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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’ Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference call is being recorded today, November 02, 2018.
I will now turn the call over to Samantha Sacks Gallagher with VICI Properties.
Thank you, Operator, and good morning. Everyone should have access to the Company’s third quarter 2018 earnings release and the supplemental information. The release and supplemental information can be found in the Investors Section of the VICI Properties Web site 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, expect, should, guidance, intend, 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 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 third quarter 2018 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 some opening remarks, and then we’ll open the call to questions.
With that, I turn the call over to Ed.
Thank you, Samantha and good morning everyone. We appreciate you taking the time to join VICI's third quarter earnings call this morning. We released our third quarter results last evening and it has been just over one year since we emerged from our spin-off. We now have a full year four fiscal quarters of the reported results under our belts.
Here are a few of our key accomplishment in building our business over our first four quarters of operations. We’ve raised nearly $2.4 billion of equity through our Q4, 2017 equity private placement and our February 2018 IPO. We refinanced over $2 billion of debt and eliminated over $1 billion of debt, we’ve closed or announced the total $2.1 billion of acquisitions and we’ve managed to de-lever from 8.4 times debt-to-EBITDA emergence to 5.0 times as of Q3, while growing our pro forma AFFO by about 46%. And might we have accomplished all of this within the governance framework that was established to serve our one and only class of shareholders the common equity shareholder. We realized that our sector leadership in and always will be contingent on us making good decision, taking the right actions and managing risk properly, day after day after day, so that every day our shareholders' interest are being relentlessly cared for and value is being steadily created.
This past quarter as regard to our growth pipeline we closed on the activity of tower acquisition from $507.5 million, adding $35 million of rent and rounding out our ownership of the real estate of the iconic Caesars Palace, Las Vegas. We continue to move toward closing the Margareta Hill, Harris Philadelphia and lease modification transactions. We hope to have all of those wrapped up during the fourth quarter. We continue to see a lot of activity in the sector as John can attest and we'll do so in a moment and we don’t see ourselves slowing down as we intend to continue to pursue attractive growth opportunities.
Not to be forgotten, we still have three call option properties in our back pocket, as well as any ROFO assets to become available. Needless to say, we feel very good about how our first year has progressed based on the three key elements of our business model; one, best in sector governance and high energetic management capability; two, high quality portfolio income that is durable and transparent through all cycles; and three, best in sector growth prospects.
With that, I’ll now turn the call over John to discuss what we’re seeing in the market. John, over to you.
Thanks, Ed and good morning everyone. The market environment for gaming transactions continues to be active and the number of transactions announced by us and the gaming REIT sector more broadly over the past year is a testament to the growing confidence operators, investors have in the gaming REIT model.
This quarter we closed on the Octavius Tower at Caesars Palace and we continue to make progress towards completing the acquisition of Harris Philadelphia with Caesars and Margaritaville, Boulder City with Pan National, which we hope to close during the fourth quarter. We have no intention of slowing down. And as you've seen from the transactions we’ve announced over the past year, there is no shortage of external growth opportunities currently out in the marketplace. While we are the new guy in the market, we have long-standing relationships within the industry that have allowed us to make progress towards our goals. Those goals have not changed. We continue to work on diversifying on tenant based, expanding geographically in attractive regional markets and growing our Las Vegas exposure; all while creating value for our shareholders.
As we have said before, we continue to believe we can further build the portfolio by putting your capital to work. The principles key to our success have been our true independence, our depth of understanding of the tenants underlying business and our focus on executing what we can consider fair deals, deals that are mutually beneficial to both the OpCo and VICI. We believe that the acquisitions we’ve completed and announced to-date have demonstrated this, not only to our operating partners but to our shareholders who we’ve entrusted with their capital.
With that, I’ll turn the call over to David who will discuss our financial results.
Thanks, John. We reported total AFFO of $132.2 million or $0.36 per share for the third quarter. Our earnings for the quarter reflect $232.7 million, which was comprised of $227.3 million from our real property business and $5.4 million from our golf business. Real property business revenue was comprised of $189.9 million of income from financing leases, $12.2 million of income from operating leases and $25.1 million of property taxes paid by our tenants.
Our income from direct financing leases for the quarter includes $13 million net change to our investments in direct financing leases, which is a non-cash item. After adjusting for the non-controlling interest attributable to Joliet, our portion with DFL that is deducted from net income should calculate AFFO to $12.9 million.
On the cost side, our general and administrative costs were $5.7 million for the quarter. We're thrilled to report that we have completed the previously discussed transition from Las Vegas to New York and reached our steady state run rate for G&A. We continue to expect that cost will hover around $16 million per quarter with slight fluctuations possibly occurring quarter-to-quarter. During Q3, the Company recognized $12.3 million non-cash loss on impairment on certain non-operating vacant land parcels.
By way of background it was part of emergence and spinoff from CEOC, VICI inherited approximately 215 acres of non-operating land parcels scattered across the country. All of the land parcels are located outside of Las Vegas and none of the land parcels are component of the operations of our regional property portfolio. As part of our efforts to monetize certain parcels, it was determined the carrying value reported on our balance sheet at the time of the emergence exceeded the fair market value. As a result, we recorded one-time non cash impairment and the reclassified remaining land value of approximately $22 million from investment in operating income to land on the balance sheets.
On the acquisition side on July 11th, we completed the acquisition of Octavius Tower for $530.5 million. The purchase was funded with cash on balance sheet. Octavius Tower is operating pursuant to a standalone lease, which provides for annual rent of $35 million and has an initial term that expires on October 31, 2032, with four, five year renewal options. In connection with the closing of Harrah's Philadelphia and the lease modifications, the detail of lease will be amended to include Octavius tower. As has been mentioned, we hope to close Margaritaville and Harrah's Philadelphia and the lease modifications during the fourth quarter.
We expect the total net cash outflow for these transactions, including the impact of the $159 million reduction of the Philadelphia purchase price in connection with the agreed upon lease modifications to be approximately $344 million. We expect both transactions to be funded using cash on the balance sheet.
Turning to our balance sheet. We ended the quarter with approximately $466 million of cash and short-term investment. Our outstanding debt at quarter end was $4.1 billion with a weighted average interest rate, including the impacts of our interest rate swaps of 4.95% and a weighted average maturity of approximately 5.2 years. We have no debt maturing until 2022. Based on annualize third quarter adjusted EBITDA, our net leverage is 5 times.
With respect to our guidance for the remainder of 2018, the Company is updating its estimated net income per share guidance to reflect the non-cash loss on impairment, which occurred in Q3. And we are reaffirming the AFFO per share guidance for the full year 2018. As a reminder, our guidance does not include pending acquisitions that have not yet closed. We estimate that net income attributable to common stockholders will be between $1.44 and $1.45 per share, and net AFFO per share will continue to be between $1.43 and $1.44 per diluted share for the year ending December 31, 2018.
Finally, regarding the Company’s dividend policy; with the closing of our Octavius Tower, we raised our targeted annual dividend rates of 9.5%; on September 17th, we declared a quarterly dividend of $0.2875 per share of common stock for the third quarter, which reflected the increased annualize dividend rate of $1.15 per share. The dividend was paid on October 11th to stockholder of records as of the close of business on September 28th.
In closing, we continue to make tremendous progress as we execute on our strategy, we believe we are well position to keep growing our portfolio and driving our shareholder value. Operator, at this time we’d be happy to open the line for questions.
Thank you [Operator Instructions]. Your first question is from the line of Daniel Adam with Nomura Instinet. Please go ahead. Your line is open.
Can we talk about the M&A environment a little bit outside of the call right properties and other dropdowns from Caesars. What are you guys seeing in terms of new pipeline opportunities? And as follow up to that, are you seeing opportunities more publicly traded operators or with both public and private casino owner operators? Thanks.
So, I’m going to sound a little bit like a broken record for the last two quarters, we’ve been speaking. The activity in the space continues to be strong. We’re out there, obviously the -- as we know, the new kid on the block and we’re making sure that all the operators out there understand our model and are true independence. When it comes to whether they’re public companies or private companies, I’d say there is a mixture of both out there. And again, we’re making sure that we’re out there and it's quite active, whether all be assets that are out there that we’re talking about transact, we don’t know but we’re making sure that VICI's presence is out there.
Dan, I might just add to that. What we’re benefiting from is the increasing understanding on the part of asset controllers and/or operators. As to what the nature of the capital is that we convey to them if we do a sale leaseback transaction, and that is to say we’re another form of permanent capital. And we believe, in many cases, a cheaper form permanent capital than they could access either through the public markets or other private channels.
Your next question comes from the line of Smedes Rose with Citi. Please go ahead, your line is open.
This is Abhishek on for Smedes. There have been a lot of media stories about the state of Caesars from perspective. Can you talk about what this change of control would mean if anything and for your existing leases with Caesars, as well as your call options on the three Harrah’s Casinos?
I mean just to start with -- to provide context whenever we talk about Caesars. We are in the deformation of a long-term relationship with Caesars. It's a relationship that has at least 34 years to go and in 2052, chances are pretty good if we’re all here -- I mean I think in my age, but then it would be a relationship that continues into the future. In terms of change of control, I think first of all just to emphasize what is perhaps obvious is that Caesars has announced nothing in regard to any potential changes of control. They're obviously undertaking a CEO search as they announced yesterday, but in terms of the technicalities of the change of control. We’re one to take place I'll turn it over to David and John.
Yes, in terms of the call properties, those are essentially obligations of Caesars and the entity, and those would carry forward if there were any change of control. And then the leases are obligations of the entity as well and we don't have any concern that those leases would be impacted if there were a change of control. And Caesars as our tenant, we're only speculating on what is rumored in the presses as you are. I mean, but we feel good about our tenant relationship we have with our tenants.
And I think obviously you know this well Smedes that we're obviously in the triple net space and you have to look past just quarter-by-quarter. But if you do look at the underlying business at Caesars, you look at the quarter two results, EBITDAR was up 13%. This quarter was a little down but they're forecasting for the fourth quarter the outlook looks really strong between I think it was 6% and 16%. Those are those are healthy growth of the underlying tenants business?
And would it change the way you think about timing of the call options. So would you opt to be more in front to exercise on them sooner rather than later, or is it little different?
No, not necessarily. Our timing on the call properties will always be based upon our believing it is a very opportune time to exercise a call or multiple calls at any given time over the remaining four years that we have to call them. We do not -- we are not concerned about anything that may happen and how it may impact timing of -- we’ll always do it when we believe it's the best time on behalf of our shareholders to take them down.
Your next question comes from Stephen Grambling with Goldman Sachs. Your line is open.
I guess one clarification just on the impairment. Can you just provide a little more details to where some of that land is, maybe why there was deterioration or maybe it fell under your expectations or maybe that's even the cost of the land? And then also what you plan to do maybe with the rest of the land?
So this is land has been on Caesars' balance sheet for years, and John can speak to how long it's been around. And this is land that Caesars accumulated. Over a period of time when there were potential opportunities to expand gaming and jurisdictions represents a likelihood that we're going to grant it. So this is really non-de minimis land non-operating land. It is not associated with any casino operations. And so we went to -- and this is something that the creditors as far as bankruptcy put within the VICI bucket so to speak. And as we went to start to monetize some of this because it has no intrinsic value to us going forward, we realized the value that was from an accounting standpoint that was on the books that was brought over during the emergence was it's simply different than the fair market value. And so we took a $12 million non-cash write down, there was $34 million in aggregate. I mean, we wrote that down to $12 million but the one time just cleaning up some of the accounting that was done at the time of the emergence.
And then maybe turning to just the overall M&A environment and you alluded to this a little bit. But have you seen any shift at all in property pricing expectations, either due to the rising interest rates or even just gaming sector performance, in general?
We have not seen any difference in activity or pricing at this time, maybe it’s a little earlier we'll just have to continue to watch that. But it’s -- the activity has been as the robust as it has been in the previous quarters as I've communicated. So, again we'll continue to monitor, continue to listen to what’s out in the market, but we have not seen a decline in the number of activities.
Your next question comes from Cameron McKnight with Credit Suisse. Your line is open.
The question is for Ed or David, or John. In terms of potential accretion from transactions, I mean lot of gaming deals over the past few years have been done with 5% to 8% accretion to AFFO per share. Where do you think that settles down over time? And do you think it settles down at some level below that?
I think historically, Cam, part of the explanation for that magnitude of accretion is that until recently most of the big trades or big portfolio trades that we’re capable of generating that on block accretion. I think when you get down to single assets, it’s unlikely you’re going to see that magnitude of accretion. And I think at that point you’d be more rightly focused on the cash on cash return of the transaction unto itself as opposed to an EPS accretion per share. Because obviously as each of us as each of the three us get bigger, the accretion per share will become mathematically somewhat harder to achiever and I would evaluate single, especially single asset transactions not only on accretion per share basis, which we will always make sure is positive but also on a cash on cash return of the acquisition in relation to the cost of capital that was required to execute that transaction.
And then, David, in terms of funding M&A. If you were issue seven to 10 year paper today, where do you think that might price?
I mean with our rating are Ba3, BB rating, it's in the mid to high 5s is what the bankers continue to tell us as the rates are moving around, 10 years moves around the books. But the overall debt markets being liquid and fluid still and pricing that would make sense to achieve the accretion that Ed talked about.
And then one last one for John, if I can. John, you’ve been in the gaming industry a long time. What’s your interpretation of what we saw in the third quarter in Vegas?
I think people were prepared for numbers. I think we’re going to be quite weaker than that Cam. The numbers that have come out had some weakness compared to prior year but they seem to have exceeded the expectation which was nice to see. It's funny, we’re looking at less about the third, Cam, and onto the fourth and the first and the operators have talked a lot about the strength that they’re seeing in fourth and into 2019, which is great to hear.
The other thing, Cam, I would just add is that as John's already alluded to we're a triple net REIT, we're going to collect the same rent no matter what happens at the operator level quarter-to-quarter. But nonetheless this is a period where we feel our portfolio strategy of having exposure to both the regional market and Las Vegas is the right strategy for us as a REIT, such that we can confidently distribute cash through all cycles, because as you did see Florence's in their reports -- in the results, Caesars reported yesterday, their reasonable performance for Q3 was very strong. It was about 50% of our portfolio out in the regions, 40% in Las Vegas. Again, we like that balance again not that we live quarter-to-quarter but we like having tenants who have that portfolio disclosure and diversity geographically.
Your next question comes from Carlo Santarelli with Deutsche Bank. Your line is open.
David just wanted to circle back to the comment that earlier in terms of the $344 million of financing net for the two transactions, including the lease modification. You mentioned largely cash. I think you guys have about $145 million of cash on the balance sheet as of 3Q. And what's the comfortable balance there you guys are willing to keep at the corporate level?
So the one thing we want to point out is that we also have $320 million of short term investments. Those are just simply from an accounting classifications highly liquid investment grade commercial paper with maturities of 91 to 120 days. So, to the extent that two together, that's the 466 that referenced in my remarks. We have plenty of cash on the balance sheet to fund the two pending transactions. As we think about our cash needs on a go forward basis, probably in the $75 million to $100 million range. We want to make sure we get enough cash to cover the next quarter's dividends. We have very little working capital needs. But we want to make sure we're able to continue to fund our dividend and with free cash flow that we generate from our low payout ratio also allows us to be well covered.
And then just if I may one follow up. As it pertains to you know, obviously, some of the changes that are taking place at Caesars. When you think about the potential for them to be doing M&A on the buy side, going forward. Does any of the decision making there or anything you could potentially be partnering on. Do you believe there might be a little bit of a lag in that right now until things are more settled?
Only time will tell, Carlo. Again, we have a lot of confidence in the Caesars' board. We have a lot of confidence in the Caesars' management team. I think what you heard yesterday was a continuing commitment to growth over time and very good results. One thing I just want to highlight that Caesars reported yesterday that probably didn't get the attention it deserves is the continuing guest satisfaction improvement that Caesars' continues to generate in terms of net promoter scores and customer service scores.
And as real estate and hospitality people with hospitality backgrounds, I put a lot of stock in how happy a tenants customers' are and whenever you have improving happiness, you have a company that has improving prospects. And I think that has implications on how they grow in the future.
Your next question comes from Sean Kelley with Bank of America. Your line is open. Hello, Sean Kelly, is your line on mute?
This is Ally on for Sean. I know you guys in your prepared remarks mentioned interest is growing in Vegas. Just wondering are there any other regional markets that you think seem appealing right now or ones that maybe you're currently in, and would be interested in expanding in?
We continue to look at all opportunities. We’ve talked about expanding our footprint in Vegas, not only on the strip but there was an opportunity to get into the local market there. We like that business. That business continues to grow. We like what we’re seeing. In the Reno market, which we already have an asset there as well and then there is some other regional markets that continue to show great strength and growth in some regional markets that we just aren’t in that we think would continue to diversify our portfolio with assets came for sale, we would be very interested in those assets as well. So that’s a short answer but hitting all the markets we think there is still opportunity for us to look at all of them.
And maybe just add onto John's comment on a day when we obviously saw very positive jobs support and moreover very positive wage growth, so much of that increased economic vitality is taking place out in the regions and we feel is going to mean good things for regional operators within years to come here.
Your next question is from Komal Patel with Goldman Sachs. Please go ahead, your line is open.
Just a couple of quick follow ups. What’s your appetite on taking on larger transactions or potentially multiple properties at once, especially considering the pace of M&A so far has been fairly measured?
Ken, I think because a lot of that obviously has to do I think the underlying question really has to do with our confidence and our ability to effectively fund larger transactions. I will turn it over to David.
I mean as a basis of any acquisition, it has to be accretive day one for us. And we would not shy away from larger portfolios, just because they are larger. We feel that we have good access to both the debt markets and the equity markets as needed to potentially acquire larger acquisitions if they were accretive, if they made sense with our portfolio diversification and our tenant diversification. So, John has alluded to, there is a lot going on out there and we’re not shying away from anything just frankly given the size.
Yes, that was actually the direction I was going in, so as a follow up. Is there a level of leverage that you think could be just too high and that would contribute you guys considering using equity for a transaction. Is it something in the six range, 6.5 range something higher than that, that could frame how you think about these potential transactions?
As we’ve talked about, Komal, and as Ed alluded to in some of his opening the remarks, they emergence we are at 8.4 times debt to EBITDA, we are 5.0 times on a net basis today. And we are going to be very discipline in keeping our leverage in the low fives, it's 5 to 5.5 times. There may be times when it picks up slightly north of 5.5 times but we would be hard pressed to ever get 6 times debt to EBITDA range. So we want to be measured and disciplined to make sure we can grow the portfolio accretively and we want to work to acquire assets or portfolios on a leverage neutral basis.
And then just one last one for me, in an effort to be more aggressive on M&A deals given the landscape. Would you consider using the TRS structure for operating rights if an attractive property comes up, something like one of your public peers recently did? Or do you think that doesn't quite align with your risk appetite?
I don't think we ever rule it out if it made sense at a given time to do so. I would say generally though, again, we take very seriously as we obviously have to the fact that we're a REIT. And we believe that equity capital invest in us as a REIT in order to receive the distributions it does in the most tax effective way possible from the source income. So again, we wouldn't rule it out but we would always look to see the degree to which we can take any dollar of income that our Company generates and turn it over to our investors in the most tax effective way possible.
Your next question is from John DeCree with Union Gaming. Please go ahead, your line is open.
I think you've touched on pretty much all of my questions, but maybe just a housekeeping item, if I missed it in the prepared remarks. Do you have updated timing or time range on the acquisitions of Harrah's and Margaritaville?
As we mentioned, we hope to have everything wrapped up by the end of the year, as Penn guided, similar timing on there in Margaritaville -- on their call in Margaritaville. We’re just working through some final regulatory and loan consent processes on both of those transactions.
And then just to say high level. We've talked a little bit about the M&A environment and your appetite in different parts, but maybe to ask a question a little differently other than obviously ensuring the next deal that you do is economic and value accretive. Are there other strategic priorities in terms of tenant diversity or things that you might be looking for as you scale the M&A environment?
We’re obviously always going to value tenant diversity. And tenant diversity is not necessarily just an end unto itself. Tenant diversity is a means of getting more exposure to more markets, more operating practices more end user end customer relationships. So again, that will always be a big part of what we're doing. But again it will have more to do at the end of the day with the quality of the market we're buying into, the quality of the asset in that market and the operators' relationship to its end customers. And if that that yields us more and more tenants, we’ll obviously be very happy to have achieve that.
Your next question is from R.J. Milligan with Baird. Please go ahead, your line is open.
Most of my questions have been asked. I'm curious though as you're having increased discussions for the smaller portfolios or single assets. Is there any change in what sellers are expecting in terms of economics or where you're selling the rents? Just curious how those negotiations have changed possibly from larger deals to smaller deals?
Not really change from larger to smaller. I'd answer that question -- it really depends on the operator that we're talking to. As you can imagine, there are different goals and objectives depending on the operator, the property, but it has not changed at all in the recent times. So it's been quite stable. We'll continue to watch. It's been quite active as we've talked about but it really comes down to what is the seller trying to achieve with a possible deal.
And R. J., maybe just to add a little bit to that. I mean, we -- the big gaming operators, especially the public gaming operators, they’ve come through a wild couple of months here. Post the Q2 earnings announcements, a number of them have seen their stocks get hit pretty hard. And it was all so quick, so volatile, so violet really that I don’t think anybody was able to just rise above that and go okay now we certainly have to re-price everything, because I think the greater sense was what the heck was going on.
And only time we'll tell if this was an air pocket that everybody is going to quickly recover from, or if it's something longer-term in nature. We think given the Q3 results you’re seeing from just about every operator out there that there was a wild over-reaction in terms of how the gaming stocks performed over these last two months. And we’ll really find here pretty quickly in equilibrium that as based upon the fundamentally strong performance that they are all showing.
And when we do hit that equilibrium, which we would anticipate greater velocity in terms of M&A and/or the selling of real estate?
I don’t know if the velocity is necessarily going to pick up. But I think there will be commitment obviously -- or very much flow to the conversations around these potential transactions and a recognition that these transactions do take time.
[Operator Instructions] Your next question is from Daniel Adam with Nomura. Please go ahead. Your line is open.
Just one quick follow up. Can you remind us what the expected AFFO per share accretion is from Harrah's Philadelphia and Margaritaville? And do you intend to update 4Q and 2018 guidance once those deals close? Thanks.
Dan, our follow through would be to update guidance once those deals do close. And just as a reminder, Harrah's Philadelphia would generate $21 million of annual rents and Margaritaville will generate about $23 million of annual rents. So you can do the math on that and I appreciate the outstanding and what that adds to really a full year 2019 in terms of AFFO per share growth, which we think once we get these closed, our shareholders would benefit from a full year of having those acquisitions in our portfolio. So we’re excited about what 2019 brings.
And maybe just to retake the obvious, because they are being paid for with the cash on hand the $400 million plus of cash that David referred to earlier. Obviously, that rent turns into NOI, turns into AFFO with 100% flow through just about.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you, Kareena. And thanks everybody for your time today. We look forward to providing an update on our continued progress when we report our fourth quarter and year-end results. Thanks again.
This concludes today’s call. You may now disconnect.