How One REIT Came to Own the Las Vegas Strip with Edward Pitoniak

Wow. Gosh, we could go a long ways back, but I grew up in Western Massachusetts, went to school there. I came down to New York after graduating as an English major in the summer of 1979, which was the summer of Fiorucci jeans. Studio 54 was still going and all that, but that really wasn't my scene. But coming down to visit you guys, I realized I was coming into the neighborhood I first lived in when I moved to New York, when I lived on East 10th between A and B, when Alphabet Town was not the Alphabet Town we know today. It wasn't that long before that that Tompkins Square was known as Needle Park. And you know, between A and B was okay. B and C got a little marginal. C to D, whoa, kind of sketchy. Now it's all baristas and yeah. But I came down to New York to get into the magazine business. I actually spent 17 years in New York in the magazine business, eventually becoming editor-in-chief of Ski magazine, which was as fun a job as you would expect it to be.

I did. I did. I managed to ski some winters, you know, 50 odd days, living as I did in Montclair, New Jersey, with my beloved wife and two very young daughters. And you know, when you're skiing 50 days living in New York with a beloved wife and two young daughters, you are realizing you're using up your karma bank at a very high velocity and you better pay it back. Oh, I know. I know. And I would sometimes call home from Vail or Aspen or Sun Valley or wherever, and I would sort of try to convince my wife I'd worked hard that day, and the call was like, 'Oh, honey, you don't believe it. They've had me out here working 12-hour days.' Broke. Yeah.

Well, through the magazine business. Believe it or not, my first job in the magazine business was at Cosmopolitan magazine, where a woman decided it'd be very amusing to have a male editorial assistant, and I did that for a little less than a year. I learned a lot, but I really needed to get out of there for various reasons. And then I went from the polar opposite, a magazine run by Helen Gurley Brown, to a magazine that had been founded by Norman Vincent Peale. And I worked there for many years and actually got a great education in magazine making and direct marketing and all the other attributes that made that actually a very quietly successful publication. Then I got the chance to join Ski Magazine in '87, which was the first opportunity I really had to take vocation and avocation and then experience the passion you can unleash in yourself when you do combine vocation and avocation. And it was a job I just loved. I loved the people I worked with. I loved the content we were able to create.

Pretty much, yeah. And skiing was actually pretty much what we would now look back on in retrospect at pretty much its historical peak. And that had a lot to do with demographics. And that demographics ended up becoming something of a field of study for me. But the greatest number of baby boomers were born in 1960. And in 1986, with the greatest summer of baby boomers being 26 years old, American skiing hit again what was probably what will prove to be its historical peak. And that led to places like Killington drawing endless numbers of 26-year-olds out of New York every weekend. Mammoth was drawing endless numbers of 26-year-olds out of LA. But six odd years later, the industry is a bit slow. Oh, and you can't explain it entirely based on weather or economics. And at that point, I was spending a couple of years on the ad sales side of publishing, which you don't usually get to do as an editor, but the publisher, in all of his wisdom or lack thereof, said, 'Hey, you ought to come over and join us for a while.' And it enabled me to learn how to tell stories with numbers. Which I think so much of finance is all about. And I became curious about demographics. So, I ended up doing a presentation to the ski resort industry on trying to explain our softness in the early '90s based upon again the greatest number of baby boomers being at home with kids too young to come skiing. And very symmetrically, the greatest number of millennials were born in 1990. So, greatest number of baby boomers, greatest number of millennials born 30 years apart. And I said, we need to be ready for when these kids are 6, 7, 8 years old, because their parents will be ready to bring them skiing, but we as an industry aren't ready at all. Kids programs at that point really weren't very good other than at places like Beaver Creek. And there happened to be a very dynamic, creative ski resort company out of Vancouver and Whistler called Intrawest in the audience. That led to me getting to know them, them getting to know me, and the next thing you know, I've got a job offer to move my family from Montclair, New Jersey to Whistler, BC.

Oh my gosh. Well, remember now it's 1996. I don't know how old you guys were in 1996, but that was really the beginning of internet silliness, right? And much in the way I guess you could say this is the era of very AI silliness. And I'm riding with my boss-to-be, Hugh Smythe, one of the most brilliant people I ever worked for. We're driving from Mammoth to Vail in California, and he goes, 'So, what are we going to call you?' And I go, 'I don't know, what exactly am I going to do?' And he goes, 'Well, we haven't quite figured it out yet, but we know we're going to figure it out, but you know, I kind of want you to work on new stuff. I don't want you to get bogged down in daily operations. Like, this needs to be about innovation and stuff.' So to my everlasting regret and shame, I actually started with the title of Vice President of Idea and Product Acceleration.

I got a call a little while after it was announced from a friend who worked at K2 Skis, and he goes, 'You know, dude, with that title, you're the first guy to get fired in a recession.' Well, no, because it didn't take that long before, because we were a roll-up. We were rolling up ski resorts all over North America, which was still a thing that a lot of groups were doing. We were probably doing it at a velocity at that point that even today isn't really achieved anymore because it was so unconsolidated in 1996. And we realized about a year into my working for Intrawest out of Whistler that we hadn't really figured out how to integrate acquisitions. And so Hugh asked me to form a team of our best performers in all of our key disciplines, both operating and administrative. So I built a team that had our best people in mountain operations, food and beverage, retail and rental, marketing, sales, finance, HR. And with this team, we began working with every resort to try to figure out how do we lift each resort up to benchmark levels of excellence. And one of the very first projects I worked on was actually a snow science project in which we focused on how do we make and groom better snow, right? Which was just a fascinating project and it was representative of the opportunity we had as a consolidator to do what individual resorts couldn't.

Well, here's the other thing. The friend of K2 Skis who had also spent a spell working for ski resorts said, 'Hey, you know, you need to accept the fact that now you work for a ski resort company. You're not going to ski much anymore because you're going to go to ski resorts and you're not going to ski.' And he was actually kind of right because you know, you would go and you would plan meetings all day, and then you would try to get out for an hour. Yeah. You're not on the slopes and meeting at the same time. Ski magazine was more fun that way. He actually went to ski resorts to ski. Yeah.

Well, in the fall of 2003, at this point I'm still working for Intrawest in operations, and I get a call from Korn Ferry, and they are saying, 'Hey, we're looking for a new CEO for a hotel REIT based in Vancouver.' And I had to say to them, 'You know, I've never really worked in the hotel business.' And they said, 'Well, yeah, you've got a lot of lodging at Intrawest,' which we did, we had 7,000 lodging units, but we weren't a hotel company, per se. And they said, 'You know, don't worry about that at this point. Let's just get your name in and see where it goes.' And to my everlasting wonderment and mystery, the board hired me. So I became a public company CEO in the beginning of 2004, and I tried to bring as much of what I had learned from Intrawest to this hotel REIT. And this is VICI already or this is something else? No, this is a company called, long before this, this is called Canadian Hotel Income Properties. The beginning of 2004, the hotel industry had had a very tough time, obviously in late 2001, early 2002, because of 9/11. 2003 was a very tough year, but I joined a team that blessedly knew way more about the hotel business than I did. So I tried to figure out how do I be of service to them as CEO so that I help them get rid of obstacles and we grow the company and our value proposition. And we owned 36 properties across Canada from Newfoundland to Vancouver Island, and we ended up having a lot of fun growing the company, figuring out how to differentiate ourselves. And we get to 2007, and really there were kind of two converging paths of awareness. And the one was my CFO and I looking at our stock price and going, 'You know, we're good, but we're not sure we're this good.' And you know, we were believers, as I think most smart people are, in the idea of mean reversion. So we did a mean reversion exercise to figure out how much would we have to grow cash flow to get back to this stock price if our valuation reverted to the mean. And this again, this is 2007, and the answer was you're going to have to work a long darn time and grow cash flow a whole lot to get back to the stock price if your either implied cap rate or your AFFO multiple reverted to the mean. In the meantime, we had a couple board members, one in particular, who in early 2007 was spooked as hell, and he kept saying, 'We got to get out of here.' He was really spooked by the state of the world in 2007. So long story short, we ended up deciding to do a strategic review from a position of strength instead of a position from weakness, and had the good fortune to sell the REIT to a Canadian pension fund in the summer of 2007.

Pretty much. Yeah. And so we made that sale. They asked me and the CFO to stay on for a while. A year later they realized that their timing was a bit unfortunate and said, 'You guys can go now. We're not going to roll this thing anymore.' I did some board advisory work, including in real estate, private equity. Eventually moved back to the US. My wife and I bought our home in Rhode Island in 2011, moved back full-time to the US in 2012. I then had the opportunity to run another hotel REIT in Canada in 2014, where I hooked up with a hedge fund here in New York that went active on this name in Toronto. We managed to go internalize governance and management. Eventually was able to replace myself with a CEO while I became chair. And then in 2016, as chair, I get a call on April 1st, April Fool's Day, from a lawyer in Toronto saying, 'I'm going to send you a letter offering to buy the company.' Okay, okay, good. Who's your client? And he said, 'Well, I really can't tell you.' And I'm, 'Well, you're going to have to tell us sooner or later.' Right.

This was, we ended up selling for 2 billion Canadian, which at that point was not all that far off 2 billion US given where the Canadian dollar was. And this was a good, very good Canadian hotel portfolio. We owned iconic assets like the Palliser in Calgary, the Macdonald in Edmonton, the Hyatt Regency in Vancouver, and we had an ownership interest in the famous Royal York in Toronto. Long story short, the company that wanted to buy us turned out to be Anbang, which was doing business in this case under the name Blue Sky Resorts. They've done a very good job running the company, very much to their credit now 9 years into their ownership. And so that was done, we closed on that in August '16. So then I'm still doing some real estate private equity work and still doing independent board work. And then in January '17, I get a call from a real estate search firm that I'd worked with in the past saying, 'We're trying to put a board together for this new REIT that's going to form out of the Caesars bankruptcy, and would you be willing to come down to New York and talk to the creditor committee that's putting the board and ultimately the management team and the company together?' And so I did, and the meetings were actually held at the offices of Elliott when they were still on West 57th, 40 West 57th, and I sat there with the members of the creditor committee and became kind of intrigued at what this could be. And to make this the long story a little bit shorter, over the course of the next couple of months I was eventually asked to become the founding CEO.

I don't know how many precedents there would be exactly like this. And it was an idea, and it turned out in the end to be a good idea for both Caesars and VICI. It was an idea that I do think David Sambur, who was running private equity for Apollo at that point and certainly running the Caesars file, and the creditors, I think, came to as sort of a convergence onto an idea that really had merits for both sides.

I think they really began earnest around 2014, right? And you know, as you say, bad timing. It was a bad time to do an LBO in 2007. And to the credit of Apollo and TPG, they did not run Caesars badly. And the operating performance and the quality of the properties never really suffered under Apollo and TPG. It's just it was an inopportune time to take on a product of consumers pulling back from... Yeah, consumers pulling back, and then I believe they originally put 28 billion of debt on this LBO, and that became hard to bear. And so I believe it was around 2014 that things came to a head, and they did create this entity known as Caesars Entertainment Operating Company, or CEO, which became the bankrupt entity. That entity consisted of Caesars Palace Las Vegas and I believe 18 regional Caesars assets. It was not the whole portfolio. There were a number of Caesars assets outside this entity, but the creditors and Apollo/TPG agreed that the real estate assets of CEO would be conveyed to the creditors as a way of satisfying the credit. And then the creditors would be responsible for creating a REIT out of these real estate assets, because they don't want to operate these properties themselves. They need a sponsor back in it. And that's the birth of VICI.

I mean, in essence it sort of was a sale-leaseback, except I suppose it's a conveyance more than a sale. In other words, the creditors have already in effect invested money in these assets as lenders, and now instead of them getting their principal paid back, we're going to hand you the property. Right. And so it was, I mean, I think still in retrospect, it was a pretty elegant solution to a difficult situation, especially insofar as at the end of the day it did not end up jeopardizing the operations. Yeah. It's not like a new operator came in and the operating team suffered and the operating results suffered and everything that goes along with that. I will say though that the prevailing view across much of Wall Street was a view steeped in skepticism to the point that a popular project name for what eventually became known as VICI, and as you know, investment bankers love to come up with project names. This was not the formal project name, but the informal project name for what we now call VICI was Project Shitco.

Yeah. Such an elegant name. And of course, absolutely expressive of all the confidence that so much of Wall Street had. Well, it's so crazy because, you know, when I think of a triple net lease, I think of, you know, some 7-Eleven down in Nowhere'sville. Yeah. This is a triple net lease at an entirely different scale that I've never even heard of. I didn't even know that you could go like this big. And that's what got me so excited because I had enough experience in real estate by then, especially between Chip Reid and Invest and some of the real estate private equity work I had done, to know to recognize this is really remarkable real estate, and no one has really told the story of this real estate as real estate. There were actually already two gaming REITs. Gaming and Leisure Properties, GLPI, had spun out of Penn in 2013, and MGM Growth Properties, MGP, had spun out of MGM in 2016. But just to give you an example of the degree to which our predecessors didn't really frame themselves as real estate investment companies per se, when we announced our very first acquisition in the fall of '17, Harrah's Las Vegas, we were the first gaming REIT to use the term cap rate in a press release, right?

They used the term rent multiple, which was really just equivalent to EBITDA multiple, which really didn't make... it did not, for the Condes and Steers and the other big REIT investment shops, it was not a term that enabled them to quickly make comparisons across asset classes to what kind of value you're getting for the real estate you're buying. So, what I got so excited about starting in the winter of '17 was the opportunity to tell this story about real estate that had not previously benefited from an institutionalization story. And I mentioned that I'd done some real estate private equity work, and I did that work principally with a very successful company based in Annapolis, Maryland, called Realterm. And Realterm's history is really predicated on institutionalizing industrial subasset classes that had previously not been institutionalized. On-airport cargo was one of the categories institutionalized. The other one was cross-dock truck terminals, which turned out to be very vital because of their focus on less-than-truckload trucking to the proliferation of e-commerce. So, I'd seen what kind of value you can create when you help institutional capital understand an asset class that it has previously not understood. And if institutional capital does not understand an asset class, they will not invest in it.

Yeah. So we, you know, we emerged from Caesars in the fall of '17. We very quickly did our very first deal with Caesars, Harrah's Las Vegas. It became a storytelling opportunity as I mentioned, or as I was implying, because it was a chance to show that we were buying 87 million of NOI at a 7.7% cap rate, and we actually created a bubble chart that showed all of the single asset trades in American commercial real estate over the prior 5 years, all the prior trades, single asset NOI 75 million or higher, and at that point there were 12 trades, eight of which were New York office, one was medical office in Austin. Another was the Crystal Shopping Center in Vegas that Simon had bought. There just weren't many of them. So...

So those, this was the glory days of New York office. So as I mentioned, eight of those were New York office with three and four handle cap rates, right? And you're getting a seven and... yeah. So it was a discount play and you were buying a massive cash-making machine. So that's a really sexy... offer net. But there's a catch to it, and I'm sure this is something that you've had to deal with or the pushback. The pushback is it's a very unique tenant, right? Yeah. Yeah. And so you know what we also said about doing was helping our investors understand the nature and the characteristics...

of the tenants business and their ability to drive value. And you know when you get into the operation of the especially the big Las Vegas casinos, you're talking about an operating capability that's really unrivaled, rivaled only in the world by what Disney and Universal do in the biggest theme parks, right? I mean, we should talk before we're done about like the Venetian as a textbook case of gaming asset management on a scale that just dwarfs anything else you can talk about. But again, that was part of our storytelling.

Yeah, regional gaming during the GFC, same store regional gaming declined about 4% same store basis peak to trough during the GFC. It was amazingly resilient. Vegas, think that is by the way, I feel like the first thing you do when you're pulling back is say yeah, you know what, we don't need that vacation to Las Vegas or Atlantic City or wherever it is.

We are talking about gamblers. We're talking about this is probably similar to booze where you drink when times are good. You drink even more when times are bad. And you know they might not go as many times. They may not spend as much on each visit, but they still want to go. It's how they experience risk and the thrill that goes with that. And so same store regional held up very well. Vegas suffered a bit more during this GFC, but that was partly an issue of a whole bunch of new supply coming on at what turned out to be an inopportune time. If we go to COVID, all of our assets were shut for in some cases 2 months, in the case of some of the Vegas assets, almost four to 5 months. Gaming came roaring back, especially regional gaming. Regional gaming came roaring back right away in 2020. Vegas took a little more time.

Yeah. So, Atlantic City would be a regional market, right? And you have regional casinos pretty much wherever you have legal commercial gaming, so we have regional assets in New Jersey, Pennsylvania, Ohio, Michigan, Indiana, Illinois.

Yeah. But they're smaller relative to Las Vegas. Yes, but our best regional casinos would make like, I mean we have a glorious asset on the banks of the Potomac called MGM National Harbor. I think if you added up every hotel in DC, I don't think all those hotels in DC would make as much money as National Harbor.

Yeah, I mean let's put it this way. If you own one of the highest NOI producing hotels in DC, maybe you'd make 20 to 30 million in EBITDA, you're talking about 10x. I mean, it's just wow. Gaming is a silverback gorilla.

IPOed at the beginning of 18, began the effort to begin to diversify away from Caesars because we were 100% Caesars at the outset. We end up agreeing to do a deal with Eldorado for them to acquire Caesars in 2019. We get through COVID. Now we're into...

Well, they acquired the operations and the real estate that was still wholly owned by Caesars. Right. We get through COVID, we get a call in late 2020 from Goldman Sachs, which was representing Las Vegas Sands, saying, 'Hey, we're going to bring the Venetian to market.' And our reaction, like many other would-be buyers, was no. I mean, late 2020, if you remember, it was still super spooky, right? And Vegas got nailed again in Q4 of 2020 when there was a resurgence of whichever variant it was, Omicron or Delta, whichever one it was. But anyway, we get into Q1 of 2021, and we end up agreeing with Apollo, with whom we had history. Needless to say, let's go after it together. And we announced it, I believe, on March 2nd, 2021. And we just took everybody by surprise because everybody thought the asset trading market for assets of that size was closed. And we announced we were buying the real estate for 4 billion and Apollo was buying the operation for two and a quarter billion.

We paid a 6 and a quarter cap rate for just to dwell in the Venetian for a moment. The biggest hotel in America at 7,100 rooms, the biggest private sector convention and trade show facility in America at 2.5 million square feet. And an overall complex that has an economic dynamism to it that I don't think is rivaled again if you leave out the big theme parks, unrivaled by any other commercial real estate in America.