VICI Properties Inc. (NYSE:VICI) Q4 2022 Earnings Call Transcript

VICI Properties Inc. (NYSE:VICI) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Fourth Quarter and 2022 Earnings Conference Call. Please note that this conference call is being recorded today, February 24, 2023. I’ll now turn the call over to Samantha Gallagher, General Counsel with VICI Properties.

Samantha Gallagher : Thank you, operator, and good morning. Everyone should have access to the company’s fourth quarter 2022 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the VICI Properties website at www.viciproperties.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, guidance, intends, outlook, 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 condition. 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 on our website in our fourth quarter 2022 earnings release, our supplemental information and our filings with the SEC. For additional information with respect to non-GAAP measures of certain tenants and or counterparties described on this call, please refer to the company’s public filings with the SEC.

Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Danny Valoy, Vice President of Acquisitions. Ed and team will provide some opening remarks, and then we’ll open the call to questions. With that, I’ll turn the call over to Ed.

Edward Pitoniak : Thank you, Samantha, and good morning, everyone. We’re excited to talk to you this morning about our results in 2022 and our outlook for 2023. John will also give you color on our operating environment and business development activities. I’ll start by talking about VICI’s first 5 years. A couple of weeks ago, we reached the 5-year anniversary of VICI’s IPO. I want to thank every single VICI team and Board member for the incredible work they’ve done over this 5-year period, enabling VICI, among other things, to become the first REIT to go from IPO to S&P 500 inclusion in under 5 years. And I want to thank all of our operating partners in and outside of gaming for the amazing work they do in making our buildings, places a great experiential and economic value.

In February of 2018, the time of VICI’s IPO, I don’t think any of you would have been very excited if I told you that the ensuing 5-year period from VICI IPO through year-end 2022 would be a period in which the S&P 500 Index would generate cumulative total return over that period of 48.5% or that their RMZ REIT index would generate cumulative total return of 27.9%. I want to emphasize those are not annual total return figures. Those are cumulative over the entire period. And that’s exactly what the S&P 500 and the RMZ REIT indices produced in cumulative total return over that period. Over that same period since our IPO, VICI produced for its shareholders cumulative total return of 109.7%. I’ll repeat that, 109.7%. This cumulative total return by VICI beat the S&P by more than 2x and beat the REIT index by nearly 4x.

Over that 5-year period, no other REIT in the S&P 500 produced cumulative total return superior to VICI, zip, zero, none. Since 2018, VICI has produced an AFFO per share compound annual growth of 7.7% and a quarterly dividend per share CAGR of 7.9%. If we look at 2022 by itself, we see another year in which VICI produced significant outperformance. VICI was the only S&P 500 REIT that produced positive total return in 2022. And VICI’s 2022 13% total return generated 31.1 points of outperformance versus the S&P 500 index overall and 37.5 points of outperformance versus the RMZ REIT index. Our stockholders have received the outperformance they’ve deserved over the last 5 years and in 2022, given the support they have been given VICI throughout our 5-year history of portfolio growth and balance sheet upgrading.

What we’re most excited about is the opportunity to continue to create value for our stockholders. In a moment, David Kieske will lay out for you our 2023 AFFO guidance. I don’t want to steal all of David’s thunder, but once David has shared that guidance with you, I encourage you to compare VICI’s 2023 guidance to consensus 2023 S&P 500 earnings forecast which are generally trending between very low single digits and negative single digits. Compare VICI’s 2023 guidance to what you are hearing from other REITs, especially other S&P 500 REITs, which is generally 2023 AFFO growth guidance in the low single digits. And once you have made that earnings growth comparison, I encourage you to make a comparison between VICI’s multiple on 2023 AFFO and the 2023 AFFO multiples of other S&P 500 REITs. Once you’ve made those comparisons, I believe you’ll find that VICI offers what we believe to be one of the more compelling 2023 price earnings growth or PEG plus yield ratios that you will find among all S&P 500 REITs. To help you along in that calculation, I’ll give you this starting point.

The AFFO growth represented by the midpoint of our guidance, plus our dividend yield as of yesterday, equals 14.5%. Compare that 14.5% figure to what other S&P 500 REITs are offering in 2023 AFFO growth, rates plus dividend yields, and I believe you will see VICI standing out. Finally, I’ll give you one more comparison. With consensus estimates of S&P 500 2023 earnings per share growth running at 1% and the current S&P 500 dividend yield running around 1.6%, the combination of current estimated earnings growth and dividend yield would be 2.6% for the S&P 500. The combination of VICI’s midpoint AFFO growth and our current dividend yield would be over 14%. With that, I’ll turn it over to John for his remarks. John?

John Payne : Thanks, Ed, and good morning to everyone. Over the past 5 years, our team has worked relentlessly to institutionalize our asset class and to deliver value for our shareholders by growing our portfolio accretively. During this time period, we’ve expanded our roster of tenants from just one at formation to 11 best-in-class operators who manage some of the most complex and profitable experiential assets across the globe. Our hard work has also resulted in growing our portfolio from 19 properties at formation to 49 assets today with our portfolio encompassing, what we believe, are some of the most iconic properties across all commercial real estate classes, and our real estate now crosses into international territory.

Now none of this would have been possible without the effort of our dedicated team who on many occasions end up working nights, weekends and unfortunately, holidays. For that, we, as an executive management team are very, very grateful. In some ways, 2022 was the hallmark of our achievements. Early in the year, we completed the acquisition of Venetian Resort in Las Vegas, arguably one of the most iconic experiential assets in the world at a very attractive 6.25% cap rate. Those of you who have followed our story may remember that the Venetian was announced during the very unique time period. While decision to acquire that asset may appear simple today, the transaction came together in early 2021 when many believe the recovery of Las Vegas was uncertain.

During our underwriting period, we allocated resources towards studying the market and performing in-depth due diligence. Throughout that process, we grew increasingly confident in our underwriting and ultimately confirmed our very bullish bet on the Las Vegas market. As we sit here today, we continue to see that the Las Vegas market is producing record results. Leisure business remains robust, meetings and conventions have returned and consumers continue to visit the city in record number. In essence, we believe consumers did not find a replacement for the experience offered by the Las Vegas market, nor do we believe they ever will. The Las Vegas economy continues to diversify catering to a broad array of consumer preferences, and the city continues to leverage vast infrastructure by hosting unique events and events of scale.

We remain firm believers in the Las Vegas market and will continue to be vocal about our belief in the outlook for the city. Following our completion of the Venetian transaction, just a few months later, we completed the strategic acquisition of MGM Growth Properties, adding 15 exceptional assets to our portfolio and beginning a former relationship with MGM Resorts. These two transactions alone deliver growth that would satisfy many companies. However, as the year carried on, we supplemented those achievements with the pending acquisition of Rocky Gap Casino in Maryland and investment in our Property Growth Fund, the acquisition of Blackstone’s interest in the MGM Grand Las Vegas and Mandalay Bay joint venture, which we closed in January. We closed on the acquisition of two additional regional gaming assets with Foundation Gaming.

And we invested in the Fontainebleau Las Vegas alongside the renowned Koch Industries. In addition to our achievements in gaming, we deepened our relationship with Great Wolf Resorts, during the year by financing certain growth projects and we announced partnerships with Cabot Golf and Canyon Ranch, widening our university of growth opportunities for years to come. Last but surely not least, as the calendar turned to 2023, we announced our first international investment by closing on the acquisition of 4 casino properties in Alberta, Canada. We have talked about expanding our portfolio internationally on many of these earnings calls before and are thrilled to demonstrate once again that we do what we say. As we look ahead to 2023, we will be planting the seeds of growth for the next 5 years and beyond.

First and foremost, we are going to continue establishing relationships that yield mutually beneficial outcomes. And as always, we intend to focus on opportunities that deliver accretive growth for our shareholders. Now I’ll turn the call over to David, who will discuss our balance sheet, our financial results and our guidance. David?

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David Kieske: Thanks, John. I want to start with our balance sheet. 2022 demonstrated the continued discipline we have maintained over our 5-plus years of existence by ensuring that we have a capital structure designed to weather all cycles and provide the safety and protection our equity and credit partners deserve. This focus provided VICI with continued access to the capital markets throughout 2022 to support our growth and just to recap a few highlights from the year. In April, we achieved our goal of an investment-grade credit rating as both S&P and Fitch rated VICI BBB- allowing us to raise $5 billion of investment-grade debt across a series of three, five, seven, 10 and 30-year tenures to fund the acquisition of MGP. VICI’s ability to access the 30-year tenure was a first for a first-time investment-grade REIT issuer, and we are thankful for the support we received from our credit partners in this transaction.

In June, we were added to the S&P 500 Index, marking the fastest time line a REIT has been added to the index from IPO to inclusion, deepening our access to equity capital. In November, we raised $575.6 million of net equity proceeds through a 19 million share forward sale agreement. We utilized the ATM throughout the year, raising equity very efficiently for a total of $696.6 million in net proceeds through the sale of 21.6 million shares via forward sale agreements. Those amounts include $208.3 million through the sale of 6.3 million shares via forward sale agreements that occurred in Q4. Then subsequent to year-end, in January, we raised $965 million of net equity proceeds through a 30.3 million share forward sale agreement, which remains unsettled today and available to fund future transactions.

Currently, we have approximately $3.8 billion in total liquidity comprised of $426 million in cash, cash equivalents and short-term investments as of December 31, 2022. We have the $965 million of net proceeds from the January forward sale agreements and $2.4 billion of availability under the revolving credit facility. As a reminder, in January, we drew down CAD 140 million or approximately USD 103 million under our revolver in connection with our PURE Canadian gaming acquisition. We will look to term out this revolver draw in the future. In terms of leverage, our total debt is currently $17.1 billion, which reflects the consolidation of the full $3 billion of CMBS debt that encumbers the MGM Grand/Mandalay Bay JV. Our net debt to adjusted EBITDA pro forma for a full year of activity from our recent acquisitions is approximately 5.7x.

We have a weighted average interest rate of 4.4%, taking into account our hedge portfolio and a weighted average 6.7 years to maturity. Turning to the income statement. Total GAAP revenues increased 100.9% year-over-year to $769.9 million in Q4 as a result of the transformative 2022 acquisition activity John mentioned. AFFO for the fourth quarter was approximately $488 million or $0.51 per share. Total AFFO in Q4 increased approximately 75% year-over-year, while AFFO per share increased approximately 15.5% over the prior year. Just as a reminder, the disparity between overall AFFO growth and the AFFO per share growth is due to an increase in our share count, which increased primarily from the equity raise and shares issued to consummate our acquisition of MGP during Q2 and our acquisition of the Venetian Resort during Q1 of last year.

Our results once again highlight our highly efficient triple net model given the significant increase in adjusted EBITDA as a proportion of the corresponding increase in revenue. Our margins continue to run strong in the 90% range when eliminating noncash items. Our G&A was $15 million for the quarter and as a percentage of total revenues was only 2%, one of the lowest ratios in the triple-net sector. Turning to guidance. We are initiating AFFO guidance for 2023 in both absolute dollars as well as on a per share basis. AFFO at year ending December 31, 2023 is expected to be between $2.115 billion and $2.155 billion or between $2.10 per share and $2.13 per diluted common share. Our guidance reflects the full year of 2022 closed acquisitions as well as the acquisitions we completed in January, the PURE Canadian Gaming acquisition and the acquisition of Blackstone’s 49.9% stake in the MGM Grand/Mandalay Bay JV.

Additionally, the per share estimates reflect the impact of treasury accounting related to the pending 30.3 million forward shares sold in January of this year. As a reminder, our guidance does not include the impact on operating results from any announced but unclosed transactions, interest income from any loans that do not yet have final draw structures, possible future acquisitions or dispositions, capital markets activity or other nonrecurring transactions. And as we have discussed with you in the past, we recorded a noncash CECL charge on a quarterly basis which due to its inherent unpredictability leaves us unable to forecast net income and FFO with accuracy. Accordingly, our guidance is AFFO focused as we believe AFFO represents the best way of measuring the productivity of our equity investments evaluating our financial performance and ability to pay dividends.

With that, operator, please open the line for questions.

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Q&A Session

Operator: First question comes from Anthony Paolone from JPMorgan.

Anthony Paolone : First question is for David, I guess. In the past, you guys have been really good at matching your investments with the debt and equity needed to complete them. As you kind of think about ’23 and looking forward, just what’s the appetite to either reduce leverage or look out further on the horizon and address future maturities just to give yourself room as you think about what you may buy next.

David Kieske : Yes. Great to talk to, Tony. Just to level set, our first maturity or next maturity comes due in May 1, 2024, for the $1.50 billion of 5.625 notes that come due. So we have no maturities due in 2023. And I think we’ll continue to focus on bringing the leverage back down to 5x and 5.5x. And just to remind everybody, when we consummated the MGP acquisition we worked with the agencies and help them understand the merits of the deal, and they were thrilled with the transaction, given the diversity and allowing us to take leverage up just north of our 5 and 5.5 guidepost. And so as you saw us do at the end of last year and with the significant free cash flow we have in the business, we’ll over-equitize some of the smaller acquisitions, use free cash flow to fund some of the smaller acquisitions and the loan fundings that we have.

And then as we navigate potentially larger transactions, we look to match fund that as efficiently as possible. But again, with the goal of bringing leverage over time back down to 5x to 5.5x.

Anthony Paolone : Okay. And then just a follow-up. As you speak with tenants and think about things like Property Growth Fund and more capital being invested in the assets, any change in the dialogue, either tapping the brakes because of the economic uncertainty or capital markets? Or just generally, what are those conversations like today? And have they changed?

Edward Pitoniak : John?

John Payne : Hey, Tony, good to talk to you this morning. We’re fortunate to have tenants right now that are doing extremely well. I think those on the phone who follow the gaming industry are watching the results coming out of Las Vegas, in particular, or if they’re not all-time records, they’re close to all-time records. So we continue to be thoughtful in our conversations with our tenants, and they continue to look longer term about how they grow their business, and we’re there to have those conversations and hopefully be part of their growth plans with, as you mentioned, our Property Growth Fund.

Operator: We now turn to Steve Sakwa from Evercore ISI.

Steve Sakwa : Maybe sort of following up on the line of question as Tony had. I’m just curious, Ed, and John, like how are you thinking about the world today maybe versus six to nine months ago? And just how are you thinking about underwriting changes and potential issues down the road. Has that sort of colored your view on kind of yield expectations or how you think about coverage ratios or business lines that you may want to go into?

Edward Pitoniak : It definitely has, Steve, and good to talk to you. The lack of visibility right now almost equals opacity. And you just need a week like this one in the markets to be reminded, in case you need a reminder as to how uncertain things are. So as John spoke of, we really have so much confidence right now in our operators, and we believe our gaming operators are going to continue to do very well for a host of reasons, particularly having to do with the demand drivers that Vegas enjoys for at least the next couple of years. But when it comes to the access to and cost of capital, we have to be as silver as everyone else has to be about the fact that obviously, credit conditions have tightened, we have definitely benefited from a cost advantage on cost of equity given how well we performed.

But we certainly need to be careful about underwriting yields that probably do need to be higher than they’ve been over the last couple of years. And we also have to be very mindful if we’re in consumer discretionary, which we are as to what a tenant’s performance might be under different operating scenarios, should we see soft lending, hard landing, prolonged soft, prolonged hard landing. We also have — need to be mindful of inflation. But we obviously do enjoy versus many of our REIT peers, certainly net lease REIT peers, the advantage of some CPI protections that definitely benefit our investors this year in 2023.

Steve Sakwa : Okay. And then maybe circling back on the international deal in Canada. I’m just curious as you kind of look at the landscape and you sort of just look at the opportunities out there. I guess, are you seeing more opportunities internationally today? Or do you see more — I assume the U.S. market is a bigger market, but if you kind of size it, do you see better opportunities outside the U.S. today or inside?

Edward Pitoniak : I’ll turn it over to John in a moment, Steve. But the way we think about growth is we think about growing both categorically and geographically, — and so as you watch us, as you actually see what we did last year and as you look at us going forward, we will always be looking for great opportunities to grow into new categories as we did last year with Cabot and Canyon Ranch. And we look to grow in new geographies as we do with Canada. But I’ll turn it over to John for his thoughts on how to how to think about the way we look at the U.S. versus international. John?

John Payne : Yes, Steve, good to talk to you this morning. I’d say a little bit is we’ve gotten more mature as a company, and we talked to you all before about adding resources to our organizations, which then allows us to go out around the world and look at opportunities. I wouldn’t say there’s better opportunities internationally than domestically. I’d simply say we’re able to learn more about different countries and the opportunities that are out there right now. As Ed started out this answering this question, we’re being very thoughtful in anything we do right now in our underwriting. But again, we’ve got resources now that allow us to go and look all over the world for opportunities, not only in gaming, but in certain experiential sectors that we really like.