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

Yes. So we're going to bring on the CEO of VICI Properties, Edward Pitoniak. There you are. Hi, how are you Ed?

Good to see you.

Hey, you too as always.

Before we kick off, do you mind just giving the viewers kind of a rundown of what VICI Properties is exactly?

Yes. So as a starting point, Kevin, VICI Properties is a real estate investment trust. And with the theme of the show you have today, which is how can your community invest in real estate? What are the key ways to invest in real estate in America as a retail investor, for example, or as a noninstitutional investor is through real estate investment trusts. Real estate investment trust really began to emerge in the early '90s. And it was IRS legislation that enabled real estate investment trust to be formed and distribute their income to their investors without the imposition of any corporate income tax, okay? So if a real estate investment trust realizes a dollar of distributable profit, it can distribute that dollar with again -- with no corporate income tax imposed upon it. That dollar gets distributed to the retail investors of the REIT or whichever investors might own the REIT institutional and retail. And then they might pay a tax on the dividend, but it doesn't get taxed twice in the way the conventional corporate dividends do. And so through real estate investment trust, you can own a whole bunch of different categories of properties. You can own offices like the one you're in today, you can own retail, you can own residential, like apartment buildings in single-family rental homes. And as of late, you can own assets like Caesars Palace or the Venetian or MGM Grand or Mandalay Bay, which happened to be among the assets we meet you on. Prior to the creation of Gaming Real Estate Investment Trust, retail investors never would have had any chance of owning a casino in Las Vegas Strip, but now you do.

Yes. I mean, to me, investing in a REIT, it seems like such an easier way to diversify than putting everything into one property, hoping that goes well, adding another and another which I think is why the things there are so many people don't get started in the real estate, even though it's hard to argue that it is such a great asset class. So getting into the REIT, like you can get any type of property that you believe in. So as you mentioned, the Venetian and MGM Grand and these iconic casino properties, you are primarily in the Las Vegas market, correct?

Almost half of our rent comes from the Las Vegas Strip. The other half comes from regional gaming properties across the U.S. from like [indiscernible] in the West, all the way through Atlantic City and the East as well, we're now collecting rent and/or interest income from a variety of nongaming operators like Valero, like Great Wolf and the Water Park Resorts like Cabot, the high-end Golf resort creator and operator and Canyon Ranch.

Okay. So would you say like your focus is -- it seems like more on like the experiential properties, things -- places where people can go and do things. What is it about that, I guess, particular asset class that you find attractive that you think is best for the future of VICI?

One of the -- I think one of the key elements of experiential real estate, Kevin, is that very often, you leave experiential real estate with nothing in your hands. Right? You haven't gone there to buy a good. You might end up buying a good, you might end up buying a T-shirt or some other memento of your trip. But you've gone there to have an experience and that really helps reduce the obsolescence risk or the secular threat of experience in real estate versus other categories of real estate that have the risk of being literally and figuratively displaced. We saw a lot of stress in retail over the last 20 years because of the emergence of e-commerce. Suddenly, I didn't need to go to a store to buy a good. We saw it emerge recently with office. People don't necessarily need to go to an office to work, right? When something to be put in a box or shipped through a wire, the real estate it might have been historically associated with is under threat. People do not go to our assets to acquire goods that can be put in a box and/or service is going to be shipped through a wire. They go to our real estate to have an experience, which we think ends up constituting the long-term durability of our real estate and the lack of risk or threat from obsolescence.

Okay. So I mean we're, I guess, facing like kind of an uncertain economic times, there's half -- some people are saying that economy is in great shape, looking at the market, things are good. Other people are expecting a crash. A lot of people have said it's going to be worse we've seen in decades. I guess, regardless of where you land with that, what is this experiential real estate. So I mean, casinos, particularly the bowling, I mean how durable is that if the economy does go south as some are anticipating?

So when we invest in real estate, Kevin, whether it's gaming or nongaming, we look at the real estate through 4 key lenses. Number one, lower than average cyclicality versus consumer discretionary at large. We'll come back to that in a moment. We don't want secular threat. We want a healthy supply-demand balance, and we want proven durability of the end user experience because that ends up constituting durability of the real estate. When you look at gaming as an example, it has historically shown surprisingly lower cyclicality than consumer discretionary and large. An example of that came during the great financial crisis when same-store regional gaming was down only 3% to 4%. That was at a time when the revenues of the S&P 500 were down 18%, when even conventional retail and food service was down 11%. Vegas did take a bigger hit during the GFC, but that was principally because a whole bunch of new supply came at exactly the wrong time. What we've certainly seen in Vegas over the last couple of quarters is the continuing resilience to the consumer spending in Vegas, even as other certain consumer categories have started to see a slowdown. So the proven durability, the weather-proofing of gaming is pretty well established over the last few decades.

Now what you see, I guess, some of the greatest opportunity? And what are you most optimistic about right now? I mean, looking at, hopefully, interest rates coming down next year, the Las Vegas market in general or other markets you're in?

Well, if we first look at a secular level, we're so excited, and we have been from the beginning about the secular trend around experiences of which we've already spoken this morning. We really see cultural and demographic factors that will continue to really support the growth of the experiential economy. That's the secular level. At the specific level of Las Vegas, Las Vegas is developing into an experiential ecosystem, driven by entertainment, hospitality, leisure, recreation, professional sports this, frankly, unlike anything else in the world. If you look at what's been going on in Vegas, just the last few months, you obviously had the opening of the sphere, which has revolutionized what a concert experience can be. You had the first F1 go off in Vegas in November and despite all the negativity of the media going into it. By the end of it all, the racers, the fans and Liberty Media, the owner of F1, we're proclaiming at the best race of the year. We just hosted the NBA in-season tournament Final 4. We've got the Super Bowl coming up in February. We've already got the Stanley Cup Champion Golden Knights, we've got the Raiders, we will have the Ace and everybody, including Lebron is proclaiming the Las Vegas is the next city that ought to have an NBA franchise. So we really see the continuing growth of Las Vegas greatly benefiting our operators and the assets that they occupy for us. We think there is no city in the world that threatens the primacy of Las Vegas as an experiential ecosystem.

So all that sounds really exciting. It sounds like it's going to be great for like you said with your operators and the assets you have. But is there still room for you to grow in Vegas? I mean are there more opportunities for you to capitalize on there?

Yes, there certainly are. Obviously, as an example, you just saw the opening of the Farm Blue Resort just last week in Las Vegas, a magnificent resort that we're involved in the financing of. Beyond that, what we're really getting excited with our partner about with our partner, MGM, is the fact that MGM operates and we own virtually all of the real estate that sits within what we've come to call the sporting triangle of Las Vegas. With where the A stadium will go if you draw a line from there to T-Mobile Arena, where the Golden Knights play and then from there to Allegiant, where the Raiders play and where you saw more activity than any of the major stadium on earth last year 2022. You form a triangle. And again, MGM operates and we own virtually all the real estate within that triangle. And we see, along with MGM and a chance to continue to densify and intensify both the assets and the experiences that can take place within that triangle. So yes, there's room to grow.

All right. It's exciting. I mean, everybody loves Vegas, right? So they see more coming to this city. I just can't imagine what it's going to look like in the next 10 years. To speak about VICI a little more specifically just full disclosure to everybody. I mean I own shares in VICI and bought more recently.

Proud to work for you, Kevin, proud to work for you.

Actually, I'm the worst at timing the market. I never try. Usually I buy something just before it goes down or sell it for it goes up. And I lucked out this time and I think I last re-upped at the end of October. So I've seen some good growth since then. So thank you for that.

No, no. Thank you. It's you're buying that supporting all.

But what is the thing that -- no, I noticed with VICI, it seemed to be a little more durable this year. This has been a tough year for REITs, no question about it. And everybody has taken some hits. But you haven't taken nearly the hit, I think as some of the other companies and the dividend is really solid. And I mean, you've seen some pretty steady growth over the past few years. And the dividend has remained attractive. Is that -- I mean, how do you see yourself as a company? I mean, more as a growth or income play? Or are you think you're going to be able to continue riding that line of both?

Yes. Well, I would say both, Kevin. I think we are growth at a very reasonable price. If you look at our track record since our IPO, the compound annual growth rate of our earnings has been just under 8%. The compound annual growth rate of our dividend has been just about 8%. Our total return over the period since our IPO is around 120%. That would still be about 30 points ahead of the S&P 500 and probably 70 or 80 points ahead of the REIT index. And that total return is a function of both the price appreciation of the stock and critically important, the dividend that we pay you. And I think as an investor, you always want to be very focused on the degree to which historically dividend represents a significant percentage of long-term total return even for roofings of stocks like the S&P 500, where the current dividend yield is only about 1.5%. . We currently offer about a 5% dividend yield. And when you look at that dividend yield, together with stock appreciation, you have a shot at getting 10% total return year after year. And if your audience knows the rule of 72, they would know. All you have to do is take that what you presume to be long-term growth rate or return rate of 10% divided in 72, that's only how soon you'll double your money, which in that case would be 7.2 years. So I think that is the value of REITs. And exactly to your point, Kevin. The dividend gives you the opportunity to get return even in very tough times in the market for most stocks which the last couple of years have frankly been. Everybody thinks the S&P 500 is going to the moon. Well, it's only just getting back to where it was 2 years ago, right? If you got a dividend during that 2-year period, you at least made some money. If you had no dividend, depending on what stocks you picked and especially if you did not take the Magnificent 7, you probably don't have a lot to show in terms of return for the last 2 years.

Yes. That's one of the thing I always look at with dividends. I mean you look at stocks with some growth over years, I hold it for 10 years, and I see these gains, but I can't do anything with those gains during the 10 years, where with the dividends, I can reinvest those, I can buy more. So that's me, it's a no-brainer. But...

Yes. Exactly your point, Kevin. You walk into a store and say, "Hey, can I pay for this with the unrealized gain in my stock." They'll say, no. I paid for this whatever I'm buying, a nice bottle of wine, can I pay for it with my dividend income? Sure, you can. Or you can reinvest the dividend income and really get the benefit of compounding.

Yes, absolutely. So I think across the board, not just REITs, but some dividend stocks in general, we've gotten beaten up this year because of the interest rates, that risk-free rate is so high. As that comes back down, I mean, do you -- and I'm not asking you to predict the market here. But I mean, typically, would you expect that to have effect on the prices of REITs and other dividend stocks as interest rates come back down?

It absolutely should. If you want to look just across the broad lens and then we'll get to REITs in a moment, right now, the earnings yield, which is simply the inverse of the price earnings ratio, the earnings yield of the S&P 500 is 4%, which happens to be just about the risk-free return rate of the U.S. 10-year treasury, okay? Which means like, why am I owning the stock if I could own a risk-free instrument at the same yield. Of course, the reality is we've learned with bonds, especially the last couple of years, it isn't really risk-free because the value of the bond can vary wildly on any given day. But to your point, yes, REITs tend to benefit in a period of stable and/or declining interest rates. They don't tend to do well as they did generally this year and last in a period where interest rates are rising markedly. So the decline in the risk-free rate has been beneficial for REITs, especially over the last 8 weeks or so. You -- again, you bought your VICI stock in October at a very good time. And we'll see what the coming year brings. Obviously, there's a lot of debate and discussion and frankly, a bit of confusion over what we should expect for risk-free rates in the coming year. But as long as they at least stay somewhat stable, and leave behind the wild volatility that the bond market has had this year, I think we're looking at a very good setup for 2024 for REITs generally and VICI specifically, given the earnings growth we've already got baked into next year.

Awesome. Well, I can't wait. I think we're probably getting just about out of time here. And before I let you go, I mean, is there anything else that you want to make sure we tell our audience today, while we have you?

Well, just again, to really look in terms of how you build your portfolio, where is it you're going to get, as you referred to a moment ago, Kevin, where are you going to get that current income, become hell or high water, you know will be there. It's money you can reinvest, it's money you can spend. It's a return you can count on even when stocks, the value of the stocks, stocks themselves are going up and down and perhaps down for a long period of time. And this is again where REITs can be a really virtuous investment as part of the portfolio. I would never tell anybody invest only in REITs but as a segment of your portfolio, it is a great way to build wealth over the long term. Because again, go back to that 5% to 10% total return compounded year after year after year. And if you're younger, if you're in your 20s or 30s and you compound for 30 years, you're going to have a lot of money at the end of it.

Yes, absolutely. Awesome. All right. Well, hey, thank you, Ed, so much for being here. I can't wait to catch up again and tell you how much better my VICI stock has done in the meantime.

All right, Kevin. Thank you.

All right. Thank you.