VICI Properties Inc (VICI) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties First Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, May 4, 2018. I will now turn the call over to Jacques Cornet with ICR. Please go ahead.

Thank you, operator, and good morning. Everyone should have access to the company's first quarter 2018 earnings release. The release can be found in the Investors section of the VICI Properties website at www.viciproperties.com.

Some of management's comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by the use of words such as will, expect, should 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, management will discuss 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 in our first quarter 2018 earnings release.

Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; and Dave Kieske, Chief Financial Officer of the company. Management will provide some opening remarks, and then we'll open the call to questions.

With that, I turn the call over to Ed.

Thank you, Jacques, and good morning, everyone. Welcome to our second earnings call as a publicly traded company and the first earnings call reporting a full calendar quarter. Today is day 210 since our emergence on October 6, 2017, and we continue to execute on our mission to be America's most dynamic leisure and hospitality experiential real estate company.

The highlight of our first quarter was our successful IPO on January 31, in which we raised $1.4 billion, delevering our balance sheet, improving our liquidity and greatly expanding our shareholder base. We were also pleased to announce our first dividend in March, and we look forward to continuing to deliver these distributions as a key part of our total return package to investors.

David will provide more details on the results, but we ended the quarter with just about $1.3 billion in dry powder available for growth initiatives. We remain hard at work, focused on prospects to advance our strategy around our 4 key pillars of value: portfolio, tenant, capital stewardship and our governance and independence.

Our pipeline of growth opportunities is healthy. We have 3 call option properties, which we can take down at our discretion at a 10% cap, at any time between now and October of 2022. Our relationship with Caesars remains very strong and we continue to work on mutually beneficial opportunities together.

And with John leading the charge, we are hard at work developing relationships with other asset operators in the industry. We do not expect that our dry powder will sit idle for any extended period of time and we remain confident that our ability to deploy your capital strategically and in an accretive and in a timely manner.

We're often asked what inning is it? We can have a healthy debate about what inning the overall REIT sector may be in, but what about gaming REITs? What inning are we in? Let's start with the fact that the gaming REIT sector is still less than 5 years old. During that period, there have been 2 major portfolio trades and 5 single asset trades that were not renegotiated or otherwise contractually dropped down from the tenant.

But what we should all know is that in recent months, the pace of activity has picked up. Market participants, both buyers and sellers, are gaining more confidence than the liquid market is truly developing. We believe this confidence will be key to generating further deal flow as would be the case in any sector.

Turning values may trend higher or against the current backdrop of rising interest rates, they may not. In either case, when it comes to the issue of trading values being higher or not, we ask the question, compared to what? When we purchased Harrah's Las Vegas in December, that is $87 million of NOI, we bought that income at a 7.7% cap rate. We know of no other real estate sector, in which that kind of quality, scale and durability of income can be bought at anywhere near that kind of cap rate.

At VICI, we're very confident that we're establishing a real estate transactional practice at truly institutional quality. We worked hard to develop our growth strategy, our acquisition criteria and our relationships with asset controllers and transaction advisers. And thanks to our successful IPO, we have established a pool of capital to fund our growth activities for the foreseeable future. That growth capital belongs of course to our shareholders, and we will deploy it with great care and great discipline.

As a REIT management team, we will be judged as we should be by the quality of our capital allocation. So to answer the original question, what inning is it? Being less than 5 years old, we say the gaming REIT sector is in no later than its third inning and we, VICI, being barely 200 days old are, by definition, in our first inning. We are very, very excited to be in the batter box.

With that, I'd like to turn the call over to John to provide more details of the current market environment. John?

Thanks, Ed, and good morning, everyone. As many of you are aware, the market environment for gaming transactions is quite active. The announced trades in the sector by us and our peers over the last 6 months are a testament to the growing confidence and the gaming REIT model.

At VICI, the opportunities that we are currently assessing and the conversations that we're having continue to indicate that our growth trajectory is not going to slow down. We believe the key ingredients to this has been our governance, our keen understanding of the tenants underlying business and our focus on executing what we consider fair deals or deals that are mutually beneficial to both the opco and VICI. We are very active on several opportunities and ask that you stay tuned as we look forward to providing updates in the future.

With that, I'll turn the call over to the David who will discuss our financial results.

Thanks, John. Yesterday, we reported AFFO of $0.36 per share to the first quarter. Our earnings for the quarter reflect revenue of $218.3 million, which was comprised of $211.5 million from our real property business and $6.8 million from our golf business. Real property business revenue was comprised of $182 million of earned income from direct financing leases, $4.2 million of rental income from operating leases and $17.2 million of property taxes paid by our tenants on the leased properties. Our earned income from direct financing leases for the quarter includes a $12.9 million net change to our investment and direct financing leases, which is a noncash item. On the cost side. Our general and administrative cost were $7.3 million for the quarter.

As we mentioned on our last earnings call, we continue to incur start-up and transition-related costs, which we expect to continue for the next 1 quarter or 2 quarters as we work towards the steady-state run rate for G&A. Our first quarter G&A includes 3 items to note. First, $500,000 of severance cost related to the relocation of our corporate headquarters from Las Vegas to New York. Second, approximately $600,000 in onetime legal professional and consulting cost associated with nonrecurring board advisory work. And finally, $300,000 in recruiting cost as we continue to build on our team. Our adjusted funds from operations includes these items, and for the quarter was $125 million and $0.36 per share.

Turning to our balance sheet. With the completion of our IPO on February 5, we ended the quarter with just over $918 million of cash, excluding $13.8 million of restricted cash. Our outstanding debt at quarter end was $4.1 billion and a weighted average interest rate of 4.6% and a weighted average maturity of approximately 6 years. We have no debt maturing until 2022.

Based on annualized first quarter results, our gross leverage through adjusted EBITDA is 5.9x and our net leverage to adjusted EBITDA is 4.6x. Our cash balance, along with $400 million of availability under our revolving credit facility, gives us approximately $1.3 billion of dry powder to execute on our growth strategy.

Subsequent to quarter end, we entered into interest rate swap transactions with a syndicate of financial institutions and counterparties. The transactions have an aggregate notional amount of $1.5 billion with an effective date of May 22, 2018, and a termination date of April 22, 2023. These transactions serve to fix the LIBOR portion of our Term Loan B at approximately 2.8% and brings our total fixed rate debt to approximately 86% of our total debt, providing clarity to our interest expense over the next 5 years.

Turning to guidance. We expect 2018 AFFO per diluted share on a same-store basis to be between $1.39 and $1.41 per share. We assume a fully diluted weighted average share count of 364 million shares outstanding at year-end, which reflects the impact at our IPO in February.

On March 15, we announced our first quarterly cash dividend of $0.16 per share. The dividend was prorated for the period commencing upon the closing of our IPO in February 5 and ending on March 31, based on an annual distribution rate of $1.05 per share. The dividend was paid on April 13.

With that, we'd be happy to answer any questions that you might have. Operator, please open the line for questions.

(Operator Instructions) I do have one question from Mike Pace from JPMorgan.

Just to clarify a couple of comments that you said. Ed, earlier -- and maybe to go back to your baseball analogy, you said that you guys are very active on several opportunities. And I'm wondering, are these opportunities, should we think of those in terms of singles or doubles or something maybe of the larger scale?

It's a great question, Mike. We are a REIT that wants to grow in a sustainable way over time. And as we delivered total return to our shareholders, made up of dividends, same-store growth and accretive acquisition growth, we believe we can be very successful knocking out singles and doubles if those are accretive, if they're going to give us really good adjusted -- risk-adjusted returns. And the thing we'd probably emphasize, and it maybe -- it goes without saying is that, especially as a triple-net REIT, our deals need to be accretive going in. This is not unlike -- this is not like, I should say, the sector I used to be in, the hotel sector, where you could underwrite any dilutive going in yield that asset managed or property managed or revenue or yield managed your way to accretion at accretive running yield over time. So we're going to be careful. We're going to be disciplined. We're going to be diligent. Where there's great singles and doubles to be achieved, we're going to achieve those as we see opportunities of greater magnitude. And as long as they're accretive, as long as the risk-adjusted return over time is good, we will certainly focus on those as well.

And then, also, you said it would be unlikely that you would sit on cash for an extended period of time. I'm just wondering what is an extended period of time mean for you guys? And maybe just in the context of should we expect that cash balance to be there at year-end?

I would say, Mike, we would hope that, obviously, would not be there at year-end. And yes, we're going to take the time to do the best deals we can for our investors. Again, given the fact that they need to be accretive going in. And when you look across the marketplace, there's really 2 types of deals that are happening and will happen in the future. One is deals in which the owner of the asset, both the owner and the operator of the asset, is looking to exit, right. And those may be marketed or non-marketed processes as it may be, but chances are they will look for the highest price. The other category is the category of sale-leasebacks, where the owner-operator will stay in as the operator on a sale-leaseback basis. And those are relationships that take time to develop. Those are relationships, should we think, can and should form the core of our strategy going forward. And so we're going to, obviously, look at both and we're looking at both at this time. And again, working very hard to execute deals that will provide very good outcomes with that cash available to us.

Your next question comes from Amanda (sic) [Stephen] Grambling from GS.

This is Bill, filling in for Stephen. You mentioned before a delivered approach to acquiring those call option properties that you have. Can you just remind us the puts and takes around exercising those contracts either in the near future or over time?

Yes. This is John speaking. So we have 3 call options, they're 5 years. We have 5 years from the date of emergence in October of 2007 -- 2017, my apologies.

It just seems like it's long ago.

Yes, exactly. They are at a 10% cap and a 1.67 rent coverage. And we need to give Caesars roughly 60 days notice before we take them down.

And as long as we have opportunities that are not going to be available over the next 5 years, we are obviously going to prioritize those opportunities to deploy both our management time and our capital.

Great. That's helpful. And then just a quick follow-up. With your competitors doing deals with different tenants, has the competitive dynamics for VICI as an independent REIT shifted at all?

No. I mean, we think -- what we think is happening is that the overall gaming REIT model is being validated by virtue of these deals. We congratulate our colleagues in the sector for getting these deals done. We know that at least one of those deals took a long time to gestate, and it's not surprising that it did. It was a big complex deal. We really do, again, point to the fact that there's finally over, I would say the last 6 to 9 months, a growing recognition of the role that gaming REITs can play in helping to either finance exits or moreover, finance growth. And I think what's exciting to us is that we are in a period now where, among other things, you're seeing the emergence of what we would call super regionals, who are focused on growing their portfolios, their operating portfolios, growing their footprint across the U.S. And we believe gaming REITs, generally, and we would hope VICI specifically, can be a provider of long-term growth capital to them as they pursue their growth ambition.

(Operator Instructions) Your next question comes from Komal Patel from Goldman Sachs.

So following up on potential M&A, given your infancy in the REIT market, would you be more focused on markets that have a more established track record? Or would newer markets, such as Massachusetts or even international, be an option for you as well?

I think that markets that have good fundamentals are going to be interesting to us wherever they are. I do think, for the time being though, we're excited about the magnitude of opportunities that exist for us within the existing gaming states, if you will. And again, we have to make sure that deals we do are accretive going in. The triple-net model, in and of itself, requires that. And so far as we can't bet on the come that accretion will come in the future. It's either going to come at the beginning or, frankly, it probably wouldn't come at all. So we will evaluate the market carefully. We will then evaluate the assets in the market and make sure they're good assets that have good fundamental real estate investment characteristics, the exact location, the quality of the buildings envelopes, the quality of the building systems, the quality of the operator and its competitiveness and its market share. So again, we believe we've got a good pipeline of opportunity in the well-established gaming states, and that's where we believe we'll get the highest return on management time for the time being.

(Operator Instructions) I have no further questions in queue. I'd like to turn the call back over to Mr. Ed Pitoniak, CEO, for closing remarks.

Thank you, Michelle. In closing, we at VICI are excited at the rapid progress we continue to make in executing our strategy and we have no plans of slowing down. Our growth pipeline continues to be robust, and we believe we are well positioned to grow our portfolio and drive superior shareholder value.

Thanks, again, for your time today. We look forward to providing an update on our continued progress when we report our second quarter results. Again, thank you, and goodbye.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.