[VICI stock] Vici Properties Q4 2020 Earnings Call (2/19/21)

Thanks Samantha. Good morning everyone, and thanks for joining us. If for any reason you hang up or the line goes dead in the next 30 seconds, here's the one message I want you to take away from this call: in 2020, according to FactSet consensus, two-thirds, or 14 of 21 US triple-net REITs, are projected to post year-over-year declines in AFFO per share in 2020. As David Kieske will elaborate on in a moment, VICI's AFFO per share grew 10.8% for the year as a whole and grew 24.3% in the fourth quarter. In a year 2020 when again two out of three peers are likely to see declines in AFFO, we think VICI's growth is worth remarking on. But it's been interesting to see commentary so far, which can be pretty much reduced to: did VICI achieve consensus AFFO per share? Did VICI achieve consensus? That is, of course, a key question. We think it's also worth asking: the consensus call for AFFO per share — growing, staying steady, or declining? If it called for growth, was it a lot of growth or a little? Once all American triple-net REITs report their 2020 results, we'll know with finality where VICI's AFFO per share growth stands on a relative basis. We already know where it stands on an absolute basis, and it is growth. We're very proud of especially coming out of a year so tough and so thoroughly dominated by the COVID-19 crisis. As I said in our Q3 2020 earnings call, what the COVID-19 crisis has taught us across the US REIT management spectrum is that the strength of a REIT's business model is the aggregated strength of a REIT's tenants' business model. And for gaming REITs generally and VICI specifically, the COVID-19 crisis demonstrated that our gaming tenants have built business models of great strength and durability. And the strength and durability of their business models is derived from the strength and durability of their relationship with their customers, the end users of our real estate. This strength of the gaming operator-gaming customer relationship is a key lesson I take from 2020. This strength of relationship and the mission-criticality of our real estate to that relationship is the key reason we at VICI collected 100% of our rents in 2020 on time and 100% in cash. It's the key reason we were able to announce what we believe is one of the larger 2020 dividend increases among large-cap American REITs. It's the reason we were able to go back on offense as early as June with our Caesars financing and later in the summer our first non-gaming financing with Chelsea Piers. Finally, it's the driving force behind our AFFO growth in 2020 and our AFFO growth trajectory coming into 2021. But there's a second lesson I take from 2020, and it's a lesson the clarity and power of which truly burst through in the second half of 2020, and that is the emerging power of sports betting within the American gaming ecosystem. As gaming real estate owners, we aren't as focused on the TAM of sports betting revenue, though of course we hope our tenants realize as much revenue and profit as they can from this new channel of business, whether online or in property. As real estate owners of assets that we will own and our tenants will occupy for decades to come, we believe sports betting will have the greatest long-term impact and create the greatest long-term value by greatly expanding the audience for American gaming. American gaming is an American consumer discretionary sector. Every American consumer discretionary sector competes with the attention, time, and spending of the American consumer. If a given sector can achieve competitive advantage in gaining and sustaining the attention of a potential new customer or consumer, that sector will likely generate outsized growth and value in the years to come. For American gaming as an American consumer discretionary sector, we strongly believe sports betting represents a new competitive advantage. What we believe sports betting does most powerfully is insert American gaming more broadly and deeply into the American conversation. Think about it: what are the two great mainstays of getting an American conversation going? Number one, weather; number two, sports. We'll see if the day ever comes when casinos offer betting on weather, but the day is now here when sports betting is getting powerfully woven into the all-consuming American conversation about sports. Just to cite two examples involving two of our tenants: every time the Caesars Sportsbook gets cited exclusively on ESPN, and every time Penn is able to deliver a sports betting message through its partner Barstool, each of these great American gaming companies is reaching an audience of potential new customers, especially potential new and younger customers. The American gaming sports betting represents a new and technology-enabled paradigm for reaching, engaging, and activating a new, bigger, and younger audience. This technology-enabled paradigm is a new tailwind behind American gaming. If you look at REIT asset class performance over the last few years, the winning asset classes in terms of superior total return have tended to be asset classes with technology-enabled tailwinds: cell towers, data centers, and e-commerce logistics are just three such examples. Conversely, the asset classes that have struggled tend to be those suffering from technology-related headwinds. We believe with high conviction that the gaming real estate asset class should, in the next few years, benefit from this technology-enabled tailwind. So all in all, 2020 was a year in which American gaming and American gaming real estate proved its defensive strengths by enduring through one of the great crises of our lifetimes. And 2020 also showed, thanks to the growing strength of sports betting, that American gaming arguably represents one of the most compelling offensive opportunities in the consumer discretionary sector in the coming years. The next sound you hear will be the sound of the American consumer roaring back. And as many of you have been writing about, after many months of consuming mainly things, American consumers will return to what has been their growing preference for the last two decades: the preference for consuming experiences over things. As some of you may have heard on the Sunstone Hotel Investors earnings call last week, our good friend and Sunstone CEO John Arabia cited transient bookings for the second half of the year at their Maui property that are currently double-digit, 133% above 2019 levels, and the outlook continues to improve on a weekly basis. We believe this is one of the many anecdotes around pent-up leisure demand that will benefit the consumer discretionary sector at large as the economy continues to reopen. I'll turn the call over to our President and COO John Payne, who will talk about what we have done and, more over, what we are doing to capitalize on the roaring return of the American consumer.

Yeah, Tony, the way we are approaching non-gaming is that we really want to pioneer into categories where REITs may not necessarily have been heavily trafficking and bidding and buying. We really have no competitive advantage in heavily marketed, heavily bid categories. So what we're working hard to do, as we did in the case of Chelsea Piers, is identify either categories or subcategories where we believe there are operators who have uniquely powerful and enduring relationships with their customers and are producing economics that can support, more than richly support, an opco-propco structure. It obviously takes a bit more time, but we're very excited about what we are learning and who we are meeting and who we're getting to know and the opportunities that they represent. And I think, Tony, as we talked about with you around the whole technology tailwind theme, there are also cultural tailwinds out there. We think there are certain experiential sectors, especially at the higher end, that are going to have tremendous cultural and demographic tailwinds behind them for the next 10 to 20 years. And that's where we see our opportunities. It's really not in the commodity categories of triple net.

It should. If this asset category behaves the way certainly so many other categories have, Tony, that have undergone an institutionalization process, yes, the prices should go higher. Our mission we work hard at every single day at VICI is to make sure our cost of capital improves at a rate equal to or in excess of the velocity of cap rate compression. But it just stands to reason that these assets should attract higher prices as time goes on as everyone recognizes that they came through a totally unforeseen magnitude of crisis, and they came through better than just about any leisure consumer discretionary sector out there as a real estate asset class. So yeah, you have to think, especially as people truly start crawling out from under the rock of COVID, that we should see what? But frankly, I joined VICI four years ago to take part in the next great cap rate compression story in American commercial real estate.

It could be all of the above, Stephen. The fact that they're not heavily bid could mean there are better bargains to be had, but it could also be exactly to your last point, that we can afford to pay and justify paying maybe a somewhat tighter cap rate because of the nature of the asset, the risk profile of the asset, the barriers to entry, and what has been a very proven durability of the asset over the long term. So it will be, I hope this doesn't sound like sort of a vague answer, but it will be situation-specific.

Let me jump in, John. The embedded growth pipeline is something we've been cultivating since we started VICI. We have a number of options and ROFRs, including the Caesars Strip asset and the Centaur call you mentioned. Timing is not something we control entirely — it depends on when our tenants decide to transact. But we are positioned to act when those opportunities materialize. Caesars has been public about wanting to monetize some Strip real estate, so we watch that closely. The Centaur option starts next year, and we'll evaluate it at that time. We're patient and we're ready.

Deals that we've announced, and we'll continue to talk to our partner in Caesars about what they're seeing ahead and what they're feeling about the Las Vegas market. Do they still feel, as they did when the Eldorado team took over Caesars, that they may have one or two incremental assets that they don't feel like they need in their portfolio, and they'd end up going through a sales process? As I mentioned a few minutes ago, we're big believers in Las Vegas. We think this is a market that is going to rebound in all segments. So if they want to move forward with a sale, we're obviously very interested in owning more real estate. Those assets that we have, you also mentioned the put-call of the two great Indiana assets in Indianapolis that do come to your right on point next year. Again, we'll continue to have talks with our partner about that. So two tremendous opportunities for us that we really worked to develop over the years with our embedded pipeline. As it pertains to timing, we'll just have to continue to have discussions with our partners on that.

Yeah, I'll start there, Dan. John can talk about the M&A landscape and outlook, but we have always historically—I should say, it's silly to use the word 'always' when the company is only about three years from its IPO, as we are—but from the beginning, we have always sought to equitize the balance sheet in the interest of having firepower when opportunity strikes. There may have been at times some near-term dilution taken on, but that was near-term dilution endured for the sake of having firepower to create long-term accretion to our ability to move very quickly when opportunity presents itself. We certainly do not intend to shortchange our shareholders by keeping excess capital on the balance sheet for prolonged periods of time. But we're pretty confident we're going to be able to put that capital to work.

Yeah, Dan, I was just going to add that I think one of the emerging dynamics that is powerful and positive is the growing recognition of the value of network effect in American gaming. Harrah's and then Caesars obviously were the pioneers of true network effect in American gaming and would still widely be considered to be the leaders through the power of Caesars Rewards. But I think increasingly operators are recognizing, in part because of sports betting, that there is genuine value in creating network effect and having stores in as many jurisdictions as you can. That we think is going to be a powerful force, especially once COVID clears away, in continuing to drive M&A, with a lot of the M&A driven not so much by the seller's need to get out as the buyer's intense desire to get in. There are markets in which buyer demand can create incremental supply.

Yes, I'm not—well, market access, but also through market access being more valuable unto yourself and more valuable to your partners, whether it be a Barstool, William Hill, FanDuel, DraftKings, whoever your partner may be.

Yeah, no, it's a very good question, John. That would certainly be probably the most meaningful way, which would be as a capital provider as great operators envision and execute what the whole sports betting, sports culture, sports viewing experience can be within a casino. John, I don't know if you've had a chance yet to go to Derek Stevens' new asset in downtown Las Vegas, but it is a great example. John Payne has been there, and John, maybe you can talk about it as an example of what we would certainly be happy with our tenants to fund, given the magnitude and vision that Derek has realized there.

Yeah, John can answer that in a moment, David. But I will just start by pointing out that this week we all learned that Koch Industries, which has a rather strong record of capital allocation, has seen fit to put capital on Las Vegas, which I took as a net positive. But anyway, John, you want to answer David's question?

Yeah, it's an interesting way to phrase it. I mean, what we've been doing is going and looking for, as I described earlier, Jay, off-market categories where REITs have typically not gone. So we are much more oriented to going and finding what we most want to invest in, as opposed to letting the market present opportunities to us, because the market tends to present opportunities to a would-be bidder that are by definition more mainstream and commoditized.

Yeah, well, Spencer, good to hear from you. We actually don't have any assets within New York state right now. But what I would say about New York state is what I would say generally in terms of how we're viewing sports betting, which is really a key means of market or audience expansion. There will be a lot—once New York figures out what it wants to do in sports betting, sports betting and the culture around it will enable it to truly widen its audience in the way so many other states and operators are doing. So we again don't have any highly informed thoughts around New York, but very excited about what this means for gaming nationwide.

Well, by REIT law or legislation, Spencer, rent variation has to be based on revenue. REITs are not allowed profit participation. So for that reason, we would expect to see all kinds of variable rent mechanisms continue to be revenue-based.

Thank you, Amy. In closing, we thank you for your engagement with us this morning. As you can tell, we are very excited about our present situation, our near-term opportunities, and our long-term prospects. We've been saying since we started in 2017 that gaming real estate represents the next great institutionalization story in American commercial real estate. Our conviction behind that thesis has only grown stronger, and we believe it can be fully realized as we collectively witness the roaring back of the American consumer. Thanks again everyone. Bye for now.