You haven't really probed its ramifications and its weak points, and the next thing you know, with your head down coming through center ice, you are flat on your back. You get leveled, looking up into the rafters, and little birdies are flying around your vision screen.
Ed, thanks so much for joining us. Happy to have you here.
So let's start with experiential real estate. It's evolved obviously over the last decade, as really everything has, and it has certainly evolved since VICI went public in 2017. You've led the company over its near-decade-long journey as an NYSE-listed enterprise and have obviously seen its transformation from the head of the table. But for the greater industry, let's start there, not necessarily on VICI. How have you watched the experiential real estate category grow, transform, evolve through everything going on around us in the world?
Yeah, well, for me it's a journey, Lance, that really began, you know, more than 30 years ago when I actually used to work in the ski resort business. And it was really around the late '90s that you actually began to hear the term the experiential economy. And there was actually a book published in the late '90s by two guys out of Harvard, Pine and Gilmore, around the whole concept of the experiential economy. And what you've seen over these last 25 years or more is really a continuing consumer preference to spend their time and their money on experiences versus things. And if you look at the relative growth rates of spending on experiences versus things, while the experience trajectory may not be absolutely hockey stick, it is very much steadily up and to the right. Whereas the goods purchasing behavior is more or less flatlined. And it is all, I think, part and parcel of the fact that people realize they have enough stuff.
And I think too, especially in the last 10 years or so, what experiences provide in so many cases is an opportunity to gather. And by providing an opportunity to gather, they provide a way to overcome what is somewhat the atomization that's happened because of our phones and other devices, right? The digital world hasn't necessarily brought people together, and in many cases it's isolated them from each other. And so what we find across the experiential spectrum is that out-of-home gathered experiences seem to continue to be growing in power, and you see it manifest itself in so many different ways, like watch parties. When you think about watch parties, you go, wait, these people probably all have TVs at home, right? But they're choosing not to watch this sporting event in the comfort of their home. They want to be together, right? And we saw it certainly with the Knicks last spring, but we saw it with the World Cup this summer. It is all part and parcel of the desire to gather and share an experience. And we at VICI just couldn't be more excited, not only by what we've done, but what we have the opportunity to do in the next 10, 20 years to continue to capitalize on this.
And how does the consumer economy and its strengths or weaknesses at any given time, how does that impact the experiential market? Because ultimately, with experiences, you are not all the time, but a lot of the time spending money, and obviously, you know, you're talking casinos, golf courses, restaurants, so be it. Is this category tied to those broader ups and downs of just how the economy is doing overall?
It's tied, but it is generally less cyclical than consumer discretionary at large. And again, when we see economic downturns or times of stress, what we tend to see is that the consumer will allocate their dollars in greater proportion to experiences than to things, because if nothing else, it's the experiences that are the consolation during periods of either economic or political or cultural stress. So we evaluate every category we look at through five key factors. But the first factor of all is lower than average cyclicality versus consumer discretionary at large.
And yeah, I think you make a good point, right? People during times of negativity, volatility, whatever you want to name it, right? It's those experiences rather than the things that act as stress relievers, so to speak. So I could see why there is a tie to it, but not as cyclical as you were saying as consumer discretionary spending. I want to look at VICI, and obviously VICI is a triple-net-lease real estate investment trust, but for those just not necessarily engulfed in what REITs do and what REITs are, can you just explain this triple-net-lease model and how VICI uses it to be as successful as you are today?
Yeah, well, let's start, Lance, at the level of what is a REIT, right? And a REIT is a real estate investment trust, and REITs generally began to come into being meaningfully in the '90s. And REITs were created to give investors a chance to participate in the ownership of income-producing real estate without them having to go buy individually a building and then figure out how to manage it, whatever the building houses. And one of the benefits of the REIT structure is that REITs do not pay corporate income tax on their REIT income. They are obligated to distribute at least 90% of their net income to their investors tax-free, and then the tax does come into play on the dividends that the investors receive. But even there, there are tax benefits to income distribution or income receipt versus ordinary income. So it's a very good way, again, of allowing investors to participate in the ownership of America's built environment. Well, America and the world's built environment. Now, within the whole REIT spectrum, you obviously have REITs that own office buildings, apartment buildings, retail facilities, industrial facilities, data centers, and hotels, and beyond that, our experiential assets.
Now, in those different categories, you can have different lease structures. We are within a lease category, to your point, known as triple net. And what that means is that the occupant of the building is responsible for all of the costs associated with operating and maintaining the building. And we as the REIT collect rent that we then don't have to dilute by virtue of, oh gosh, now we the landlord have to pay to fix the roof or fix a chiller or do anything else. The benefit to the occupant is that they do have total control over the building to run as they see fit within certain boundaries, and then enjoy any upside that they can create through the operation of the building.
And so through triple net, right, you say that you're bringing in rent money, so to speak, from these operators. The operators are the ones who, as you said, they take care of all the costs of, you know, fixing a roof, fixing a wall, fixing this, fixing that. With that type of structure, what does a good landlord-tenant relationship look like then? Because, like you said, it's not you having to get a call from, you know, X, Y, and Z tenant and saying, 'Hey, can you come fix this?' Right? You're just getting the rent money from them. But what does that look like in terms of a landlord-tenant relationship?
Yeah, we certainly strive to make them really positive and productive landlord-tenant relationships. We obviously, as we tenant a building, we want to be assured that the tenant is going to operate its business successfully. The success and value of the building is largely contingent on how well the occupant runs its building. And to that end, so much of it in our category is dependent upon the relationship that the building occupant, our tenant, has with its end customers. And so we're very mindful that we depend upon the operating success of the operator, which means that's a key criteria in how we evaluate a potential tenant. Not only the quality of their balance sheet, which is obviously important, but the quality of their relationship with their end users, because it's the quality of that relationship that's likely to drive how successful they will be as an occupant 5 or 10 years from now, and thus how valuable the building will be.
Do you have a standard? And I would assume the answer is no, because you operate a diverse portfolio, which we'll get into a little bit. Do you have like a standard, this is how long we have contracts with operators? Like, do you go into it with a 5-year contract, a 10-year contract, a 15, right? Or does it vary dependent on, you know, the asset you have?
There's some variation, but typically the way that our leases work is that there's an initial term, and that initial term can be between 15 and 25 years, and then there's usually extensions to that initial term at the option of the tenant. Got it. So we looked at through a lens of initial term plus renewal options. You could say our weighted average lease term is around 40 years assuming they extend. But even at the base level, the typical lease is 15 to 25 years. And that works for us as a landlord, and it generally works for the tenant as well, because we're the owner of physical assets, of buildings that are not commonly available out in the market. Right? If Starbucks wants to place a store on any given street front, there's options. There's a lot of options. But if you want to operate a big-box casino, well, there's not a lot of empty ones sitting around. Right. And so it is to the benefit of both us and the tenant to make sure they're going to have access to this building for a long time to come.
And so VICI's portfolio, it spans iconic landmarks on the Las Vegas Strip, regional casinos as well, non-game experiences, golf courses, other entertainment concepts, etc. How do you think about strategically building out a portfolio like that? Right? One that is so diverse, one that has different experiential assets, right? Not even talking about how you then go about deciding on what the right tenant looks like. Just on the assets themselves, how do you go about deciding this is an asset that we want to bring into our portfolio and then eventually allow a tenant or work with a tenant to then come in and use it?
Yeah, well, the starting point for us, Lance, is making sure we're confident about investing in a given category, right? We're obviously confident about investing in gaming. We're very confident about investing in wellness through our investment in Canyon Ranch. We're very confident about our investment in indoor water park resorts through our partnership with Blackstone on Great Wolf. But whenever we look at a new category beyond the categories we're already invested in, we look at five key investment criteria. The first one we've already talked about, which is lower than average cyclicality. The second one is secular trends and secular threats. Is it a category of real estate that is relatively well protected against getting disintermediated or displaced by technology? Sure. Right. Number three, healthy supply-demand balance. It's a category where you don't have to worry as much about overbuilding and oversupply, and thus a loss of pricing power. Number four is proven durability over decades. And then number five is what we call economic dynamism, which is a business model that's highly responsive to energetic and innovative operators, their ability to pull multiple levers in terms of the guest experience, and thus create multiple revenue channels and multiple profit channels. I'll give you an example of a category that we haven't really figured out yet in terms of our comfort in investing in it or not. And that would be the very explosive category of these new racket sports, pickleball and fidel, which are popping up.
I will say, like, those pickleball facilities, I'll call them. I mean, I have seen from two years ago to today, just in my area in New Jersey, I've probably seen five or six pop up all within like a five-mile span of one another. Like, they're ballooning at a pretty good rate.
They are. And so when you take those five key criteria, we look at it, we go, okay, a little scary how much supply growth there is. And then the durability hasn't been proven yet. And when I'll sometimes say when asked, 'Hey, Ed, what about investing in pickleball?' I'll go, 'Well, we just want to get confident that it's not the next racquetball.' Sure. And then many people I talk to, younger, much younger than I, go, 'What's racquetball?' Yeah. And I go, 'Well, when I moved to the city in the '70s and then through the '80s, racquetball was really popular.' And they still go, 'Well, yeah, but what was it?' Because I've never heard of it. And I say, 'Well, it was kind of like a brute version of squash.' Yeah. And it was so much fun to go inside that box where you didn't need the finesse and skill of squash and just basically hammer the leap out of the ball. Right. And it was actually kind of fun to play, but for whatever reason it's gone, right? And so that is how we have to think about categories.
Once we're confident about a category, we then do what most real estate investors would do, which is to ask, okay, first of all, is it in a geographic market we want to be in? Are there positive demographic and economic trends in that market? Is it a good location in that market? Is it well situated? Is it a really good building that the tenant can be successful in? Right? And is it a competitive marketplace where again you're not worried about oversupply, where there's good demand trends, and you have confidence the tenant can be successful over the length of the lease? And so that's how we evaluate both categories and assets. And there's a lot of what we look at that we get excited about and proceed on, and then there's others that we are cautious about, and then there's others that frankly we've just ruled out.
Yeah, and I like that you brought up the pickleball example because even, you know, I'm 30 years old. And through my 30 years of existence, we've seen plenty of trends come and go. And ones that I thought, especially that came around when I was in high school, right? I'll give an example. Like a frozen yogurt trend, for example, when I was in high school, like frozen yogurt was like all the rage. Everyone, like, there were frozen yogurt places popping up left and right. And I loved it. I like frozen yogurt. I still, you know, will get it today. But the amount of frozen yogurt places today compared to when I was in high school back in the early 2010s, like it's decreased at such a significant level. So trends come and go. Well, obviously it remains to be seen what the future of pickleball is, but I completely understand the desire to sort of wait and see, especially for a category like that. And so I think bringing that up and then comparing it to even racquetball, what racquetball once was, makes a lot of sense. And besides that portfolio diversity, what is the process in determining the tenant? Now, obviously, I know you have a lot of properties in the portfolio, like I said, a lot of casinos, golf courses, and there are specific tenants that obviously focus on those types of areas, but just in general, like how do you go into a meeting and say, 'Hm, this is the right tenant that we think could last for a long time at this property that we have.'
Yeah, we evaluate them on a number of factors. And there's obviously the basic financial factors, you know, do they have a solid balance sheet? Do they have a solid track record of delivering profitability? Are they clearly good managers of their P&L? But beyond that, we also want to know, again, going back to the point I made a moment ago, we want to know they have a really good relationship with their customers. But that also means then they also need to have a really good relationship with their own employees. You know, and a case study and how it works when it works really well is our partnership with Apollo on the Venetian. We bought the Venetian in 2021 in partnership with Apollo. We bought the property, they bought the operating company, otherwise known as the OPCO. And what we've been able to witness as their partners since they took full control of operations at the beginning of 2022 is just an amazingly energetic and creative approach to managing the entirety of the business, of really thinking long and hard about how do we support our people best? How do we enable them to deliver the best experiences day after day after day in a very intense operating business? The Venetian is America's largest hotel at 7,100 rooms. It's America's largest conference, convention, and trade show space. It has an enormous amount of food and beverage, an enormous amount of retail. It is the site of Sphere. It is a mammoth operation.
I was there back in March.
Did you get to see a Sphere show?
I didn't get to see a Sphere show. We obviously drove past, I think Wizard of Oz was playing at the time I was there. I did not get to see it, but I mean, just going past it on the Strip is like you just look up at it and you're like in awe.
