VICI Properties Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Vichy Property Second Quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded today, August 1, 2019. I will now turn the call over to Samantha Gallagher, General Counsel with Vichy Properties.

Thank you, Operator, and good morning. Everyone should have access to the company's Second Quarter 2019 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the Vichy Properties website at .vchproperties.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, intends, projects, 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 filing for a more detailed discussion of the risks that could impact future operating results and financial conditions. 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 second quarter 2019 earnings release and our supplemental information. Hosting the call today, we have Ed Petoniak, 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. Good morning, everyone, and thanks for joining us on our Q2 2019 earnings call. The second quarter of 2019 has proven to be another extremely busy quarter in VG's short history. In a moment, John will recap our Q2 growth activities and David will recap our Q2 financing activities and financial results. But before we get to that, I'd like to spend a moment putting our Q2 activities and results into the context of what we're striving to achieve over the long term for our shareholders. VG is now almost two years old and we have accomplished a lot in a short amount of time. In a nutshell, we have announced approximately $6.7 billion of acquisitions and raised approximately $5.6 billion of equity. We reduced our leverage from 8.4 times net debt to adjusted EBITDA at emergence to 3.7 times net debt to EBITDA at quarter end by refinancing nearly $2 billion of debt at lower interest rates and eliminating over $1.3 billion of debt. We also increased the company's annual base rent by 181% if you include the incremental annual rent of the pending transactions announced but not yet closed. That is a lot of activity over the short term, all of which has been in pursuit of our goal to build an institutional REIT for the long term. Towards that end, we have upheld a relentless focus on the following. Improving our portfolio for the long term through accretive acquisitions and investments. Enhancing our lease structures and terms for the long run. Growing our tenant relationships and enhancing tenant strength for the long term. Having the broadest investment spectrum across the gaming real estate landscape. Building a balance sheet for the long term. A balance sheet that can successfully weather any economic or credit cycle we may endure. Building and executing a VG dividend strategy for the long term. A strategy that delivers a secure and well covered dividend with sustainable growth with dividend growth funded by achieved income growth, not anticipated income growth. Building an ownership base for the long term. An ownership base that recognizes and values the quality, durability, and irreplaceability of our real estate. And building an unrivaled growth pipeline that gives our shareholders the value of predictable long term growth years into the future. The investment community can trust that this relentless focus on creating long term value means that we will not cede our prospects for creating lasting shareholder value for the purposes of capturing a short term gain. With some of the longest duration leases in the industry, we are able to take an expansive outlook and act accordingly. Take for example the stat I mentioned earlier. We have announced approximately $6.7 billion of acquisitions and raised approximately $5.6 billion of equity. A REIT focused on immediate short term accretion would not have relied as heavily on equity funding for the announced acquisitions, especially not far in advance of acquisition closings. If we had not taken this disciplined approach however, while we may have generated more immediate accretion, we would have sacrificed long term value creation for that kind of short term gain. Another short term measure would have been to delay funding until closing. But in doing so, we would have taken significant market and pricing risk. In either case, we would not have stayed true to our relentless focus on building a REIT that can thrive through all cycles. The focus we believe is essential for our investors to be able to trust and rely upon as we act in their best interest in our capital allocation decisions. Looking back on the transactions we announced this quarter and those we have completed in our short history, you will see a consistency in that we fund our transactions in a manner designed to provide long term funding certainty, long term accretion, long term security of cash flow and long term sustainability and growth of the Vichy dividend. We realize that the long term nature of our acquisition and capital allocation strategies makes it challenging to calculate with precision the immediate impact of our related funding activities. We benefit greatly from cultivating a base of investors and covering analysts who collectively understand and support the long term value creation that we believe our strategies will deliver. We especially value this understanding and backing when our shareholders stepped up with such strong support for the equity raise we launched concurrently with the announcement of our transformative transaction with El Dorado. Before I turn things over to John, I would like to stress the degree to which our transaction with El Dorado was all about long term value creation. We believe this transaction will enable us to, number one, contribute significantly to the long term success and competitiveness of our largest tenant. Number two, significantly improve and extend our Caesar's leases for the long term. Number three, add significant long term AFFO accretion. Finally number four, restock our growth pipeline for the long term. And that's a great introduction to what John has to say about our Q2 2019 growth activities. And with that, over to you John.

Thanks Ed and good morning to everyone. As Ed mentioned, we had quite a busy quarter. We closed on one acquisition and announced over $4 billion in new acquisition. We established three new tenant relationships while adding upon closing seven new properties across six regional markets while at the same time we refreshed our growth pipeline. I'd like to spend a minute on each of these transactions and their strategic benefit for Vichy. Jack Cincinnati. As we discussed on last quarter's call, on April 5th we kicked off the quarter by announcing the Jack Cincinnati transaction in partnership with Hard Rock International. We've agreed to acquire $42.75 million in rent for $558 million, representing an attractive .7% cap rate. With this transaction, we will enter the strong urban gaming market of Cincinnati with a world class gaming operator with a proven track record of success in the Ohio market. And we add another first class operator to our tenant roster. Greectown. Next, on May 23rd, we officially closed on the acquisition of the Greectown Casino Hotel for approximately $700 million, simultaneously leasing the asset to Penn National. This high quality asset located on seven acres in the urban core of Detroit is a great addition to the Vichy portfolio and adds $55.6 million in rent at an attractive .9% cap rate. We are pleased to expand our partnership with Penn National and further diversify our tenant income while adding to our geographic diversification by entering a strong and stable regional market. Century Casinos. On June 17th, we announced the acquisition of three regional gaming properties for $278 million in partnership with Century Casinos. Upon closing, this transaction will add an additional $25 million in rent under a master lease at a very attractive 9% cap rate. The transaction provides us several strategic benefits. First, we are creating a new tenant partnership with Century Casinos, an expert operator of small to mid-size assets with plans to expand further into US regional gaming. Second, we'll be entering the state of West Virginia and the Pittsburgh MSA, thereby diversification while adding value for our shareholds that are creative to AFFO on a long-term basis. The El Dorado transaction. Lastly, one week after we announced the Century transaction, we announced a transformative $3.2 billion deal in conjunction with El Dorado's proposed combination with Caesars Entertainment. The combination of El Dorado and Caesars will create the largest domestic gaming company with market-leading assets in nearly every regional market benefiting from the most robust and sophisticated customer loyalty database, Caesars Rewards. We are thrilled to partner with El Dorado to provide a portion of the capital they need in order to execute on their goal of creating the largest and most dynamic gaming company in the country. This transaction is especially attractive for Vichy, as we will add $252.5 million of incremental rent, including $98.5 million of rent from our Las Vegas strip properties and $154 million of rent across our regional master lease, all for a blended cap rate of 7.9%. What's more, as Ed touched upon, we have also refilled a strong, diverse growth pipeline that ensures the company maintains visible long-term growth opportunities. This refreshed pipeline includes two ropher opportunities on Las Vegas strip assets, a put-call option on two high-quality assets in the growing Indianapolis gaming market, and an additional ropher on an urban core casino in Baltimore. We're excited to work with the El Dorado team and look forward to our continued partnership in the future as we both execute on our strategic goals. In conclusion, with over $4 billion of transactions announced in the second quarter alone, we've accomplished an incredible amount for Vichy shareholders. We are very proud of the progress we've made in adding to our tenant roster, further diversifying our geographic distribution, refreshing our growth pipeline, and of course, doing it all in a manner that is long-term accretive to AFFO. As our activity in the quarter indicates, we've proven our ability to source, execute, and finance acquisitions of all shapes and sizes. We will continue to be determined, and we believe Vichy remains in a great position to capitalize on opportunities that the market presents. With that, I'll turn the call over to David, who will discuss our balance sheet and financial results. David?

Thanks, John. I'll first cover a few of the highlights from our quarterly financial results before turning to our balance sheet and the specifics surrounding our recent transaction activity. As a reminder, starting on January 1, 2019, under ASC 842, the new lease accounting standard, we're no longer required to present real estate taxes and the related tenant reimbursements on a gross basis since they are paid directly by our tenants to the relevant taxing authority. Therefore, neither of these items appear on our June 30, 2019 statement of operations. The prior periods will not be retrospectively adjusted, and therefore the historical financial statement presentation remains unchanged and continues to include the gross up of real estate taxes and the related tenant reimbursements. Our total revenues in Q2 2019, excluding the tenant reimbursement of property taxes, increased 9.3 percent over Q2 2018 to $220.7 million. Our GNA was $6.5 million for the quarter, and as a percentage of total revenues was only 3 percent for the quarter, which is in line with our full year projection and represents one of the lowest ratios in the triple net sector. We incurred $2.9 million of transaction expenses in the quarter, primarily related to the legal and accounting costs associated with documenting the leases for Jackson Cincinnati, the Century Portfolio and the Alderado transaction. These costs are required to be expensed under the new Leasing Guidance. Our AFFO for the second quarter was $156.8 million, or $0.38 per share. AFFO increased almost 22 percent year over year, while AFFO per share increased approximately 29 percent over the prior year, given the equity issuances last November and the most recent offering at quarter end. Our results once again highlight our highly efficient triple net model, as flow through of cash revenue to adjusted EBITDA was approximately 105 percent, and while flow through of cash revenue to AFFO was approximately 95 percent. As always, for additional transparency, we point you to the quarterly financial supplement, which is located in the Investors section of our website. Under the menu heading Financials, we believe you'll find detailed information helpful and welcome any feedback on the materials. Moving on to our balance sheet and capital markets activity, we had an active quarter, further strengthening our balance sheet and positioning the company for continued growth. In connection with the Alderado transaction, combined with the other transactions that have been announced but not yet closed, we pursued a comprehensive capital funding strategy. Our objective was to immediately de-risk the balance sheet by effectively locking in funding certainty for a transformative sequence of deals. With this approach, we will have some near-term dilutions, but we believe this capital will ensure that we maintain balance sheet flexibility in an effort to provide our shareholders with long-term growth. This thinking led to the activity during the last week of the quarter. On June 28th, we completed an upside follow-on offering of 115 million shares sold at a price of $21.50 per share for net proceeds of approximately $2.4 billion. The offering was comprised of a 50 million share regular away common stock offering, resulting in immediate net proceeds of approximately a billion and the shares being added to our total share count on June 28th. We also entered into forward sale agreements for the additional 65 million shares. Upon settlement, the forward component of the offering is anticipated to raise net proceeds of approximately $1.3 billion. We retain the ability to settle the forward transaction in whole or in tranches at any time between now and September 26, 2020. We view the success of this upside offering as a significant expression of support, confidence, and trust from our shareholders, and we do not take that commitment lightly. We will continue to work to deploy your capital accretively as we execute on our long-term strategic goals. For the remainder of the funding needed to close the El Dorado transaction, as well as the refinancing of the existing secured CNBS loan currently on Caesars Palace Las Vegas, we intend to access the debt markets through a combination of term loan and unsecured bonds on a leverage-neutral basis. Related to our debt, in May we amended our revolving credit facility. We increased the borrowing capacity by $600 million to a total capacity of $1 billion. We also extended the maturity by two years to May 2024, and we moved our interest rate to a leverage-based grid with a range of 175 to 200 basis points over LIBOR. Our total outstanding debt at quarter end was $4.1 billion, with a weighted average interest rate of 4.97%. 98% of our debt is fixed, with the remaining 2% floating, providing clarity to our future interest expense. The weighted average maturity of our debt is approximately 4.5 years, and we have no debt maturing until 2022. We ended the quarter with over $2 billion in liquidity, including approximately $1.3 billion cash in short-term investment and availability of $1 billion under our revolver, subject to compliance with the terms of our revolver. As of June 30, our net debt to LTM EBITDA was approximately 3.7 times, well below the low end of our long-term target of 5 to 5.5 times. Regarding our acquisition activity, John touched on most of the specifics, so I won't repeat it all. We closed on the Greentown transaction on May 23, adding approximately $55.6 million in annual cash rent at a .9% cap rate. Then between the three announced pending transactions, Jacks & Sonati, the Century Portfolio, and El Dorado, we will add just over $320 million in annual cash rent, increasing our annualized rental income by approximately 32% in just one quarter. In terms of timing, we expect Jacks & Sonati to close by the end of 2019. For the Century Portfolio, we continue to target closing in early 2020, and the El Dorado transaction is targeted to close in the first half of 2020. Now with respect to guidance. Beginning this quarter, we will be presenting our guidance in absolute dollars as well as on a per share basis to provide additional transparency. We are updating our full year 2019 guidance to reflect the closing of Greentown on May 23, as well as all capital markets activities completed in the second quarter. We now expect AFFO to be between $635 million and $645 million, or $1.45 and $1.47 per share, versus our prior guidance of $600 million to $650 million, or $1.47 to $1.50 per share. Our underlying AFFO assumptions are consistent with prior guidance adjusted for the closing of Greentown. While the per share range now accounts for the 50 million shares issued in Q2 and the potential dilutive impact resulting from the forward sale agreements we entered into in June to the extent that our stock trades above the deal price, as we will be required to record treasury stock dilution under GAAP. As always, our guidance does not reflect any of the pending acquisitions. Turning to our dividends, we paid a dividend of $0.2875, based on the annualized dividend of $1.15 per share on July 12th to stockholders of record as I close the business on June 28th. With that, operator, please open the line for questions.

At this time, if you would like to ask a question, please press star, send the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Carlo Centarelli with Deutsche Bank. Your line is open.

Hey, guys. Thank you and good morning. This question is probably really going to blow your mind. But if I can, if I can, in the prospectus back in June, you guys did talk about another deal that you were potentially in later stages of negotiations for. I don't know if you're able to comment directly on that specific reference, but if you could talk a little bit about maybe how things have proceeded in terms of the pipeline, that would be helpful.

John, you want to go ahead?

Sure. Well, I can't specifically talk about that, but I think as the past 22 months have indicated, I hope to you, Carla, that we remain busy and active at all times. And so we continue to work on that deal that we called out and we continue to be on the opportunities as well. So it's busy even during the summer months right

now. Great. Thank you, John. And then if I could, maybe David, you would be best positioned for this one. But in terms of that specific transaction with the financing that you've done to date, including the equity as well as the term loan and unsecured that you're targeting, are you in pretty good shape in your opinion to kind of do the deal with not necessarily maybe cash on hand, but cash on hand and the proceeds of what you're going to raise later in the year regardless of this transaction?

Yeah, that's right, Carla. And just to clarify in terms of what we'll raise later in the year in terms of as we access the debt markets, we do not need any more equity. We will not go back to the equity markets to fund the acquisitions that we have announced or the potential acquisition that's referred to in S4. Part of the reason we upsized the offering was to take into account our pipeline. We feel confident about our pipeline and do not foresee us needing any more equity in the near term.

Great. Thank you, guys.

Our next question comes from John Decree with Union Gaming. Your line is open.

Good morning, everyone. Congratulations on a busy 2Q. I think busy might be an understatement, but congratulations nonetheless.

Thank you, John. Two talk.

High level for a second. Ed, in your prepared remarks, you've discussed the importance of balancing the short-term accretion with long-term value creation. And I think some of the merits of the transactions you've done are quite obvious with replenishing the growth pipeline and so on and so forth. I was wondering if you could talk a little bit more. It might be helpful to talk about some of the strategies for long-term value creation and really where you see VG going as we get out a year and some of these transactions close and your ultimate goal for the company.

I think, John, our fundamental opportunity continues to be to invest in what we believe is fundamentally great real estate, real estate of high institutional quality. And yet we're able to do so at this time at what are still, we believe, bargain prices. If you wanted to put it into something of a private equity real estate framework, typically in private equity real estate you talk about either core yields, core plus yields, value add and opportunistic or opportunistic and value add. And we believe right now we're buying core plus to opportunistic yields for what is fundamentally core real estate. We love this opportunity and we believe for those who haven't yet been able to see it, we highly recommend that everybody take a look at the report that Green Street put out on our sector earlier this week. It's a collaborative effort on the part of VG, MGP and GLPI and we think it further emphasizes the core message which is this is fundamentally great real estate and what we fundamentally have is the opportunity to build a great portfolio of real estate with great tenants whose operating business is what ensures the long-term integrity and durability of our real estate cash flows. So again, we just want to continue to tell the story. We want to continue to ignore the noise in the market. We're at a point right now as a country, frankly, where there is so much noise and policy or the capital markets and yet we think underneath all of that, the economy continues to be very strong and as you've seen, you know, John, with the reports out of Penn and Boyd last night and as everybody saw from the June strip data, gaming continues to go along really well and we believe it's got a long-run way ahead of it. And we also like obviously the prospects for other experiential sectors as you look at demographic trends and cultural trends that we think are going to continue to put great value on experiential real estate. I realize that's a 50,000 foot answer but I hope it's of some service to you.

That's helpful. That's all I was looking for. I think good comments and I think you've been answered my follow-up so maybe to switch gears slightly. You guys provided some unique financing sources for two very different types of companies. One very large scale and one much smaller scale. I think historically over the last couple of years we've seen some of the gaming partners be a little resistant to partnering with REITs and we've certainly seen that change over the last 12 or 18 months. As you provide unique financing opportunities for these companies of all different sizes and positionings, have you seen increased receptivity or inbounds from other potential partners? I guess the short question is are you seeing an increase in acceptance and receptivity to refinancing on forward transactions?

Yeah, I'm going to turn it over to John in just a second here. John Payne, John Decree. But what I just want to say before I turn it over to John is that what we're seeing is greatly increased receptivity from gaming companies that want to grow. It's as simple as that. Gaming companies that want to grow are realizing that gaming REITs are a great way to help finance their growth. We represent another source of permanent capital, permanent capital that's frankly more affordable than equity they might raise out or other permanent capital they might raise in the public markets. And we continue to believe that gaming-oriented growth companies will continue to look to Vichy for help in achieving their growth ambitions. But to give you more color and granularity on that, I'll turn it over to John.

Yeah, John, it's a great question. And I give a lot of credit to my colleagues on the phone, Ed, David, Sam, Gabe, and the whole team that come from a REIT background. And I think in the gaming space, the explanation of how a REIT can help a company grow was really based on my colleagues helping me tell that story to potential sellers. It hadn't been done before in our space. And so the first year we spent a lot of time doing that. And it's led, as you can see, to opportunities with a wide variety of folks in our space and really outside in the experiential space. So to answer your question specifically, we obviously continue to spend a lot of time without bound calls. But as I've said over the previous course, we are seeing more inbound calls. And we're also seeing more inbound calls with folks who understand the model a lot better than they did a few years ago where it wasn't just throw a lease on the table and say, take it. It's an explanation of how a REIT in our space can be a partner, can be a long-term partner, can help the companies grow. And so it's been a good start for our company.

Thanks, everyone. Appreciate the comments.

Our next question comes from Stephen Grambling with Goldman Sachs. Your line is now open.

Good morning. Thanks. First on the intermediate term, you've outlined a lot of the details around the incremental rent from the announced transactions. You've already to a degree front-loaded the financing for these. So maybe we can help investors frame what the AFFO per share kind of power is of the business as we look at all these transactions together, maybe a couple years out. And then maybe a follow-up to John's question. As you look longer term, I mean, what are the guardrails to think about when you start to look outside of gaming, or is that still not really something that's top of mind? Thank you.

Yeah, Stephen, it's a good question. I mean, just in the announced acquisitions, the $4 billion that we announced in the second quarter, that adds about $320 million of rent. Obviously, we need to lever that. I mean, based on our share count, that's $0.60 a share of rent and others, so we need to put that on a leverage-neutral basis. So the way we set up the REIT is to have year in, year out growth of 10 to 12% on the total return. And part of the issue that we face in this sector is just front-loading that growth, right? We announced REIT down in November. We closed it this year, so you get three-quarters of an odd year of rent and AFFO in 2019. And now Century, as well as Alvarado, will close next year. So we continue to build the growth in AFFO for years to come. We'll get you about half of the Alvarado transactions, assuming a mid-year close in 2020 and a full year of rent in 2021. So we continue to ladder the growth of the company by working day in and day out to add the acquisitions and sequence it into the AFFO growth over time.

And for the second part of your question, Stephen, in terms of outside of gaming, what would we see as guardrails? Most fundamentally, the real estate has to be home to an experience that we believe has great durability to it, that it is an experience that is greatly valued today by the end user and is an experience that will be greatly valued by the end user 25, 35 years from now. And that experience probably has to have within it what we call experience complexity. It's what we love about gaming. It is an experientially complex business in which the operator has the opportunity every day to refine the experience, add new elements to it, replace what has become obsolete with what is new and fresh. And we will look, when we do look outside of gaming, we'll look for that same experience of complexity and that same fundamental durability of experience.

But so it doesn't sound like you currently feel the need or compelled to look outside of gaming?

We're certainly doing all we can to learn about sectors outside of gaming, identify sectors outside of gaming. They would have the characteristics that would lend themselves to a compelling investment thesis. But needless to say, with $4 billion of gaming acquisitions in one quarter, we are very, very excited about continuing to help gaming companies grow. And that includes big companies like El Dorado and Caesars and obviously smaller companies like Century, which see great growth opportunities for themselves as well.

Great, thanks. Fair enough. I'll jump back in the queue.

Our next question comes from Smeadie Rose of Citi. Your line is now open.

Hi, this is Cameron Gies on behalf of Smead's. I just wanted to get your take on the range of deal sizes you might look at going forward, whether they'd be larger like the El Dorado transaction, more complex or smaller like the Century deal.

John? Well, I think you described the range for us. I think, you know, we, as we started the company, we didn't put brackets around what we're going to look at and not look at. We thought that would restrict us and it would not allow us to meet all gaming operators and even non-gaming operators at this time. And so we really do, we take any meeting. It doesn't mean we'll do any deal, obviously. But we don't put parameters around the size. If it's a credo for us, if it's with a strategic partner like Century that many would describe as a small deal, not many $300 millionish deals are called small, but they are and they seem to be in this space. But that was with, as an example, an operator that we believe is growing a U.S. platform. And not only would do that deal, but others. So the simple answer is we're looking at a lot of different things of all magnitude and we'll continue to do that because we think it will lead to quarters like we just ended.

You know, Cameron, I'd just like to add to what John said that, you know, the fundamental value proposition of a REIT is to be able to distribute cash through all cycles. And given that reason for being, a REIT should inherently have some element of hedging in its portfolio strategy. A REIT should not be overexposed to any one geography, any one necessarily customer segment so that one can, again, ensure that the cash is there to distribute through all cycles. And thus we like having the biggest investment spectrum in the gaming REIT space that again enables us to do the kind of deal we did with El Dorado while also doing the kind of deal we did with Century. Because by having that diversity of tenant, diversity of geography, we again put the REIT in a place where we're not overexposing to any one particular aspect of the business that could lead to, you know, higher risk in terms of the sustenance, the sustainments are. Sorry, of distributions.

Great. Thanks, guys.

Our next question comes from John Misoka with Sladenburg Talman. Your line is now open.

Good morning.

Morning,

John.

So, just kind of roughly speaking, what do you think your capacity is today to do larger deals given maybe assuming you close on the more tangible acquisitions in the pipeline that you mentioned at the time of the equity offering? You know, essentially, is there enough kind of on your plate today that maybe there needs to be a pause or do you think you can continue to do some larger transactions going forward? In the near term.

John, it's David, us, Darden, and John Payne can add on to that. I mean, right now, obviously, we've announced a lot and we have a lot to digest and to close. So, right now, we're focused on ensuring that we lay out a disciplined financing plan with a long-term debt and continue our path towards lowering our accounts to capital, ultimately pursuing a path towards investment grade. But in terms of acquisitions, look, we've got the capacity to, as John said, we meet with a lot of people and we look at a lot of things and some larger transactions probably right now are probably off the table for us as we think about ensuring the closing of Cincinnati, the closing of Century, and then ultimately working with El Dorado to ensure seamless closing of the broader transaction early next year.

Okay. And then you kind of mentioned the debt markets in investment grade. If you think about the cadence of the type of debt you plan to issue, is there any thought about potentially taking out the CMBS, the CSER CMBS with term debt in order to position yourself for the rating agencies in the unsecured market or is the timing of all that going to be dictated more by the security of getting that kind of cash on hand?

We will take out the CMBS debt as part of the broader El Dorado transaction. As we announced back in June, El Dorado has agreed to split those, you know, the transaction costs, the breakage costs with us. And as part of the overall transaction, we will either take that out with either term loan or high yield and just a little bit of depending on the markets where they are and the cost of capital. And that cleans up our capital structure too, which has been a very positive feedback for the rating agencies. And then that begins to remove the big hang up in the rating agencies right now is just the amount of secure debt that we have in our cap structure. And so to start to morph towards an unsecured borrower, ultimately through the high yield markets and then long term through the investment grade markets is our plan over the course of the next several months.

Do you think you'd be able to raise in the kind of investment grade markets before, I guess, the closing of ERI? I know it's a bit of a, some of that's out of your hands.

Investment grades probably 24, you know, 18 to 24, maybe 36 months off. We'll meet with the agencies in the fall here. But a lot of it will be, again, to remove the secured debt that's in our cap stack. And that's both the CMBS, the second liens that we can call next year in October of 2020. And obviously the term loans we have today are secured debt. So we've got a little bit of work to do, but taking out that CMBS is the big first step and we're excited about that.

Okay. And then do you provide any color maybe on potential timing for taking out of the CMBS?

It's November 10th is when we can repay it. That's the first call window. And then so sometime late fourth quarter, early first quarter 2020.

Okay,

that's it for me. Thank you very much. Thanks, John.

Our next question comes from Daniel Adam with Nomura Instament. Your line is now open.

Hey, guys. Good morning. So earlier in the week, Boyd had made some comments about the current M&A market. And I think their exact quote was that it feels a little quiet right now. Obviously, Boyd is an operator and you guys are a real estate company. But why do you think they're seeing the current M&A landscape differently than you are?

I think it varies by geography, by market segment, by operator size. You know, you've obviously seen Dan in recent weeks. You obviously saw our announcement with Century. You saw the announcement of the transaction Twin River did with El Dorado. You know, there are there are there is activity going on. And again, it's going on maybe at segments or at asset level, asset size levels that Boyd does not operate at. And again, Boyd is a really good company. And again, I think it's part and parcel of the fact that this is this is a sector that we those of us moved to gaming like myself and David are realizing has more diversity to it than we initially understood. And these smaller assets need to be understood as smaller assets in the larger context of hospitality and entertainment and recreation, because while they may be relatively small assets within the gaming universe in terms of either Dauphor assets versus hotels or other recreational assets, these things make a lot of money. So there is activity going on. And again, we we like the fact that we've got an investment spectrum that enables us to do the kind of deal we did with El Dorado for strip assets at the same time that we can do the deal we did with Century.

And let me just add a little bit to that, because I think sometimes Daniel's is just perspective. I mean, we just finished announcing a quarter of three billion dollars worth of acquisitions, you know, just three years or in this in this four billion dollars. Sorry. And just in this perspective, I mean, just in this space, you know, three years ago, that would last 18 months before someone would do anything else. And so I think that it's just perspective change a little bit to say, well, there's not a lot of activity in this space. And we're sitting here in August and we're just one company that last quarter announced four billion dollars of acquisition. So I'd say it's very active. Again, I'm not contradicting my friends at Boyd at all. It's just I think perspective. It depends on where your perspective is.

OK, that's helpful. And then my follow up is a bit more nuanced. But with respect to the Las Vegas strip rofer, would your rofer on on those assets still apply if they transacted prior to the closing of the El Dorado Caesar's deal?

And sorry, who would the baby in that in that case? So we would rather it would

be Cesar's in the interso between now and closing.

These are really would be essentially precluded under their merger agreement with El Dorado likely to do a deal without having El Dorado's approval. So it would be more complicated than that. OK, given the size of the.

Awesome. Thanks, guys. Appreciate it.

Thanks, Dan.

Our next question comes from David Katz with Jeffrey. Your line is now open.

Hi. Good morning, everyone. You've covered a lot of ground, but I wanted to follow up on some of the earlier commentary from Ed. From the beginning, you know, the the discourse has been around establishing, you know, your independence from, you know, from Caesars. And, you know, I think it's fair to say that you've, you know, walked a lot of that talk or maybe, you know, flown or driven. But this the El Dorado deal, you know, does sort of tether you, you know, in some way to a to a single, you know, tenant. And I recognize concentration is not the same as, you know, in overall independence. But as we think about going forward and, you know, deals that you may be considering, how much does that notion of independence and concentration factor into the decisions relative to accretion or the other evaluative criteria?

Yeah, I think I'll start David and I'll turn it over to John. I think that what what this transaction most represents is our ability to creatively transact with independent operators. In other words, what I'm what I'm trying to say, and I'm not saying very elegantly, David, is that we did this transaction with El Dorado. We didn't do it with Caesars. Right. And and I think it's a great testimony, especially to John's leadership in our business development activities, that we were able to initiate a relationship with El Dorado, an independent arm's length relationship that led to a transformative transaction that does happen to involve our existing largest tenant. So I think the greatest message to take out is transaction is not an issue of are we independent or not from Caesars. It is our ability to create relationships that yield deal flow. And I think we work relentlessly hard every single day on the development of relationships because it is those relationships that generate deal flow. In this case, this particular deal does intensify our tenant concentrations with degree, but we take great confidence in the relationships we've built with Penn and Hard Rock and Century that we will continue to to generate tenant diversity, which will ultimately lead to some lessening of that concentration, though that concentration in and of itself does not scare us. John, if you want to add to that.

No, I think you described it well. I mean, I was it are independent to the huge competitive advantage for us. We don't have a parent company that gives us deals or hands us deals. We have to work every day to get out there to build relationships with others and prove that we can close deals with a wide variety of operators. We're going to continue to do that or a simple way of doing it makes me makes me work hard every day to get out there to get more deals. And it will continue to be the independence, as you mentioned, is going to continue to be a big factor of it.

Thank you very much. Appreciate it. Thanks, David.

Our next question comes from Barry Jonas with SunTrust. Your line is now open.

Thanks. Good morning, guys. Maybe just another angle on El Dorado. They've said they're going to come out of the Caesars deal at around a fifty fifty mix of lease versus wholly owned. How do you kind of weigh the opportunity to further penetrate that ratio versus the strong rent coverage ratio you have now? Thanks.

Yeah, no, it's a great question, Barry. And it was it was obviously a guiding principle to the to the deal we ended up constructing with Tom Regan, Brett and the El Dorado team. We see great merit in them having that balance. It adds to your point. It is the substance, the key substance of our rent coverage. And it obviously is a key element in their cost of capital and how it is their valued. So, you know, we we would be very happy if they continue to maintain that kind of ratio. You know, the rovers don't necessarily mean sale lease backs. And, you know, we we again think that Tom is approaching this with a philosophy that puts both companies, the new Caesars and Vichy in very strong positions.

Great. And just to follow up, you know, last quarter, we talked about other REITs potentially exploring the gaming asset class. Just curious, are you seeing anything out there and given the unique nature of gaming? What's the likelihood we see another entrant? Thanks.

I'll start and I'll turn it over to John. I think it's high. I mean, because again, I go back to this being fundamentally really good real estate that is available at very, very attractive prices. And, you know, there are certain bidders that could show up for regional assets. There's perhaps another set of bidders who would show up for Las Vegas assets. I think we should all keep in mind that Las Vegas strip real estate gaming real estate does not require the real estate owner to be licensed, which could make it very comfortable for certain kinds of real estate institutional investors to very quickly move into the ownership of Las Vegas strip real estate. And again, we're seeing the degree to which institutional capital applies very high value to Las Vegas strip real estate. If you happen to notice the latest print on the refinancing of the Grand Canal shops at the Venetian, which got valued for the purposes of the loan made on those assets, I think was an implied cap rate of 4.5. Right. So again, I think there will be a lot of hunger for this real estate given how fundamentally good it is. In a commercial real estate environment where you're looking at sectors that are either undergoing secular challenges or otherwise really fully baked in terms of how they are valued today.

And I'll just add on to that. I mean, I think that as people see the number of transactions that we've done as a company at 7%, 8%, 9% cap rates when they're in other industries and they're buying and the stability of our tenants and the quality of our tenants and their ability to attract new consumers and keep those consumers. And then there's other REITs that are in spaces that are buying things at 3, 4, 5. I think there's no question that people are taking a look at this space. Obviously, EPR has put one of the best gaming executives I've worked with on their board. And I don't think they'd do that if they weren't looking at about this space. And as I'm out talking to potential sellers, there's no doubt that there's other REITs that are beginning to try to understand this space. And that's why we've built our model on partnerships and winning the ties and being the firm that understands the growth plans and those things. So anyway, I agree with Ed that over time there's going to be others entering this.

Fantastic. Thank you so much.

Our next question comes from R.J. Milligan with Baird. Your line is now open.

Hey, good morning. Just a question on the reloaded captive pipeline. Obviously, you guys don't have control in terms of the timing with those assets like you did with the call option properties. But curious if you could give some color on, you know, if you did have that optionality when you would like to bring those assets on and maybe what you think the timing looks like based on your conversations with El Dorado.

Yeah, again, I'll start and John will add. R.J., we obviously are going to generate tremendous rent growth in 2020 by virtue of, you know, the closing of Cincinnati, the closing of century and eventually the closing of the El Dorado transaction, which will probably also generate 2021 AFL growth based on the timing of a of a mid-year close. So to be honest with you, the pipeline, if the pipeline starts in 2021, 2022, that's perfect in terms of growth cadence. And yet we will be very responsive if El Dorado wishes to proceed on any of these opportunities at an earlier date. They're fundamentally great opportunities. We want to be a great partner. If they're ready, we're ready. John, you want to add?

No, I think you described it well. That's how we thought about negotiating is having multiple opportunities in the future and not just one. So whether it's when they want to execute in Indianapolis or on the strip or in Baltimore or other opportunities, you can see that our quote unquote embedded pipeline opportunities are are multiple and will allow us to again have that metronomic growth that historically has not been seen in the gaming space. But I think you're seeing it in our two years of just continuing to knock out growth and acquisitions for our shareholders.

You know, R.J., previously we had a growth pipeline that that lasted until 2022, given the original call agreements. And we use those call properties to effectively extend our growth pipeline to what we believe is probably around 20, 25, especially if you then incorporate the put call we already possessed on the Las Vegas, the Forum Convention Center, which opens next spring by hosting the NFL draft. So, again, we've got we've got a pipeline now that visibly goes to about 20, 25 and includes hundreds of millions of dollars of incremental rent. And I don't think there's many other American reach out there with that kind of pipeline.

That's helpful. Thanks. My second question is maybe you could comment on the board strategy in terms of the dividend just in terms of expectations for growth going forward. Can we expect it to move in line with the AFO growth slightly lower as you look to maybe retain some free cash flow? Or is there any taxable issues where it might actually increase more than earnings growth?

Yeah, I did. David. Good question. As you saw last year, we announced a dividend increase in Q3. I think one of the things that we want to set this company up to be ultimately be a dividend aristocrat. So you're in and you're out consistent dividend announcement in terms of timing and ultimately dividend growth. We discussed the dividend with the board on a quarterly basis. So any future increase or bump is subject to board approval. But we've always targeted an AFO payout ratio in the mid 75 percent area. That's as we talked about with you to give us that kind of internal self-funding. So I think you'll see the dividend in and around that payout ratio and start to implement a consistent annual sequencing of increasing that dividend on an annual basis and not in line just with the announcement of acquisitions. But again, to keep us a year and year consistent timing for our increase.

OK, that's helpful. And then last question, just sort of a modeling question. David, can you talk about or quantify the impact you're assuming the AFO from the forward or the dilution of the forward in the back half of the year?

Yeah, if you layer in the 50 million shares, you know, starting January 28th and take that out to whatever that is, 183, 182 days, that gives you about 435 million weighted weighted average share, kind of about 435 million. You see our release or about 438 million. So there's a three million share impact from the forward. And you expect that

to continue through the end of the year? That's right. Yes. Great. Thanks, guys.

Thank you, Andre.

Our next question comes from Delia White with Evercore ISI. Your line is now open.

Good morning. Can you comment on how the investor education initiatives are progressing? Do you guys think we're any closer to closing the gap between gaming and net lease rates? Or do you think that it may take a downturn for this to actually play out?

Yeah, it's a great question, Delia. We think that all three companies, MDP, GLPI, and ourselves, have done a very good job of showing the degree to which on a backtesting basis the gaming rents would have been well covered even during the great financial crisis. So we have a lot of faith that a garden variety recession, if you will, should absolutely have no harmful impacts to our cash flows or to those of our colleagues at MDP and GLPI. So we don't think that that is in and of itself a necessity. We think that there is a growing awareness, again, of the quality of the real estate and thus what should be the ultimate valuation of our sector. It takes time. Every cap rate compression story that's ever played out takes time. And frankly, the entrance of new bidders is a validating step that could be a key element in that re-rating. But at the end of the day, what we most have faith in is the fundamental intrinsic quality of our real estate and its ability to produce sustained free cash flow for our investors cycle in, cycle out. That's the ultimate base case comfort that everyone should have. But above and beyond that, there is this opportunity for our real estate to be revalued accordingly.

Thank you. That's helpful. And I guess on a similar note, can you provide any detail on how you think about tenant quality? What factors are most important? Are there any red flags when a new tenant is under consideration?

Yeah, I think the two fundamental elements are their operating strengths. Do they operate well? Do they know their customers? Do they have a strong, enduring relationship with the end user who is the ultimate determinant of the value of the property? And then do they have a good, strong balance sheet that's going to enable them to weather every cycle, credit and economic. And so far, needless to say, we're very happy with the tenant roster we have. And we will continue to use those two key criteria, operating strength and balance sheet to evaluate any other tenant we'll do business with.

Great. Thank you.

Our next question comes from Bradford Talinka with Morgan Stanley. Your line is now open.

Hey, good morning. Brad on for Thomas Allen. Hey, Brad. I just wanted to see if you could help us think about the balance sheet -a-vis the put call options that are out there. I know in the past you've talked about some long-term leverage targets, but do you plan to keep extra capacity in there in case you had a speed bump in the economy and maybe there could be a put rather than a call? Thank you.

Bradford, it's a good question because obviously part of the El Dorado overall strategy is de-levering, and I think Tom and Brad have been pretty vocal that the put could be a potential mechanism for El Dorado to deliver their balance sheet. So part of the way we think about it is we are, you know, once we settle the forward, we'll have $11 billion of equity market cap and be somewhere in the 16, 17 billion total enterprise value company. We increased our line of credit this year to a billion. You'll probably see that increase over time as well. So as we approach the period between 2021 and 2024 when that asset could be potentially put to us, we feel we'll have sufficient liquidity on our balance sheet or access to liquidity to be able to execute that put if El Dorado doesn't do that during that time period.

You know, I would just add to that, Brad, that when the day comes that all the puts or calls have been exercised, I would say as a general management principle, we will still want to have that capacity to take advantage of opportunity. You know, as Warren Buffett says, you know, you want to be fearful when everybody else is greedy and greedy when everybody else is fearful. So we always want the REIT to be in a position to be opportunistic when others may not have the capacity to be opportunistic.

Thank you. That was extremely helpful.

There are no further questions in queue at this time. I'll turn the call back over to Ed Petonia for closing remarks.

Thank you, operator. Thank you to everybody who's been on the call. To sum up, the shortest VG's history has been Q2 2019 was an inflection point in our brief history. We announced new partnerships with great new tenants, hard rock and century. We entered into a transaction to help facilitate the transformation of our largest tenant, Caesar's. We further fortified our balance sheet with the largest primary re follow on in history. We struck restocked our growth pipeline such that through embedded growth, we could potentially add hundreds of millions of dollars of new rent to our rent roll over the next five to seven years. None of this would have happened without our shareholders for whom we are honored to work for whom will stay relentlessly focused on long term value creation. Thanks again to all of you for joining us today.

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