VICI Properties Inc (VICI) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to VICI Properties' First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note, this conference is being recorded today, April 30, 2021. I will now turn the call over to Samantha Gallagher, General Counsel with VICI Properties.

Thank you, operator, and good morning. Everyone should have access to the company's First Quarter 2021 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 generally identified by the use of words such as will, believe, expect, should, guidance, intend, project 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 condition.

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 first quarter 2021 earnings release and our supplemental information.

Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Danny Valoy, Vice President of Finance. 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.

Thanks, Samantha. Good morning to everyone on the line, and thanks very much for joining us today. Some of you may recall that I started our last earnings call on February 19 by pointing out the pre-call commentary on our earnings release concerning Q4 2020 and full year 2020 pretty much distilled down to VICI meets consensus. And me being me, I couldn't help more or less yelling out, "Hey, consensus kind of misses the point." This is what I actually said exactly. "Did VICI achieve consensus is, of course, a key question. But we think it's also worth asking, did consensus call for AFFO per share growing, staying steady or declining? If it called for growth, was it a lot of growth or a little of growth?"

In VICI's case, we reported what we believed at the time, back again on February 19, we proved to be a lot of growth, 10.8% AFFO growth for full year 2020 and 24.3% AFFO growth for Q4 2020. Now that the Q4 2020 reporting period is well behind us, we know with certainty that VICI did indeed post the highest AFFO per share growth of any American triple net REIT in 2020 for the year and in Q4 2020. 12 out of 19 American triple net REIT reported AFFO per share declines in 2020. Among those triple net REITs that grew, the closest to VICI achieved 7.0% AFFO per share growth for 2020 for the year and 11.8% growth for Q4 2020. The average AFFO per share year-over-year change, and I'm emphasizing the word change, and I don't want to use the word growth, because negative growth is an oxymoron. The year-over-year change with triple net REITs in 2020 was, on average, negative 6.9%.

Back on February 19, and as one of the few REITs to restore guidance, we announced 2021 guidance calling for between $1.82 and $1.87 of AFFO per share. In a moment, David will reaffirm that guidance. If in 2021, we achieve the midpoint of our guidance, our year-over-year AFFO per share growth will be approximately 12%. If you measure our AFFO per share growth from 2019 to the midpoint of our 2021 guidance, you end up with a growth rate for that period, that 2-year, 3-year period, of approximately 25%.

To put VICI's earnings growth into perspective, we encourage those who own our stock and those who follow us to dust off that old-school metric known as the price earnings growth ratio or PEG ratio. In the case of VICI or any other REIT that reports AFFO, you calculate the PEG ratio by comparing the current AFFO earnings multiple to the projected AFFO per share growth rate. These 2 numbers, the AFFO multiple and the AFFO per share growth rate percentage, are then expressed in ratio to each other. A REIT that trades at a 16x multiple of AFFO and has projected AFFO per share earnings growth of 16% would be said to have a PEG ratio of 1:1. A REIT that trades at a 16x AFFO multiple and has projected AFFO per share earnings growth of 8% would have a PEG ratio of 2:1. Obviously, the lower the PEG ratio, the less you are paying for growth. The higher the PEG ratio, the more you are paying for growth, if any is there. We encourage you to look at the current PEG ratios for America's triple-net REITs.

But because 2020 was a decline year for so many triple nets -- again, 12 out of 19 triple nets saw AFFO per share declines in 2020 -- we suggest you look at their PEG ratios over the period of 2019 through 2021. Take each triple-net REIT's actual 2019 AFFO per share as the base, measure that against 2021 consensus AFFO per share and then compare the resulting percentage of change against the current AFFO multiple of the REIT. To make the measurements meaningful, you'll need to eliminate those triple-net REITs that show lower AFFO per share in 2021 than they did in 2019. And that, in fact, means you have to eliminate 8 of the 18 triple-net REITs, excluding VICI, in our sample group. Yes, according to FactSet, 8 of these 18 triple-net REITs show consensus AFFO per share earnings for 2021 that are lower than 2019.

Based on data either publicly available or through FactSet, the resulting average PEG ratio for triple net REITs that showed 2019 to 2021 AFFO per share growth, again excluding VICI, is the PEG ratio of 2.5:1, meaning, of course, at the average current AFFO multiple for these REITs from 17.5 is 2.5x the average expected AFFO per share growth rate percentage of 7% for the period of 2019 through 2021. We encourage you to calculate VICI's PEG ratio based on our current AFFO multiple and our projected AFFO growth percentage based on the midpoint of our guidance. Whether you measure our growth percentage for 2021 versus 2020, a period for which the midpoint of our 2021 guidance yields 12% growth in AFFO per share or 2019, a period for which the midpoint of our 2021 guidance yields 25% growth in AFFO per share, we are confident you will end up with a VICI PEG ratio that stands up very well to the triple net REIT group and likely any other American REIT out there.

The follow-on question, of course, is, "Well, VICI, what about next year, 2022 and the years after that?" Bear with me just a second. I'm now going to turn the call over to John Payne. He will tell you about our drivers of AFFO growth in 2022. And for the period beyond 2022, we believe VICI stockholders can feel confident in our robust embedded pipeline of property acquisition opportunities and as well our strong record at sourcing, executing and funding open market deal flow. John, over to you.

Thanks, Ed. Good morning, everyone. The first quarter of this year was a very exciting quarter for our company. On March 3, we announced the acquisition of the real estate of the iconic Venetian Resort and Sands Exposition Center in Las Vegas. Upon closing, this $4 billion acquisition will add $250 million of annualized rent, growing VICI's revenue base by nearly 20% and is expected to be immediately accretive to AFFO per share.

Importantly, we are acquiring over 8 million square feet of world-class real estate along the center of gravity on the Las Vegas Strip. The Venetian Complex is one of the top revenue-generating real estate assets in the world, and we are thrilled to acquire this property at a discount to replacement cost and at an accretive spread to our cost of capital.

The Venetian checks many of the boxes that are crucial to successful real estate investing. One, quality real estate in a prime location. Two, robust rent protection through an effective guarantee from an investment-grade entity through 2023, followed by significant property level covenant protection. And three, an incredible organization running the operations, which will be supported by Apollo's vast resources and incentivized by their own business model to grow profitably, which ultimately enhances our rent coverage.

Many of you who closely follow the gaming operators have undoubtedly heard that the recovery in Las Vegas is accelerating. Leisure customers have already returned in great numbers and convention and meeting bookings continue to grow. We are very bullish on the future of Las Vegas and look forward to growing our portfolio in this geography.

In the gaming regional markets, our properties continue to showcase strength driven by a new, stronger operating model that we believe is here to stay. Many assets continue setting records as revamped operating models meet robust and consistent consumer demand. We are proud to be partners with the best-in-class operators on our tenant roster and wish them continued success. They deserve the upside they are currently enjoying.

Over the past 42 months, we've acquired 14 assets, deploying over $12 billion of capital, doubling the size of our portfolio and making us the most active REIT in the gaming sector by a very wide margin. As many of you understand, the nature of our triple net business model means we do not operate or asset manage our properties on a day-to-day basis. This affords our team the ability to study and execute opportunities on behalf of our shareholders. Our diverse team of gaming, hospitality and real estate executives remain busier than ever, working tirelessly to create one of America's leading REITs. We're very excited about the potential deal volume we see before us. While the nature of gaming transactions are lumpy, we have delivered consistent acquisition activity, enhancing our portfolio accretively on fair terms and with appropriate risk protection.

From the day we started this company, we have strived to create sustainable value for our shareholders. We believe this is a basic principle that should be a fundamental goal of any successful independent REIT and we will work tirelessly on your behalf to continue growing VICI, creating sustainable fundamental value by enhancing our real estate portfolio.

Now I'll turn the call over to David who will discuss our financial results and guidance.

Thanks, John. I'll touch briefly on our balance sheet and liquidity and give a summary of our financial results and guidance, which are fully detailed in the press release we posted last night.

As we've discussed, during the first quarter, we announced our biggest transaction to date, a $4 billion acquisition of the real estate of the Venetian Resort and Sands Expo Center Las Vegas, which will significantly grow the left side of our balance sheet. Simultaneously, we maintained our relentless focus on our capital structure to immediately access the equity capital markets, an approach we have taken since day 1 of this REIT, to secure accretive long-term funding and ensure we build the right side of our balance sheet to endure any heavy weather that may come our way.

On March 8, we completed a follow-on offering of 69 million shares of common stock at an offering price of $29 per share for gross proceeds of $2 billion through a series of forward sale agreements to fund the equity portion of the Venetian acquisition. The proceeds remain subject to settlement pursuant to the terms of the forward sale agreements. This equity, along with an unsecured debt raise that we intend to execute prior to the transaction closing, provides VICI with all the capital needed to acquire this world-class asset on a leverage-neutral basis.

Our total outstanding debt at quarter end was $6.9 billion, with a weighted average interest rate of 4.01%. The weighted average maturity of our debt is approximately 5.9 years, and we have no debt maturing until 2024. As of March 31, our net debt to LTM EBITDA was approximately 5.4x. This is in line with our stated range and focus of maintaining net leverage between 5 and 5.5x. But please note, this ratio is not reflective of our true run rate leverage level as it does not include the full impact of income from the Eldorado/Caesars transaction, meaning if you take into consideration a full 12 months of rent from that transaction, our pro forma leverage would be at the low end of our stated range.

We currently have approximately $3.8 billion in liquidity, comprised of $323 million in cash and $1 billion of availability under our undrawn revolving credit facility. In addition, we have access to approximately $537.4 million in proceeds from the future settlement of the 26.9 million shares under the June 2020 forward and approximately $1.9 billion from the future settlement of the 69 million shares under the March 2021 forward.

Turning to financial results. AFFO was $255 million or $0.47 and per diluted share for the quarter. Total AFFO increased 41.7% over Q1 2020, while our weighted average diluted share count increased approximately 17.1% as a result of the settlement of the June 2019 forward sale agreements which added 65 million shares to our balance sheet in June of 2020, ahead of the closing of the Eldorado/Caesars transaction.

Our G&A was $8.1 million for the quarter and as a percentage of total revenues of 2.2% for the quarter, which represents one of the lowest ratios in the triple-net sector. As Ed mentioned, we are reaffirming AFFO guidance for the full year 2021 in both absolute dollars as well as on a per share basis. As many of you are aware, beginning in January 2020, we were required to implement a CECL accounting standard, 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 to measure the productivity of our equity investments and evaluating our financial performance and ability to pay dividends.

We continue to expect AFFO for the year ending December 31, 2021, to be between $1.010 billion and $1.035 billion or between $1.82 and $1.87 per diluted share. These per share estimates reflect the dilutive impact of the pending 26.9 million shares related to the June 2020 forward sale agreement, assuming settlement and the issuance of such shares on December 17, 2021, the amended maturity date of the June 2020 forward, as well as the dilutive effect of the pending 69 million shares related to the March 2021 forward sale agreements. And as a reminder, our guidance does not include the impact on operating results from any pending or possible future acquisitions or dispositions, capital markets activity or other nonrecurring transactions.

With that, operator, please open the line for questions.

(Operator Instructions) And your first question comes from the line of Barry Jonas from Truist Securities.

I wanted to start with the Venetian deal, congrats on that. Just curious, what are your expectations for Apollo to potentially do more deals down the road that could get moved into the master lease and offer some cross collateralization?

John?

Yes, Barry, good to talk to you. Look, I won't speak for Apollo and their plans of growth. Obviously, they're excited about this asset. We're excited to be partners with them. I'm sure they'll continue to look at this space as others because of how great the operators have been in recovering from the pandemic. But we didn't go into it that there would be other assets rolled into this Venetian lease, but we'll just have to wait and see, Barry.

Got it. Okay. Great. And then CityCenter just sold 2 acres on the Strip for $40 million each. Pretty nice comp for you, I guess. But where do you think the market is overall now? And given that number, will you be a buyer or seller of Vegas land here?

Barry, good talking to you about this. I sent a couple of thank you notes when I saw $40 million an acre. But in all seriousness, you know we've got land, tremendous amount of land behind our asset at Harrah's Las Vegas and Caesars has land as well behind their assets at Flamingo and the LINQ. And we continue to look to see if there's opportunities to expand the Strip or deepen the Strip there. Whether we're buyers or sellers, we're just going to continue to look at ways to grow our company accretively and continue to talk to folks to see if there's opportunities to make our assets and to create value with our real estate.

And Barry, if I could just add, this is yet another example of investors and other real estate asset classes realizing the value of the Las Vegas Strip, right? And I know, Barry, you've heard us cite in prior conversation the fact that retail real estate along the Strip, has traded in the last 10 to 15 years at cap rates that start with either 3 or 4, right? And this trade of those 2 acres is another indication that retail real estate investment along the Strip is further advanced in terms of valuation than the gaming real estate, but that's part and parcel of the institutionalization story we've been talking about with you for the last 3.5 years.

Over time, the world is going to recognize that gaming real estate along the Strip should be considered just as valuable as retail real estate along the Strip for both fundamental reasons and, frankly, secular reasons.

Your next question comes from the line of Smedes Rose from Citi.

This is [Stefan] on for Smedes. I just wanted to ask, do you have any updates regarding a new tenant at the Horseshoe Hammond? And then do you think regulators would be willing to be flexible around timing, given they already granted the 1-year extension?

Yes, Stefan. Good to talk to you this morning. We don't have any updates from the Indiana gaming regulars. We just have to wait and see their plans. They've always operated in the State of Indiana very fairly. And we'll just have to see how this ultimately plays out over the coming months.

Great. And then you guys were creative in moving outside of the brick-and-mortar casino business with the Chelsea Piers transaction. And then outside of the credit-enhancing benefits of iGaming, are there any other ways you're thinking about participating in the growth of iGaming?

Yes. I think the -- when we look at the emerging trends in gaming, iGaming is obviously an interesting aspect of it. And in this case, I'm not sure if you mean iGaming to also encompass sports betting. And it is sports betting that we, as a REIT, are most excited about as a secular technology-enabled trend behind the gaming business. As some of you have heard us talk about, gaming is a consumer discretionary sector. Gaming operators compete for consumer discretionary time and consumer discretionary spending. The way you increase your share of consumer discretionary time and spending is by increasing your share of mind. And the way you increase your share of mind is by increasing your share of voice, so that you are ultimately top of mind when the consumer makes their spending decisions, spending of both time and money.

And what sports betting is doing is giving gaming a much bigger share of voice, and that was certainly demonstrated in the announcement Caesars made a week or 2 ago in terms of their new partnership with the NFL, and I believe the 7 NFL teams they also partnered with. And it's obviously strongly exemplified by the media reach, the media and marketing reach that Barstool gives to Penn, another very important tenant for us. So that's where our greatest focus is in terms of the emerging digitization of American gaming. We think it's being expressed most powerfully in terms of creating long-term value by greatly expanding the audience for gaming.

Your next question comes from the line of Carlos Santarelli with Deutsche Bank.

I don't know who wants to tackle this one, but as you guys look out there today at kind of -- and you alluded to it in the prepared remarks, I believe it was John talking a little bit about the costs that have been taken out of the business and whatnot. When you think about how, in years past, synergies often drove kind of M&A activity, whether it was the larger portfolios plucking from smaller or vice versa. But synergies were always a big part of an acquisition story. When you think about kind of the uncertainty of the future, you think about where kind of trading multiples are today for a lot of these names, and you think about kind of what really is left of a synergy store with kind of cost as they have been. Do you -- how do you kind of envision the next, call it, 6, 9, 12 months of M&A? Obviously, as someone who has been able to recently get a significant deal done.

John, do you want to start?

Yes, I'll start, Carlo. First, I want to give a shout out and just an amazing compliment to all the operators in the gaming space. I mean, the results that are coming out that have been released are really amazing and operate in a new model in a very difficult time and showing margin improvements from 500, 600 all the way up to over 1,000 basis points, Carlo. It's pretty amazing. And sometimes it gets forgotten how hard that is, the amount of work that the teams have had to do. And I just -- our team has just tremendous respect, not only for our tenant operators -- the operators who are tenants, but the others in this space.

With that said, Carlo, you mentioned it right at the end is since we started the company in '17, we've been very active, we've been very fortunate to be able to do a large amount of accretive transactions for our company. And I just don't see those conversations stopping, at least with my plate, I'm back on the road, back meeting with asset holders and operators. I can't tell you, obviously, when the next deal will be for our company, but there's a great understanding now because of the time that we've spent and the other REITs in our space of how REITs of our nature can fit into their capital stack.

So I think they'll continue. There's run rate in front of us that we obviously have in our embedded pipeline, but even outside our embedded pipeline. I don't know if Ed wants to add to that or David as well.

Yes. I think what I would add, Carlo, is that another factor driving M&A right now is, I think, increasing conviction on the part of operators that network effect is important and is valuable if you can achieve it, right? In my old category of ski resort operations, obviously, Vail has demonstrated very powerfully the rewards of network effect. And Caesars, Harrah's/Caesars historically has obviously demonstrated the power of network effect. And I think with the emergence of sports betting and what should be a very strong tailwind for gaming coming out of COVID, I do think that network effect is as much a factor in driving M&A right now for both bigger and smaller operators. At least that's my sense as best as we have.

Your next question comes from the line of Dan Adam with Loop Capital Markets.

So in light of the major REIT deal that was announced yesterday between Realty Income and VEREIT -- I guess, what is your latest thinking on M&A, not so much from a single property or asset standpoint, but more along the lines of a portfolio of assets or even a merger with another retail facing triple net. Does it make sense from your standpoint? And are there any accretive opportunities out there for you guys?

Yes. Again, it's an intriguing question. And first of all, hats off to Sumit and the team at Realty Income. They are demonstrating what you can achieve when you have a superior cost of capital, right? Basically, the better and better your cost of capital gets, the wider your funnel gets when it comes to generating growth. I would say, for the time being, we are so most fundamentally focused on defining what it will mean in the decade and decades ahead to be an experiential REIT. And at this point, we cannot identify another REIT out there that has a critical mass of experiential real estate of the kind we want to invest in.

But having said that, we're obviously very mindful at the end of every day, the beginning of every day, that we work for our shareholders. And if we determine, especially in consultation with our shareholders, that the time has come when we should be considering such M&A, we will absolutely do so. We're not dogmatic about anything. Except for the fact that we think we own great real estate on behalf of our shareholders.

So again, we really do believe that experiential is going to be the best place to invest given the secular trends behind experiential. Those secular trends were already in evidence before COVID. The consumer preference for experiential over things was very strong before COVID and went in hiatus for a bit during COVID. We're already starting to see it come back not only with our operators but other experiential sectors. And if you combine that secular trend with the demographic trends that are in place, whether it be baby boomers moving into their prime leisure years, or millennials entering family formation, experiential is really where we want to be.

And if we're going to continue to grow our experiential portfolio, we're going to need to do it and want to do it by, frankly, discovering and mining white space that triple net REITs have not conventionally played in.

And then David, you've really done a tremendous job over the past 3 years, strengthening the balance sheet. And earlier this month, S&P revised its outlook on VICI to positive from stable. I guess to the extent that you guys get upgraded to investment grade over the next 12 months, what does that mean from an incremental cost of debt perspective? And would lower debt costs potentially expand the universe of M&A targets from an accretion standpoint?

Yes. Thanks, Dan. In terms of the incremental improvement in our cost of capital from investment grade, and obviously it depends on the debt markets overall, but if you look at historical spreads, it's 50 to 100 basis points or 150 basis points, sometimes 200 basis points of improvement in rates for investment grade versus rates in the unsecured high-yield market, which we're currently in. I think our path to investment grade is probably not quite 12 months, maybe it's 12, 24 months from now. As most folks know, we need to get rid of that $2.1 billion term loan that's outstanding and unencumber our balance sheet. But the overall goal from day 1 is to get to that investment-grade credit rating to ultimately lower our cost of capital, and to exactly your point, that it makes our transactions, our ability to pay -- increases our ability to pay and increases the accretion that widens that funnel and allows us to do more accretive deals going forward. So it's something we're highly focused on, and we talk to the agencies frequently, and we were pleased to see S&P's report that came out that you referenced.

Your next question comes from the line of Rich Hightower with Evercore.

Ed, I was going to say thank you for your professorial treatment of the humble PEG ratio. I'm sure that was helpful for..

You couldn't see it, Rich, but I was actually smoking a pipe while I did that.

That's awesome. I wish I could see that. Now listen, I want to go back to the Venetian deal for a second. And if we think about other private equity involvement in the gaming REIT structure so far, it's been in a, I guess, what I would call a permanent capital structure, which I believe might be distinct from Apollo structure having invested from one of their sort of traditional private equity funds. So just as you think about maybe the risk down the road of a potential exit by Apollo, how do you sort of underwrite that risk and replacing the operator, if I'm thinking about that correctly? How do you sort of peg that, guys?

Yes. I'll start, and then I can turn it over to John and David, Rich. It is obviously a question that we

(technical difficulty)

-- what we're very confident is that Apollo is coming into this with a very clear vision of how to value. As you know, Richard, I've worked in a lot of sectors. And I have never seen the depth of due diligence going to an underwriting like I saw in this case. They did, very much to their credit, they did primary research, primary proprietary research, to determine, among other things, what exactly is the outlook of meeting planners across America, right? And I cite that as one example of the depth of due diligence they brought to this and the credibility they're bringing to their strategic and their business plan.

And then when it comes down to it, private equity firms obviously tend to exit when they've created a lot of value and can crystallize that value. So our prevailing assumption is they will exit when the asset is performing very well and when the asset will be very attractive within whatever structure the exit takes place, right? And at this point, I don't think that's predefined. Whether by then it's within a platform that gets taken public or whether it's still a single stand-alone asset, it will nonetheless be a single stand-alone asset -- as John referred in his remarks, is we believe the highest ever producing single asset in American commercial real estate

So we're really sanguine when about this, Rich, and excited to see what they're going to do, especially...

(technical difficulty)

Hey, Ed, are you still there? Sorry, I think you're breaking up on me.

Rich, this is John. I think we lost Ed in that answer. I think he was just going to add an excited with -- as you've been following, the rebound in Las Vegas and how quickly that those business, obviously, the regional businesses we've been talking about. But how quickly the businesses are rebounding there, the rebooking windows that people are seeing are filling up. So I think that's how he was going to end that question.

Your next question comes from the line of R.J. Milligan with Raymond James.

I had a question for Ed because he had his analysts hat on at the start of the call. But John, I guess you're going to get it for me.

R.J., that won't be as fun with Ed. So go ahead.

I'm sure it will be a great answer, John. We're still seeing cap rates north of 6% for gaming assets in general. And at the same time, we're seeing some retail assets, net lease assets trading in the 5, some even in the 4s. And I guess, one, do you think cap rates for gaming assets accurately reflect risk today? What potentially pushes them lower? And then do you think that would be a positive or negative for VICI?

Yes. I'm actually going to -- David is going to take this answer, because we've been talking about this quite a bit. But David, do you want to step in and try to get some color while we wait for Ed to come back?

Yes. R.J., good to talk to you. I mean to your first part, do they actually accurately report the risk? No, I think that's why we want to acquire as much as we can, as fast as we can, because we think the risk is mispriced. And I think ultimately people will continue as they have done over the last 3 plus 4, 5 years to understand the strength and really demonstrated by the last 12 months, if we go back to our call a year ago what we were talking about, closings of every casino in the world. And the business model, the resiliency of our operators, the ability to maintain rent throughout one of the worst pandemics in history highlights the strength of our cash flows and, honestly, the resiliency of our real estate.

And it's come -- as John mentioned in his remarks around the levels of conversation, and we've talked to all of you about this before, that there are new entrants that are looking at gaming because they realize, wow, that's a sector where the consumer hasn't found a replacement for the experience, and it's a sector that is making money versus other entertainment, leisure, hospitality sectors that are still talking about cash burn or finally turning the corner from cash burn to slightly cash flow positive. So I think that's the ultimate driver that continues to push cap rates lower as you have more entrants and more fluidity in the transaction market like you see in broader real estate sectors.

And so if that does happen over time, does that then increase the desire for VICI to go out and look at non-gaming assets?

I don't think it's an either/or. Gaming, by the magnitude of the assets and the cash flows, will still be the majority of our investment spectrum. But as you see us do with Chelsea Piers and we've talked with all of you in the past, we study other sectors and meet with other operators to understand where we might be able to expand into nongaming and nongaming in states that may not have gaming to give us a diversified portfolio of real estate or with operators like the Chelsea Piers team that have a phenomenal business model that are essentially casinos without gaming that have multiple levers, multiple business drivers, multiple revenue streams and a customer base that is very, very resilient and loyal to that experience.

And your next question comes from the line of Jordan, Macquarie.

Are you starting to see the number of companies looking or bidding on assets increasing from pre-COVID levels? I guess what I'm getting at here is, was the Venetian bidding process more competitive than what you might have seen pre-2020?

This is John. I'll answer that. We've seen many competitive bid processes during our time over the past 4 years. Obviously, if you're in the business of gaming or you're in the business of real estate that buys gaming assets and you're not interested in the Venetian, I'm not sure where you're spending your time, right? I mean, this is an irreplaceable, iconic, world-class asset, center of the Strip located. And so it was a competitive process. There were people who were interested in this asset as many would be, and we are, again, we're fortunate to partner with Apollo and come up with a structure that ultimately got the transaction done.

I would -- I don't know if there's more or less folks that will be involved in the processes. I will say, I'll reiterate what David said, which is because gaming has performed so well coming out of the pandemic, I mean there's still many hospitality or experiential companies talking about cash burn. Compared to the gaming companies, our tenants who are talking about record EBITDA levels, all-time record EBITDA levels and all-time margin hikes that I do think it's caught many investors' eyes to say, "Wow, this is a business that the consumer did not find a substitute during this pandemic. We should look into it." And so if that leads to more competition, we'll just have to see.

Okay. And then coming up on [years 7-8] here for the whole gaming REIT sector and we're sitting at roughly $30 billion to $30.5 billion of rental revenue across this space. I was just wondering if you can go over kind of your TAM and what you might think is left out there in terms of something that you would look at?

You want to take that, David?

Yes. I mean I think what has continued to be -- as we talked about, more folks looking at gaming, but the overall TAM continues to grow as you see the expansion of gaming in new jurisdictions. The ballots since last November where there are 6 new jurisdictions, you've seen new entrants or new proposals for casinos in Richmond, Virginia. Obviously, we have the ROFR in Danville. So as we think about the investable universe, we've talked to you about $4 billion to $5 billion of viable rent, that's $50 billion to $60 billion, $70 billion of viable real estate. But it's not a static number. It's a number that goes beyond that because you think about the ability for operators to add towers, add rooms, add convention space, and that gives -- creates funding opportunities for VICI. And then the new supply that comes in. Supply can cut both ways. We need to be cognizant of where the new supply is relative to our existing assets. But generally, it's a positive because it creates funding opportunities and increases the TAM. So we're very optimistic about the future and our ability to continue to grow consistently year in and year out as we've done from day 1 with this REIT.

Your next question comes from the line of Stephen Grambling with Goldman Sachs.

It's Stephen Grambling, like gambling with an R. Follow-up to -- I think this is Carlo's question on the regional markets and strength in margins. As you look at the pipeline, how does the strength in the regional markets impact how you think about underwriting, corresponding EBITDA coverage on rent?

Yes. It's a great question. I mean this is where having expertise in-house that have run these assets with myself and Danny and understanding how they're increasing their margin, where they're increasing their margin, which part of that margin is sustainable, where do we see there to be risk. And so as we think about any individual asset or combination of assets where their margin has increased over the previous year, we'll study where we think it'll ultimately land. We'll work with the operator if it's a bid process to see where they think it will land and we'll underwrite accordingly.

And have seller expectations generally set -- have been reset to that same level? Or how does that -- how have those negotiations been evolving?

Well, it's not necessarily that they set the level. They're forecasting where their business is going to be. They show what the previous 3 months or 6 months has been. So there's actual numbers, there's forecast numbers. And again, if we're digging into the purchase of the real estate of an asset with an operator, we'll dig into the historic EBITDA levels and margin levels, where the new levels are and really study what is going to be sustainable. And that's how we'll ultimately come up with the appropriate starting EBITDAR that we underwrite the asset with the tenant, if it's a sale -- I mean, with the current operator if it's sale leaseback or with a new tenant, new operator if it's a complete sale that we're going in with an opco.

Yes. I guess the question is, is there a widening spread in terms of expectations from the operators versus -- the sellers versus what you're thinking through?

You'd have to take -- honestly, you'd have to take that asset by asset. And it's hard to say whether there's a widening or not. We, again, will follow our process that we've done to acquire assets over the past 3 years.

Your next question comes from the line of Thomas Allen with Morgan Stanley.

David, one for you. I know some of your escalators have CPI kickers in them. Can you just remind us what one could kick in, near term? I think some are after a few years?

Yes. Thanks, Tom. Good to talk here. Overall, 92% of our rent is subject to CPI kickers. And the biggest one being Caesars, both the regional master lease and the Las Vegas lease, which takes effect every November 1. So that kicked in -- or that escalated last November. And in terms of -- if you look at what -- it didn't hit at CPI last year, but just given where CPI was versus the 2% bump in Las Vegas and the 1.5% bump in the regional leases. But we like our -- we like our CPI protections. It's something that we focus on in our leases and something that we think just given the -- with all the talk around inflation out there, it differentiates us from the other 2 gaming REITs.

And then are there some that don't kick in for a couple of years? Or are they all good to go this year?

There is -- there are certain leases that have kind of a 1- or 2-year, 3-year holiday, depending on the lease. Hard Rock is 1.5% for the first 4 years and then it's the greater of 2% over CPI after. The Century lease is 1% for years 2 and 3. And then 1.25% over CPI thereafter. So there is a holiday for -- depending on the lease and when we closed the transaction for a period of time. So it's somewhat staggered throughout our portfolio.

Your next question comes from the line of Rich Anderson with CMBC (sic) [SMBC.]

Yes, SMBC. So on the Venetian, I'm wondering if you would be able to comment on what the cap rate might have been had Sands stayed on as the operator. I know you're getting their backing for a few years, but perhaps the market would have -- for everything Apollo is, and I don't mean to throw them under the bus at all, but I wonder if it would have been a different price if Sands stayed on. Do you sense that? Or do you think it would have not had an impact on pricing of the asset?

Rich, good to talk to you. This is Ed, and I apologize to everyone for dropping off during my answer to Rich Hightower. It's a very interesting question that no one's actually asked before. It probably would have been a factor given they're investment grade. They're obviously very well established. They're the biggest market cap gaming company in the world. So hypothetically, yes, potentially. I do think, though, Rich, it's also worth reiterating that this deal took place at a very idiosyncratic time in the market, a time in the market when a whole lot of would-be bidders were sidelined because of uncertainty, right?

This whole process began at a point in late -- mid- to late Q4 when the world was -- well, when the U.S. was at a point of COVID resurgence that was causing a lot of uncertainty. And thus, we were able to take action with Apollo at a time when many others couldn't or wouldn't. And that is -- that, too, was a fundamental factor in the price we ended up paying.

As they say, never waste a good crisis, right? So obviously, excellent transaction for all parties.

The other question I have is and you sort of alluded to earlier in the call, but I didn't really get quite the answer in terms of future M&A and other operators engaging with the REIT. What do you think the main holdback is for anybody who's not sort of done business with the gaming REITs? What's the negotiating hiccup has kept them on the sidelines to this point? And do you expect that you'll see that sort of answer get -- that question gets answered so that there's even more players involved?

And just to be clear in terms of what you're asking, Rich. This would be what has kept would-be sellers from selling?

Yes. Or operators. Wynn, for example. Like those that have not engaged the REITs in any way to finance their assets.

Yes. I think the most fundamental issue, Rich, or the most fundamental question for any operator is, well, what would I do with the money, right? Selling simply for the sake of selling, selling for the simple sake of financial engineering nonetheless begs the question, what would I do with the proceeds? And frankly, when John and the rest of our team meet with operators, we always say, you need a good reason to sell. And that really then raises the next question is, what would you do with the proceeds, right?

And what we really preach, frankly, is you should have a compelling use for the proceeds and we fundamentally believe that funding growth is a tremendous use of proceeds because if you receive proceeds through a sale-leaseback, you're receiving proceeds that are de facto equity because we never ask for the money back, right? And you can then deploy that de facto preferred equity at a price that even with the trading up of the gaming operators is still cheaper equity than make a raise in the open market. And I do think one of the dynamics that's at work right now is the dynamic of network effect of growing store count. And that, I think, is already creating and will continue to create transactional liquidity.

Next question comes from the line of David Katz with Jefferies.

You've covered a ton of ground. I just wanted to ask quickly whether there are mature international markets that would be inside or outside the boundary of consideration? Not that you don't have it quite a bit to do domestically, but it's just sort of crossed the consciousness.

John?

David, good to talk to you. I wish I could see you all. Yes, David, these are areas that we continue to look at if there's opportunities north of us in Canada or other countries that could fit into our REIT format and be good REIT income, we'll continue to understand if there's an opportunity for us. So we've got capacity to do it. We've got expertise to look there. You are right. We do have a strong embedded pipeline to continue to grow our company in the coming years without any new deals. But that does not stop us from understanding where there could be opportunities and where we could help, as Ed said, a company grow by monetizing the real estate.

Right. And that could encompass pretty much the entirety of the planet, so to speak, as long as it meets the criteria.

As long as it meets the -- we've got to understand the tax situation, the rule of law of owning real estate, a variety of other things. If it can work, we'll tend to look at it.

And maybe I'll just add to David's question that our business model is one as well that enables us, puts us in a position, I should say, to grow internationally very cost effectively. And just to dramatize the efficiency of our business model. If you use 2018 as a base year, since then, on an annualized basis, we've grown our rent and because we're triple net, thus, our NOI by approximately $1 billion. And growing our NOI by $1 billion has cost us only about $1.5 million to about $1.8 million of incremental cash G&A. I feel like I died and went to business model heaven with VICI, because we can grow and grow very cost effectively, and there's no reason that will not apply as well to creating global reach, David.

Your next question comes from the line of John DeCree with Union Gaming.

Covered a lot of ground so far, as David had indicated. So just 2 questions maybe. One first on construction costs. We're seeing those creep up. And I think some of your operators are looking at development projects. You mentioned a comment in your prepared remarks about the purchase price of the Venetian being below replacement costs. So when we think about M&A activity and cap rate compression, I think we're seeing some of the highest increase in construction costs that we have since you guys became public. Are you hearing that from your partners? Is that pushing more people to M&A? Would you expect that to be a gating factor going forward as some of your partners look to grow?

Yes. John, I don't know that we've seen a lot of evidence yet that commercial construction costs are accelerating anywhere near the way that residential construction costs are accelerating. I mean, a piece of plywood has gone from $17 to $42 in recent months. But there's not a lot of commercial construction that uses a whole lot of plywood. So it remains to be seen what will be the impact on commercial construction. I would just say, though, being in the meetings convention business as our operators are, especially in Las Vegas, when there's a roaring construction sector in the U.S., that tends to be a very good thing for Las Vegas and for the regional market. And not just [like ConX or] ConExpo or the World of Concrete shows up. If that's all part and parcel of a roaring economy, really good for our operators and thus, good for us.

Very true. And just a separate note. The Venetian acquisition increases your exposure or rental income to Las Vegas quite a bit. You probably get this question every quarter in some capacity. Also, a lot of your ROFRs and contracted opportunities are around the Las Vegas Strip. We have talked at length of how attractive the market is. But in the near to medium term, in your M&A and your acquisition approach, do you look to maybe be a little bit more active away from the Las Vegas Strip? Or Is that less of a consideration just given the favorable dynamics that the Strip has right now?

John?

John, good talking to you. When we announced the Venetian, we were very clear that we -- after the Venetian is closed, we'll still be getting 58% of our rent from regionals and 42% from Las Vegas. And as you mentioned, we do have ROFRs. But don't forget the very exciting put call that we have on 2 large Indianapolis assets, which would be [in region.] So I think our plan continues to be to have a diverse portfolio of a mix of Las Vegas. And again, you've heard me say, John, I like the downtown area of Las Vegas. I like the regional part of Las Vegas, and I like the Strip where we have assets today. And then I think you'll see us continue to add to our portfolio in other regions. So the key is that we're going to remain balanced and diverse as we have since we started the company.

Next question comes from the line of Peter Hermann with Baird.

You recently opened in a mall in Western Pennsylvania of all places. And I was wondering if you have a sense for the kind of appetite you think operators would have in expanding their real estate footprints into malls if this particular asset were to perform well down the road.

Yes. It's a good question, and you are correct. Cordish has opened a Live! asset in Westmoreland, Pennsylvania. It would be interesting to watch -- this was a supplement license in Pennsylvania where they added some what they call the smaller licenses. And obviously, as you mentioned, they're opening in a -- they opened in a mall. Whether other states decide that the licensing process, they either add to licenses that are already in restricted states or as new states open, they specifically say we're going to use it as a redevelopment tool and your site is this mall that's not doing too well.

We'll just have to wait and see the asset that they built is from my understanding is very nice and is a unique way of using real estate in a different way. And we'll just continue to monitor and I'm sure other states are looking at how that ultimately plays out, but I think we're in the early innings there.

And your last question comes from James Villard with Ladenburg Thalmann.

Can you hear me? Following the Venetian transaction, what do you think that implies about the value of Caesars Palace? Not trying to be too direct with you.

That's a great question to close out this call with, James. One would think it suggests that the value of Caesars Palace is quite high, as it should be, as was obviously, the value of the Bellagio when Blackstone made what we think is a tremendously attractive and valuable purchase of Bellagio. And then again, with MGM Grand. Again, these are incomparable commercial real estate assets. The revenue productivity, the profit productivity of these assets is really unrivaled by just about anything out there. When we announced the Venetian, we invoked iconic examples or analogs like the GM building, like Ala Moana, like the biggest Amazon distribution center that Prologis owns outside of Seattle.

These are assets that are just tremendously valuable. And we own them. And they are occupied by tenants that are on leases that are effectively 35 to 50 years in length. And just to put a fine point on it, in buying -- contracting to buy the Venetian at $4 billion with $250 million of rent, we bought an amount of rent that the average triple net REIT would have to do 1,000-store acquisitions to equal what we bought in the Venetian, right? The top triple net REIT in America, the average rent per store is $250,000, right? We bought $250 million in one asset, and we bought it with a lease term of effectively 50 years, right? Weighted average lease term, a lot of these $250,000 boxes, is in the single digits. Right?

And I think, James, as more and more investors into real estate through public equities understand our model of tremendously resilient rent, 100% rent, cash rent collection for VICI in 2020. As they realize our weighted average lease terms, as they realize that we escalate our rent with CPI kickers, I don't know if you can find a better liability matching real estate investment, especially if you're a long liability investor like a pension fund than gaming real estate.

And there are no more questions at this time.

Thank you, operator. Let me just close out by reiterating our thanks to all of you for being on today's call. We're proud of the growth that we provided to our stockholders this quarter and believe we are very well positioned to continue delivering industry-leading growth and driving shareholder value. And as John pointed out, we are very excited about the continuing growth prospects of our tenant partners. They are at the forefront of the reopening of America's leisure economy. Again, thank you, and good health to all.

And this concludes today's conference call. You may now disconnect. Speakers, please stand by.