in terms of revenue last year?

Absolutely. And I'm shocked. But again, because not a lot has opened and casinos are still closed. So it's a result of people just being pent-up and having cabin fever and getting -- wanting to get away from their kids or their spouses or whatever. They just -- they've got to get out into open space.

Staying on the top of the Atlantic City, Bart, you obviously bought The Showboat about 5 years ago, and you've been buying land around it. Ed, you executed an option earlier this year -- no, last year, to increase your exposure to that market through Harrah's Atlantic City? Why are you investing more in Atlantic City?

Well, I'm a contrarian, so I try to get into a market when it's at the most distressed and buy critical mass of real estate, and especially adjacent real estate. I've assembled probably 32 acres in Atlantic City around The Showboat, in and around The Showboat. And the casinos are $3.5 billion industry in a very small town of 48 blocks. So I'm just piggybacking on them. I mean Ed pointed out to it even more so about the hundreds of millions of dollars that is spent in marketing Atlantic City to bring people basically to my front door. And of course, Atlantic City is an untapped market within a stone's throw of 30% of the nation's population. And by accident, it's doing $3.5 billion. It has way, way further to go. There's 104 casinos in Las Vegas, actually. I think 103 now. I think one closed in the middle of nowhere. We have 9 in the middle of everywhere, and I think the potential is enormous.

Thomas, do you want me to talk about Harrah's Atlantic City?

Yes, Ed. You bet.

I am going to dine out on Bart's 9 casinos in the middle of everywhere. That...

I agree with that.

Come on, bring it on. Bring them on.

But I grew up in New England, and like other parts of the country, but I think it's especially strong in New England, we worship beaches, right? Maybe it's because the winters are long, but beaches are what we get excited about and what are so hard to get access to. And when I go to Atlantic City, I look around and go like, wow, this is one of the more beautiful beaches, accessible beaches along the entire East Coast of North America. To Bart's point, it's got 1/3 of the nation's population with an easy driving distance. And I do think that there is the chance for an Atlantic City revival, driven by entrepreneurs like Bart, driven by the gaming operators, such that people begin to remember or rediscover, I should say, what they knew about places like Atlantic City in the late 1800s and the early 1900s, when people flocked to these destinations, as I believe they will do again. And certainly, in this specific case of Harrah's Atlantic City, we are very excited to be buying the real estate of an asset that has one of the stronger convention offerings up and down the East Coast. It's got a very big footprint for convention service. And to Shai's point, as to the fact that there will be a recovery in normalcy, the convention business will recover for sure and maybe in some ways, be stronger than ever, if the desire to gather grows, as I believe it will.

So I'm going to follow-up on that question. So we're doing this conference virtually. I think generally, virtual conference has proven to be somewhat of a success. I think the base case is that group business, which is conventions, weddings, everything, where more than 10 hotel rooms are booked at a time is going to take the longest to recover. Two questions: one, as you said that you think that the convention business will come back stronger than ever, Shai, do you agree with that? And second of all, do you think all the hotels are going to survive? There are a lot of big boxes out there that rely on convention business that they're going to be -- are not going to get it for the next year probably. Do you think they will all survive, Shai?

Well, convention hotels, large convention hotels, and we own quite a few of them, are the ones that are feeling the impact of COVID the hardest, not only because of the lack of demand, but they are expensive to operate. Your fixed expenses related to taxes, insurance, utilities, maintenance, is very high. Will they survive? The asset will survive. I don't know if the owner will survive, but the asset sure will survive. So I think that it's -- that's number one. So if you think that the business of conferences and weddings is gone for good, I would challenge that notion. I think that on the short term, virtual meetings and virtual conferences are effective to a certain extent on the short term. But when you think about pharmaceutical gatherings, medical conferences, educational conferences, large technology conferences, the interaction, the human interaction that is by coincidence, cannot happen virtually. Bumping into somebody and starting a new conversation, getting on the plane and coming up with an idea or coming up with a contact, those things do not happen virtually. And therefore, I agree with Ed that it will come with vengeance. When will it come? Like I said before, I think when people feel confident about that interaction. I don't think that handshakes are gone for good. Even I think that the -- that physical element will continue. But for the next 18 months, we're seeing people in groups kicking the can down the road, and we didn't see cancellations for Q4 of this year or Q1 of next year, but we do see some phones calling and saying, "Well, can I push it back a little bit." And many mentions the challenges with the airlift. And I think that's important to keep in mind. We are at the end spectrum of the channel here, and we're reliant not only on health, the vaccine and treatment and reliant on the level of confidence among CEOs to start again, travel, be it because of liability or control of our expenses, but at the end of it, airlift needs to come back. And until airlift doesn't come back in a meaningful way, that will be a hindrance for convention hotels. And that's what we have to track, and that's why rather than looking at booking pace or searches on Google, I'm keeping my eye focused on what United, Delta, Southwest are reporting and when we can see some of that airlift coming back and then tracking the load -- airplane load. So that's -- like I said, we have a lot of questions, but nobody knows.

So Shai, there have been some articles out there that we are starting to see and some of the airlines have talked, I think, this week about increasing their route capacity and their seat capacity. In terms of what your hotels are seeing, are they starting to see some increased business on the corporate side? I think we started off by talking about how there had been some improvement on the leisure side. Are you starting to see some improvement on the corporate side?

The indication that we're seeing is that as opposed to the phone ringing with corporate clients, be it for group or conventions, calling to cancel the meetings, there are calls now that are happening on either planning or pushing back the meetings. And that's an encouragement because think about the impact on the [ '18s ], right? I mean think about how much money we've had to go back and pay back clients that decided to cancel and wanted their deposits back. So that's encouraging. I think that the conversation has shifted. I think the panic had subsided, and we're seeing some of the dynamics from the group side, specifically for corporate. Until you don't have, like I said, some resolution around the liability related to sending your workforce on the road again and people wanting to build that inertia back, corporate is -- we're seeing a recovery on leisure, and we've not seen the full recovery on -- or any symbolic recovery on the corporate traveler to the effect that we're used to. And you see it on the TSA stats. The trend is positive. We've turned the corner, but we're very far off of the volumes that we're used to of about 2.2 million TSA passengers per day. We're still in 300,000 per day. So it's quite low.

So Ed and Shai, talking to both of you in the past about the attractions of each other's main focus. So Shai, I've talked to you about gaming assets or gaming real estate, which I cover the gaming REITs. Ed, we've talked about potentially investing in nongaming assets. How do you think about that today, pivoting your strategies a little bit? And then Bart, as someone who owns a hotel in Atlantic City of all places, what do you see as a more attractive asset class, casinos or hotels?

Why don't we have Bart start?

That was very strategic, Ed.

Yes.

Look, I love Atlantic City. I grew up coming to Atlantic City. Atlantic City has a very colorful 160-year history, and it's always been a town for working class and middle-class people. The casinos came along in the late '70s, and it was bonkers on the East Coast, that was it. But then convenience gaming came along in the other states, and we're currently, I think, around 24 million visitors a year to Atlantic City, which is huge, but we lost 20 million additional people that were brought in by bus. So it's time for Atlantic City to morph into offer -- have more offerings. The Las Vegas, I think, Thomas, I think 80% of revenue is nongaming or 75% is juxtaposed in Atlantic City. There's very, very few offerings in Atlantic City for families. There's nothing for families other than Steel Pier. And that's why I say the opportunities are immense for Atlantic City. So I love the nongaming, and I don't have a casino, and I love the nongaming. So I'm building a water park, I break around by September. So it will be the first family attraction and family resort in Atlantic City.

Ed?

Yes. So Thomas, as you and I have talked about, we have been evaluating nongaming sectors, and the 4 filters that we applied or have been applying to nongaming sectors consist of: number one, cyclicality. Is it a sector, an experiential sector that's more, the same or less cyclical to gain, which is relatively low cyclicality for consumer discretionary sector? Is it a sector under secular threat or not, i.e., what is the Amazon threat, among others? Number three, is there a healthy supply/demand balance? Meaning, are there some barriers to entry, whether capital intensity or regulatory jurisdiction? And then finally, number four goes back to the point I made at the outset, which is the durability of the experience, having been proven over decades such that the real estate is durable. We've certainly seen nongaming sectors that appear to tick the right boxes in those 4 categories, but the one thing now that we also have to ask is how are nongaming sectors is going to come back from this pandemic compared to the way gaming's coming back. Gaming is coming back at least certainly on relative terms very strongly. Those who read your coverage know that we have about half of our assets open right now, we should have close to 3/4 of them by the end of this weekend. Some of the early signs on certain markets are very strong. A lot of people have heard about how Mississippi posted gross gaming revenue over the Memorial Day weekend. It was actually higher than Memorial Day weekend last year despite the fact that the biggest asset in the market, Beau Rivage, was not open. And we're hearing similar stories from around the gaming map. So gaming, I think, is going to prove its resilience through this. And now we will look at and evaluate other sectors based on how they come back from this, especially as compared to gaming.

Can I add something, Thomas, if I may?

Go ahead. Go ahead.

The -- my market is an under 40 market, and the under 40 market is heavy into e-sports and gaming and also sports betting. And the casinos are adjusting to that, and I think we see just the beginning of those 2 users in that sector. It's just that the -- in its infancy, the sports betting impact, and especially the e-sports and gaming. I posted a number of e-sports events at The Showboat, and they're great. There's 100 million gamers in this country and over 1 billion in the world, and there's no denying effect that it's a monster.

Yes. So we're forecasting U.S. sports betting and online gambling to grow from less than 1.5 billion in 2019 to 12 billion in 2025, and that's excluding just traditional e-sports. And so that's one of the growth avenues in the space that we're most excited about. So I definitely understand the focus there. Shai, just ending with you, any thoughts on owning casinos in the future?

Well, we own a casino at our Atlantis Hotel in the Bahamas, so I think that both Ed and Bart are spot on. I think Atlantic City has a great future ahead of it because of the reasons that we spoke about earlier, driving markets, experiential focus, resort orientation, and I agree with the comment, the beach there is fantastic. So I think these are great place. I think that gaming, whatever you indicated prior, you can accelerate it coming out of COVID. And the reason I think so and I'm bullish on gaming, is because a lot of these municipalities are going to need a way to raise tax money. The burden of the COVID has been immense, and we'll continue to pay the bill for all the measures that have taken place for years to come. The states, the municipalities will have to figure out new sources of revenues, and I think gaming is one of those that will be very appealing. So I'm very bullish on the gaming. I think that as travel comes back, although in Vegas, it might not -- there might be a lot of revenues coming out of it, and I agree with that. When you start thinking about sports gamings and the impact of sports gaming on real estate, the ancillary revenues that will come from that are going to be immense. And I think that that's something that we are studying, and we would love to do more as states get desperate for tax revenues, and our real estate can allow for that. So it's a very interesting one to watch.

Yes. We put out an interesting report on May 1, led by our U.S. public policy analyst, Michael Zezas that he found that states will likely have a $180 billion budget shortfall through fiscal 2021. And from our standpoint, this is going to lead to more legalization of sports, being online gambling. You've already seen some progress last week, both Louisiana Senate and House passed bills to older referendum in November to legalize sports betting. You've seen progress since COVID in Virginia, Oklahoma and Washington. So I think this is already starting to -- oh, and in California, a Senate -- or a committee passed the bill out, so you're already seeing some progress there. So we have 5 minutes left, and there are 3 questions that have been sent in, I want to address one for each of you. So Ed, starting with you, because of COVID, the casino operators are going to be burning a lot of money in the near term, right? The properties are closed. Eldorado/Caesars is your main tenant, and so they'll have a good amount of leverage coming out of this. How are you thinking about your master leases credit now versus pre-COVID?

Yes. It's a good question, Thomas. And it's obviously a question I would have answered differently maybe a month ago when assets have not yet reopened. But now that we see them reopening and we see the strength of demand recovery, we're obviously growing more hopeful and more optimistic by the day and more confident in the credit profile of Caesars and frankly, our other tenants as well. This is an unprecedented crisis, obviously, but what it also has within it is an unprecedented opportunity for the operator to turn the cost back on in a way they can never do in a garden-variety recession. In a garden-variety recession, demand declines in advance of operators' ability to modulate costs in relation to that demand decline. In this case, both demand and cost got -- variable cost got turned off to 0 at the same time -- almost at the same time. And now operators are able to turn back on. So you're hearing operators speak very confidently of their ability to generate 100% EBITDA recovery at less than 100% revenue recovery. So if that continues to play out the way we're already seeing signs of it doing so, we're very confident that Caesars as it is today and Caesars, as it will be once it closes its merger with Eldorado, will be in a strong cash flow position and thus, a strong credit profile position.

And then Shai, what do you expect RevPAR to be at the end of the year? You can count on whatever you want, caveat and all.

Look, you have -- listen, the one thing I'm glad is that I'm not going to be asked the question in these conferences about where we are in the cycle that -- if there's one silver lining out of all this. I -- anybody who answers your question is -- I'm curious to meet him, because nobody has visibility. We don't have visibility a week or 2 weeks out. So I'll tell you where, RevPAR is going to be significantly below people's expectations, and I think that we'll continue to see it in 20 -- at least the end of 2020, even 2021. Operators, and I'm one of them, are typically have rosy grasses on, and we've seen this through this crisis. So I'm not going to even attempt to answer your question, but I do want to agree with Ed that finally, our operators in our industry have learned what it means to do zero-based budget. That has never happened before. And this crisis has really forced both the C-Corps, the REITs, single-asset owners to understand what it means to do zero-based budgeting. And because of that, watch when the recovery happens because you're going to have tremendous flow-through if we really keep that discipline, and we have to keep the discipline because all the collaboration with the lenders is going to dissipate. So I'm very, very optimistic about the future of the business because of that.

And Shai, I agree with you that it's going to take a lot longer to recover than people appreciate. I think a lot of management teams have been out there saying that I think that hotel RevPAR will get back to peak in 2022, 2023. If you look at post 9/11, it took them 44 months. And during and after the financial crisis, it took 52 months. And we're seeing more superior declines today than we've ever seen before. And prior to COVID, hotel pricing power is weaker than it was in both those experiences. So we think that RevPAR won't come back until 2025. So just last one for Bart with our last minute. The question is, in terms of new developments and redevelopments, how do you plan to account for future potential viruses? Will you retrofit current properties?

Well, it's not a very exciting question, Thomas. But to end the grouping here, I mean I'd rather talk about something else. Look, I think like -- there's some protocols that will remain. But overall, people are going to go back to a normal, like Shai was discussing earlier. Right now, we're all panicky about the thermal. Can you hear me, by the way?

Yes.

You hear me, right?

We hear you well.

Yes.

Yes.

Okay. I'm having trouble on my end. Yes, I think things will go back to a normal in a year, and we'll retain some protocols, but get rid of most of them.

Yes.

There will be a cure...

Bart, I have a question you want to ask better than that -- answer better than that. So you've historically been more focused on traditional types of real estate, right, office, retail and residential.

Yes. I'm not very bullish on office right now, although in my collection there are really good. Pardon me?

What made you...

I'm sorry, it's breaking.

I think -- what made you want to shift?

My ADD. I get bored. I don't have any hobbies, my golf game sucks. Oh, I couldn't say that, I'm sorry, I shouldn't say that. So I like a challenge, and Atlantic City is a wonderful challenge. I got in at the bottom, I purchased a 1,300 room to form a casino hotel at $18,000 a key. It's pretty hard to screw up, so -- when your basis is that low. And I love Atlantic City. I think we're just at the beginning of this morphing into a new town. With Ed [ also bought some ].

Happy to provide it, Bart.

Well, thank you all 3 of you. We're past our time. But thank you, and feel free to reach out anyone if you have any additional questions.

Thanks, Thomas.

Thank you. It's nice meeting you, Ed and Shai. Pleasure. Thank you, Thomas.

Thank you.

Thank you.

Bye now.