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VICI Properties Inc.
5/1/2020
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VG Properties First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded today, May 1, 2020. I will now turn the call over to Samantha Gallagher, General Counsel with VG Properties. Please go ahead.
Thank you, operator, and good morning. Everyone should have access to the company's First Quarter 2020 earnings release and supplemental information. The release and supplemental information can be found in the Investor section of the VG Properties website at .vgproperties.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, 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 filings for a more detailed discussion of the risks that could impact future operating results and financial conditions. During the call, we will discuss non-GAP 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 GAP. A reconciliation of these measures to the most directly comparable GAP measure is available in our first quarter 2020 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. Here is what is foremost at this time for us, and that is that we hope that all our stakeholders are weathering this crisis as best as can be hoped. Our hearts go out to any who have been stricken by this virus and to the hundreds of thousands of US gaming industry employees who have been furloughed for the past few weeks. To those stricken, we wish a speedy recovery, and to those who have been furloughed, we wish for re-openings that come soon and come safely. We held our last earnings call on Thursday, February 20th, and in my opening remarks, I focused on the ways in which Vichy's relationships have fostered the building and bettering of our REIT. I talked on that call about our relationships with gaming operators and asset controllers, our creditors, our own people, and of course you, our stockholders. Today, about two months after our last earnings call, I want to talk about another critical Vichy relationship, and that is our relationship to reality. The essence of our relationship to reality is this, we don't deny reality. We don't fight reality. We manage our business so that we make the best we can of reality. Reality has changed a lot since our last earnings call to the point where reality can feel sort of unreal. Here's what we know with real certainty. 28 of 28 of our assets are closed. Here's what we do not know with any certainty. When our assets will all reopen and what the recovery pace of our tenants' businesses will be. There are many different scenarios for when our assets could reopen and many different scenarios for what the recovery pace of the American regional and Las Vegas gaming could be. We are modeling all those scenarios and digging deep into what the implications of each scenario could be for Vichy and for our tenants. But it's too early to commit to any strategy that only works if a certain scenario prevails because we don't know which scenario will prevail. We are working and will continue to work day by day, week by week, month by month with our tenants to determine how we best mutually navigate this crisis which may ultimately mean supporting our tenants during the short term in ways we believe will benefit us over the long term. But there is one strategy we have committed to and have in fact been committed to since day one at Vichy and that's to be prepared for heavy weather and scenarios that heavy weather may bring. The one strategy that works for most varieties of heavy weather is a liquidity focused strategy. A strategy that centers on already possessing and having ready access to cash is sufficient to meet the company's fundamental financial obligations for a prolonged period of heavy weather. Our cash position is supported by the way we run our business. Low GNA, high margins, high flow through of revenue growth to profit growth, strong cash retention driven by a payout ratio at the lower end of triple net reach standards. As our CFO David Kieske will make clear later in this call, Vichy's liquidity position today is a position we will work to preserve every day going forward. I've talked about what we know and what we don't know, the outlook for reopening and recovery. But let me close out these opening remarks by turning to what we strongly believe. We believe we own high quality, well located real estate that is and moreover will remain mission critical to our tenants. We believe that our tenants are in a business, gaming, that has proven its deep and enduring consumer appeal over decades. And through February 2020, American casino traffic, revenue and profit were at their highest levels in recent years. American gaming is a consumer sector that did not come into the COVID-19 crisis with pre-existing conditions. And while we don't know what the pace of gaming recovery will be -COVID-19, we believe that there will come a time in the future when consumer demand for the gaming experience will return to prior levels. All of this is to say that because of the long-term durability of gaming as a consumer experience, we believe strongly in the enduring value of gaming real estate. Vichy's owners, you, our stockholders, own this fundamentally valuable real estate. And we believe strongly that the value of your real estate will endure long past the passing of this crisis. With that, I will turn the call over to John Payne, our president and chief operating officer. John.
Thanks, Ed. Good morning, everyone. To start, the first quarter of 2020 remained productive for Vichy. On January 24th, we closed on the acquisition of Jack Cleveland Casino and Jack Thistle Down Racino in a sale-leaseback transaction with Jack Entertainment. We paid a total of $843 million and added $65.9 million of annual rent to our portfolio through a master lease, which represents an attractive .8% cap rate for urban real estate in Ohio. Just last week, on April 24th, we and our tenant, Caesars, announced the disposition of Bally's Atlantic City for total proceeds of $25 million. Not only will we receive approximately $19 million of the gross proceeds from the sale, but we will retain ownership of the Wild Wild West Casino area in Sportsbook, which will be folded into our Caesars asset. And importantly, there will be no change to the existing annual rent under the master lease with Caesars. This transaction helps balance our geographic diversification as we work to complete the acquisition of Hera's Atlantic City, and it's just another example of how Vichy works constructively with our tenants, even in this current environment. Turning to our tenants and the outlook of the gaming industry, unlike many other REITs who have hundreds of tenants, we currently benefit from only having five tenants, and we continue to have active dialogue with each of our tenants during this unprecedented time. We collected 100% of our rent in April, and with respect to the outlook for May, we believe all rent will be received this month. Many of you have asked about our diversification strategy on prior calls, specifically as it relates to investments outside of gaming. We have been very thorough in our evaluation of other sectors and have not made an investment to date by design. We believe this measured, diligent approach has benefited our investors given the current environment. While we'll continue to evaluate the investment characteristics and overall attractiveness of other sectors, we will remain intensely focused on gaming as we believe at the right time, gaming will yield opportunities for Vichy to continue to grow accretively. In addition to our tenants, I am spending time with other casino operators to best understand the potential reopening timelines across the industry. As Ed mentioned, every commercial casino property across the United States remains closed, and at this time, we're not yet aware of a definitive timeline for reopening. As many of you know, in normal times, the gaming industry operates 24 hours a day, seven days a week, 52 weeks a year, and operators have extensive experience developing, communicating, and executing detailed operational plans. This energy, expertise, and rigor will be key to reopening safely, successfully, and profitably. We are firm believers in the resilient and enduring nature of the gaming industry. The gaming industry has an extremely loyal customer base and has proven its resilience through challenges in prior economic cycles. As Ed noted, gaming did not suffer from any preexisting conditions heading into this pandemic. In fact, January and February of this year were among the best months many properties have experienced in decades, and we believe customers are eager to return to our facilities, particularly at the local level, upon reopening. While we do not know exactly what tomorrow brings, we believe that the importance of our assets will only increase in the months and years ahead, given the mission-critical nature of the asset to the operators, the revenues collected by the states from gaming tax, and the total jobs the casinos create in their respective communities. We retain a strong liquidity position, as David will discuss, and we stand ready to support our tenants to the extent absolutely necessary in ways that create value for Vichy over the long term. And lastly, with respect to the El Dorado transaction, El Dorado stated in their press release last Friday morning that they continue to remain intensely focused on closing the transaction with Caesars. We stand ready to close on our portion of the overall transaction, as our financing is complete, which David will discuss. Now I'll turn the call over to David, who will discuss our financial results and balance sheet.
Thanks, John. Before I discuss our financial results and balance sheet, let me take a moment to express my sincere gratitude to our accounting, asset management, finance, and legal teams for all their efforts and relentless focus closing the quarter remotely during this pandemic, truly a remarkable effort. I'd like to point out that we added an additional schedule to the back of our earnings release, which breaks down our cash revenue by lease and the corresponding non-cash adjustments in order to tie to gap revenue as presented on the face of our income statement. We also disclose this breakdown, as well as other detailed financial information in our quarterly financial supplement, which is located in the investors section of our website under menu heading, financials. For the quarter, total gap revenues in Q120 increased .2% over Q119 to 255 million, while total cash revenue in Q120 was 257.6 million, an increase of .8% over Q12019. These increases were the result of adding 44.1 million of rent during the quarter from the Greek town, Hard Rock, Cincinnati, and the Century Acquisitions, which closed in 2019, and the Jack Cleveland Thistle Down acquisition and related loan, which closed on January 24th, 2020. AFFO was 180 million, or 38 cents, per diluted share for the quarter. Our GNA was seven million for the quarter, and as a percentage of total revenues, was .8% for the quarter, which is in line with our full year projections and represents one of the lowest ratios in the triple net sector. Our results once again highlight our highly efficient triple net model, as flow through of cash revenue to adjusted EBITDA was nearly 100%. Beginning January 1st, 2020, we adopted CECIL, a new accounting standard, which required us to estimate and record a non-cash provision or allowance for future credit losses relating to all existing and any future investments in direct financing and sales type leases and similar assets. CECIL is applicable to us as we account for our investments as finance leases, which are subject to the new accounting standard, as opposed to operating leases like our gaming peers, which are scoped out of the standard. We have historically determined that our leases effectively have 35 year durations, given the mission criticality of the assets to our tenants. This lease duration and other factors lead to our leases being classified as finance leases for accounting purposes. The CECIL allowance is derived from estimated probabilities of lease default and any resulting losses over the full life of the leases, inclusive of all extension options. The impact of the COVID-19 pandemic has caused the allowance to increase in the first quarter of 2020 to reflect the current economic environment. This resulting non-cash allowance is recorded through our statement of operations, impacting net income and FFO, but is excluded from the calculation of AFFO due to its non-cash nature. In the first quarter, the non-cash allowance related to CECIL was 149.5 million drag on net income and a 32 cent drag on net income per share. Like to again make the point that this is a non-cash allowance, and as such, there is no impact to AFFO and AFFO per share. Moving on to the balance sheet and capital markets activities. On January 24th, 2020, we amended our credit agreement, which reduced the interest rate on our term loan fee from LIBOR plus 2% to LIBOR plus 175, with a LIBOR floor of 0%. On February 5th, 2020, we closed on a $2.5 billion unsecured notes offering comprised of 750 million of five-year notes at 3.5%, 750 million of seven-year notes at 3.75%, and a billion of .5-year notes at 4.125%. We placed two billion of the net proceeds into escrow pending the consummation of the El Dorado transaction, which amount is subject to a special mandatory redemption if the El Dorado transaction does not close. The remaining 500 million of the proceeds were used to retire the 8% second lien notes, which were redeemed on February 20th. On February 7th, we sold 7.5 million common shares under our -the-market equity program for net proceeds of 200 million. Our total outstanding debt at quarter end was 6.9 billion, inclusive of the 2 billion of unsecured notes currently held in escrow, with a weighted average interest rate of 4.19%. The weighted average maturity of our debt is approximately 6.9 years, and we have no debt maturing until 2024. As of March 31st, our net debt to LTM EBITDA was approximately five times in our stated range and focus of maintaining net leverage between five and five and a half times. This includes the impact of the restricted cash that sits in escrow. We currently have approximately 1.3 billion in liquidity comprised of approximately 310 million in cash on hand and 1 billion of availability under our revolving credit facility, which is undrawn. In addition, the company has access to approximately 1.3 billion in proceeds from the settlement of the 65 million shares that are subject to the forward sale agreements entered into in June of 2019. Between the proceeds from the equity forward agreements and the 2 billion of unsecured notes in escrow, we have 3.2 billion of capital earmarks for the closing of the El Dorado transaction. As noted in the press release we put out on April 16th, 2020, given the economic uncertainty and rapidly evolving circumstances related to the COVID-19 pandemic, together with the implementation of the new Cecil accounting standard, which significantly impacted net income, we withdrew our previously issued 2020 guidance and are not providing an updated outlook at this time. As many of you know, our guidance does not include acquisitions that have been announced but not yet closed. We believe this approach to guidance is prudent and responsible, though it has typically resulted in a material difference between the range we provide and consensus estimates, which do include pending acquisitions. Accordingly, we will evaluate the overall structure and usefulness of guidance going forward. Finally, as relates to the dividend, during the first quarter we paid a dividend of 29 and three-quarter cents based on the annualized dividend of $1.19 per share. Our AFFO payout ratio for the first quarter was 78%, slightly above our long-range target of 75% as a result of the June 2019 equity offering. With that, operator, please open the line for questions.
At this time, if anybody has a question, please press star one on your telephone keypad. Again, that would be star one on your telephone keypad. Your first question will come from Spendice Rose from Citi. Your line is open.
Hi, good morning. I wanted to ask you about the current situation and I wanted to ask you about some of the language in your more recent filings where you, in the context of your leases, you talk about ongoing dialogue with your tenants. So I'm assuming that rent deferrals or concessions are kind of not on the table at this point, but could you talk about some of the things that you are considering or what you might need to work with them on to help them through this time? And then my second question, you talked about liquidity a little bit, and is there a point where you would consider paying a portion or all of your dividend in stock or combination of stock and cash?
Yeah, thanks, Meads. Good to hear from you. John, why don't you take the first part of the question regarding how we approach tenant discussions and then David can address the dividend funding question. John?
Yes, Meads, good morning. As I said in my opening remarks, one of the advantages we do have, we have five tenants and not hundreds of tenants. So as you can imagine, we are actively engaged in discussions with our tenants, not only about our leases and potential modifications, but really about their business, what they're seeing, how they think they're gonna ramp. And we've had a variety of apps from our tenants based on a variety of potential scenarios as it relates to the openings and timelines and ramps. And currently right now, as you know, you follow the space, there's not real clarity about exactly when these assets are gonna open. And then there's a variety of models that we run on how they're going to ramp. So as you can imagine, the tenants are beginning to ask. Some of the ask has included partial rent or relief or deferral of rent, but there are other temporary lease modifications like capex spend that could help our tenants preserve cash. So we're looking at this holistically, it is important to realize that we think that value needs to be traded for value. And we do think that this is a temporary problem. So temporary problems need temporary solutions. And so that's how our discussions continue to go. They've been productive and hopefully we'll continue to have greater visibility in the next day or in weeks of when the assets will open. And then we'll get a better idea of how the assets will ultimately ramp. All right, I'll turn it back to you.
Yeah, David, you wanna address the dividend funding question?
Yeah, thanks, mates, hope you're well. Look, as most people know, as you know, we set the payout ratio very low from day one. We've always had a targeted payout ratio of around 75%. Obviously we're a little bit above that given the equity offering from last June. But part of the reason we set the payout ratio low is to be able to weather all storms and to maintain the dividend. And we're obviously in a hell of a storm right now. And so we're relentlessly focused on maintaining that dividend. And as we work with our tenants, we feel confident that we will be able to maintain that dividend as we sit here today. We have the liquidity to maintain that dividend. I think, Smete, part of your question was, would we consider paying some of that in stock? If needed, we might evaluate that option. That would not be our first choice. But if things continue on and we don't know what tomorrow brings, that's something we might evaluate. But at this time, as we sit here today, we're very focused on maintaining that cash dividend.
Great, thank you.
Your next question will come from Carlos Santarelli from Deutsche Bank. Your line is open.
Hey everybody, good morning. Guys, obviously you, you know, with the deals that you did, both the equity and some of the capital markets transactions in preparation for the acquisition that you guys have closed on and plan to close on, you've left yourself in a very nice liquidity position. As you think about the balance sheet and going through these upcoming transactions, whenever it is that they close, you'll still, it seems, have a pretty good buffer of cash. And I guess my question is, is there anything that you guys could consider in terms of maybe some creativity around how you put that cash to work in the short term, whether that is cash needs to potentially support some of your tenants or cash use to go out and kind of look to be a little bit more aggressive on the M&A front as one could surmise that there will be other assets out there that are in need of some form of capital markets help or liquidity.
Yeah, Carlo, I'll start on that. And good to hear from you, Carlo. I hope you're well. I just wanna start by actually recognizing David Kieske for his leadership on that, the bond financing we did in late January. I remember talking to David in early January going, really, you really wanna go that soon? And he said, yeah, I wanna go that soon. And God bless us that we did when we did. You may have seen that Netflix, which is obviously a pretty good credit these days, went out to raise money last week and they still couldn't reach our benchmark on our five year. So anyway, again, thanks to David for that. In terms of how we think about use of our cash, Carlo, the general approach we're taking right now, and it's an approach we really dug into with our board yesterday on our Q1 board meeting, is an approach that we define as situational readiness. At this point, given the uncertainty of reopening, given more over the uncertainty of ramp back, we have to be ready, strategically and economically for the broadest possible array of situations or scenarios. And that array ranges from the highly, highly defensive on one end to the highly offensive on the other. And at this time, we really can't pre-commit to being highly, highly defensive or highly offensive because it's, again, too early to tell. But if things start to show green shoots, if we see the consumer coming back, if we see the assets reopening and producing good results, you are absolutely right. Our liquidity position puts us in a position where we can make the jump into offense, potentially before others. Because again, thanks to David's leadership on our balance sheet, we've got a totally undrawn revolver and we have that ample cash that you referred to. But at this point, what we really like about our position is it makes us situationally ready for the broadest array of situations from, again, the extremely defensive to the highly offensive.
That's awesome. Thank you very much,
Ed. Thank you, Trello.
Next question will come from Rich Hightower from Evercore. Your line is open.
Hey, good morning, guys. Trust everybody's doing well?
Yes, thanks, Rich.
I guess, Ed, just to follow up, go ahead,
sorry. Oh, all
yours. Okay, just to follow up, I guess, on that last question as we think about longer term, maybe with respect to the external growth prospects for this sector, to the extent that you are having those sorts of discussions right now with potential sellers, depending on their situation, do you detect an extra sensitivity around maybe layering on the added fixed costs of a lease to an operator's capital structure? Do you think more equitized capital structures will be the norm going forward? And then maybe as we think about how covered ratios and everything along those lines will change just in the context of greater uncertainty. Obviously, no one runs a business with a zero revenue outlook, but just that added level of conservatism as we think about the potential rent revenue that could be out there, does that diminish kind of in light of what's happened?
Yeah, it's a really good question, Rich, and I think the answer could be very complex and fairly variable based upon the situations of each operator. I think one point you make is absolutely right. I think you could see for both operators and REITs a more conservative approach to balance sheet management and cashflow. I think in the hedge fund activist lexicon, the term lazy balance sheet is not gonna get used for a while here. I think companies will generally get rewarded for being conservative. I do think where gaming REITs could have appeal to gaming operators who still own a critical amount of property is that we can be another form of capital. I think you can presume their equity is gonna be quite expensive. Their debt has gotten more expensive to the extent that we can provide another form of permanent capital at affordable prices. That could be appealing, especially when combined with the fact that our capital does not bring with it any kind of bullet maturity. And I think anybody right now who is facing any kind of bullet maturity is in probably a pretty high state of nausea. And we are a form of capital that does not bring that kind of anxiety with it.
Yeah, I think that makes a lot of sense. And then just a quick sort of model in question. I know you've got some time before the coverage test on the Caesar's leases and certain other leases before those tests kick in, but I think on the two 10 leases, those come up in year two. Do you care to sort of ballpark where we are maybe with respect to getting those escalators by that time? John and David?
Yeah, Rich, it's David. Hope you're well. The two leases you're referring to are obviously Margaritaville and Greectown. Margaritaville reset earlier this year, one 120 and we got that escalator. We're coming up on year two of Greectown. We closed that in May of last year. So June one of this year will be the reset. Or the, yeah, the reset, excuse me. And we're in discussions with Penn around that. Unlikely that reset happens just given the performance of the asset.
Okay, thanks, David, I appreciate that.
The next question will come from Steven Grambling from Goldman Sachs. Your line is open.
Thanks for taking the question. I guess my first is for John, I guess given your experience as an operator, how would you generally think through cash needs to reopen some of these properties and how cash generation or breakevens might change in an environment where there's just lower occupancies due to social distancing?
Well, to remind you, I'm a recovering operator. So you can only take what I say with that I've been there. Look, I think that I've got great confidence in these operators. You know, it reminds me of the time Churchill said, never let a good crisis go to waste. And what I mean by that is this is something that no one would ever wish upon an industry or a country. But these operators have now had a few weeks without operating business to think about how they reopen them in new ways. And I think what you're gonna see is obviously there's going to be restrictions on, whether that's mask or social distancing restrictions, but they're also as those pass over time, different ways of how the companies think about operating the business. So to answer your question, I think that will in the short term when revenues aren't gonna be the way they were in 2019, you're gonna see some margin differences in those performances. But I think over a long period of time, you're gonna see those businesses come back and the teams are laser focused, the operating teams are preserving cash, ensuring they got the right amount of cash in the cage, not too much, not too little. And we'll just have to see again, how these businesses ultimately ramp. And then the follow up, go ahead.
Steven, if I could just add a little more color to that as a fellow recovering operator in this case, skiing golf in my case. When you're an operator, your two main inventory items are the utilization of space and the utilization of time. The social distancing strategies that our operators undertake, as John has spoken of, they will obviously reduce space utilization at one time. But we were talking to one of our operators the other day and it's an example of how energetically and rigorously gaming operators think about the management of their two key inventory items, space and time, that they're taking a very innovative approach to how they manage the utilization of time and have identified segments in the day where specific customer demographics will be given a specific invitation to come at a specific time of day. And thus, while the overall space utilization may be somewhat lower, you could potentially get higher utilization of day parts than you had previously because of the customer's willingness to adapt their behavior in order to safely visit and enjoy the casinos. And again, I take a lot of encouragement, we're not solace, but I get a lot of encouragement from how our operators are thinking about how they're going to manage their businesses in that respect. And we're seeing the example close to home, as you know, within our TRS, we own four golf courses, two of which are going to reopen tomorrow. And in Southern Indiana, our tee sheet is full for the day and we're selling tee times based on social distance practices right up until the four o'clock time slot. Many of you who've ever been in golf course operations know it's usually very tough to book the four o'clock in the afternoon time slot. And it's an example of how I think the American consumer will adapt their behavior in order to enjoy what they really want to enjoy.
Great, thanks. And then not to beat a dead horse, but with the stock trading where it is, it seems like the market or investors are expecting some kind of relatively permanent rent reduction, I guess, are you considering or how are you thinking about permanent amendments such as rent coverage floors or just an outright change in leases at this point? David?
Yeah, Stephen, hope you're well. And to use a business school answer, it all depends, right? It's tenant by tenant specifics and what the individual circumstances are. I think you heard John say, could it be a form of temporary liquidity to bridge them through a period of back to Carlos or back to the question around what's cage cash and what are the operating needs for the next couple of months? We do benefit from the fact that we do have liquidity. So could we buy additional assets from our tenants? Could we provide some form of true liquidity versus trading an asset for rent, deferred rent? And I guess it comes down to, as John said, making sure that we trade value for value. The unique aspect about this sector is that these are mission critical assets for these tenants. And unlike the broader triple net sector where a lot of tenants are just walking and not paying, not gonna pay rent and may not ever come back, given the licenses, given the importance of the assets to the tenants, to the employees, to the states and the tax revenues they generate, the tenants need to maintain these boxes and need to stay in these boxes. So we will find ways to help support our tenants if needed, but we're still in the early stages here as we sit here May 1st and the outlook for opening is still a little bit unclear, but there's some green shoots out there.
Great, thanks so much.
Your next question will come from Todd Stender from Wells Fargo. Your line is open.
Thanks. Just on that theme of cash in the cage, obviously visibility when states will reopen remains unclear, but can you speak to what states, what else they can do to lower the barrier to reentry, modify or loosen regulations? I've heard about cash in the cage, but anything else that you can think of?
Karen? Yeah, I mean, I think you're thinking about this correctly. Again, we are not the operator, our tenants are, but we stay in contact and I think you're thinking about it right and that these operators are going to these states and saying, look, this is unprecedented time, we don't know yet exactly the demand from our consumers when we first open up, are there some things here that can help our liquidity position that ultimately over the next month, two months, six months year, we'll get back to quote unquote normal operations. So I don't have the specifics, cash is obviously one that's been, but there are other regulations that have put in place over time. Remember, many of these regulations in these states were created 20, 25 years ago and made sense. I do think that there will probably be a push over time to continue to find new ways to make it more efficient for the property. So I don't have any specifics, but I'll tell you, that is what the operators are doing, are pushing the states to find ways that they can have some temporary solutions to this unique situation.
Great, that's helpful, thank you.
Thank you, Todd. Next question will come from Thomas Allen from Morgan Stanley, your line is open.
Morning, can you just talk a little bit more about the Ballet's Atlantic City transaction and kind of how you got to the results that you did?
Thank you, yeah, good to hear from you, Thomas, John?
Yeah, I mean, this is a discussion, I mean, we announced it, as I said, on April 24th. As we continue to look at that market, as you know, Thomas, we will be acquiring as part of the El Dorado deal, Harrah's Atlantic City. We saw this unique opportunity to kind of decrease our position there. We're at the same time, the Wild Wild West Casino and its sports book will be rolled into Caesar's. So not all of the real estate or the asset is being sold and it also was a negotiation that allowed our rent out of the non-CPLV lease to remain the same and we just saw this as a unique opportunity to make that transaction and for those reasons, thought it was good for us to do that.
I guess, do you have the expectation that your tenant's income will go down because of it and hence, you wanted to get some incremental cash to defer that or how did you get to the $19 million calculation?
David's splitting of the 20, go ahead, David.
John, either one.
Yeah, no, look, go ahead, David. No, go ahead. All right,
Thomas, it was, yeah, similar to the Reno transactions where we split the proceeds 75-25 with Caesar's that we announced at the end of, at the beginning of this year. Similar proceeds split, roughly 75% of the total consideration went to Vichy as landlord and Caesar's as operator.
Okay, thank you.
And your next question will come from John Masacoka from Lanner Berg. Well, then your line is open.
Good morning. Morning, John. I know we've kind of belabored this point a little bit but just given some of your commentary on prior questions, I mean, is it fair to categorize your view of negotiations with tenants that you would prefer some kind of asset for, you know, asset exchange or asset for liquidity exchange to the traditional deferral that maybe we're seeing more of in kind of the retail-oriented net lease space?
John? I think, yeah, I think that's the way you should think about it. I think it's important to understand also how we, for us, that it's May, it's May 1st today. The clarity on when the assets are gonna open is not great. Hopefully, in the next week or so, we'll get greater clarity. And then how these assets ultimately ramp is not real clear. I mean, you can see there's numerous scenarios run by every operator and by us. So it's important for us to continue to see how this ultimately is gonna play out. But your description is exactly how we've been thinking about it is that these are temporary issues. There needs to be temporary solutions. And those temporary solutions have to have value for value trade. And that's a quick way of our overview of our philosophy.
Very helpful. And then switching gears a little bit, as we kind of enter what might be a more challenged environment for kind of Las Vegas and the Las Vegas strip market, how does that change maybe philosophically the way you look at your rovers there? Does it maybe make it more attractive because you might be able to potentially get into it, a property at a lower basis or, you know, with a little more uncertainty, would you potentially think about not executing on those if the opportunities arose? Yeah, I'll
turn over to John Payne in a moment, John Masaka, but you know, I think our starting point would be that while Vegas may indeed, you know, recover somewhat more slowly than the region, over the long term, we have no, there is no flagging of our conviction that it is one of the world's great destinations. But John Payne, I'll turn it over to you for more color.
Yeah, I think, Ed, you started out the answer in the question perfectly. I mean, we are long term investors of real estate. As you all know, as David opened up by saying, we look at our leases over 35 years. You know, this pandemic has been just awful and unprecedented, but we do think that it is temporary. Now, whether temporary is months or temporary is a year or a year and a half, we'll have to wait and see how that ultimately plays out and I sure can't predict that. But it doesn't change our long term view of Las Vegas and our long term view of the very limited amount of assets that are on the strip in Las Vegas. So we still think that that is a community and a destination that over the long term will continue to perform and we'll continue to evaluate opportunities there, whether that's in the short term or in the long term. So I hope that gives you some visibility at how we're thinking about it.
No, I appreciate all the callers. That's it for me. Thank you guys very much. Thanks, John.
The next question will come from David Katz from Jeffreys. Your line is open.
Hi, good morning, everyone. You know, covered a lot of detail, but I wanted to just follow up on Cecil and I did get on a minute or two late, so apologies if you've touched on this, but just thinking and recognizing that it is non-cash and optical and what it represents, how could we think about what that will look like a quarter from now, two quarters from now, three quarters from now, on the assumption that we start to move down a road toward properties starting to open up, is this kind of the one big shot for it and what we see is incremental from here? Is that how we might expect that to look?
Yeah, David Katz, good to hear from you. I'll turn it over to David Kieske in just a moment, but let me give you my perspective as a non-accountant, my perspective as an asset manager. And when Cecil first came along, I will confess, I went, really, we gotta do that, why? But what I've come to appreciate about the Cecil practice, if you will, is that it is, I believe, a valuable management tool when it comes to being situationally ready. What Cecil requires us to do is, first of all, to look forward, which is always valuable in and of itself and as we look forward at the credit quality, credit condition and operating performance of our tenants, the forecasted performance of our tenants, it requires us to be honest and rigorous about what the various scenarios could be and it is a further tool in our toolkit to make us situationally ready for what may transpire in the coming period based on a reasonable and rigorous forecast. As to the volatility that Cecil could bring in coming quarters and years, I'll turn that over to David Kieske.
Great, thanks Ed. David Katz, yeah, as Ed said, Cecil reflects the deterioration, especially in Q1, in the broader economy and it's not managed in its expectation for any losses in the current portfolio. It is simply an accounting standard, it's a non-cash allowance. And if you look at, you know, note six, page 28 and 29 of our 10Q, we've put some good disclosure in there around how Cecil evolved over the first quarter. On -1-2020, we had to record an initial allowance. That was .88% of our total investment balance. That number on a normalized, normal economic environment should, to answer your question, David, should move around five, 10, maybe 15 basis points a quarter. Given COVID, given the downturn, it spiked up to about 100 basis points this quarter. So the model is all identifiable inputs, really around credit rating and the economic outlook of the economy. And so that's what drove the change. But once we get back to a normalized run rate, you're right, David, it should be much, it will be less volatile and stay within a little more of a stated range.
Okay, perfect, thank you, appreciate it.
Thanks,
David.
Your next question will come from Barry Jonas from SunTrust. Your line is open.
Hey, guys, good morning. I guess just at a high level, any color on how this crisis may change or say influence thoughts on how you structure deals in the future?
Yeah, I'll give you some first thoughts, Barry. Good to hear from you and hope you're well. You know, as I said in regard to what Rich Hightower asked about, you know, I do think, you know, this whole experience will cause all of us to expand the rigor with which we account for extreme scenarios of performance or operating condition. And so I think, you know, there will be a lot of focus, obviously, on tenant credit quality, as there always already was with us, and coverage, and various lease terms and conditions that give us and the tenant comfort that even in the most dire times, we can each, you know, mutually survive and ultimately thrive. John and David Kieschke, you wanna add anything to that?
No, I think you described it well. I think we'll, so I'd have nothing to add to that.
Great, and then I guess just a follow-up from me. Any color on golf operations? Just curious, any expectations on when that business could reopen and what the ramp could look like for that particular business? John?
Yeah, I'll take that. As Ed mentioned, we're opening two of our courses today and two of our courses tomorrow. And Navajas gave the go-ahead two days ago, so we've not had a lot of pre-selling there, and those will open tomorrow, our course in Mississippi and our course in Indiana open today. And as Ed mentioned, the T-sheets were quite full. So we'll continue to watch that. The operations, like we're seeing in other hospitality areas, are not full operations, meaning our clubhouses are not open, our food and beverage is not open. I think we'll have some really good visibility over the next six weeks as we're able to start marketing to consumers in our destination courses in Las Vegas. We'll obviously be more focused at the time on locals, and in some of these courses like Cascada, which I'm not currently a golfer, but I know from golfers, that's a bucket list course that we'll price at a fee to allow locals to come out and play. So we should see some good demand to start getting that business up and running. So to answer your specific question, I think we need a couple weeks to better understand how it's going to ramp, but the early results, at least what we're seeing in Indiana and Mississippi, are quite encouraging.
And what I would just add is that, while obviously the economic impact of this to VG is not all that material, I think the greater meaning for us, and perhaps for you as well, is the pent-up demand to get out of that goddamn house that so strongly exists in America right now. I mean, you're seeing it manifest itself on beaches. People just want to get out. I think that's a good way to look at it. And while we see data that measures public perceptions of safety and their willingness to go back out again, while we do see a high percentage of Americans rightly saying they're going to be careful in how they return to leaving home, there's a lot of people who really, really want to leave home.
Including me. All right,
thank you so
much.
Next question will come from Sean Kelly. From Bank of America, your line is open.
Hi, everyone. Good morning. I'm not sure who this question is best for, but I'm just kind of curious, as we think about the reopening plan from the operator perspective, just wondering if you guys have any thoughts about how, like, which properties reopen by the operators could impact sort of the difference in coverages between sort of four-wall properties and the broader corporate guarantee. So maybe just your broad view on sort of, how does the corporate guarantee help you in this type of landscape, and how could that fluctuate around the portfolio or impact operator decisions? Thanks.
Sure.
David, you want to take that?
Yeah, thanks, Sean. And as Yogi Berra once said, it's tough to make predictions, especially about the future. So, you know, this is where we take comfort in the master lease, and especially across the CESARS portfolio, which obviously has assets all across the country, Vegas and very, very good regional network. So we came into this, you know, north of three times on a corporate coverage, given the wholly-owned assets in the CESARS portfolio, primarily on the Vegas Strip. But that corporate coverage will come down, and nobody really knows what the ramp will be, or what EBITDA will be, but, you know, the corporate coverage is key to us. And obviously we have that with Century, Penn, and we have the individual leases with Penn, where we are, you know, with Perry Pursuit, with GLPI, that corporate coverage. And then Hard Rock is also a corporate coverage, but given the investment-grade nature of that tenant, we feel very, very comfortable with that. And we have a corporate coverage on a smaller entity, with Jack, very meaningful investment, where Dan Gilbert's one of the owners there. So we'll have to see. It's hard to predict. The coverages will come down, but we don't really, you know, we don't have a good sense, as John talked about, how this ultimately opens and ramps.
Thanks for entertaining that, David. And then my other question was just on the Jack portfolio, specifically, can you just remind us of what sort of the extra collateral or what is, you know, kind of, you know, what may be in that corporate guarantee beyond the, you know, the obvious operating properties? And that's it for me.
David or John?
Yeah, I can keep going there, Sean, and give another, entertain that one. Look, it's an entity called Rock Ohio Ventures, ROV. It owns the two casinos, Jack Cleveland and Jack Thistle. Jack Cleveland actually sits within the Higbee Building, which is part of ROV, Rock Ohio Ventures, as well as a garage next door, and then some additional land right in that area. So, and that's part of the reason we ultimately did that loan to Jack, because there's additional real estate collateral within that entity.
Thank you very much.
The next question will come from Daniel Adam from Namura. Your line is open.
Hey, guys, thanks for taking my questions, and I hope everyone's safe and well.
Thank you, Dan. Oh, same for you.
Yeah, all is well here, thanks. So, I was planning to ask a softball question, but because I'm so far down in the queue, I think I'll throw you guys a curveball. So, my first question relates to the pending El Dorado transaction. When you guys weigh the benefits of deal accretion with the risks associated with the pro-formal leverage and credit profile of the tenant, I guess my question is, does Vichy necessarily even want the deal to close? And I fully recognize, of course, that the decision is in the hands at this point of the regulators and totally out of your control, but just curious as to how you guys think about it.
Yeah, I'll start, Daniel. Yeah, we absolutely want it to close. We think it's the best outcome for Caesar's. We think it's the best outcome for Vichy. We think the resulting company will have the best footprint in American gaming, the biggest, broadest regional footprint, the best CRM system in American gaming, which will now also put horsepower into the El Dorado assets. It will feed the best hub in the hub and spoke network in American gaming. You've got a great management team that we think is gonna run the business very energetically and moreover is taking an approach to decision-making, accountability, and operational energy that's very much focused out at the property level, which we think is going to be absolutely key in a time like this, where as these gaming assets reopen and as they recover, each single asset is gonna have to be intensely in touch with its own marketplace to make the best decisions for that marketplace. And that's very much the strategy that Tom Regas talked about since day one for the new company, but it's even more critical now. So yeah, we're very excited. And when it comes to the leverage Tom Regas said all along that they will fiercely work to delever and de-risk that company. And we take a lot of confidence in that.
Okay, great. I appreciate that, Colorado. And a question for John. I think you alluded to it to some extent in the prepared remarks, but I'm just wondering if your experience from the current crisis has altered in any way the company's appetite for diversifying into non-gaming real estate asset classes. That's it for me. Thanks, guys.
John? Yeah, we've talked about this quite a bit. I mean, as I said in my opening remarks and I've said throughout any meetings we've had over the past couple of weeks is we've been very thorough in looking outside of gaming. And since even before the pandemic, we have elected not to make any investments into assets outside gaming. I think right now we're laser focused on our tenants and the gaming industry and we will remain that way. But I don't think, again, if we're talking short term, long term, I think in the long term, we'll continue to do our diligence on some areas that we have found interesting. But I wouldn't expect an investment outside of gaming in the relatively short term. Great, thanks guys. Thank you, Daniel.
Next question will come from John Decree from Union Gambling. Your line is open.
Hey everyone, good morning. Just one for me and it's maybe a little higher level or conceptual, but when we think about the trend evaluation here, which is obviously hard to discover given casinos are closed. And on the other side of this, I think when we talked in the past about the cap rate compression story here, the idea was buy as much real estate as you can before the market realizes how valuable it is. And when I compare you guys to other REITs in the space, we still haven't seen a change in dividend policy from you or rent concession yet. We're in a zero revenue environment from your tenants. So I'm kind of wondering how you think about the market's perception of your business as we kind of crossover onto the other side of this and your views. We've already saw some third party interest from the likes of Blackstone and the casino industry prior to the pandemic. I mean, do you think the sector becomes a lot higher profile on the other side of this given what you've done or been able to do just so far with your tenants and the resilience that you've kind of proven so far?
Yeah, it's a very good question, John, to agree. And it is a time will tell answer to your question. I can tell you what I hope. And I hope that the gaming as a consumer sector ends up coming through this whole crisis in relatively good shape versus other consumer discretionary sectors. I believe it will. I think if it does, and it will help prove out the resiliency of our gaming real estate model. You're certainly seeing across many other real estate asset classes. Obviously, rent payment performance, it certainly does not equal what you're seeing in our gaming REIT sector so far. And I think you're also seeing what happens when a real estate asset class comes into a situation with pre-existing conditions, as you're seeing again, in so many other especially retail focused asset classes. So I'm hopeful that it is gonna validate our model, that it will validate our values and potentially drive them higher in the future. But again, a time will tell. And it is so dependent, obviously, when we get reopened and how we recover.
Thanks Ed, I appreciate the thoughts.
Thank you, John.
Next question will come from Jay Hornreach from SMBC. The line is open.
Hi, thanks for taking the question. I was just curious, if you somehow knew for sure that the El Dorado merger would close, would you still have suspended guidance?
David, you can take that. Given that we don't guide on acquisitions anyway.
Yeah, Jay, as I mentioned in my remarks, our guidance, which was a buck 50 to a buck 54, didn't include the El Dorado deal. So it was not related. It was really around the noise that the CESA allowance was creating, given that the net income obviously is negative. FFOs are the same as our net income, given there's no reconciling items between the two line items in our business, but obviously an add back for FFOs. So that was really what drove it.
Got it, thanks for the clarity there. And then also as it relates to the critical nature of casinos, I'm wondering if you or your tenants have had any conversations with state government about potential tax relief to support the gaining recovery.
John, Payne?
Yeah, I can't tell you what every operator has done. We have not. But as I mentioned earlier in my remarks, if I was an operator, I know that some are, they're digging into all the things that affect their P&L. And I'm sure there have been some discussions about temporary relief or reduction of taxes. I have not seen any state give those, but it wouldn't be surprising if there were those discussions. I just don't know what the outcome and if there would be any change at this time. Obviously the states need those tax dollars because they're in a tough situation as well.
Okay, thanks very much, that's it for me.
Your next question will come from Spencer Allouay from Green Street Advisor, your line is open.
Good morning, Spencer. Hi, thank
you.
Hi, good morning. I just wanted to clarify something related to the CFO adjustments recorded in 1Q. I know you guys said that moving forward, the adjustments should be less volatile, but as it relates to the reduced value of investments and leases on the balance sheet, is this line item able to be revised upward if the environment improves or is this a permanent reduction?
David? Yep, Spencer, hope you're well. No, it will reverse over time. It's one of the main drivers is the credit ratings of our tenants and a couple of the tenants were downgraded during Q1. So as those, a lot of people know, agencies are quick to downgrade and it'll take some time for them to ultimately upgrade them, but as they do get upgraded and the economic environment improves, this will be reversed over time.
Okay, thanks. And then just maybe one more if I may. As it relates to your Vegas assets, when the closure mandates are ultimately uplifted, do you guys suspect that operators will open casinos all at once or do you think that we could perhaps see select openings on the strip just due to the unique nature of nearby competition, potentially lower traffic, and then obviously the higher cost of operating these assets?
Yeah, Spencer, I'll have John answer that question directly in a moment, but before he does, I just, I wanted to cite something you actually pointed out in a report you put out earlier this week, which is that California represents, I think it was about 23% of visitation to Las Vegas. And I just wanna say for the benefit of everybody, as we think about the recovery of Las Vegas, we need to appreciate the fact that Las Vegas, while it is an international destination, is a regional destination for the California gaming customer. And I would not underestimate the extent to which California traffic will bring a vitality back to Vegas that you would not have in a more isolated location. They are highly proximate to whatever it is, 30-odd million people. And I think that is going to be to the benefit of Las Vegas. As to the way in which managers may choose to open properties in sequence in Vegas, I'll turn that over to John.
Yeah, I believe for the operators that have multiple assets, I believe that in fact, MGM yesterday released earnings and I believe they talked about opening a few assets at a time. That wouldn't surprise me if that's the case in the Caesar's network. They've not come out, obviously, with the plan, because they don't know yet when they can open. But I think your thought process is right. As demand gets built up, supply will continue to open up and hopefully that'll be quicker than longer.
Okay, thank you. And yes, Ed, yeah, it's a great point on the California visitors. Really a good point we were trying to make that obviously Vegas could recover faster than what some may assume, just kind of based on those data points that some people might not be aware of. Anyway, thank you guys for the color. Thanks.
I have no further questions in queue. I turn the call back over to the presenters for closing remarks.
Thank you, operator. This is Ed. I hope all of you have found the call to be of value today and maybe even a little bit entertaining. One of our owners texted me during the call to let me know he was pretty sure this was the first earnings call that invoked both Winston Churchill and Yogi Berra. So again, we hope you found the time of value. And let me just close by reiterating our thanks to all of you for being on today's call. With each passing week, we will learn more about what our collective recovery from COVID-19 will look like as a society, as an economy and as a gaming industry. And as the coming periods unfold, we will share our learning with you as we can. And we insist that you always feel you can reach out to us whenever we can be of help to you. So now you have our best wishes for good health. Thank you very much.
Thank you, operator. No, you're welcome. Thank you, everyone. This will conclude today's conference call. You may now disconnect.