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

Why don't I start from the high level, and then you and Danny can get into more of the granularity of how sports betting economically works for our tenants and thus for us. And maybe to step back for a moment, R.J., if you look at gaming REITs and if you look at VICI specifically, we have been a good defensive choice in this period of COVID, right? We have outperformed during this period of COVID because our tenants simply have been in much better shape than so many other tenants and so many other asset classes across the triple-net spectrum. So it's great to be a defensive choice in a time of crisis. But then the question arises, well, how good a choice will you be as an equity pick when this crisis is finally over and it's time to play offense again. And so I think the 2 key themes that come out of 2020 for VICI are, number one, how well we have performed because of how well our tenants have performed during COVID, but the second big theme that is going to come out of 2020 is the degree which in 2020 iGaming and sports betting have revealed themselves as a powerful new secular tailwind behind American Gaming, right. It represents a whole new way of gaming, engaging with a potentially much bigger audience, a much bigger marketplace of potential visitors to casinos, not unlike what ESPN and regional sports cable did in terms of growing the fan bases of every major league team over the last 40 years, when you no longer had to go to the stadium to become a fan. But once you became a fan, you became more likely to go to the stadium. So again, 2 very powerful things in 2020: one, somewhat defensive in nature; one, offensive. And John and Danny can now talk about the degree to which it will help our tenants, not only strategically in the way I've described engaging a new generation, but economically as well. John?

I'm going to let Danny take that one.

Yes, I'm happy to jump in here. Thanks. So look, actually, sports betting overall, it's a really big tailwind for the operators, as Ed mentioned. I'd say sports betting in and of itself isn't hugely profitable. You have a similar concept to what you have in poker, where the house effectively takes a rake for a percentage. In sports betting, the operators effectively make money by pricing the bets in certain ways. And so if you think about the biggest Sportsbooks on the Las Vegas strip, at properties like Caesars Palace and Bellagio, they generate somewhere between $5 million and $10 million of EBITDA a year. That said, there's a lot of ancillary benefit that comes from having that amenity. So sports betting has been proven in the regional markets and jurisdictions, like Iowa, to drive a significant increase in visitation to the properties. There's a property there that cited a 20% increase in foot traffic with the addition of a Sportsbook. Both Caesars and MGM have cited stats in Mississippi where with the addition of sports betting, food and beverage revenues have increased 200% to 300%, and there is a 20% to 40% increase in table games volume because there is a lot of crossover play. So I think one of the really big benefits here is sports betting drives, attracts an incremental customer and then really drives that foot traffic to the property and ultimately, helps our tenants to the online portion, obviously, accrues to the corporate entities of our tenants that ultimately makes them a better credit longer term. And for us, in a way, there is some ancillary benefit in our existing leases and that this new incremental revenue stream ultimately gets captured into the property P&L, and we do have a longer-term reset mechanism where we measure the revenue performance of the asset over a longer period of time and then align rent with that performance. So to the extent that things like sports betting and even online gaming potentially are additive, there is an incremental benefit there for VICI as well.

Thanks, Danny. One of the questions that I'm asking all of the companies during NAREIT is the potential or what we've already started to see additional shutdowns due to the spike in cases in COVID. And how do you think that impacts VICI or potentially impacts VICI? Obviously, we had an unprecedented closing of all casinos, all casinos, in the United States. VICI still collected 100% of rents and imagine that the answer is going to be whatever the shutdowns are, they're going to be more regionally focused and less impactful. But just curious what your thoughts are as we're asking all the companies as we go into this winter and seeing the unfortunate number of cases increasing. How do you think that impacts or potentially impacts VICI's business?

John, you want to take that?

Sure. Absolutely, and I understand that you're asking everyone about this. We completely understand that. The way we've looked at and our operators do it, obviously very different than March and April. We do believe that there could be some more shutdowns. You're seeing this in -- already R.J., in states like Michigan that have announced the shutdown of their casinos for 3 weeks. You see some hours being reduced in states like Ohio. But unlike March and April where there was complete shutdown and unknown, we do think there will be a tailored and targeted solution for these shutdowns. What is right for Michigan is probably not right for Louisiana. What's right for Louisiana is probably not right for Nevada. And I think you're seeing the governors and the state regulators understand that. So our teams, our tenants are prepared for this. They obviously have game plans that are already in place of how to shut down a casino, how to reopen it safely and soundly, how to have a place that's incredibly clean for the guests. And so we'll just continue to monitor it. We do expect that there'll be more of those, whether they're complete shutdowns or changing of the policies and procedures and the timing. And we're seeing some of that play out right now. But to your point, we have been fortunate to have very strong tenants that even when the casinos were shut down in March and April and May, we continued -- VICI continued to receive 100% of our rent. And our tenants are better prepared today than they were for the complete shutdown in March and April.

Can you just touch on that, John, why are they better prepared? Or what steps of your tenants taken through this pandemic to increase their ability to pay rent? Which ultimately, as we look at the space, the unique part about gaming net lease REITs is that you can really underwrite the tenants and their ability to pay rent. Can you just talk about how that's improved despite the pandemic?

Yes. I'll talk operationally because during the times they've been open, they've been able to generate more cash than ever before, particularly on the regions. But David can talk about their balance sheets -- David and Danny, about the balance sheets and what our tenants have done to continue to get stronger over this time. But R.J., as I talked earlier, as many other hospitality areas are still burning cash, the casinos that have opened up, in particular, in the regional markets because of the hard work of the tenants to reimagine how they operate, are running at all-time highs and all-time margins. So over the course of the summer and now into the fall, the businesses have been cash flow positive, again many at records. And we see that, they're obviously stronger. And then the final thing is they're prepared to operate the businesses with these restrictions in a safe environment with more cleaning staff, understanding what the restrictions are, new layouts of the casino floor, and they're just better prepared for the situation that we find ourselves. So I'll turn it over to David and talk a little bit about what the tenants have done during this time.

David, just before you start, just to reemphasize the point, R.J. In the spring, regulators -- public health authorities, regulators and the operators had to work together to figure out once it is safe to reopen, how are you going to reopen? What are the safety procedures? And that required time that won't be required, to John's point, this time around, right. When the all clear whistle is blown, can get right back to business because you've done all the work last spring to figure out what it is going to require to reopen safely. David?

Yes. Thanks, Ed. And R.J., you've mentioned something that's critical. There is transparency into our tenants, right? 3 of our 5 tenants are public companies. So as an investor in VICI, you have a look-through to how our tenants' financial performance is based on their filings, based on their quarterly reporting. JACK and Hard Rock are private and -- JACK is a smaller private company. Hard Rock is obviously, a globe, a multinational entertainment company that has public debt. So there is some better transparency in our model versus the typical triple net model. And what you've seen from the operators is their ability to access capital, their ability to pivot on a dime, to shut down, take out cost of the system and then reopen from basically a zero-based budgeting standpoint. And if you just take Penn as an example, it was trading at $4 and change back in end of March, early April, and they had closed yesterday north of $65 a share. And they've raised significant amounts of capital, significant amounts, both equity and debt to bolster the balance sheet and to reopen. Caesars is similar, they had a big equity raise in June and another very big equity raise a few weeks ago, ahead of gaming -- sports betting acquisition around William Hill. So unlike the global financial crisis, the capital markets are wide open for the operators, and the operators are taking advantage of that to bolster their positions as they -- whether this pandemic better than any other leisure entertainment hospitality operator out there.

Thanks, David. That's helpful. And I would encourage any questions from the line. Feel free to submit them and take them in. Happy to ask those. I think the last topic I'd like to touch on is all the gaming REITs have talked about moving into non-gaming, more experiential assets and acquisitions. And VICI was the first to do a transaction outside of gaming. Just wondering if you could give us a little color on that transaction? The thought process behind it? And what do you think the opportunity set is beyond those for non-gaming assets?

Yes. I'll start out, R.J., and then turn it over to David. From the very beginning, VICI has been positioned as an experiential REIT. We were formed on the investment thesis that experiential real estate will prove to be a really great commercial real estate asset class deserving an institutionalization. And we -- because we are positioned that way, from the beginning, we created a board and we created a management team with expertise across a broad array of experiential sectors. And we've taken advantage of that expertise in order to be the first gaming REIT to actually allocate capital outside of gaming. It is a small first step, but we think a very indicative -- a powerfully indicative representation of how we think about experiential real estate and where we go from here. And to give you a little more color on that specific deal, I'll turn it over to David.

Yes. Thanks, Ed. Thanks, R.J. The transaction is around Chelsea Piers New York. And for those of you who don't know Chelsea Piers New York, very, very unique asset, 780,000 square feet, sits on [ 4 piers ], that does have a land-based component. But it's a very complex asset with a lot of levers, very similar to gaming, a further reason we're very attracted to it. And it's an asset that we've had a long-term history with. But just to give you some perspective, there's a golf driving business -- driving range business is doing phenomenally well. Very, very big fitness component to it that has opened up post Labor Day. Unlike other fitness assets, they have space. So they spread people out. Their customers are returning. It's a big field house, kids, sports, gymnastics, soccer, et cetera. There's a huge banquet business. Some of the best banquet space in New York sits right on the Hudson River. That has been closed given the pandemic. But the resiliency of this operating team is they've pivoted and used the space in other ways, shapes or forms. One specific example, they served over 100,000 meals a month, to frontline workers and pandemic workers just taking advantage of the kitchen that they have in there. And then there's a Marina business. There's a -- one of the biggest homeowners in the country. And then there's a Studio business, which has been going -- gamebusters for the just a global desire for content -- media content. So -- and the asset, as I said, has a 25-year operating history. They've weathered a degree of financial crisis. they've weathered 9/11. They've weathered Hurricane Sandy, which is one of the most impactful to their business. And they've been able to come through this and start to see through the other side being free cash flow positive. And just to give you a perspective, we were able to structure a loan, which funded $65 million on August 31, with another $15 million kind of delayed draw component if the business still needs it. We're the only debt in the capital stack, and we structured it as a debt instrument in a way that's a very safe instrument for both VICI and our investors to generate current -- consistent, predictable income. And then ultimately, we use our loan book, we have a loan on Caesars Forum Convention Center in Las Vegas. We have a small loan with JACK Entertainment as a way -- as a potential way to ultimately own the real estate. And so if there is a monetization event of Chelsea Piers New York, it -- we should have a seat at the table. Any event, the operators look to monetize that asset, if someday in the future. And the other thing, as we think about experiential real estate outside of gaming, we want to look at markets where we may not be able to own gaming assets because they're -- just the regulations don't allow gaming assets. As we think about the REIT in building a diversified portfolio of real estate, adding this as experiential on real estate in markets where gaming is allowed, produces a diversified revenue stream for us and helps protect us throughout these ups and downs of the economy.

Thanks, David. That's very helpful. Well, gentlemen, I think we're just about out of time. So I'd like to thank everybody for participating on today's call. And thank you, guys, VICI, for participating. I hope you guys have a great day.

Thank you, R.J.