VICI Properties Inc (VICI) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this conference call is being recorded today, November 2, 2018.

I will now turn the call over to Samantha Gallagher with VICI Properties.

Thank you, operator, and good morning. Everyone should have access to the company's third quarter 2018 earnings release and the 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 usually identified by the use of words such as will, 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 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 third quarter 2018 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; and Gabe Wasserman, Chief Accounting Officer.

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.

Thank you, Samantha, and good morning, everyone. We appreciate you taking the time to join VICI's third quarter earnings call this morning. We released our third quarter results last evening, and it has been just over one year since we emerged from our spinoff. We now have a full year, 4 fiscal quarters, of reported results under our belt. Here are a few of our key accomplishments in building our business over our first 4 quarters of operations. We've raised nearly $2.4 billion of equity to our Q4 2017 equity private placement and our February 2018 IPO. We refinanced over $2 billion of debt and eliminated over $1 billion of debt. We've closed or announced a total of $2.1 billion of acquisitions, and we've managed to delever from 8.4x debt-to-EBITDA emergence to 5.0x as of Q3 while growing our pro forma AFFO by about 46%. And I might add, we've accomplished all of this within a governance framework that was established to serve our one and only class of shareholders, the common equity shareholders. We realized that our sector leadership is and always will be contingent on us making good decisions, taking the right actions and managing risk properly day after day after day so that every day our shareholders' interests are being relentlessly cared for and value is being steadily created.

This past quarter, as regards to our growth pipeline, we closed on the Octavius Tower acquisition for $507.5 million, adding $35 million in rent and rounding out our ownership of the real estate of the iconic Caesars Palace, Las Vegas.

We continued to move toward closing the Margaritaville, Harrah's Philadelphia and lease modification transactions. We hope to have all of those wrapped up during the fourth quarter. We continued to see a lot of activity in the sector, as John can attest and will do so in a moment, and we don't see ourselves slowing down as we intend to continue to pursue attractive growth opportunities. Not to be forgotten, we still have 3 call option properties in our back pocket as well as any ROFO assets become available. Needless to say, we feel very good about how our first year has progressed based on the 3 key elements of our business model: one, best-in-sector governance and high energetic management capability; two, high quality portfolio income that is durable and transparent through all cycles; and three, best-in-sector growth prospects.

With that, I'll now turn the call over to John to discuss what we're seeing in the market. John, over to you.

Thanks, Ed, and good morning, everyone. The market environment for gaming transactions continues to be active, and the number of transactions announced by us and the gaming REIT sector more broadly over the past year is a testament to the growing confidence operators and investors have in the gaming REIT model. This quarter, we closed on the Octavius Tower at Caesars Palace, and we continued to make progress towards completing the acquisition of Harrah's Philadelphia with Caesars and Margaritaville, Bossier City with Penn National, which we hope to close during the fourth quarter. We have no intention of slowing down. And as you've seen from the transactions we've announced over the past year, there is no shortage of external growth opportunities currently out in the marketplace.

While we are the new guy in the market, we have long-standing relationships within the industry that have allowed us to make progress towards our goals. Those goals have not changed. We continue to work on diversifying our tenant base, expanding geographically in attractive regional markets and growing our Las Vegas exposure, all while creating value for our shareholders.

As we've said before, we continue to believe we can further build the portfolio by putting your capital to work. The principles key to our success have been our true independence, our depth of understanding of the tenant's underlying business and our focus on executing what we consider fair deals, deals that are mutually beneficial to both the opco and VICI. We believe that the acquisitions we've completed and announced to date have demonstrated this not only to our operating partners, but to our shareholders who we've entrusted with their capital.

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

Thanks, John. We reported total AFFO of $132.2 million, or $0.36 per share, for the third quarter. Our earnings for the quarter reflect $232.7 million, which was comprised of -- revenue of $232.7 million, which was comprised of $227.3 million from our real property business and $5.4 million from our golf business.

Real property business revenue was comprised of $189.9 million of income from direct financing leases, $12.2 million of income from operating leases and $25.1 million of property taxes paid by our tenant. Our income from direct financing leases for the quarter includes a $13 million net change to our investments in direct financing leases, which is a noncash item. After adjusting for the noncontrolling interest attributable to Joliet, our portion of the DFL that is deducted from net income to calculate AFFO is $12.9 million.

On the cost side, our general and administrative costs were $5.7 million for the quarter. We're thrilled to report that we have completed the previously discussed transition from Las Vegas to New York and reached our steady-state run rate for G&A. We continue to expect that costs will hover around $6 million per quarter, with slight fluctuations possibly occurring quarter-to-quarter.

During Q3, the company recognized a $12.3 million noncash loss on impairments on certain nonoperating vacant land parcels. By way of background, as part of our emergence and spinoff from CEOC, VICI inherited approximately 215 acres of nonoperating land parcels scattered across the country. All the land parcels are located outside of Las Vegas and none of the land parcels are a component of the operations of our regional property portfolio.

As part of our efforts to monetize certain parcels, it was determined that carrying value recorded on our balance sheet at the time of emergence exceeded the fair market value. As a result, we recorded a onetime noncash impairment and reclassified the remaining land value of approximately $22 million from investments in operating leases to land on the balance sheet.

On the acquisition front, on July 11, we completed the acquisition of Octavius Tower for $507.5 million. The purchase was funded with cash on the balance sheet. Octavius Tower is operating pursuant to a stand-alone lease, which provides for annual rent of $35 million and has an initial term that expires on October 31, 2032, with four 5-year renewal options. In connection with the closing of Harrah's Philadelphia and the lease modifications, the CPLV Lease will be amended to include Octavius Tower. As has been mentioned, we hope to close Margaritaville and Harrah's Philadelphia and the lease modifications during the fourth quarter.

We expect that total net cash outflow for these transactions, including the impact of the $159 million reduction of the Philadelphia purchase price, in connection with the agreed-upon lease modifications to be approximately $344 million. We expect both transactions to be funded using cash on the balance sheet.

Turning to our balance sheet. We ended the quarter with approximately $466 million of cash and short-term investments. Our outstanding debt at quarter-end was $4.1 billion, with a weighted average interest rate, including the impact of our interest rate swaps of 4.95% and a weighted average maturity of approximately 5.2 years. We have no debt maturing until 2022.

Based on annualized third quarter adjusted EBITDA, our net leverage is 5x.

With respect to our guidance for the remainder of 2018, the company is updating its estimated net income per share guidance to reflect the noncash loss on impairment which occurred in Q3, and we are reaffirming the AFFO per share guidance for the full year 2018. As a reminder, our guidance does not include pending acquisitions that have not yet closed. We estimate that net income attributable to common stockholders will be between $1.44 and $1.45 per diluted share and that AFFO per share will continue to be between $1.43 and $1.44 per diluted share for the year ending December 31, 2018.

Finally, regarding the company's dividend policy, with the closing of Octavius Tower, we've raised our targeted annual dividend rate by 9.5%. On September 17, we declared a quarterly dividend of $0.2875 per share of common stock for the third quarter, which reflected the increased annualized dividend rate of $1.15 per share. The dividend was paid on October 11 to stockholders of record as of the close of business on September 28.

In closing, we continue to make tremendous progress as we execute on our strategy. We believe we are well positioned to keep growing our portfolio and driving shareholder value.

Operator, at this time, we'd be happy to open the line for questions.

(Operator Instructions) Your first question is from the line of Daniel Adam with Nomura Instinet.

Can we talk about the M&A environment a little bit? Outside of the call right properties and other drop-downs from Caesars, what are you guys seeing in terms of new pipeline opportunities? And as a follow-up to that, are you seeing opportunities more with publicly traded operators or with both public and private casino owner operators.

John, go ahead.

Yes. So I'm going to sound a little bit like a broken record for the last 2 quarters we've been speaking. The activity in the space continues to be strong. We're out there, obviously, as we noticed the new kid on the block, and we're making sure that all the operators out there understand our model and our true independence. When it comes to whether there are public companies or private companies, I'd say, there's a mixture of both out there. And again, we're making sure that we're out there, and it's quite active. Whether all these assets that are out there that we're talking about transact, we don't know, but we're making sure that VICI's presence is out there.

Dan, I might just add that what we are benefiting from is the increasing understanding on the part of the asset controllers and/or operators as to what the nature of the capital is that we convey to them if we do sale leaseback transaction and that is to say we're another form of permanent capital and we believe, in many cases, a cheaper form permanent capital that they could access either through the public markets or other private channels.

Your next question is from Smedes Rose with Citi.

This is Abhishek on for Smedes. There have been a lot of media stories about the sale of Caesars. From your perspective, can you talk about what a change of control would mean, if anything, and for your existing leases with Caesars as well as your call options on the 3 Harrah's casinos?

Sure, yes. I mean, just to start with -- to provide context whenever we talk about Caesars, we are in the definition of a long-term relationship with Caesars. It's a relationship that has at least 34 years to go, and in 2052, chances are pretty good if we're all here and, frankly, I may not, given my age, but then it would be a relationship that continues into the future. In terms of the change in control, I think, first of all, just to emphasize what is perhaps obvious is that Caesars has announced nothing in regard to any potential changes of control. They're, obviously, undertaking a CEO search as they announced yesterday. But in terms of the technicalities of the change in control were one to take place, I'll turn it over to David and John.

Yes, in terms of the call properties, those are essentially obligations of Caesars and the entity, and those would carry forward if there were any change in control. And then the leases are obligations of the entity as well, and we don't have any concern that those leases would be impacted if there were a change in control. Caesars is our tenant. We're only speculating on what is in the -- rumored in the presses as you are and -- but we feel good about our tenant relationship we have with our tenants.

And I think, obviously, you know this well, Smedes, (sic) [Abhishek] that we're obviously in a triple net space and you have to look past just quarter-by-quarter, but if you do look at the underlying business at Caesars, you look at the quarter 2 result, EBITDAR was up 13%, this quarter was a little down and -- but their forecasting for the fourth quarter, the outlook looks really strong between, I think, it was 6% and 16%. Those are healthy growth of the underlying tenants business.

Great. And to what it changed to what you think the timing of the call options, would you want to be more inclined to exercise on them sooner rather than later or just kind of indifferent?

No, not necessarily. Our timing on the call properties will always be based upon our believing it is a very opportune time to exercise a call or multiple calls at any given time over the remaining 4 years that we have to call them. We are not concerned about anything that may happen and how it may impact the timing. We'll always do it when we believe it's the best time on behalf of our shareholders to take them down.

Your next question comes from Stephen Grambling with Goldman Sachs.

I guess, one clarification, just on the impairment. Can you just provide a little more details where some of that land is, maybe why there was a deterioration and maybe it fell under your expectations, maybe that's even the cost of the land? And then also what you plan to do maybe with the rest of the land?

Sure, Stephen. So this is lands that have been on Caesars' balance sheet for years and John can speak to how long it's been around. And this is a land that Caesars has accumulated over a period of time when there were potential opportunities to expand gaming and jurisdictions or potential licenses that were going to be granted. So this is really non-de minimus land, nonoperating land, is not associated with any casino operations. And so we went to -- and this is something that the creditors as part of the bankruptcy put within the VICI bucket, so to speak. And as we went to start to monetize some of this because it has no intrinsic value to us going forward, we realized the value that was -- from an accounting standpoint that was on the book that was brought over during the emergence was just simply different than the fair market value. And so we did a $12 million noncash write-down. It was $34 million in aggregate and, obviously, we wrote that down to $12 million. So it's a one time, just cleaning up some of the accounting that was done at the time of the emergence.

Great. And then maybe turning to just the overall M&A environment, and you alluded to this a little bit, but have you seen any shift at all in property pricing expectations either due to the rising interest rates or even just gaming sector performance in general?

Stephen, this is John. We have not seen any difference in activity or pricing at this time. Maybe it's a little early, and we'll just have to continue to watch that. But the activity has been as robust as it has been in the previous quarters as I've communicated. So again, we'll continue to monitor. We'll continue to listen to what's out in the market, but we've not seen a decline in the number of activities.

Your next question comes from Cameron McKnight with Crédit Suisse.

A question for Ed or David or John. In terms of potential accretion from transactions, I mean, a lot of the gaming deals over the past few years have been done with 5% to 8% accretion to AFFO per share. Where do you think that settles down over time? And do you think it settles down at some level below that?

Yes. I think, historically, Cam, part of the explanation for that magnitude of accretion is that until recently, most of the big trades were big portfolio trades that were capable of generating that kind of on-block accretion. I think when you get down to single assets, it's unlikely you're going to see that magnitude of accretion. And I think at that point, you would be more rightly focused on the cash and cash return of the transaction onto itself as opposed to an EPS accretion per share because, obviously, as each of us -- as each of the 3 of us get bigger, the accretion per share will become mathematically somewhat harder to achieve and I would evaluate single -- especially single asset transactions, not only on an accretion-per-share basis, which we will always make sure it's positive, but also on cash and cash return of the acquisition in relation to the cost of capital that was required to execute that transaction.

And then David, in terms of funding M&A, if you were to -- if you were to issue a 7- to 10-year paper today, where do you think that might price?

Yes, 7- to 10-year, I mean, with our ratings of Ba3/BB rating, is currently in the mid- to high 5s is what the bankers continue to tell us as the rates are moving around -- 10-year moves around the bunch, but the overall debt market seems liquid and fluid still at a pricing that would make sense to achieve the accretion that Ed spoke about.

Perfect. And then one last one for John, if I can. John, you've been in the gaming industry a long time. What's your interpretation of what we saw in the third quarter in Vegas?

Yes, I think people were prepared for numbers. I think we're going to be quite weaker than that, Cam. The numbers that have come out had some weakness compared to prior year, but they seem to have exceeded the expectation, which was nice to see. It's funny I was looking less about the third, Cam, and onto the fourth and the first and the operators have talked a lot about the strength they're seeing in the fourth and into 2019, which is great to hear.

The other thing, Cam, I would just add is that as John's already alluded to, we're a triple-net REIT. We're going to collect the same rent, no matter what happens at the operator level quarter-to-quarter. But nonetheless, this is a period where we feel our portfolio strategy of having exposure to both the regional market and Las Vegas is the right strategy for us as a REIT such that we can confidently distribute cash through all cycles because, as you did see, for instance, in the reports -- sorry, in the results Caesars reported yesterday, their regional performance in Q3 was very strong. With about 60% of our portfolio out in the regions, 40% in Las Vegas, again, we like that balance, again, not that we live quarter-to-quarter, but we like having tenants who have that kind of portfolio exposure and diversity geographically.

Your next question comes from Carlo Santarelli with Deutsche Bank.

David, just wanted to circle back to the comment you made earlier in terms of the $344 million of financing net for the 2 transactions, including the lease modification. You mentioned largely cash. I think you guys have about $145 million of cash on the balance sheet as of 3Q end. What's the comfortable balance there you guys are willing to kind of keep at the corporate level?

The one thing we want to point out is that we also have $320 million of short-term investments. Those are just simply from an accounting classification, highly liquid investment grade commercial paper with maturities of 91 to 120 days. So to sum those 2 together, that's $466 million I referenced in my remarks. We have plenty of cash on the balance sheet to fund the 2 pending transactions. And as we think about our cash needs on a go-forward basis, probably in the $75 million to $100 million range, we want to make sure we got enough cash to cover the next quarter's dividend. We have very little working capital needs but want to make sure we're able to just continue to fund our dividend. And free cash flow that we generate from our low payout ratio also allows us to be well covered.

Great. And then just, if I may, one follow-up. As it pertains to, obviously, some of the changes that are taking place at Caesars, when you think about the potential for them to be doing M&A on the buy side going forward, does any of the decision-making there or anything you could potentially be partnering on, do you believe there might be a little bit of a lag in that right now until things are more settled?

Only time will tell, Carlo. Again, we have a lot of confidence in the Caesars' board, we have a lot of confidence in the Caesars' management team. I think what you heard yesterday was a continuing commitment to growth over time and very good results. One thing I just want to highlight that Caesars reported yesterday that probably didn't get the attention it deserved is the continuing guest satisfaction improvement that Caesars continues to generate in terms of net promoter scores and customer service scores. And as real estate and hospitality people with hospitality background, I put a lot of stock in how happy a tenant's customers are. And whenever you have improving happiness, you have a company that has improving prospects. And I think that has implications on how they grow in the future.

Your next question comes from Shaun Kelley with Bank of America.

This is [Ally]; I'm on for Shaun. Today, you guys in your prepared remarks mentioned interest is growing in Vegas. Just wondering are there any other regional markets that you think seem appealing right now or ones that maybe you're currently in and would be interested in expanding in?

John?

Yes, we continue to look at all opportunities. We've talked about expanding our footprint in Vegas not only on the strip, but if there was an opportunity to get into the local market there, we like that business. That business continues to grow. We like what we're seeing in the Reno market, which we already have an asset there as well and then there are some other regional markets that continue to show great strength and growth and some regional markets that we just aren't in that, we think, we'd continue to diversify our portfolio with assets came for sale, we would be very interested in those assets as well. So that's a short answer, but hitting all the markets, we think, there is still opportunity for us to look at all of them.

And then, [Ally], just -- maybe just to add on to John's comment. On a day when we, obviously, saw very positive job support and moreover very positive wage growth, so much of that increased economic vitality is taking place out in the regions and, we feel it is going mean good things for regional operators for the years to come here.

Your next question is from Komal Patel with Goldman Sachs.

Just a couple of quick follow-ups. What's your appetite on taking on kind of larger transactions or potentially multiple properties at once, especially considering the pace of M&A so far has been fairly measured?

Ed, you want to touch on that, you want me to?

David can, I think, because a lot of that, obviously, has to do -- I think the underlying question really has to do with our confidence in our ability to effectively fund larger transactions. I'll turn it over to David.

Thanks. The basis of any acquisition is, it has to be accretive day one for us. And we would not shy away from larger portfolios just because they are larger. We feel that we have good access to both the debt markets and the equity markets as needed to potentially acquire larger acquisitions if they were accretive, if they made sense with our portfolio diversification and our tenant diversification. So as John alluded to, there's a lot going on out there, and we're not shying away from anything just, frankly, given size.

Got it. Yes, that was actually the direction I was going in. So kind of as a follow-up, is there a level of leverage that you think could be just too high and that would kind of trigger you guys considering using equity for a transaction. Is it something in the 6 range, 6.5 range, something higher than that, that could kind of frame how you think about these potential transactions?

Yes, as we've talked about Cameron has alluded to in some of his opening remarks, on the date of emergence, we were about 8.4x debt-to-EBITDA. We are 5.0x on a net basis today. We are going to be very disciplined in keeping our leverage in the low 5s, kind of about 5 to 5.5x. There may be times when it ticks up slightly north of 5.5x, but we would be hard pressed if it ever gets at 6x debt-to-EBITDA range. So we want to be measured and disciplined to make sure we can grow the portfolio accretively and we want to work to acquire assets or portfolios on a leverage-neutral basis.

Got it. And then just one last one for me. In an effort to be more aggressive on M&A deal kind of given the landscape, would you consider using a TRS structure for operating rights if an attractive property comes up, something like one of your public peers recently did? Or do you think that doesn't quite align with your risk appetite?

I don't think we've ever ruled it out if it made sense at a given time to do so. I would say generally though, we -- again, we take very seriously as we, obviously, have to the fact that we're a REIT. And we believe that equity capital invests in us as a REIT in order to receive the distributions it does in the most tax effective way possible from the source income. So again, we wouldn't rule it out, but we would always look to see the degree to which we can take any dollar of income that our company generates and turn it over to our investors in a most tax effective way possible.

Your next question is from John DeCree with Union Gaming.

I think you've touched on pretty much all of my questions, but maybe just a housekeeping item, if I missed it in the prepared remarks. Do you have kind of updated timing or time range on the acquisitions of Harrah's and Margaritaville?

John, it's David. As we've mentioned, we hope to have everything wrapped up by the end of the year, as Penn guided similar timing on Margaritaville -- or their call around Margaritaville. We're just working through some final regulatory and loan consent processes on both of those transactions.

Okay. Got it. And then I guess, to kind of stay high level, we've talked a little bit about kind of the M&A environment and your appetite in different parts, but maybe to ask a question a little differently other than, obviously, ensuring the next deal that you do is economic and value accretive. Are there other strategic priorities in terms of tenant diversity or things that you might be looking for as you kind of scale the M&A environment?

We're, obviously, always going to value tenant diversity, but tenant diversity is not necessarily just an end unto itself. Tenant diversity is a means of getting more exposure to more markets, more operating practices, more end user, end customer relationships. Again, that will always be a big part of what we're doing. But again, it will have more to do at the end of the day with the quality of the market we're buying into, the quality of the asset in that market and the operator's relationship to its end customers. And if that yields us more and more tenants, we'll, obviously, be very happy to have achieved that.

Your next question is from R.J. Milligan with Baird.

Most of my questions have been asked. I'm curious though, as you're having increased discussions for the smaller portfolios or single assets, is there any change in what sellers are expecting in terms of economics or where you're setting the rents? Just curious how those negotiations have changed possibly from larger deals to smaller deals.

John?

R.J., not really changed from larger to smaller. I'd answer that question, it really depends on the operator that we're talking to. As you can imagine, there are different goals and objectives depending on the operator, the property, but it has not changed at all in the recent time, so been quite stable, we'll continue to watch, been quite active as we talked about. But it really comes down to what is the seller trying to achieve with a possible deal.

And R.J., maybe just to add a little bit to that. I mean, we -- the big gaming operators, especially the public gaming operators have come through a wild couple of months here. Post the Q2 earnings announcement, a number of them have seen their stocks get hit pretty hard. And it was all so quick, so volatile, so violent, really, that I don't think anybody was able to just kind of rise above that and go, okay, now we certainly have to reprice everything. So I think the greater sense was what the heck is going on. And only time will tell if this was an air pocket that everybody is going to quickly recover from or if it's something longer term or -- in nature, we think, given the Q3 results you're seeing from just about every operator out there, that there was a wild overreaction in terms of how the gaming stocks performed over these last 2 months, and we'll refind here pretty quickly an equilibrium that is based upon the fundamentally strong performance that they're all showing.

And we do hit that equilibrium, would you anticipate greater velocity in terms of M&A and/or the selling of real estate?

I don't know if the velocity necessarily is going to pick up, but I think there will be commitment, obviously, very much so to the conversations around these potential transactions and recognition that these transactions do take time.

(Operator Instructions) Your next question is from Daniel Adam with Nomura Instinet.

Just one quick follow-up. Can you remind us what the expected AFFO per share accretion is from Harrah's Philadelphia and Margaritaville? And do you intend to update the 4Q and 2018 guidance once those deals close?

Dan, our policy would be to update guidance once those deals do close. And just as a reminder, Harrah's Philadelphia will generate $21 million of annual rent and Margaritaville will generate about $23 million of annual rent, so you can do the math on that. But -- and I appreciate that standing and what that adds to really a full year 2019 in terms of AFFO per share growth, which we think -- once we get these closed, our shareholders will benefit from a full year from having those acquisitions in our portfolio. So we're excited about what 2019 brings.

And maybe just to restate the obvious, because they are being paid for with the cash on hand, the $400 million-plus of cash that David referred to earlier, obviously, that rent turns into NOI turns into AFFO, with 100% flow-through just about.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you, Kareena. And thanks, everybody, for your time today. We look forward to providing an update on our continued progress when we report our fourth quarter and year-end results. Thanks, again.

This concludes today's call. You may now disconnect.