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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that today's conference is being recorded today, July 30, 2020.
I would now like to turn the call over to Samantha Gallagher, General Counsel of VICI Properties.
Thank you, operator, and good morning. Everyone should have access to the company's second quarter 2020 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, intend, project 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 in our second quarter 2020 earnings release and our supplemental information.
Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; and Gabe Wasserman, Chief Accounting Officer. Ed and team will provide opening remarks, and then we will open the call to questions.
With that, I'll turn the call over to Ed.
Thank you, Samantha. Good morning, everyone, and thanks for joining us. Here's what remains foremost for us at this time. We continue to hope that all our stakeholders are weathering this COVID-19 crisis as best as can be. We held our last earnings call on Thursday, May 1. In my opening remarks, I focused on what because of COVID-19 we did not know with any certainty at the time; we did not know when our assets would reopen, what the recovery pace of our tenants’ businesses would be; when exactly our $3.2 billion transaction with Eldorado Caesars would close; finally, when VICI would be able to return to an offensive portfolio growth strategy.
Here today, July 30, we now know four key facts. Number one, virtually all of our assets have reopened. Number two, our operators have seen strong operating recovery at our regional assets, and through the end of June, we're seeing improving results at our two Las Vegas assets. Number three, the Eldorado-Caesars merger closed in July 20 and our $3.2 billion portion of that overall transaction will produce annual incremental rent of $253 million at a 7.8% cap rate, while also replenishing VICI's embedded growth pipeline.
Number four, we returned to offence and continued our opportunistic growth on June 15 when we announced our intention to provide a $400 million mortgage loan on the brand new Caesars Forum Convention Center and purchased 23 more acres of strip proximate land, giving us a total land assemblage of 50 strip proximate acres, giving VICI the only large scale opportunity to deepen the Las Vegas strip at its center and to participate in the potential for long-term growth that this land represents. It all added up to another quarter that validated VICI’s business model and generated market leading growth.
For second quarter 2020, and in July, VICI collected 100% of cash rent from all of our tenants, which very few American REITs were able to do in Q2. This contributed to VICI achieving 20.4% growth and adjusted EBITDA year-over-year, which we believe will be among the various – very highest EBITDA growth rate among all American REITs for the quarter. In a moment, John Payne will discuss our operators performance and the benefits of the Caesars merger in more depth, and David Kieske will give you details about our own financial performance. But let me take a moment to speak of the root causes of our Q2 2020 performance.
We believe VICI was able to continue collecting 100% of rent, delivered 20.4% EBITDA growth and opportunistically go back on offense in Q2 2020 because fundamentally we have high quality tenants. For any rent collecting multi-tenanted REIT, the strength of the REIT’s business model is the aggregated strength of its tenants’ business models. All of our tenants at this time are gaming operators. And during Q2, gaming operators generally, and our five gaming operators specifically, mainly Caesars, Penn National, Hard Rock, Century Casinos and JACK Entertainment showed the strength, liquidity, durability and agility of their business models.
As most of you know, I've spent time and have experience in a number of leisure, recreational and hospitality sectors, both as an operator and as a real estate investment manager. In coming to gaming real estate, as I did in 2017, I've come into a sector where the operators are I strongly believe the most dynamic and success driven operators in global leisure and hospitality. Over the course of this COVID-19 crisis, our five operators have shown just how skilled, energetic, decisive and driven they are. Here's what they have shown over the last few months; quick and effective action to shore up their liquidity; quick and effective action to minimize costs and cash burn rates during the period of closure; quick and effective action to be ready to reopen safely once given the green light; finally, quick and effective action to restore revenue and EBITDA when many other leisure sectors haven't even reopened yet.
What we're also seeing is that our operators’ businesses are key factors to the health of their local economies and to their state and local treasuries. As long as our operators can operate safely, their states and cities want them open for everyone's benefit. At VICI, we're sober, very sober in fact, about the fact that the COVID-19 crisis is not over. We cannot rule out the resurgence of the virus could depress demand for, or potentially lead to reclosures of casinos. But in what we've seen so far for our gaming tenants and for VICI, this crisis may ultimately provide strong proof of the strength and quality of the gaming REIT business model, which is built in turn on the strength and quality of our tenants’ businesses.
To hear more about our tenants, I'll now turn the call over to our President and COO, John Payne. John?
Thanks, Ed. Good morning, everyone. The second quarter of 2020 was another very productive quarter for VICI. Over the past several months, we've worked jointly with our tenants, including Caesars, Century Casino and JACK Entertainment to provide limited short-term relief with respect to certain non-rent related requirements under our leases. As we said in the past, we will work to provide short-term solutions for our partners as needed based on each individual operator’s unique circumstances. Accordingly, during this quarter, we've announced agreements to modify certain near-term capital expenditure requirements for Caesars and Century.
Additionally, as noted in more detailed in our earnings press release, during the second quarter, we partnered with JACK Entertainment and agreed to fund a gaming expansion at Thistledown Racino, yielding more rent for VICI commencing in April 2022 at an attractive 10% cap rate, while also modifying our existing loan facility to provide certain temporary covenant relief and to add an additional five years to the initial lease term, as well as increasing the principle on the existing term loan and providing revolver facility to JACK. These agreements in short-term modifications help ensure that the operators we partner with are able to focus intently on reopening and operating their business through the current pandemic, while also protecting the integrity of our lease agreements and preserving long-term value for our stakeholders.
As many of you have likely seen by now, the reopening of casino properties throughout the United States has been met with very robust consumer demand. Property across the regional landscapes have experienced healthy volumes. And in many cases, profitability is exceeding pre-COVID and prior year levels. We view this as a testament to the resilience, durability and longevity of the brick and mortar casino experience. While destination and fly-to markets may take longer to recover we remain believers in markets such as Las Vegas, which has proven over value proposition over a decade.
As real estate investors, we think about investing in assets and markets over long periods of time. And believe the geographic exposure we have engineered with approximately 70% of rent coming from drive-to regional markets and the remaining 30% from the Las Vegas Strip represents a good balance for VICI and our shareholders during this time. Over the past, nearly three years, since we started VICI we have communicated our firm belief in the attractiveness of gaming as a real estate asset class.
We believe the gaming industry through early reopening results is showcasing superiority to many other real estate sectors. While the gaming industry is unique and at times complex, we are fortunate as real estate investors to have decades of gaming experience within our management team, which greatly benefits us as we continue to navigate the pandemic and ultimately focus on investing for the long-term and growing VICI through accretive transactions.
In terms of acquisitions and the outlook for growth on June 15, we announced a planned $400 million mortgage loan transaction with Caesars, which will be secured by the Caesars Forum Convention Center in Las Vegas. This structure allows VICI to benefit from $30.8 million of incremental annual income upon closing, while providing flexibility for the asset to ramp before ultimately converting to an OpCo/PropCo structure accelerating our call option from 2027 to 2025.
Simultaneous with the mortgage transaction, we announced the intended purchase of approximately 23 acres of land from Caesars at a very attractive valuation of $4.5 million per acre. This land sits adjacent to the center of gravity of the Las Vegas Strip surrounded by assets that have proven their financial viability over the decades. And combined with our existing 27 acres along the same corridor gives us approximately 50 contiguous acres. Over time, we will seek to partner with third-parties for the development of that land with the goal of continuing our market beating growth well into the future.
And finally, 10 days ago on July 20, we completed our transformative transaction as part of the Eldorado Caesars merger. We acquired Harrah’s Atlantic City, Harrah’s Laughlin and Harrah’s New Orleans, and modified our existing leases with Caesars for total consideration of $3.2 billion. This transaction adds $253 million of incremental annual rent for VICI, it strengthen the terms of our leases with Caesars and restocks our embedded growth pipeline through ROFRs on two Las Vegas Strip assets, our put/call agreement on Harrah’s Hoosier Park and Indiana Grand in Indianapolis and a ROFR on Horseshoe, Baltimore.
In addition to this robust and unmatched embedded pipeline of opportunities, we continue to maintain a very active dialogue with our operators across gaming and other sectors, and believe our broad investment spectrum will continue to yield consistent, accretive growth for VICI’s stockholders. Now I'll turn the call over to David who will discuss our financial results and balance sheet. David?
Thanks, John. I'll touch briefly on our financial results for the second quarter and then move to our balance sheet and liquidity. Before I discuss the quarter, let me just acknowledge and express my sincere gratitude to our team across accounting, asset management, finance and legal for all their efforts closing the quarter remotely during this pandemic. While at the same time we are closing a $3.2 billion transaction. We at VICI are lucky to have such a cohesive team.
For the quarter total GAAP revenues in Q2 2020 increased 16.8% over Q2 2019 $257.9 million, while total cash revenues in Q2 2020 were $261 million, an increase of 19.5% over Q2 2019. The year-over-year increases were the result of adding $44.4 million of rent during the quarter from the Greektown, Hard Rock Cincinnati and the Century acquisitions which closed in 2019. And the JACK Cleveland, Thistledown acquisition and related loan which closed on January 24, 2020.
AFFO was $176.3 million or $0.36 per diluted share for the quarter. Total AFFO increased 12.4% over Q2 2019, while our weighted average diluted share count increased approximately 18.5% as a result of our June 2019 equity offering and settlement of the June, 2019 forward sale agreements which added 65 million shares to our balance sheet in advance of closing on our portion of the Eldorado Caesars transaction. AFFO for the quarter was also negatively impacted by approximately 23 million of negative interest expense carry related to the February bond offering for the Eldorado transaction being held in escrow for the entire quarter and approximately $3 million less in interest income on a year-over-year basis due to the decline in interest rates.
Our G&A was $7.5 million for the quarter and as a percentage of total revenues was 2.9% for the quarter, which is in line with our full-year projections and represents one of the lowest ratios in the triple net sector. Our results, once again highlight our highly efficient triple net model as flow through of cash revenue to adjusted EBITDA was 99.2% for the quarter.
As you may recall, beginning in January 1, 2020, we adopted CECL, Current Estimated Credit Losses a new accounting standard which requires us to estimate and record a non-cash provision or allowance for future credit losses related to all existing and any future investments in direct financing and sales type leases in similar assets. CECL is applicable to VICI as we account for our investments as finance leases, which are subject to the accounting standard as opposed to operating leases like our gaming REIT peers, which are scoped out of the standard. In the second quarter, then non-cash allowance related to CECL was a reversal of $65.3 million from the allowance for Q1 2020, which drove a $0.13 increase in net income per share.
I'd like to again, make the point that this is a non-cash allowance and as such there is no impact to AFFO or AFFO per share. We continue to point investors to AFFO and AFFO per share as we believe that should be the primary metric used to evaluate our financial performance and our ability to pay dividends.
Turning to our balance sheet and capital markets activities, on June 2, 2020, we settled in full the June, 2019 forward sale agreements utilizing net proceeds of approximately $1.3 billion of cash onto our balance sheet. In June 19, in connection with the announcement of the pending Caesars Forum Convention Center mortgage and acquisition of the approximately 23 acres of land completed an upsize primary fall on operating of 29.9 million shares of common stock at a offering price at $22.15 per share for gross proceeds of $662.3 million through a forward sale agreement.
The proceeds remain subject to settlement pursuant to the terms of the forward sale agreement. And then John had mentioned, on July 20, 2020 we closed on our portion of the Eldorado Caesars transaction adding $253 million of annual rent to our portfolio through the acquisition of three Harrah’s assets and the acquisition of incremental rents from our Caesars Palace and Harrah's Las Vegas assets for total consideration of $3.2 billion in cash. We utilized the proceeds from the settlement of the June, 2019 forward sale agreements as well as the $2 billion of proceeds from the February bond offerings that were previously in escrow to fund the transaction. Following this we have approximately $400 million of cash on hand.
Our total debt outstanding at quarter end was 6.9 billion with a weighted average interest rate of 4.18%. The weighted average maturity of our debt is approximately 6.6 years and we have no debt maturing until 2024. As of June 30, our net debt-to-LTM EBITDA was approximately 3.4 times below our stated range and focus of maintaining net leverage between 5 times and 5.5 times. This does include the impact of the June 2, forward settlement and restricted cash that’s set in escrow as of June 30.
We currently have approximately $1.4 billion in available liquidity comprise of the approximately $400 million in cash on hand and $1 billion of availability under our revolving credit facility which is undrawn. In addition, the company has access to approximately $630 million in net proceeds from the future settlement of the 29.9 million shares that are subject to the forward sale agreement entered into on June 19.
During the second quarter, we paid a dividend of $0.2975 per share based on the annualized dividend of $1.19 per share. Our AFFO payout ratio for the second quarter was 83%, slightly above our long-term range of 75% as a result of the June, 2019 equity offering. With that Operator, please open the line for questions.
[Operator Instructions] Your first question comes from the line of Carlo Santarelli with Deutsche Bank.
Hey, everybody. Thanks guys for your comments. Good to hear from you, and thanks for taking my questions. For starters, maybe this one’s kind of best for John. John, as things have evolved coming out of obviously the pandemic disclosure period, et cetera, as you look ahead at drawing from kind of your deep industry knowledge and whatnot, I think it would be fair or at least from my perspective, would be fair to say that we do likely see some contraction of the go forward in terms of trends that we’re seeing right now.
In the event that, that happens, and we do start to see a little bit of that the macro economic impact of the pandemic and kind of trends, do you believe in this new interest rate paradigm and where we are right now, and kind of what we’ve seen in terms of debt issuances from some operators coming in at meaningfully higher than what we’ve seen previously spreads, that there will be a flow of kind of new opportunities as kind of the trading multiple versus the cost of capital dynamic has shrunk materially in favor of promoting more transaction activity?
Yes, it’s a very good question. Again, I think it’s important to remember because we moved so fast that just back in April, the focus of these operators was really about getting open, right, and ensuring liquidity. We now are sitting here in July and it’s about staying open. And I think to your point, Carlo, you’re asking about, now are they starting to think strategically and are there going to be opportunities for us.
What I would tell you is from our perspective, and I think I’ve communicated this, not only we’ve been working with our five current tenants throughout this pandemic, I’ve stayed active with really almost every operator in the gaming industry, understanding their position, how their business doing, what they’re seeing from their consumers and letting them know due to our positioning that David and Ed had put us in with ample liquidity that should there be an opportunity for us to transact with them, to help them grow their portfolio or provide liquidity or do a sale lease back that we’re available and when we’d like to talk to them.
That doesn’t really answer your question about predicting the future, but what I would tell you, it’s our job to make sure that if there are transactions that at least we’re in the mix, and people understand that we’re moving from, as Ed said earlier in his remarks, from being completely on the defensive to back as we’ve shown over the past weeks, back on the offensive side of the ball a little bit here. But Ed should also – Ed and David should also weigh in on that question.
Yes. Carlo, you have rightly identified the fact that for a lot of operators in gaming, as frankly, across every major and hospitality sector, the cost of capital has gone up meaningfully in the last few months, both the cost of debt capital as you’ve cited, but also the cost of equity capital. And as I think you’ve heard us talk about before, we actually see the capital we provide through a sale leaseback. And in fact, being another form of equity, it is permanent capital. The recipient of it does not have to pay us back. And the cost of the capital we give them as simply the rent they pay us.
So if you look at rent as expressed as a cap rate, it is generally much lower than their cost of equity currently and probably for a while yet. And to your point, it is becoming competitive with their cost of debt. So based on that, and also based on the fact that I think we’re already starting to see operators, especially regional operators, who want to grow their store count, those who do want to grow their store count are very focused on partnering with REITs in order to win the bid because it will otherwise be very hard for an operator who wants to grow store count to win the bidding if they have to bid against an OpCo/PropCo bidding combination.
That’s very helpful. Thank you both. And David, if I just could, one quick one, I think if you kind of look at fourth quarter run rate EBITDA relative to kind of your current net debt levels, et cetera, you guys would probably be looking at leverage of around five times, which certainly does provide a little bit of cushion in a lower rate environment for you guys to go out and potentially take on some leverage. Could you kind of comment a little bit about how you’re thinking about the capital structure here moving forward in terms of the hypothetical potential transaction?
Yes, Carlo. Good to talk to you. You’re right. We’ll be just kind of sub five times on a pro forma run rate basis for everything we’ve announced. As we talked about what’s the equity raise in June, we’ll likely match funds that equity with debt at some point in the future, which gives us $1.2-odd billion of total volume power if you go out and think about raising $600 million, $700 million of high yield here at some point in the future. So on an ultimate leverage neutral basis with the balance sheet, we’ve got the functionality, the flexibility, and obviously the capital markets are going to do some backdrop right now for that.
Great. Thanks, guys. Thank you all very much.
Your next question comes from the line of RJ Milligan with Baird.
Hey, good morning, guys. Ed, you mentioned restocking the pipeline, especially, the captive pipeline with the closing of Eldorado and Caesars. Just curious on your thoughts on timing of executing on any of those growth opportunities.
Yes, I’ll turn it over to John here momentarily, RJ, but I mean there’s no question that Eldorado was what we now call, should now call Caesars, the new Caesars was greatly helped by the financing activities they undertook in mid-June, simultaneous with the announcement of our convention center mortgage and land purchase. So they obviously put themselves in a better position than the market at large had anticipated post-merger. And when it comes to the timing of anything we might do with that, I’ll turn it over to John.
Yes. Look, I – it’s hard to, as I’ve said before, exactly predict the timing. But as our embedded growth plan has ended or the ROFRs on the Las Vegas strip, we obviously talked quite a bit about our put call opportunity on the two assets in Indianapolis and then a ROFR Horseshoe Baltimore. So as Tom Reeg and Bret Yunker takeover Caesars, they’ll continue to see where there’s opportunities. We like all of those opportunities. I think you’ve heard them talk about having enough supply in Las Vegas and potentially selling one or two assets there.
As I said in my opening remarks, we’re big believers in the long-term of Las Vegas. Las Vegas obviously has some short-term issues. They’re going to have to deal with the decrease in flights, the loss of international business and the decrease the of convention business. But we really are big believers in that city for the long-term, based on consumer behavior, and absolutely the number of segments that people can be attracted.
So we’ll just have to see what plays out with the embedded pipeline, but that doesn’t mean we’re sitting back and waiting just for the embedded pipeline to determine our growth of our company. As I’ve said, I’ve been quite active making sure people know, understanding what’s going on with operators and spending time and talking to them. So we’ll see how it plays out in the coming months.
Thanks. And do you anticipate doing more unique transactions, similar to the one that we saw with the convention center, if you’re not happy with where your cost of capital is?
I don’t think RJ so much. It will be a function of whether or not we’re happy with our cost of capital, I think it’ll be more a function of the organic situation of what we’re looking at, how much clarity and certainty there is around income production at the moment and how much clarity and confidence there is around forecasting the income production in the near to midterm. So again, I think those will be the key elements, it will drive the structuring decisions that we make. David, I don’t know if you want to add to that.
No, I was going to say the same point. It’s not necessarily related to the cost of capital. It’s a myriad of factors that go into it. And obviously with the mortgage, it was – as we talked about kind of a synthetic bridge to long-term real estate ownership.
Understood. Thanks, guys.
Thank you, RJ.
Your next question comes from the line of Barry Jonas with SunTrust Robinson.
Hey, guys. Good morning. I wanted to start off asking how should we think about any regulatory risks around your ability to exercise the put call agreements for the two Caesars racetracks in Indiana? And if for some reason regulators had any issues, would you get access to a comparable asset or assets within Caesars portfolio instead? Thanks.
John, you want to start on that?
Yes, I’ll start. I mean, I think that like any transaction, there’s always – you always have to get regulatory approval. So the comment that the racing condition of Indiana would need to approve a sale leaseback of the two Indianapolis assets, not surprising to me at all, having been in the industry for too many years, 20-plus years, every acquisition we’ve ever done is – had those stipulations that we need to go through a process. We need to spend time with the racing commission to let them understand who we are. So not a concern about the language that’s out there right now. Maybe Sam or Danny, you want to answer the second part on the potential substitution? Should there be an issue?
Sure, John. This is Samantha. The arrangement that John said does not have substitute assets. But as John mentioned, I think those comments surrounding the put call was not surprising and is actually no different than prior comments when we had a ROFR, prior ROFR from those assets. So we intend to work with the regulators of the period of time or the put call. In exercise, we want to make sure they can get comfortable with our REIT structure.
Great. That’s really helpful. And then I guess, Caesars is – new Caesars is talking about selling, I believe, operations at three of your assets now. Just curious, can you remind us that they would need your consent to sell those operations?
John, Samantha?
Yes. So if you’re talking about two assets in Indiana, and then I think what’s the third you’re referring to just so I answered the question, but the answer is yes.
Yes. Got it.
Yes. So, yes, both those assets in Indiana that been referred to the Southern Indiana and Hammond would meet our consent if they currently sit inside the master lease and we’ve really liked the real estate of those two assets.
Understood. Then just a quick one, you’ve agreed to various CapEx waivers for your operators. Given the strength we’re seeing in regional markets now top line, but more so margin, do you think those waivers are still needed?
I think when we negotiated these waivers with a few of our tenants, it was absolutely appropriate. We – the properties are doing well right now, and we’re excited about that, but I think we’re pretty cautious. And as Ed said in his opening remarks, we’re pretty realistic about that the pandemic is not over. We hope the business continue to perform well. We expect them at this time do that, but again, I think those relief packages at the time we negotiate were absolutely appropriate for us and for our tenant.
Great. I appreciate all the color. Thank you.
Your next question comes from the line of the Smedes Rose with Citi.
Hi, thanks. I just wanted to go back to the convention center for a moment. You talked about just having some clarity on income production. And I was just wondering, can you talk about your views on income production at that center? What’s kind of the book of business look like? And I assume it’s all sort of been pushed out a little bit. And how do you anticipate financing that loan? Will it be with cash on hand? Will you use equity? Maybe you could talk about that a little bit.
Yes. So on the book of business needs, prior to the outbreak of the crisis, Caesars had actually built up a very strong book of business for the convention center. And obviously to your point, conventions that were scheduled for the assets in 2020 had largely been postponed or canceled within 2020. And you would have to – we would have to all hear from Caesars, which we’ll be doing obviously shortly as to how things are looking for 2021 and beyond. In terms of our financing of the mortgage, I’ll turn it over to David because that was obviously the main focus of our equity raise back in June. David?
Yes. Thanks, Ed. Smedes, it’s good to speak to you. As we – when we announced the deal on June 15, we obviously simultaneously announced the equity offering, which resulted in an upsized equity offering and gross proceeds about $660-odd million. As we talked about in connection with that, there’s an efficiency to raising capital over equitizing. And as I mentioned earlier, we will match fund that to ultimately run our balance sheet on a leverage neutral basis.
So as we think about funding that mortgage, we’ve got cash on hand about $400 million as we sit here today, and then we have access to that forward, which really doesn’t have an end date on it. So we’ll likely fund that with a mix of cash. And some of that forward here as that closes probably third quarter and then ultimately go to the debt markets at some point in the future to match fund that on a leverage neutral basis.
Would you expect this acquisition then to be accretive to earnings?
Yes, we would. I mean, the 7.7% cap rate and on a leverage neutral basis, it is accretive to earnings.
Great, thanks. And then I just wanted to ask you, do you have any color on when the Greektown Casino might reopen?
John?
We got word yesterday that the state of Michigan is going to allow the Detroit casinos to open in August. I think it was August 5 or 6. So Penn will come out, I’m sure relatively shortly here and give an exact date, but the news came out to me yesterday that that will happen in the state of Michigan.
Great. Okay. Thank you, guys.
Thank you, Smedes.
And your next question comes from the line of John G. DeCree with Union Gaming.
Hey, guys. How’s you’re doing?
Thanks, John. Good to hear from you.
Good. Wanted to ask a question about the land that you’ve purchased in your land bank in Las Vegas and spent quite enough time on that. So I believe parcels or your initial parcel is a part of the lease with your existing tenant, maybe not the part you’ve just bought, but the existing part. And I was wondering if you could talk about any restrictions that you might have on that? Or how the relationship would work if you wanted to develop it or if your partner wanted to develop it? And what are some of your options on those parcels?
Yes. So I’ll start John, and then Samantha can jump in and correct me if I get anything wrong. You’re absolutely right. The land that we already own, the 27 acres we already owned, were subject to the Caesars lease and Caesars have the right to use that land within our overall leisure arrangement with Caesars. With our purchase of the 23 acres we did not already own, we’ve also built an agreement that will become part of this formal agreement once we execute on the transaction in fall, whereby Caesars will be able to continue to occupy the land until we have a use for it. And they will in turn for occupying the land, cover the cost of that land in regard to things like real estate tax, insurance and security.
In terms of our overall vision for the land, we see this as a way of capitalizing on what we still very strongly believe to be the long-term growth of Las Vegas. The long-term growth of Las Vegas is tourist destination. And frankly also the long-term growth of Las Vegas as a global city in its entirety. And we see that land as giving us a chance to participate again, not only in the growth of Las Vegas tourism, but in the growth of Las Vegas as a place where people choose to work and to live as well as to play. And this land gives us an opportunity to do what we most love doing, which is growing our business by growing our relationships.
We are not a developer. We will not take on development risk, if not what REITs generally do. And what we will do is partner with great developers, great providers of development capital, who should get rewarded for development risk in order to realize the highest and best use of this land over time. And what does land ultimately does is provide part of the answer to the question where does VICI’s growth come 5 to 10 years from now? Because again, over that kind of timeframe, we are still raging bulls on Las Vegas.
A quick follow-up on that. If you were to find a partner away from Caesars today, would there be any restrictions on what the land could be used for? I’m not sure if it’s entitled for gaming. Maybe a better question for John, but would we expect it to be, maybe it’s too soon at this point, complimentary to the building that your tenant owns nearby? Or could you potentially do hotel casino there as well that may be competitive?
Yes, it’s way too early to tell, John. Way too early. I mean, what I would say is, whenever you develop, you want it to be complimentary to what’s around you because that tends to be the way you realize the greatest amount of traffic and the greatest amount of overall attraction for the destination.
Got it. Thanks, Ed. That’s all for me. Appreciate it guys.
Thank you, John.
Your next question comes from the line of Todd Stender with Wells Fargo Securities.
Hi, thanks. Most of my questions have been answered regarding the land parcels. But I would suspect you’ll see some earnings drag, I guess. If you’re combining the mortgage with the land parcel, yes, I get the impression that Caesars will cover some of the operating expenses, but maybe just not cash flow producing real estate. How do you think about funding that with this equity, but having maybe some earnings drag going forward?
David?
Yes, Todd, it’s really on the $100 million or $103 million of incremental capital that we have to invest to acquire the approximately 23 acres at the right point in time when we ultimately decide what we do with the land, as Ed’s talked about, the right partnership and the right long-term vision, the other 27 acres would come out of the lease. And then at that time, there might be some drag, but obviously that’s very, very early days and how that ultimately plays out VICI determined. But if you think about $100 million on our total balance sheet, very, very de minimis minor drag given that asset start to producing nature of that asset mix.
Especially when looked at, Todd, as a leverage neutral, i.e., not $103 million of equity.
Got it. Okay. And timing, I think I got the impression, this is a late to Q3. And if that’s the case, is that forward equity? Maybe that’s the timing around maybe seeing some of that be settled?
Yes. We’re working on. As you know, we talked about it with everybody, we announced that on a letter of intent and working through documentation and diligence now as we speak. So sometimes mid to late third quarters when we’d expect that to close. And you’re right, that’s probably when we would ultimately use some of that forward – settle a portion of that forward agreement.
All right. That’s helpful. Thank you.
Your next question comes from a line of Jared Shojaian with Wolfe Research.
Hi, good morning, everyone. Thanks for taking my question. Now that the Creasers deal has closed, your payout ratio on go-forward AFFO is well below your historical target. Can you just talk about how you’re thinking about the dividends right here? And should we assume that September is kind of your typical time period for when you reevaluate it?
David?
Yes. Jared, thanks for joining and thanks for your work this quarter. Yes, we adhered to an annual increase in our dividend. We bumped it in Q3 of 2018, we bumped it in Q3 of 2019. We don’t bump our dividends mid-year or at the closing of transactions. So we’ve got time before we make any decisions around the September declaration and ultimately October payout. We work closely with our board and assess where we are in terms of our liquidity, where we are in terms of state of the pandemic and COVID, obviously where our tenants business are and the outlook going forward.
So our payout ratio is a little bit high right now just because of the non-income earning shares that we’ve had on our balance sheet since the June, 2019 offering. But we’re going to approach the third quarter with cautious. And as Ed talked about, we’re silver, where we are in the world. So we’ll evaluate it with the board and make the right decision to be in a position to ensure that we never put VICI out there as a REIT that has to cut their dividend or change – use of dividend going forward.
Okay. Thank you, David. And then just a separate question, love to get your thoughts and opinion on this. Do you think we could see a reevaluation of regional gaming assets as this crisis has probably shown the world that regional assets are a lot more stable than many people might've realized? And then on the flip side obviously, I know you sound pretty bullish on Las Vegas, but how are you thinking about the revaluation or devaluation potential of Vegas here multi-year perspective?
Yes, I'll speak initially from a real estate perspective Jared and then John can jump in. But starting with Las Vegas, I do not think over the long-term it should change the way in which Las Vegas gaming real estate is valued. We obviously saw institutional investor have the caliber of Blackstone come in and validate Las Vegas real estate. They obviously are investing in long-term. They are long-term believers in the value of Las Vegas real estate we are.
This is a temporary crisis that will eventually come to an end. We do not think this crisis generates secular negatives for Las Vegas. We do think Las Vegas can and will come roaring back for a whole host of reasons. But to your first point, regional, yes, you are absolutely right. This should really validate regional gaming as a real estate asset class as well as obviously an operating business given that it is far outperforming, just about any other leisure hospitality sector you can possibly identify.
And it is not – it was not under secular threat coming into this year, it was posting very positive results as a sector in January and February. It is showing itself again very well here, and going forward you're not looking at the kind of overhang of secular negatives you are seeing in other categories like movie theaters where, Universal has said, yes, okay, after 17 days we will start streaming a movie. So again we think this is very validating the regional gaming.
But I'll turn it over to John who has obviously operated so many of the assets that we own in the regions and can verify just how integral they are to the lives of regional customers. John?
Yes, not much to add here other than I have a smile on my face as someone who's spent almost 20 years of his career operating these regional assets, it's nice to see that the world is starting to understand how durable they are, the loyalty from their consumers. As you probably heard me say I mean, these are people, social clubs or country clubs or this is where people go to have their entertainment. It's where their friends are and you can see even during this worst pandemic that we've ever seen in our lifetime that as the businesses open up, they've been quite successful.
So it's nice to see and I agree with that. And it is common, especially when you look at these assets compared to restaurants and movies, theaters, and a variety of other areas that are struggling where these assets that they've been open up have done quite well.
Great. Thank you very much for the time.
Your next question comes from line of Greg McGinniss with Scotiabank.
Hey good morning.
Hi, Greg.
Ed, I am just curious, given the 2019 to Q2 access the open ability for your largest tenant factor capital and the apparent return to regional business. Just wondering why you did feel confident about to reinstate guidance for the year and what would need to happen for you to become more comfortable to do so?
Yes, I think we need the benefit of time, Greg. We are still as a nation and as a national economy we're still in a period of great uncertainty – uncertainty and lack of clarity. And when you have uncertainty and lack of clarity it pretty much leads to not being able to be bullish and confident in forecasting, anything. So to return to guidance at this point, we believe would be fundamentally premature. David, I'll turn it over to you to see if you have any added thoughts.
No. Yes, the other thing Greg is I think we've talked to you about, I would say our business is pretty transparent, pretty predictable, especially now that Eldorado deal is closed and the noise out of that speak is now flowing through on a run rate. When we pulled – we pulled guidance, part of the reason was also CECL, there's new noise in the non-cash implications of CECL. We will have a charge in the third quarter around related to closing of the Eldorado transaction and bringing those three new assets on their balance sheet. So it's hard to exactly predict that and pinpoint that. So we'll assess guidance probably returning to calendar into 2021 the next point in time.
Okay. Fair enough. Thank you. And then just a quick two-parter on the Caesars agreements with state regulators. So first is what level of additional financial commitment is now required to Caesars. And how do you think about that burden versus rent POU? And secondly, are there any other demands that we should be aware of the impact of the business such as the sale of the casino operations?
I think we're started, Greg, everything with all of the principle requirements and obligations have been obviously publicly announced that is the way the regulators do business. And in terms of the additional financial partners that you're referring, for example in the CapEx requirements in New Jersey obviously those will benefit the assets and their performance as in the expansion Caesars enjoyed as we believe they will have incremental return on incremental capital.
I agree. Thank you very much.
Thanks Greg.
Your next question comes from the line of Richard Hightower with Evercore.
Hey, good morning everybody.
Hey, Rich.
I hope everybody's doing well. So a couple of ones, here so just with respect to the incremental term loan and revolver to JACK Entertainment, I know that the initial term loan tranche had a five year term, are there any prepayment features that we should know about there? And if – given that it's 9% secured paper and potentially JACK might have other options for that capital or another source of capital that's maybe a little bit cheaper. How should we think about that dynamic between VICI and JACK? And then what would you do to sort of replace the income before the end of the five years, if it came to that?
Yes. If there is a prepayment feature after 18 months, I believe anything correct me if I'm wrong. But given is a small amount, 50 million not $70 million, we've looked for opportunities to reinvest that, but this is a kind of a win-win and it's consistent with our approach where helping our liquids – helping our tenants shore up some of their liquidity at a point in time when nothing was open and as you’ve seen in Ohio, the assets are doing extremely well.
Okay. Go ahead sorry.
And Rich, were they to repay the loan, we certainly do not lack for confidence in our ability to redeploy that returned capital accretively. Obviously, led by John Payne, Business Development, who works for VICI over the last two and a half years with over $8 billion of transaction. We are always confident that if there are compelling opportunities out there, we're going to source them and execute on them best we can.
It is a staggering amount of work that you guys have all done. So I agree with that. And my second question is, maybe a twist on the valuation question from earlier, but just looking at stock performance in multiples across the net lease in REIT space, Ed, where do you think VICI and your closest peers are with respect to that incremental cap rate compression relative to some of the more traditional retail focused net lease names given the collections are all across the board, but some are quite low and you guys are sitting at 100%, where do we think we are in that evolution?
Yes, I think we're on a positive upslope, Rich. We were obviously not there yet. And I think part of the explanation for not being there yet for not having closed the gap quickly is, that these things do take time and I'm not sure frankly how much fundamental analysis and evaluation is going on right now anyway.
But to your implicit point, yes I do think the broad investment community, the dedicated REITs, the income seeking generalist investors are going to recognize and are – again to your point starting to recognize the game REITs, all three of us are posting very good rent collections results. But moreover our tenants are showing themselves to be performing very strongly and that I do believe to your point deserves ultimately reserves relating. It leads to parity and not arguably to some measure premium given how we performed. And again given this as well Rich that this crisis is really showing the stress and strain of any sector that we’re beginning to show signs of secular threat.
Whether it be the secular threat as represented by e-commerce, the secular threat is represented by things like streaming media. Gaming is really well integrated as a place-based destination experience in the lives of millions of Americans. And we think that ultimately adds-up to very high quality real estate.
Great. Thank you.
Your next question comes from the line of Thomas Allen with Morgan Stanley.
HI, good morning. So I think in the prepared remarks, you talked about how the tenants businesses that held-in well through the end of June maybe for John what are you hearing on the latest kind of operations since COVID cases picked up?
Yes. Good to talk to you, Thomas. I've not heard much of a change in the business. I have heard some occupancy levels going up in some jurisdictions, but regionally the business continues to be strong based on the conversations that I've been having. Again, I think as they continue to add some more amenities back to the facilities as when the restrictions are lifted you're going to see the business continue to perform.
Okay. That echoes what Boyd said earlier this week. And then just as my follow-up on how are you thinking about the multiple paid or the returns you're looking for when you're funding capital improvements versus the entire real estate of a property? Thank you.
David, you want to take that?
Yes, that's a good question Thomas. And then with the JACK capital that we just funded, obviously we are earning 10% return but that's partly because we're not – the incomes are coming in until April of 2022, so even though it's $18 million very small amount for VICI but it's a factor of return, but it's out in the future.
It goes part and parcel of what it is, it is expansion of a ballroom, is it really income enhancing, income producing where the overall asset is going to be significantly improved, which would lower the risk of the asset and maybe warrant for a higher price? Or is it, I have the specific examples but it’s in and around probably playing higher than where we've been acquiring assets just giving us an incremental add-on to an asset, but each situation, each cap rate is obviously dependent upon the unique facts and circumstances of the situation.
Okay. Thank you.
And next question comes from the line of John Massocca with Ladenburg Thalmann.
Good morning.
Good morning, John.
So I know you've almost talked largely about the pipeline, but maybe as we think about underwriting an appropriate valuation for Las Vegas Strip assets, do you think you would need to see a couple of quarters of post-pandemic performance in the market, where you're comfortable in underwriting any transaction or you didn't give the long-term nature of your leases, you just underwrite to almost kind of pre-pandemic performance levels?
I am going to turning it over John Payne here in a moment. John will talk about that, I would just say when it comes to growth, we never attach to any kind of words that have anything with business to our growth, but head-to-head. I will hand it over to you John Payne.
It's hard to follow that. Look things to Las Vegas. I mean again, I think we've been consistent and I've been very loud about this, that we really are long-term investors. Yes, in short-term Vegas has some hurdles that they need to get over, but this is a city that even during this time and even with the restrictions that are on it consumers are going to enjoy what they have to offer. And we believe over the time 2022, 2023 and moving on this business is going to rebound.
As it pertains to underwriting an asset, now that's exactly what we're spending time on is what is the appropriate level to do that? What is the appropriate cap rate? But we'll have to continue to study the business as to your point we'll have to consider and see what the next couple months are like in the quarters and then determine the EBITDA that we use to underwrite as well as the cap rate.
But again, I can't stress enough, you heard a lot about the short-term of Las Vegas, but we talk a lot more about the long-term in this, how resilient this city has been and how resilient the operators are to continue to reinvent themselves and be successful with the properties that they have.
Okay. And then may be switching gears a little bit, given the strength of kind of regional operations, should we expect or potentially could we see any more of these modifications going forward? I mean, correct me if I'm wrong, but the only leases that are kind of as is versus pre-pandemic are Hard Rock and the Penn leases?
John?
Yes. I mean, I can't predict what's going to happen. I think we've been, as we've said a couple of times, we've been sober about that. We are still in the middle of a pandemic, the operations that have open and almost all of our operations have opened other than Michigan, which will open here shortly have been quite successful, in fact exceeding some of their 2019 numbers.
So we're just going to have to wait and see if we continue on this path, the business are going to be strong and there won't need to be any concessions, but we'll just have to monitor what happens in the United States, but we feel obviously much better here in July than we did back in early May.
Good. That's it for me. Thank you all very much.
Thanks John.
Your next question comes from David Katz with Jefferies.
David?
Hello. Can you hear me, okay?
Yes, how are you doing, David?
Sorry. I know you've covered quite a bit of detail. I appreciate that. I just wanted to talk about the CapEx waivers that are in place and how you're thinking about those versus a terminology that would be more like defer? And whether there could be sort of catch-ups down the road and the interest of preserving real estate’s value by making sure it's properly invested?
Yes. I think David, one of the key principles that we believe in is that ultimately our operators are the beneficiary of capital well-spent and they bear the first pain when capital is not spent. I think the self-reinforcing positive qualities of this business model as opposed to say the hotel business model where a third-party manager dictates capital that they all may or may not get a return on. We much prefer this model, because at the end of the day the operator is responsible for the capital, but it's also again the beneficiary of capital well-spent and is the one first harmed, when it is not spend in terms of loss competitiveness, revenue, and profit.
So we believe in this model and the ability of this model to prevent assets deteriorating in a way as you rightly pointed out they can when capital is not spent over the long-term, it didn't needs to be spent.
Okay. Thank you very much. That’s it from me.
Thank you, David.
Your final question comes from the line of Shaun Kelley from Bank of America.
Hi, everyone. Just in under the wire I suppose, just one question for me, John in your prepared remarks you said or mentioned a sort of 70-30 mix between the regional portfolio and the Vegas portfolio. The undertone has been here throughout the call, but just kind of curious to say it out loud, is this an appropriate mixture of VICI going forward or how do you think about that 70-30 split kind of strategically, obviously you'll underwrite acquisitions as they come? But is that a target ratio that investors should think about there's a comfort level for management, especially after everything we've seen from a performance perspective through COVID or just how do you think about that?
Yes. I don't think we've ever talked about necessarily a target. I think what we've talked a lot about is we like the diversification that we are really the only REIT in this space that has positioned itself to invest in destination resorts in Las Vegas also as well as the local business in Las Vegas, should that come about as well as every market in the region with all different types of operators.
So I think our philosophy has been, we want to remain diverse. We want to continue to grow our tenant base. We started this company 2.5 years ago with one tenant now have five and I think you'll ultimately see that grow. But we today were at 70-30, we like where that is. But I don't think Shaun, you hear and say that's where absolutely has to be exactly around those numbers. We just liked the diversification than being in many different types of markets. And you can see that diversification has helped us during this pandemic.
Thanks, everyone. Appreciate the time.
And Shaun, I would just add to what John has rightly said that, as a REIT we obviously want to give our investors a chance at not only income steady, predictable income, but we also want to give our investors a chance to capital appreciation as the market recognizing superior value of the assets.
And over the long term and as I think again was validated by the investments Blackstone made in Las Vegas last year and early this year, we do believe that Las Vegas could give the greatest opportunity for capital appreciation, which when combined with a steady income production of regional. We think it adds up to a very compelling long-term in our both income and capital appreciation strategy.
Thank you.
And there are no further questions at this time.
Thank you, operator. To close out, please let me reiterate our thanks to all of you for being on today's call. We’re proud of the results we have provided to our stock holders in this quarter and those results again our validation of both VICI’s business and the businesses of our tenants. With 100% rent collection – cash rent collection in Q2, with our ability to go back on offense well before most other REITs, with the closing of our $3.2 billion transaction with Caesars and the $253 million of annual rent growth that brings, we believe we are on track to deliver one of the strongest growth rates of any REIT in America over the next year or two.
Again, thank you and good health to all. Operator, that concludes the call.
This concludes today's conference call. You may now disconnect. Presenters, please remain on the line.