7/30/2020

speaker
Operator
Conference Call Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that today's conference is being recorded today, July 30, 2020. I would now like to turn the call over to Samantha Gallagher, General Counsel with VICI Properties.

speaker
Samantha Gallagher
General Counsel

Thank you, Operator, and good morning. Good morning. Everyone should have access to the company's second quarter 2020 earnings release and supplemental information. The release and supplemental information can be found in the investor section of the Vichy Properties website at www.vchyproperties.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, believe, expect, should, 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 filings for a more detailed discussion of the risks that could impact future operating results and financial conditions. During the call, we will discuss certain non-GAAP measures. which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our second quarter 2020 earnings release and our supplemental information. Posting the call today, we have Ed Pekoniak, 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.

speaker
Ed Pekoniak
Chief Executive Officer

Thank you, Samantha. Good morning, everyone, and thanks for joining us. Here's what remains foremost for us at this time. We continue to hope that all our stakeholders are weathering this COVID-19 crisis as best as can be. We held our last earnings call on Thursday, May 1st, and in my opening remarks, I focused on what, because of COVID-19, we did not know with any certainty at the time. We did not know when our assets would reopen, what the recovery pace of our tenants' businesses would be, when exactly our $3.2 billion transaction with Eldorado Caesars would close, Finally, when VT would be able to return to an offensive portfolio growth strategy. Here, today, July 30th, we now know four key facts. Number one, virtually all of our assets have reopened. Number two, our operators have seen strong operating recovery in our regional assets, and through the end of June, we're seeing improving results than our two Las Vegas assets. Number three, The Eldorado-Caesars merger closed on July 20th, and our $3.2 billion portion of that overall transaction will produce annual incremental rent of $253 million at a 7.8% cap rate while also replenishing VG's embedded growth pipeline. Number four, we returned to offense and continued our opportunistic growth on June 15th when we announced our intention to provide a $400 million mortgage loan on the brand-new Caesars Forum Convention Center and purchased 23 more acres of strip proximate land, giving us a total land assemblage of 50 strip proximate acres, giving Vichy the only large-scale opportunity to deepen the Las Vegas Strip at its center and to participate in the potential for long-term growth that this land represents. It all added up to another quarter that validated Vici's business model and generated market-leading growth. For second quarter 2020 and in July, Vici collected 100% of cash rent from all of our tenants, which very few American REITs were able to do in Q2. This contributed to Vici achieving 20.4% growth in adjusted EBITDA year over year. which we believe will be among the very highest EBITDA growth rate among all American REITs for the quarter. In a moment, John Payne will discuss our operators' performance and the benefits of the seizures merger in more depth, and David Kesey will give you details about our own financial performance. But let me take a moment to speak of the root causes of our Q2 2020 performance. We believe Vichy was able to continue collecting 100% of rent, deliver 20.4% EBITDA growth, and opportunistically go back on offense in Q2 2020 because fundamentally we have high-quality tenants. For any rent-collecting multi-tenanted REIT, the strength of the REIT's business model is the aggregated strength of its tenancy. business models. All of our tenants at this time are gaming operators, and during Q2, gaming operators generally, and our five gaming operators specifically, namely Caesars, Penn National, Hard Rock, Century Casinos, and Jack Entertainment, showed the strength, liquidity, durability, and agility of their business models. As most of you know, I've spent time and have experience in a number of leisure, recreational, and hospitality sectors, both as an operator and as a real estate investment manager. In coming to gaming real estate, as I did in 2017, I've come into a sector where the operators are, I strongly believe, the most dynamic and success-driven operators in global leisure and hospitality. Over the course of this COVID-19 crisis, Our five operators have shown just how skilled, energetic, decisive, and driven they are. Here's what they have shown over the last few months. Quick and effective action to shore up their liquidity. Quick and effective action to minimize costs and cash burn rates during the period of closure. Quick and effective action to be ready to reopen safely once given the green light. Finally, quick and effective action to restore revenue and EBITDA when many other leisure sectors haven't even reopened yet. What we're also seeing is that our operators' businesses are key factors to the health of their local economies and to their state and local treasuries. As long as our operators can operate safely, their states and cities want them open for everyone's benefit. At VG, we're sober, very sober, in fact, about the fact that the not over. We cannot rule out the resurgence of the virus could depress demand for or potentially lead to reclosures of casinos. But in what we've seen so far for our gaming tenants and for VG, this crisis may ultimately provide strong proof of the strength and quality of the gaming REIT business model, which is built in turn on the strength and quality of our tenants' businesses. To hear more about our tenants, I'll now turn the call over to our President and COO, John Payne. John?

speaker
John Payne
President and Chief Operating Officer

Thanks, Ed. Good morning, everyone. The second quarter of 2020 was another very productive quarter for Beeching. Over the past several months, we've worked jointly with our tenants, including Caesars, Century Casino, and Jack Entertainment, to provide limited short-term relief with respect to certain non-rent-related requirements under our leases. As we've said in the past, we'll work to provide short-term solutions for our partners as needed based on each individual operator's unique circumstances. Accordingly, during this quarter, we've announced agreements to modify certain near-term capital expenditure requirements for CSRS and Century. Additionally, As noted in more detail in our earnings press release, during the second quarter, we partnered with Jack Entertainment and agreed to fund a gaming expansion at Thistledown Racino, yielding more rent for Beachy, commencing in April 2022, at an attractive 10% cap rate, while also modifying our existing loan facility to provide certain temporary covenant reliefs and to add an additional five years to the initial lease term. as well as increasing the principal on the existing term loan and providing revolver facility to Jack. These agreements and short-term modifications help ensure that the operators we partner with are able to focus intently on reopening and operating their business through the current pandemic, while also protecting the integrity of our lease agreements and preserving long-term value for our stakeholders. As many of you have likely seen by now, the reopening of casino properties throughout the United States has been met with very robust consumer demand. Property across the regional landscapes have experienced healthy volumes, and in many cases, profitability is exceeding pre-COVID and prior year levels. We view this as a testament to resilience, durability, and longevity of the brick-and-mortar casino experience. While destination and fly-to markets may take longer to recover, we remain believers in markets such as Las Vegas, which has proven over value proposition over decades. As real estate investors, we think about investing in assets and markets over long periods of time and believe the geographic exposure we have engineered, with approximately 70% of rent coming from drive-to regional markets and the remaining 30% from the Las Vegas Strip, represents a good balance for Vici and our shareholders during this time. Over the past nearly three years since we started Vici, we have communicated our firm belief in the attractiveness of gaming as a real estate asset class. We believe the gaming industry, through early reopening results, is showcasing superiority to many other real estate sectors. While the gaming industry is unique and at times complex, We are fortunate as real estate investors to have decades of gaming experience within our management team, which greatly benefits us as we continue to navigate the pandemic and ultimately focus on investing for the long term and growing Vichy through accretive transactions. In terms of acquisitions and the outlook for growth, on June 15th, we announced a planned $400 million mortgage loan transaction with Caesars, which will be secured by the Caesars Forum Convention Center in Las Vegas. This structure allows Vici to benefit from $30.8 million of incremental annual income upon closing, while providing flexibility for the asset to ramp before ultimately converting to an opco-propco structure, accelerating our call option from 2027 to 2025. Simultaneous with the mortgage transaction, we announced the intended purchase of approximately 23 acres of land from Caesars at a very attractive valuation of $4.5 million per acre. This land sits adjacent to the center of gravity of the Las Vegas Strip, surrounded by assets that have proven their financial viability over decades, and combined with our existing 27 acres along the same corridor, gives us approximately 50 contiguous acres. Over time, we will seek to partner with third parties for the development of that land with the goal of continuing our market-leading growth well into the future. And finally, 10 days ago on July 20th, we completed our transformative transaction as part of the Eldorado-Caesars merger. We acquired Harrah's Atlantic City, Harrah's Laughlin, and Harrah's New Orleans, and modified our existing leases with Caesars for total consideration of $3.2 billion. This transaction adds $253 million of incremental annual rent for Vici, It strengthens the terms of our leases with Caesars and restocks our embedded growth pipeline through ropers on two Las Vegas strip assets, a put-call agreement on Harrah's Hoosier Park in Indiana Grand in Indianapolis, and a roper on Horseshoe, Baltimore. In addition to this robust and unmatched embedded pipeline of opportunities, we continue to maintain a very active dialogue with our operators across gaming and other sectors and believe our broad investment spectrum will continue to yield consistent, accretive growth for VG stockholders. Now, I'll turn the call over to David, who will discuss our financial results and balance sheet. David?

speaker
David Kieske
Chief Financial Officer

Thanks, John. I'll touch briefly on our financial results for the second quarter and then move to our balance sheet and liquidity. Before I discuss the quarter, let me just acknowledge and express my sincere gratitude to our team across accounting, asset management, finance, and legal services. for all their efforts closing the quarter remotely during this pandemic, while at the same time, we're closing a $3.2 billion transaction. We at Vici are lucky to have such a cohesive team. For the quarter, With year-over-year increases were the result of adding $44.4 million of rent during the quarter from the Greektown, Hard Rock, Cincinnati and Ascensory acquisitions which closed in 2019 and the Jack Cleveland Thistledown acquisition and related loan which closed on January 24th of 2020. AFFO was $176.3 million or $0.36 per diluted share for the quarter. Total AFFO increased 12.4% over Q2 2019. transaction. FFO for the quarter was also negatively impacted by approximately $23 million of negative interest expense carry related to the February bond offering for the Eldorado transaction being held in escrow for the entire quarter, and approximately $3 million less in interest income on a year-over-year basis due to the decline in interest rates. Our GNA was $7.5 million for the quarter, and as a percentage of total 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 99.2% for the quarter. As you may recall, beginning January 1, 2020, we adopted CECL, Current Estimated Credit Losses, a new accounting standard which requires us to estimate and CECL is applicable to VG as we account for our investments as finance leases, which are subject to the accounting standard, as opposed to operating leases like our gaming repairs, which are scoped out of the standard. In the second quarter, the non-cash allowance related to CECL was a reversal of $65.3 million from the allowance for Q1 2020, which drove a $0.13 increase in net income per share. I'd like to again make the point that this is a non-cash allowance, and as We believe that should be the primary metric used to evaluate our financial performance and our ability to pay dividends. Turning to our balance sheet and capital markets activities, on June 2nd, 2020, we settled in full the June 2019 forward sale agreements, realizing net proceeds of approximately $1.3 billion of cash onto our balance sheet. On June 19th, in connection with the announcement of the pending Caesars Forum Convention Center mortgage and acquisition of the approximately $23.8 forward sale agreement. The proceeds remain subject to settlement pursuant to the terms of the forward sale agreement. As Ed and John have mentioned, on July 20, 2020, we closed on our portion of the Eldorado Caesars transaction, adding $253 million of annual rent to our portfolio through the acquisition of three Harrah's assets and the acquisition of incremental rent from our Caesars Palace and Harrah's Las Vegas assets for total consideration of $3.2 billion in cash. of the June 2019 Ford sale agreements, as well as the $2 billion of proceeds from the February bond offering that were previously in escrow to fund the transaction. Following this, we have approximately $400 million of cash on hand. Our total debt outstanding at quarter end was $6.9 billion, with a weighted average interest rate of 4.18%. approximately $400 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 $630 million in net proceeds from the future settlement of the 29.9 million shares that are subject to the forward sale agreement entered into on June 19th. During the second quarter, we paid a dividend of 29.75 cents per share based on the annualized dividend of $1.19 per share. slightly above our long-term range of 75% as a result of the June 2019 equity offering. With that, operator, please open the line for questions.

speaker
Operator
Conference Call Operator

As a reminder, to ask a question, you will need to press Star 1 on your telephone. To withdraw your question, press the pound key. Hey, everybody. Thanks, guys, for your comments.

speaker
Anonymous Caller

Good to hear from you, and thanks for taking my questions. For starters, maybe this one's kind of best for John. As things have evolved coming out of, obviously, the pandemic, the closure period, et cetera, as you look ahead and drawing from kind of your deep industry knowledge and whatnot, I think it would be fair, or at least from my perspective, it would be fair to say that we do likely see some contraction of the go forward in terms of trends that we're seeing right now. In the event that that happens and we do start to see a little bit of the macroeconomic impact of the pandemic in kind of trends, do you believe in this new interest rate paradigm and where we are right now and kind of what we've seen in terms of debt issuances from some operators coming in meaningfully higher than what we'd seen previously spreads, that there will be a flow of kind of new opportunities as kind of the trading multiple versus the cost of capital dynamic is strong materially in favor of promoting more transaction activity?

speaker
John Payne
President and Chief Operating Officer

It's a very good question. You know, again, I think it's important to remember because we moved so fast that just back in April, the focus of these operators was really about getting open, right, and ensuring liquidity. We now are sitting here in July, and it's about staying open. And I think to your point, Carlos, you're asking about now are they starting to think strategically and are there going to be opportunities for us? You know, what I would tell you is from our perspective, and I think I've communicated this, not only have we been working with our five current tenants throughout this pandemic, I've stayed active with really almost every operator in the gaming industry understanding their position, how their business is doing, what they're seeing from their consumers, and letting them know due to our positioning that David and Ed have put us in with ample liquidity that should there be an opportunity for us to transact with them to help them grow their portfolio or provide liquidity or do a sale lease back that we're available and we'd like to talk to them. That doesn't really answer your question about predicting the future But what I would tell you, it's our job to make sure that if there are transactions, that at least we're in the mix and people understand that we're moving from, as Ed said earlier in his remarks, from being completely on the defensive to back, as we've shown over the past weeks, back on the offensive side of the ball a little bit here. But Ed and David should also weigh in on that question.

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, Carly, you have rightly identified the fact that for a lot of operators in gaming, as frankly across every leisure and hospitality sector, the cost of capital has gone up meaningfully in the last few months. Both the cost of debt capital, as you've cited, but also the cost of equity capital and And as I think you've heard us talk about before, we actually see the capital we provide through a sale-leaseback as, in fact, being another form of equity. It is permanent capital. The recipient of it does not have to pay us back. And the cost of the capital we give them is simply the rent they pay us. So if you look at rent as expressed as a cap rate, it is generally much lower than their cost of equity currently and probably for a while yet. And to your point, it is becoming competitive with their cost of debt. So based on that and also based on the fact that I think we're already starting to see operators, especially regional operators, who want to grow their store count, those who do want to grow their store count are very focused on partnering with REITs in order to win the bid because it will otherwise be very hard for an operator who wants to grow store count to win the bidding if they have to bid against an opco-propco bidding combination.

speaker
Anonymous Caller

That's very helpful. Thank you both. And, David, if I just could, one quick one. I think if you're kind of looking at fourth quarter run rate, relative to kind of your current net debt levels, et cetera, you guys would probably be looking at leverage of around five times in a lower rate environment for you guys to go out and potentially take on some leverage. Could you kind of comment a little bit about how you're thinking about the capital structure here moving forward in terms of the hypothetical of that potential transaction?

speaker
David Kieske
Chief Financial Officer

Yeah, Carlos, good to talk to you. You're right. We'll be just kind of sub-five times on a pro forma run rate basis for everything we've announced. As we talked about with the equity raise in June, you know, we'll likely match fund that equity with debt at some point in the future, which gives us, you know, a billion-two-odd of total buying power if you go out and think about raising, you know, like $700 million of high yield here at some point in the future. So on an ultimate leverage-neutral basis with the balance sheet, we've got the optionality, the flexibility, and obviously the capital markets can do some backdrop right now for that. Great.

speaker
Anonymous Caller

Thanks, guys. Thank you all very much.

speaker
Operator
Conference Call Operator

Your next question comes from the line of RJ Milliken with Bayer.

speaker
RJ Milliken
Bayer

Hey, good morning, guys. You mentioned restocking the pipeline, especially the captive pipeline with the closing of El Dorado and Caesars. Just curious on your thoughts on timing of executing on any of those growth opportunities.

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, I'll actually turn it over to John here momentarily, RJ, but I mean, there's There's no question that Eldorado was what we now should now call Caesars. The new Caesars was greatly helped by the financing activities they undertook in mid-June, simultaneous with the announcement of our Convention Center mortgage and land purchase. So they obviously put themselves in a better position than the market at large had anticipated post-merger. And when it comes to the timing of anything we might do with it, I'll turn it over to John.

speaker
John Payne
President and Chief Operating Officer

Yeah, look, it's hard to, as I said before, to exactly predict the timing, but as our embedded growth plan has ended, or the rofers on the Las Vegas Strip, we obviously have talked quite a bit about our call opportunity on the two assets in Indianapolis and then a rofer on Horseshoe, Baltimore. So as Tom Rigg and Brett Junker take over Caesars, they'll continue to see where there's opportunities. We We like all those opportunities. I think you've heard them talk about having enough supply in Las Vegas and potentially selling one or two assets there. As I said in my opening remarks, we are big believers in the long term of Las Vegas. Las Vegas obviously has some short-term issues they're going to have to deal with, with the decrease in flights, the loss of international business, and the decrease of convention business. But we really are big believers in that, say, for the long term, based on consumer behavior and absolutely the number of segments of people can be attracted. So we'll just have to see what plays out with the embedded pipeline. But that doesn't mean we're sitting back and waiting just for the embedded pipeline to determine our growth of our company. As I said, I've been quite active making sure people know, understanding what's going on with operators, and spending time and talking to them. So we'll see how it ultimately plays out in the coming months.

speaker
RJ Milliken
Bayer

Thanks. And do you anticipate doing more unique transactions similar to the one that we saw with the Convention Center, you know, if you're not happy with where your cost of capital is?

speaker
Ed Pekoniak
Chief Executive Officer

I don't think, RJ, so much it will be a function of whether or not we're happy with our cost of capital. I think it will be more a function of the organic situation of what we're looking at, how much clarity and certainty there is around income production at the moment, and how much clarity and confidence there is around forecasting the income production in the near to midterm. So, again, I think those will be the key elements that will drive the structuring decisions that we make. David, I don't know if you want to add to that.

speaker
David Kieske
Chief Financial Officer

Now, I was going to say at the same point, it's not necessarily related to cost of capital. A myriad of factors that go into it, and obviously with the mortgage, it was, as we talked about, kind of a synthetic bridge to long-term real estate ownership.

speaker
RJ Milliken
Bayer

Understood. Thanks, guys.

speaker
Ed Pekoniak
Chief Executive Officer

Thank you, RJ.

speaker
Operator
Conference Call Operator

Your next question comes from the line of Barry Jonas with SunTrust Robinson Hughes.

speaker
Barry Jonas
SunTrust Robinson Hughes

Hey, guys. Good morning. I wanted to start off asking, how should we think about any regulatory risks around your ability to exercise the put-call agreements for the two Caesars racetracks in Indiana? And if, for some reason, regulators had any issues, would you get access to a comparable asset or assets within Caesars' portfolio instead? Thanks.

speaker
Ed Pekoniak
Chief Executive Officer

John, you want to start on that?

speaker
John Payne
President and Chief Operating Officer

Yeah, I'll start. I mean, I think that... Like any transaction, there's always, you always have to get regulatory approval. So the comment that the Racing Commission of Indiana would need to approve the, you know, a sale lease back of the two Indianapolis assets, not surprising to me at all, having been in the industry for too many years, 20 plus years, every acquisition we've ever done is, uh, had those stipulations that we need to go through a process. We need to spend time with the Racing Commission to let them understand who we are. So not a concern about the language that's out there right now. Maybe Sam or Danny, you want to answer the second part on the potential substitution should there be an issue?

speaker
Samantha Gallagher
General Counsel

Sure, John. This is Samantha. The arrangement that John said does not have substitute assets, but as John mentioned, I think those comments surrounding the PUC call was not surprising and is actually no different than prior comments when we had a roper, a prior roper on those assets, so we intend to work with the regulators over the period of time for the PUC call. It's exercisable to make sure they can get comfortable with our rate structure.

speaker
Barry Jonas
SunTrust Robinson Hughes

Great. That's really helpful. And then I guess, you know, New Caesars is talking about selling, I believe, operations at three of your assets now. Just curious, can you remind us if they would need your consent to sell those operations?

speaker
Ed Pekoniak
Chief Executive Officer

John, Samantha?

speaker
John Payne
President and Chief Operating Officer

Yes. So if you're talking about two assets in Indiana, and then I think What's the third you're referring to, just so I answer the question? But the answer is yes. Yeah. Yeah. Got it. So, yeah, both those assets in Indiana that have been referred to, the Southern Indiana and Hammond, would meet our consent if they currently sit inside the master lease, and we really like the real estate of those two assets.

speaker
Barry Jonas
SunTrust Robinson Hughes

Just a quick one. You've agreed to various CapEx waivers for your operators. Given the strength we're seeing in regional markets now, top line, but more so margin, do you think those waivers are still needed?

speaker
John Payne
President and Chief Operating Officer

I think when we negotiated these waivers with a few of our tenants, it was absolutely appropriate. You know, the properties are doing well right now, and we're excited about that. But I think we're pretty cautious, and as Ed said in his opening remarks, we're pretty realistic about that the pandemic is not over. We hope the business continues to perform well. We expect them at this time to do that. But, again, I think those relief packages at the time we negotiated were absolutely appropriate for us and for our tenant. Great. We appreciate all the callers. Thank you.

speaker
Operator
Conference Call Operator

Your next question comes from the line of Samit Rose with Citi.

speaker
Samit Rose
Citi

Hi, thanks. I just wanted to go back to the convention center for a moment. You talked about just having some clarity on income reduction, and I was just wondering, can you talk about your views on income reduction at that center? What's kind of the book of business look like? And I assume it's all sort of been pushed out a little bit. And how do you anticipate... financing that loan? Will it be with cash on hand? Will you use equity? Maybe you could talk about that a little bit.

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, so on the book of business needs, prior to the outbreak of the crisis, Caesars had actually built up a very strong book of business for the convention center. And obviously, to your point, the conventions that were scheduled for the assets in 2020 have largely been postponed. or canceled within 2020. And we would have to all hear from Caesars, which we will be doing, obviously, shortly, as to how things are looking for 2021 and beyond. In terms of our financing of the mortgage, I'll turn it over to David. That was obviously the main focus of our equity raise back in June. David?

speaker
David Kieske
Chief Financial Officer

Yeah, thanks, Ed. It's good to speak to you. When we announced the deal on June 15th, we obviously simultaneously announced the equity offering, which resulted in an upsized equity offering and gross proceeds of about $660 million. As we talked about, in connection with that, there's an efficiency to raising capital and over-equitizing. As I mentioned earlier, we will match fund that to ultimately run our balance sheet on a leverage-neutral basis. As we think about funding that mortgage, we've got cash on hand, about $400 million as we sit here today, and then we have have an end date on it. So we'll likely fund that with a mix of cash and some of that forward here as that closes probably late third quarter and then ultimately go out to the debt markets at some point in the future to match fund that on a leverage-neutral basis.

speaker
Samit Rose
Citi

Would you expect this acquisition then to be accretive to earnings?

speaker
David Kieske
Chief Financial Officer

Yes, we would. I mean, the 7-7 cap rate on a leverage-neutral basis, it is accretive to earnings.

speaker
Samit Rose
Citi

Great. Thanks. And then I just wanted to ask you, do you have any color on when the Greektown Casino might reopen? John?

speaker
John Payne
President and Chief Operating Officer

We got word yesterday that the state of Michigan is going to allow the Detroit casinos to open August, I think it was August 5th or 6th. So Penn will come out, I'm sure, relatively shortly here in and give an exact date, but the news came out to me yesterday that that will happen in the state of Michigan.

speaker
Samit Rose
Citi

Okay. Thank you, guys. Thank you, Smith.

speaker
Operator
Conference Call Operator

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

speaker
Ed Pekoniak
Chief Executive Officer

Hey, guys.

speaker
John G. Decree
Union Gaming

How's everyone, John?

speaker
Ed Pekoniak
Chief Executive Officer

Good, John. Good to hear from you.

speaker
John G. Decree
Union Gaming

Good. I wanted to ask a question about the land that you've purchased in your land bank in Las Vegas and, you know, if you've spent quite enough time on that. So I believe parcels or your initial parcel is a part of the lease with your existing tenant, maybe not the part you've just bought but the existing part. And I was wondering if you could talk about any restrictions that you might have on that or how the relationship would work if you wanted to develop it or if your partner wanted to develop it. What are some of your options on those parcels?

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, so I'll start, John, and then Samantha can jump in and correct me if I get anything wrong. You're absolutely right. The land that we already own, the 27 acres we already own, were subject to the Caesars lease, and Caesars had the right to use that land within our overall lease arrangement with Caesars. built an agreement that will become part of the formal agreement once we execute on the transaction in full, where by season we'll be able to continue to occupy the land until we have a use for it. And they will, in turn, for occupying the land, cover the costs of that land in regard to things like real estate taxes, insurance, and security. But in terms of our overall vision for the land, We see this as a way of capitalizing on what we still very strongly believe to be the long-term growth of Las Vegas. The long-term growth of Las Vegas as a tourist destination, and frankly also the long-term growth of Las Vegas as a global city in its entirety. And we see that land as giving us a chance to participate again, not only in the growth of Las Vegas tourism, but in the growth of Las Vegas as a place where people choose to work and to live as well as to play. And this land gives us an opportunity to do what we most love doing, which is growing our business by growing our relationships. We are not a developer. We will not take development risk. It's not what REITs generally do. And what we will do is partner with great developers get rewarded for development risk in order to realize the highest and best use of this land over time. And what this land ultimately does is provide part of the answer to the question, where does VT's growth come five to 10 years from now? Because again, over that kind of timeframe, we are still raging bulls on Las Vegas.

speaker
John G. Decree
Union Gaming

A quick follow-up on that. If you were to find a partner away from Caesars today? Would there be any restrictions on what the land could be used for? I'm not sure if it's entitled for gaming. Maybe a better question for John, but would we expect it to be, you know, maybe it's too soon at this point, complementary to the buildings that are your tenant owns nearby? Or could you, you know, potentially do hotel, casino there as well that may be competitive?

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, it's just way too early to tell, John. Way too early. I mean, what I would say is that whenever you develop, you want it to be complementary to what's around you because that tends to be the way you realize the greatest amount of traffic and the greatest amount of overall attraction for the destination.

speaker
John G. Decree
Union Gaming

Got it. Thanks. That's all for me. Appreciate it, guys. Thank you, John.

speaker
Operator
Conference Call Operator

Your next question comes from a line of Todd Spender with Wells Fargo Securities.

speaker
Todd Spender
Wells Fargo Securities

Hi, thanks. Most of my questions have been answered regarding the land parcels, but I would suspect you'll see some earnings drag, I guess. If you're combining the mortgage with the land parcel, yes, I get the impression that these will cover some of the operating expenses, but maybe just not cash flow producing real estate. How do you think about funding that with this equity, but having maybe some earnings drag going forward? David?

speaker
David Kieske
Chief Financial Officer

Yeah, Todd, it's really on the $100 million or the $103 million incremental capital that we have to invest to acquire the approximately 23 acres at the right point in time when we ultimately decide what we do with the land, as Ed's talked about, the right partnerships. how that ultimately plays out to be determined. But if you think of $100 million on our total balance sheet, very, very de minimis, minor drag given that asset. I mean, reducing nature of that asset.

speaker
Ed Pekoniak
Chief Executive Officer

Especially when looked at, Todd, as leverage neutral. I mean, not $103 million of equity.

speaker
Todd Spender
Wells Fargo Securities

Got it. Okay. And timing, I think I got the impression this is a late Q3. And if that's the case, is that... maybe that's the timing around maybe seeing some of that be settled?

speaker
David Kieske
Chief Financial Officer

Yeah, we're working on, as you know, or we talked about with everybody, we've now set up a letter of intent and working through documentation and diligence now as we speak. So, you know, sometime, you know, in the late third quarter is when we'd expect that to close. And you're right, that's probably when we would ultimately use some of that forward, settle a portion of that forward agreement. All right. That's helpful. Thank you.

speaker
Operator
Conference Call Operator

Our next question comes from the line of with Wolf Research.

speaker
Caller
Wolf Research

Hi. Good morning, everyone. Thanks for taking my question. Now that the CSRS deal is closed, your payout ratio on go-forward AFFO is well below your historical target. Can you just talk about how you're thinking about the dividend? right here, and should we assume that September is kind of your typical time period for when you reevaluate?

speaker
Sean Kelly
Bank of America

David?

speaker
David Kieske
Chief Financial Officer

Yeah. Jared, thanks for joining. Thanks for your work this quarter. Yeah, we adhere to an annual increase in our dividend. We bumped it in Q3 of 18. We bumped it in Q3 of 19. We don't bump our dividends mid-year or at the closing of transactions. the September declaration and ultimately October payout. We work closely with our board and assess where we are in terms of our liquidity, where we are in terms of the state of the pandemic and COVID, obviously where our tenants' business are and the outlook going forward. So our payout ratio is a little bit high right now just because of the non- So we'll evaluate it with the board and make the right decision to be in a position to ensure that we never put VG out there as a REIT that has to cut their dividend or change the dividend going forward.

speaker
Caller
Wolf Research

Okay. Thank you, David. And then just a separate question. I'd love to get your thoughts and opinion on this. Do you think we could see a revaluation of regional gaming assets as this crisis has probably shown the world that regional assets are a lot more stable than many people might have realized? And then on the flip side, obviously, you know, I know you sound pretty bullish on Las Vegas, but how are you thinking about the revaluation or devaluation potential of Vegas here from your perspective?

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, I'll speak initially from a realist But starting with Las Vegas, I do not think over the long term it should change the way in which Las Vegas gaming real estate is valued. You obviously saw an institutional investor of the caliber of Blackstone come in and validate Las Vegas real estate. They obviously are investing for the long term. They are long-term believers in the value of Las Vegas real estate as are we. This is a temporary crisis. It will eventually come to an end. We do not think this crisis generates secular negatives for Las Vegas. We do think Las Vegas can and will come roaring back for a whole host of reasons. But to your first point, regional, yes, you are absolutely right. This should really validate regional gaming. that it is far outperforming just about any other leisure hospitality sector you can possibly identify. And it is not, it was not under secular threat coming into this. It was posting very positive results as a sector in January and February. It is showing itself again very well here. And going forward, you're not looking at the kind of overhang of secular negatives you are seeing in other categories like movie theaters where Universal has said, yeah, okay, after 17 days we can start streaming the movie. So, again, we think this is very validating for regional gaming. But I'll turn it over to John, who has obviously operated so many of the assets that we own in the regions and can verify just how integral they are to the lives of regional customers. John?

speaker
John Payne
President and Chief Operating Officer

Yeah, not much to add here other than I have a smile on my face as someone who spent almost 20 years of his career operating these regional assets. It's nice to see that the world is starting to understand how durable they are, the loyalty from their consumers. As you've probably heard me say, these are people's social clubs or country clubs. This is where people go to have their entertainment. It's where their friends are. And you can see even during this worst pandemic that we've ever seen in our our lifetime, that as the businesses open up, they've been quite successful. So it's nice to see, and I agree with Ed and his comments, especially when you look at these assets compared to restaurants and movie theaters and a variety of other areas that are struggling where these assets, as they've been opened up, have done quite well.

speaker
Caller
Wolf Research

Great. Thank you very much for the time.

speaker
Operator
Conference Call Operator

Your next question comes from a line of Greg McGinnis with Scottsdale Bank.

speaker
Greg McGinnis
Scottsdale Bank

Hey, good morning. Hi, Greg. I'm just curious, given the payments through Q2, assets being open, the ability for your largest tenants, active capital, the apparent return to regional business, I'm wondering why you didn't feel confident enough to reinstate guidance for the year and what would need to happen to become more comfortable to do so?

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, I think we need the benefit of time, Greg. We are still, you know, as a nation and as a national economy, we are still in a period of great uncertainty, uncertainty and lack of clarity. And when you have uncertainty and lack of clarity, it pretty much leads to, you know, not being able to be bullishly confident To return to guidance at this point, we believe would be fundamentally premature. David, I'll turn it over to you to see if you have any added thoughts.

speaker
David Kieske
Chief Financial Officer

Now, the other thing, Greg, is I think we've talked to you about, you know, our business is pretty transparent and pretty predictable, especially now that the El Dorado deal is closed and the noise out of that, so to speak, is now flowing through on a run rate. You know, when we... Pulled guidance, part of the reason was also CECL. There's noise in the non-cash implications of CECL. We will have a charge in the third quarter around related to the closing of the Eldorado transaction and bringing those three new assets on their balance sheet. So it's hard to exactly predict that and pinpoint that. So we'll assess guidance probably as we turn the calendar and go out into 2021, like I said, next point in time.

speaker
Greg McGinnis
Scottsdale Bank

Okay. Fair enough. Thank you. And then just a quick two-parter on the CSER agreements with state regulators. So first is, you know, what level of additional financial commitment is now required of CSERs, and how do you think about that burden versus monthly OU? And secondly, are there any other demands that we should be aware of that may impact the business, you know, such as the sale of the Indiana casino operations?

speaker
Ed Pekoniak
Chief Executive Officer

announced that is the way the regulators do business. And, you know, in terms of the additional financial burdens, if you're referring, for example, to the CapEx requirements in New Jersey, obviously those will benefit the assets and their performance. And to the extent that Caesars enjoys, as we believe they will, an incremental return on an incremental capital, it will enhance, obviously, their performance as a tenant.

speaker
Greg McGinnis
Scottsdale Bank

All right, great. Thank you very much.

speaker
David Katz
Jefferies

Okay, great.

speaker
Operator
Conference Call Operator

Your next question comes from the line of Richard Hattower with Evercore.

speaker
Richard Hattower
Evercore

Hey, good morning, everybody. Hey, Rich. I hope everybody's doing well. So a couple ones here. So just with respect to the, you know, the incremental term loan and revolver to Jack Entertainment, I know that the initial term loan tranche had a five-year term, are there any prepayment features that we should know about there? And if, you know, given that it's 9% secured paper and potentially Jack might have other options for that capital or another source of capital that's maybe a little bit cheaper, how should we think about that dynamic between Vici and Jack? And then what would you do to sort of replace the income, you know, before the end of the five years if it came to that?

speaker
David Kieske
Chief Financial Officer

Yeah, Rich, there is a prepayment feature after 18 months, I believe. Correct me if I'm wrong. But given it's a small amount, $70 million, we've looked for opportunities to reinvest that. But this is kind of a win-win and consistent with our approach for helping our tenants store up some of their liquidity at a point in time when nothing was open.

speaker
Richard Hattower
Evercore

Okay, that's all. Yes, go ahead, sorry.

speaker
Ed Pekoniak
Chief Executive Officer

And, Rich, you know, were they to repay the loan, we certainly do not lack the confidence in our ability to redeploy that returned capital accretively. Obviously, you know, led by John Payne's business development, heroic for VG over the last two and a half years with over $8 billion in transactions. we're always confident that if there are compelling opportunities out there, we're going to source them and execute on them the best we can.

speaker
Richard Hattower
Evercore

Yep, it is a staggering amount of work that you guys have all done, so I agree with that. My second question is maybe a twist on the valuation question from earlier, but just looking at stock performance and multiples across the net lease REIT space, Ed, where do you think Vici and your closest peers are with respect to that, you know, that incremental cap rate compression relative to some of the more traditional retail-focused net lease names, you know, given that, I mean, collections are all across the board, but some are quite low, and you guys are sitting at 100%. You know, where do we think we are in that evolution?

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, I think we're on a positive upslope, Rich. We're obviously not there yet. And I think part of the explanation for not being there yet, for not having closed the gap quickly, is that these things do take time. And I'm not sure, frankly, how much fundamental analysis and valuation is going on right now anyway. But to your implicit point, yeah, I do think the broad investment community the dedicated REITs, the income-seeking generalist investors are going to recognize and are, again, to your point, starting to recognize that the gaming REITs, all three of us, are posting very good rent collection results. But moreover, our tenants are showing themselves to be performing very strongly. And that, I do believe, to your point, ultimately deserves re-rating. It leads to parity, if not arguably to some measure of premium, given how we perform. And again, given this as well, Rich, that this crisis is really showing the stress and strain of any sector that was beginning to show signs of secular threat. You know, whether it be the secular threat as represented by e-commerce, the secular threat as represented by things like streaming media, you know, Gaming is really well integrated as a place-based destination experience in the lives of millions upon millions of Americans. And we think that ultimately adds up to very high-quality real estate.

speaker
Richard Hattower
Evercore

Great. Thank you.

speaker
Operator
Conference Call Operator

Your next question comes from Thomas Allen with Morgan Stanley.

speaker
Thomas Allen
Morgan Stanley

Hey, good morning. So I think in the prepared remarks, you talked about how the tenants businesses have held in well through the end of June. Maybe for John, what are you hearing on the latest kind of operations since COVID cases picked up?

speaker
John Payne
President and Chief Operating Officer

Yeah, good to talk to you, Thomas. I've not heard much of a change in the business. I have heard some occupancy levels going up in some jurisdictions. But regionally, the business continues to be strong based on the conversations that I've been having. Again, I think as they continue to add some more amenities back to the facilities when the restrictions are lifted, you know, you're going to see the business continue to perform.

speaker
Thomas Allen
Morgan Stanley

Okay. Thank you. That echoes what Boyd said earlier this week. And then just as my follow-up, how are you thinking about the multiple paid or the returns you're looking for when you're funding capital improvements versus the entire real estate or property? Thank you. David, do you want to take that?

speaker
David Kieske
Chief Financial Officer

Yeah, that's a good question, Thomas. With the JEC. capital that we just funded, obviously, we're earning a 10% return, but that's partly because the income's not coming in until April of 2022. So even though it's $18 million, a very small amount for Vici, it's an effective return, but it's out in the future. It goes part and parcel with exactly what it is. Is it an extension of a ballroom? Is it, you know, truly income-enhancing, income-producing, where the overall lower the risk of the asset and maybe warrant a slightly higher price. I don't know if there are specific examples, but it's in and around slightly higher than where we've been acquiring assets, just giving us an incremental add-on to an asset. But each situation, each cap rate is obviously dependent upon the unique facts and circumstances of the situation.

speaker
Operator
Conference Call Operator

Your next question comes from the line of John Misanka, Willett and Bert Dallman.

speaker
John Misanka and Bert Dallman
Willett and Bert Dallman

Good morning. Hey, John. How's it going? So, I know we've almost talked ad nauseum about the pipeline, but maybe as we think about underwriting an appropriate valuation for a Las Vegas strip asset, do you think you would need to see a couple of quarters of post-pandemic performance in the market before you can get comfortable underwriting any transaction? If you didn't give us a long-term nature of releases, you could just underwrite to almost kind of pre-pandemic performance levels.

speaker
Ed Pekoniak
Chief Executive Officer

I'm going to turn it over to John Payne here in a moment, John Osaka, but I would just say that when it comes to growth, we never attach any kind of words that have anything to do with nausea. We love growth. But anyway, over to you, John Payne. Okay.

speaker
John Payne
President and Chief Operating Officer

It's hard to follow that. Look, things to Las Vegas, I mean, again, I think we've been consistent, and I've been very loud about this, that we really are long-term investors. Yes, in short term, Vegas has some hurdles that they need to get over, but this is a city that even during this time and even with the restrictions that are on it, consumers are going to enjoy what they have to offer. And we believe over time, 2022, 2023, moving on, that the business is going to rebound. As it pertains to underwriting an asset now, that's exactly what we're spending time on, is what is the appropriate level to do that? What is the appropriate cap rate? But we'll have to continue to study the business. As to your point, we'll have to consider, see what the next a couple months are like in the quarters and then determine the EBITDA that we'd use to underwrite as well as the cap rate. But again, I can't stress enough. You hear a lot about the short term of Las Vegas, but we talk a lot more about the long term and how resilient this city has been and how resilient the operators are to continue to reinvent themselves and be successful with the properties that they have. Okay.

speaker
John Misanka and Bert Dallman
Willett and Bert Dallman

And then maybe switching gears a little bit, given the strength of kind of regional operations, should we expect, you know, or potentially could we see any more lease modifications going forward? I mean, correct me if I'm wrong, but the only leases that are kind of as is versus pre-pandemic are Hard Rock and the Penn leases.

speaker
John Payne
President and Chief Operating Officer

Bob? Yeah, I mean, I can't, you know, I can't predict what's going to happen. I think we've been, as we've said a couple times, we've been sober about that we are still in the middle of a pandemic. The operations that have opened and almost all of our operations have opened other than Michigan, which will open here shortly, have been quite successful. in fact, exceeding some of their 2019 numbers. So we're just going to have to wait and see. If we continue on this path, you know, the businesses are going to be strong and there won't need to be any concessions, but we'll just have to monitor what happens in the United States. But we feel, obviously, much better here in July than we did back in early May.

speaker
John Misanka and Bert Dallman
Willett and Bert Dallman

Okay. That's it for me. Thank you all very much. Thanks, John.

speaker
Operator
Conference Call Operator

Your next question comes from the line of Jeff, excuse me, your next question comes from the line of David Katz with Jefferies.

speaker
David Katz
Jefferies

David?

speaker
David Katz
Jefferies

Hello. Can you hear me okay? Yes. Hi there, David. Sorry. I know you've covered quite a bit of detail. I appreciate that. I just wanted to talk about the CapEx waivers that are in place and how you're thinking about those versus a terminology that would be more like deferral and whether there could be sort of catch-ups down the road in the interest of preserving real estate's value by making sure it's properly invested.

speaker
Ed Pekoniak
Chief Executive Officer

Yeah, I think, David, one of the key things principles that we believe in is that ultimately our operators are the beneficiaries of capital well spent, and they bear the first pain when capital is not spent. I think the self-reinforcing positive qualities of this business model, as opposed to, say, the hotel business model, where a a third-party manager dictates capital that the owner may or may not get a return on, we much prefer this model because at the end of the day, the operator is responsible for the capital, but it's also, again, the beneficiary of capital well spent and is the one first harmed when it is not spent in terms of loss competitiveness, revenue, and profit. So we believe in this model and the ability of this model to prevent losses assets deteriorating in a way that, as you rightly point out, they can when capital is not spent over the long term that needs to be spent.

speaker
David Katz
Jefferies

Okay. Thank you very much. Thank you, David.

speaker
Operator
Conference Call Operator

Your final question comes from the line of Sean Kelly with Bank of America.

speaker
Sean Kelly
Bank of America

Hi, everyone. Just in under the wire, I suppose. Sue, just one question for me. John, in your prepared remarks, you said or mentioned a sort of 70-30 mix between the regional portfolio and the Vegas portfolio. The undertone has been here throughout the call, but just kind of curious to say it out loud. Is this an appropriate mix for Vici going forward, or how do you think about that 70-30 split kind of strategically? Obviously, you know, you'll underwrite acquisitions as they come, but is that a target ratio that investors should think about that is a comfort level for management, especially after everything we've seen from a performance perspective through COVID, or just how do you think about that?

speaker
John Payne
President and Chief Operating Officer

Yeah, I don't think we've ever talked about necessarily a target. I think what we've talked a lot about is we like the diversification that we are really the only REIT in this space that has positioned itself to invest in destination resorts in Las Vegas, also as well as the local business in Las Vegas should that come about, as well as every market in the region with all different types of operators. So I think our philosophy has been we want to remain diverse. We want to continue to grow our tenant base. We started this company two and a half years ago with one tenant and now have five. And I think you'll ultimately see that grow. But today we're at 70-30. We like where that is. But I don't think, Sean, you'd hear us say that's where it absolutely has to be exactly around those numbers. We just like the diversification and being in many different types of markets. And you can see that diversification has helped us during this pandemic.

speaker
Sean Kelly
Bank of America

Thanks, everyone. Appreciate the time.

speaker
Ed Pekoniak
Chief Executive Officer

And, Sean, I would just add to what John has rightly said, that as a REIT, we obviously want to give our investors a chance at not only income, steady, predictable income, but we also want to give our investors a chance at capital appreciation of the market recognizing the superior value of the assets. And over the long term, and as I think, again, was validated by the investments Blackstone made in Las Vegas last year and early this year, we do believe that Las Vegas could give the greatest opportunity for capital appreciation, which when combined with the steady income production of regionals, we think it adds up to a very compelling long-term both income and capital appreciation strategy.

speaker
Sean Kelly
Bank of America

Thank you.

speaker
Operator
Conference Call Operator

And there are no further questions at this time.

speaker
Ed Pekoniak
Chief Executive Officer

Thank you, Operator. To close out, please let me reiterate our thanks to all of you for being on today's call. We are proud of the results we've provided to our stockholders this quarter, and those results, again, are validation of both VT's business and the businesses of our tenants. With 100% rent collection, cash rent collection in Q2, with our ability to go back on offense well before most other REITs, with the closing of our $3.2 billion transaction with Caesars and the $253 million of annual rent growth it brings, we believe we are on track to deliver one of the strongest growth rates of any REIT in America over the next year or two. Again, thank you and good health to all. Operator, that concludes the call.

speaker
Operator
Conference Call Operator

This concludes today's conference call. You may now disconnect. Presenters, please remain on the line.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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