Investing In Experiential Real Estate Sectors - Discussion With VICI

Yeah, well first of all, David, great to be with you and thank you for doing this with me. It actually hasn't been quite 10 years, it's seven years. We IPOd in February of 2018. I first got associated with what we now call Vici very early on in 2017. And I do love looking at this chart because it really encapsulates our story better than you could on any other single slide. We started in 2017 as a consequence of a credit settlement between Caesars, which had gone through an LBO in 2007 led by Apollo and TPG, a credit settlement between Caesars and its creditors. And that agreement really pivoted on the creditors agreeing to create a REIT out of the property that had been conveyed from Caesars to the creditors as a way of satisfying the credit. The moment I got involved, I was just so excited by the quality of this real estate, the magnitude of it, basically an economically bigger operator in terms of envisioning and delivering experiences. So I got started by really figuring out how do we tell the next-grade institutionalization story to American REIT investors, both equity and credit. And we emerged in the fall of '17. We immediately did a deal on Harrah's Las Vegas and we were immediately able to demonstrate that we were buying an incredible magnitude of NOI out of a single property — $87 million — and we were doing so at a 7.7% cap rate. And one of the ways we really got the attention of the dedicated REIT community was by creating a bubble chart that showed the number of single-asset American commercial real estate trades that had taken place since 2015 of $70 million of NOI or higher, again from a single asset. There were 12 trades at that point, eight of which were New York office, one was medical office in Boston, one was Crystals shopping mall in Las Vegas, and most all of those trades of these assets of $70 million of NOI or higher were trading at three and four handle cap rates. And here we were showing that we were buying this asset on a net lease basis with $87 million of NOI at a 7.7% cap rate. It was all part and parcel of really engaging the institutional community and getting the support from both the equity and the credit communities that have enabled us to fund the growth that you see taking place on this chart between 2017 and 2024.

Yeah, and I should point out that when we began in 2017 and IPOd in 2018, we had one and only one tenant — that was Caesars. 100% of the rent roll was Caesars. And we knew we had both the opportunity and the necessity to diversify our rent roll. One point I want to clarify is that in all of our properties, we own the improvements as well. In nearly all the properties, we own the land. There's actually a couple of situations where we are on long-term ground leases ourselves but then own the improvements on that land, so we are a fully vertical, if you will, landlord. And again, it really came down to recognizing the opportunity we had to expand into both the gaming category and the wider experiential sector. But so much of what we've done obviously has been focused on gaming, and you are right, David, you are right to point out that our operators operate on one-night leases while we operate on a weighted average lease term of 40 years. That one-night lease term obviously brings volatility with it for our operators, but one of the things I think we really strive to emphasize about gaming operators is their resiliency through all cycles. During the Great Financial Crisis, regional same-store gaming only declined about 3 to 4%. That was a period when other categories like retail and food service were down anywhere from 9 to 11%. S&P 500 revenues overall were down 18%. Regional gaming proved its resilience then. Vegas held up better than most people ever thought it would, especially in light of all the new supply that happened to come along right in time for the GFC. And Vegas occupancy during the GFC troughed at 86%. The resiliency of this business for operators gives us a whole lot of confidence in their ability to continue to pay rent through all cycles, and that was certainly dramatized during COVID when we collected 100% of our rent in cash and on time.

Yeah, so before I do that, I just want to point out that we would not consider Las Vegas Sands a competitor; we would consider them a past and a potential future partner. We obviously partnered with them on the massive Venetian transaction — they as seller, we as buyer. And 'Come on down to Dallas' then? Come on down to Dallas in that. And we stay in touch with the LVS folks and hope that we can help them grow as they address their growth opportunities potentially in New York and in Texas and potentially beyond. We committed ourselves from day one to being an experiential real estate investment trust, not purely a casino real estate investment trust. And that really grew out of our belief, our conviction in the secular trend of consumers increasingly preferring experiences over things — the spending of discretionary income and time on experiences rather than things. So we began from day one working to identify categories that would meet our key investment criteria. When it comes to making investments, those start with lower than average cyclicality versus consumer discretionary at large, an absence of secular threat. We really want to stay away from categories that are subject to real estate obsolescence because of technological change — i.e., real estate that's no longer necessary because whatever took place in the real estate can now be sent in a box through a wire or wavelength directly to the end consumer. We want proven durability, usually measured over decades. We really are careful about investing behind fads. We really want to know that the end-user experience has been proving its durability over decades. We want favorable supply-demand balance, and we want what we call economic dynamism — we want an operator P&L that really responds to management intensity and innovation. So from the beginning, we identified certain categories we believed had all these characteristics. And two of the categories were indoor water park resorts and complex — highly complex — fitness and wellness facilities like Chelsea Piers. And we basically did our Chelsea Piers and Great Wolf deals almost overlapping in 2020. Those marked our first allocations of capital into non-gaming real estate, and we've continued to grow since then into other categories and with other partners in the way we'll talk about here in a moment.

Yeah, I don't know if I was talking about that so much as to diversifying the gaming experience so that it is more family welcoming. That definitely takes place at some degree. In fact, the recent data is showing an increase in visitation of families to Las Vegas, and that does have to do with the diversification of demand drivers that you now have in Las Vegas, whether it be the music residencies, the sports teams relocating to Las Vegas, the shopping, what have you. But I think our greater focus would have been on investing in sectors that can benefit from either family activities or youth activities that we believe have strong secular trends. For example, youth sports is a secular trend we believe has a long way to go, and thus the sort of investment and partnership we've made with both Chelsea Piers and with our HomeField Partners in Kansas.

I would say it's marginally more positive. It's been, ever since interest rates started rising in 2022, it's been generally speaking a transaction market where it's been hard to get things done. Especially given that a lot of would-be sellers are anchored to what their assets might have been worth in 2021, and you have to remind them it's not 2021 anymore. Unless they have a really compelling reason or need to sell, there hasn't been a whole lot of transaction activity. There has been a fair amount of development activity, which we've capitalized on through the use of our Vici Experiential Credit Solutions line of business. But I would say it's feeling somewhat better, but boy is it volatile. On a day-by-day basis, the volatility of the US 10-year makes it very hard for anybody in the capital allocation business to have a lot of conviction and clarity around what money is going to cost one, two, three months from now. I mean, if we just look at the past couple days, we were looking at the US 10-year trading back up almost all the way to 4.35, traded almost all the way down to 4.15 today, and now I think it's back up to 4.24 or whatever it is. These kinds of intraday moves are not... well, they didn't used to be normal. We only had three days in 2018 where the US 10-year moved in a day 10 basis points or more. We had 48 in 2022, almost 40 in 2023, we had probably close to 30 in 2024, and I bet we've had at least 10 so far this year. That volatility does not appear to be going away anytime soon. And thus, what it really emphasizes is taking great care in making your capital commitments and making sure you don't turn out to be on the wrong side of a wack equation two months from now because you made a bet that it would stay the way it is today.

Not directly, because again, we're a net lease landlord, so we don't buy a whole lot of stuff other than real estate. We're not buying furniture, fixtures, and equipment the way our operators do or the way a lot of landlords in other categories would. So no, not a whole lot of tariff impact. Again, I would say because the environment has stayed volatile, I wouldn't say it's fundamentally changed a whole lot. And again, while I would absolutely say there are not endless opportunities to place capital, we are seeing very interesting opportunities like the kind we saw obviously we won Beverly Hills, and you just heeded it up. So you spent a lot of time talking about One Beverly Hills. I saw the relationship obviously mentioned with Kane in London. You met one of the partners at Guggenheim who's a Dodgers owner — if you recall, I've got some ties to the Dodgers with my stepfather-in-law, so to hear these stories it hits very close to home for me. Was it the conversation? Was it like-minded interest? Because looking at a lot of the stuff that you guys have participated in, One Beverly Hills kind of fits in the scope, but I think if you had said to us two years ago we have this on our radar, people would be like, 'Wait, what?' But now it obviously makes sense because you're a capital provider. You're not going to be the entertainment provider, you're a capital provider. And by the way, what can you tell us about the Aman hotel brand? Because I wasn't familiar with it until you guys highlighted this massive deal. So walk us through this and why not other potential mixed-use developments that are on the table across the country right now.

Yeah, well I think when you look at the attributes of One Beverly Hills and why that as opposed to potentially other mixed-use development projects, it obviously all starts with location. This is one of the most compelling real estate locations in America. We talk about the Las Vegas Strip as the most economically productive street in America, if not the world, and I absolutely believe that it is. And we love having the 10 locations we have on the Strip. I believe, if I remember the numbers right, we own 1.7 miles of frontage on the Las Vegas Strip, and there's four total miles of frontage on the Las Vegas Strip. It is really important and value-enhancing to own or otherwise invest in real estate that is in truly compelling locations. The location of One Beverly Hills is a dream location. It's at the triangle formed by the intersection of Wilshire and Santa Monica in Beverly Hills. The apex of the triangle is the legendary Beverly Hilton, and as it widens out, it abuts LA Country Club, one of the most exclusive private clubs in America. You can look at this land and go, 'Wait, how was this ever available? How was this not developed decades ago in such a way that you could never develop it today?' And yet the Kane team got this tied up, they got it entitled, they got it permitted, and they've created a vision that will make this one of the most compelling luxury destinations in the world. It will have a newly renovated Beverly Hilton, it will have an Aman Hotel, an Aman Club, and two Aman branded residential towers, and a luxury retail and restaurant garden. In terms of helping you understand who and what Aman is, Aman actually started in Thailand, and from the beginning was positioned as one of the most ultra-luxurious and private hospitality experiences you could have in the world. They became famous in the US, at least among certain people, for the development of a property in Southern Utah called Amangiri. And I would encourage everybody to Google them and just look through the portfolio, because they're pretty much one-of-a-kind properties in one-of-a-kind locations. Their pricing power is really not nearly equal and certainly not exceeded by any other player out there in the global luxury hospitality space. I remember we were meeting with folks at the Citi Real Estate Conference back here at the very beginning of March; we decided to just figure out, okay, what would it cost you to stay at the Aman in New York at the intersection of 57th and 5th, what would it cost you to stay there this coming weekend? And the cheapest room available on that Friday night was $11,100.

Yeah, well it's way up there. I mean, obviously I look back and I'm still giddy about the deal we were able to do with our Apollo partners on buying the Venetian. Still giddy about becoming a partner to MGM through our acquisition of MGP. And I would say yeah, this is up there, both on the merits of the capital allocation to One Beverly Hills and probably even more so the opportunity to begin what we believe to be a very long-term and growing partnership with Kane and Aldridge, who are incredibly dynamic investors across the experiential spectrum. And we're going to get into that a little bit more.

Yeah, I will just say, David, I'm actually on a flight to Vancouver tonight, to a province I lived in for 16 years. And if you... I don't know of a much better way to make Canadians angry, and we've done a great job as a nation, to say Canada is not really international. We consider it to be international at any rate. We will pursue international growth when it's truly compelling. There are certainly certain REITs whom we respect tremendously, most notably Prologis, that have expanded internationally very productively and very creatively. We want to make sure we take care in any investment we make anywhere, but especially internationally, to know that it is truly going to be a good investment for the long term. That we've protected ourselves against currency risk, we've protected ourselves as best we can against tax leakage, that we're in countries with a rule of law and economic health. The investment could be a great one for the long term.

Yeah, I would say that you can do very well by making a bet on both us and GPI. We are really striving to be a total return investment. We want our investors to benefit not only from the income we distribute to them but from enduring value appreciation in the properties. And we feel we give our investors the best shot at enduring value improvement in the properties we already own by giving them exposure to an incomparable location like the Las Vegas Strip and through the ownership of incomparable assets like the Venetian, like Caesars Palace, like MGM Grand, like Mandalay Bay, and the other assets we own along the Strip. So our exposure to the Las Vegas Strip, which constitutes almost half of our rent roll, and our willingness, ability, and excitement in investing in non-gaming categories, we think gives us a growth opportunity and a total return opportunity that is truly compelling and differentiated. And that was borne out in terms of the guidance we were able to give for 2025 when we announced our guidance in our February earnings call. We guided to 2025 growth in AFFO per share at 3.3% at the midpoint. GPI guided I believe to 1.4% growth in AFFO per share at the midpoint. And we're about three times bigger, but we were able to post growth that wasn't quite three times the rate. So I think it's our ability to identify growth opportunities outside the gaming spectrum or within the gaming spectrum that are somewhat unique to us.

I think the evolution will be driven by the leaders of cultural innovation and transformation. Vegas has become probably the leading experiential development lab in the world. There's a reason the first and still only sphere in the world is in Las Vegas. There's a reason Las Vegas is really the only place in the world where you have residencies like you have in Las Vegas. Adele hasn't done a residency anywhere else. Lady Gaga doesn't really do residencies anywhere else like she does in Las Vegas, nor Bruno Mars, nor Usher. That cultural energy is the energy out of which the innovation and the transformation will grow. And I have no business, no qualifications to predict what it will look like, but I do know that transformation will grow out of the richest experiential petri dish that exists in the world today. And so much is dependent upon infrastructure that exists nowhere else in the world today. That infrastructure started with the roads into Las Vegas, the airport that serves Las Vegas, everything that goes into enabling... I don't know what, there are 140,000 hotel rooms on the Strip. 140,000 hotel rooms to function properly every night of the year. Our biggest Vegas assets do occupancy year-round occupancy in the 90 plus percent range. There's nowhere else in the world that does that. Like you said, 140,000 rooms in a two-mile, less than two-mile block, it's tight.

Not exactly sure, because to be clear, sphere was developed on its own and operated by Madison Square Garden. Well, standalone now, it's technically sphere, it's its own ticker. They effectively sublet from the Venetian, and then the Venetian leases from us. So we don't actually have a direct relationship with sphere. But I do believe they'll be successful in Dubai because the UAE is one of the places in the world that's achieving the same incomparable critical mass that Las Vegas is, with the difference being gaming and a whole lot of other things that can take place in Las Vegas are only just beginning to take place in the UAE.

It'll be interesting to see how Macau evolves with the way China controls Macau. And just to be clear, Macau is a place we could not own real estate. The whole Macau model is a concession-based model, not an ownership model. But any rate, here's a fun game I like to play. I like to ask people, if you could pick any one band to play sphere, who would it be? David, I'm going to put you on the spot. I know you're a Deadhead, so you can't say Dead. The Dead... Fish? They've already been there, it was Fish. So outside of the Dead and Fish, one band. If you could name it.

I think you're right. I think you're talking about the Stones, you're talking about Springsteen. If you could ever reunite Pink Floyd in any way, what Pink Floyd could do with that venue would be great. They kind of did sphere-like things before sphere ever existed. You just gave me the chills thinking about literally... I've got the chills thinking about Pink Floyd playing in the sphere.

Well, it does. I obviously hope it all ends well. Paying $6 billion for the Celtics, a team that does not even own its own arena, that's quite breathtaking. But hey, I'm really glad that Wyc and all the other owners who came in at $300 million whatever year that was in the early 2000s, they've done a great job with the franchise, they deserve to be rewarded. Our interest in sports is obviously in sports infrastructure. And one of the elements of sports infrastructure we're frankly most interested in is the whole training facility dimension of sports infrastructure. We would have to evaluate stadiums and arenas very carefully given what can be the obsolescence factor, especially in the North American model. There's a lot of teams that decide after 20 years they've already outgrown this arena. We don't want to own an arena where the one and only tenant leaves after 20 years. Training facilities, on the other hand, are very big complexes, both operating and capital. As an example, the Miami Dolphins spent $150 million building their new training center. And as you look across the European football landscape, training grounds, especially if they have an academy component, tend to be big ticket items. What we like about training centers is that they're key infrastructure, but even in a worst-case scenario where the team left or outgrew the facility, you would have a sports and recreation complex that you could turn into a commercial enterprise by bringing in the likes of a Chelsea Piers or a St James as an operator.

Well, met with Jerry and Stephen gosh, this was a year and a half ago. And what they've done with The Star is utterly amazing. It is pretty crazy. I was there for a meeting a couple of months ago, my first time I'd been there, and it was jaw-dropping. We're getting close to the end. I want to be respectful of your time. I do have a couple of audience Q&As that we got before we visited today. So let's kind of tee up towards the end here. All right, final: if it's your final pitch, we've gone through a lot of stuff here. If you haven't tried to convince somebody yet, why Vici? What is the value proposition in 2025 and beyond? If somebody was questioning, 'Should I buy the stock?', why would I buy the stock? Why Vici?

The power of total return compounded. We've been through a period here in the equity markets where it was all about the Magnificent Seven and all about wild expansion of multiples and incredible earnings growth. And as we kind of come back to reality here, I think people really need to think, especially those saving for retirement or other critical life needs, as to how is my money going to grow over the next 10 years, and to what degree am I going to compound my return over that period, and what are going to be the drivers of that compounding. So when you take Vici and you take our five-odd percent dividend yield and our ability to grow our earnings year in and year out at a minimum of three to four percent, even if you capitalize that at a constant multiple and added to the dividend, you should be getting total return of 8 to potentially 10%. And everyone of course should know the rule of 72. If you can achieve compounded total return at 10%, you'll double your money in seven years. That didn't sound that fun and sexy in the last couple years when Nvidia and all the other Mag Seven were just multiplying in terms of valuation and stock price at dizzying rates. Well, that may not happen over the next 5 to 10 years. And the value of owning a REIT is to own a share of the cash flow through the dividend and the opportunity to participate in the increasing capital value of what it owns and the earning power of what it owns. Vici, like so many other great REITs, really should be looked at as a compounding vehicle. And anybody who's read Buffett or Howard Marks or anybody else knows at the end of the day it's all about compounding.

NAV honestly is not a metric we spend a lot of time on. First of all, we can't manage it per se. What we can do is influence the way in which our properties are perceived and understood and help the market understand better that through our ownership of our incomparable assets, especially on the Las Vegas Strip, we own assets that deserve to trade at among the tightest cap rates in American commercial real estate because there are very few other assets in American commercial real estate of this scale, quality, and economic magnitude. So the storytelling is something that we have to continue to do for years to come because the both the bad and the good news is the market still doesn't fully appreciate the rarity of what we own in terms of the price per share. Well, that's... I assume that's what PPS stood for? Yeah. I mean, we just need to keep growing income, we need to keep growing the dividend. And those are really the only two things we can manage. If we can do those things well, those things do get rewarded over time. But there will be periods through the equity market cycle that those don't get rewarded the way they should. And frankly, we've been in that period as Vici for the last couple years, and the whole REIT sector frankly has been in it for almost 10 years. If you look at the RMZ today versus where it was 10 years ago, it hasn't gone very far. Which is not to say everybody's hovered around the same value. There've been winners over that 10-year period, obviously like a Prologis, the data center REITs, Tower. And then there have been losers over that period, notably obviously office. So we just have to focus on what we can control, and that's really growing the earnings and growing the dividend.

We are always concerned about safety of the dividend, but I would go back to the criteria we apply before we go into a category and then the criteria we apply to evaluate a given operator as a partner, as a credit. So no, inherently we do not feel we are in any way endangering the dividend by diversifying into sectors that we know have the right investment characteristics.

No, we haven't really. And it kind of goes back to your great question David about what's Vegas going to look like over the next 10 to 25 years. And the answer is we don't know yet. But the good thing is we don't need to know. We want to make sure that that land is available to us when innovation and development opportunities come along for which that land is the perfect solution, the perfect answer to the question 'where is it going to get built?'

Now and then, but not every day.

Not imminently, no.

I think really always being clear on why one should invest in REITs generally and then a specific REIT like Vici. There are folks out there who actively trade REIT stocks, and I'm actually kind of baffled by it. It's like, man, if you're going to actively trade something, maybe it ought to be something where there's genuinely something happening every day, every week, every quarter. REITs really are about predictability, stability, and the opportunity to compound total return. And one of the keys to compounding total return is do not go backward. If you go backward, that compounding machine really starts to get kind of creaky. So REITs that can deliver solid dividend safety and growth based upon solid and steady earnings growth give you that really good opportunity for compounding. It's not to say that the equity price may not go backward in a given year, but if you measure it over a longer time period, did the REIT continue to grow earnings in such a way that over the long term it grew in value?

My pleasure, David. Thank you.