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VICI Properties [VICI] Conference call transcript for 2022 q3

2022-10-28 12:52:09

Fiscal: 2022 q3

Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Third Quarter 2022 Earnings Conference Call. Please note that this conference call is being recorded today, October 28, 2022. I will 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 third 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.vicipropertys.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 as will, believe, expect, should, guidance, intend, 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 third quarter 2022 earnings release and our supplemental information. For additional information with respect to non-GAAP measures of certain tenants and/or counterparties described herein, please refer to respective 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 and Finance. Ed and team will provide some opening remarks and then we will open the call to questions. With that, I will turn the call over to Ed.

Ed Pitoniak: Thank you, Samantha and good morning everyone. The third quarter of 2022 for VICI was a quarter of both realization and continuing activation. By realization, I mean that in Q3 2022, we realized the full magnitude and impact of our growth activities in 2021. And by activation, I mean that we continue to create incremental capital allocation opportunities for VICI, especially in non-gaming. The key benefits realized in Q3 2022 included growing our revenue by 100% versus the same quarter in 2021, manifesting the full impact of our acquisitions of the Venetian and MGP; growing our AFFO by 83% year-over-year; growing AFFO per share by 8.5% year-over-year; announcing a dividend increase of 8.3%, giving VICI a dividend compound annual growth rate of 8.2% since our emergence in October 2017. Our key growth activities in Q3 and early Q4 included announcing an additional $186 million of financings within our partnership with Great Wolf Resorts; announcing our $203.9 million acquisition of Rocky Gap Casino Resort; announcing a $200 million real estate financing partnership with Canyon Ranch. In 2022, we have invested in relationships with high-quality partners operating in high-quality experiential segments. Our year-to-date capital allocation commitments, the ones I just mentioned, plus our Cabot investment announced in June 2022 are expected to generate a going-in weighted average unlevered yield on investment of approximately 7.4%, as this nearly $710 million of capital is deployed over time. Before I turn the call over to John Payne and David Kieske, who will talk about our outlook, growth activities and financial results, I want to say a few words about our new partnership with Canyon Ranch, which we announced just last week. When we announced our new partnership with Cabot Golf back in June, you heard me talk about our belief in the power and moat qualities of what we call Pilgrim’s experiences, many experiential categories, especially those with strong elements of expertise and/or knowledge accumulation are parameatal in shape. And at the apex of these pyramids are the purest rarest realizations of that category’s experience. These are experiences that tend to attract within that experiential category, the most valuable and loyal clientele, able and willing through all cycles to pay a premium for the purest realization of the experience to which they are devoted. At VICI, as real estate investors, our thesis is a simple, and we believe, powerful one. Places of pilgrimage are places of great value. We want to and we are investing in these places. Cabot creates and operates golf resorts that represent pilgrimage experiences in golf. We are proud and excited to partner with Cabot on the creation of Cabot Citrus Farms. It’s our next pilgrimage destination and we believe we can partner on many subsequent opportunities with Cabot. Of us note as well the Las Vegas Strip is also a pilgrimage destination for people seeking Apex experiences of all kinds. I was just there this week. It is the busiest place on earth. In the experiential category of wellness and personal performance, Canyon Ranch has been, is, and I believe will be for decades to come, the market leader, creating an operating resort that represents a definition of pilgrimage experiences and wellness. The Canyon Ranch brand was born in 1974. For nearly 50 years now, Canyon Ranch’s clientele has traveled to Canyon Ranch Resorts to make the most important investment they can make, an investment in themselves, in the betterment of their lives, body, mind and spirit. The Canyon Ranch clientele, in order to make this investment and trust themselves to the Canyon Ranch team, an active trust that the Canyon Ranch team takes with existential seriousness. Under the leadership of Chairman and Principal owner, John Goff, a legend in American real estate investing through his creation of Crescent Real Estate and CEO, Jeff Kuster, formerly North American Head for Ralph Lauren. Canyon Ranch has built a wellness and humid performance team of great strength and authority. This team includes by way of example, a former U.S. Surgeon General, a former Head of Sports Medicine Research and Innovation at the U.S. Olympic Committee; a former Head of Physical Therapy for the U.S. Women’s National Soccer team; a former strength coach with the Philadelphia 76ers; a nationally renowned behavioral therapists; physicians who have pioneered integrated and lifestyle medicine fields; former Chef Dietitian at the U.S. Olympic Committee; and a Harvard Divinity School appointed spiritual innovator. The Canyon Ranch clientele is able and willing to pay through all cyclicals premium for the experiences and life improvements they obtain at Canyon Ranch. As many of you know, I have worked across ski resorts, heli ski resorts, beach resorts, golf resorts and now casino sorts. I can tell you, based on my experience that the Canyon Ranch capital and operating economic model, is among the most compelling and productive I have seen in revenue intensity per dollar of capital invested, in margins and in the returns on invested capital. Canyon Ranch, we believe will benefit greatly for decades to come from highly positive demographic and cultural tailwinds. The growth opportunities for Canyon Ranch are manifold both domestically and internationally and we are very excited to be Canyon Ranch’s capital partner funding this growth. You can hear John Goff speak of the role he sees VICI playing in Canyon Ranch’s growth. If you watch the Mad Money segment that John and I did with Jim Cramer on October 17. That clip can be found at our website, www.viciproperties.com. Finally, we are particularly excited about our first investment with Canyon Ranch, because it enables us to invest capital into and ultimately gives us the opportunity to own high-quality real estate in one of America’s most dynamic metropolitan areas, Austin, Texas, a region that, at least for the foreseeable future, we cannot invest in through gaming. Let me now turn the call over to John Payne, who will talk about our outlook and growth activities. John?

John Payne: Thanks, Ed. Good morning, everyone. It’s good to be talking to you this morning. During the third quarter, we announced the acquisition of Rocky Gap Casino Resort in partnership with our existing tenant, Century Casinos. Upon closing, rent under our master lease with Century will increase by $15.5 million, representing a 7.6% acquisition cap rate. Given our relationship with Century, we were able to leverage our existing master lease and our combined cost of capital to structure a transaction that work for all three parties involved, that being VICI, Century and Golden Entertainment, the seller of the asset. We are excited about expanding our relationship with Century as we have witnessed their relentless operating focus firsthand since we jointly acquired three regional assets in 2019. And upon the closing of Rocky Gap, we look forward to adding another remarkable regional destination asset to our portfolio. Moving to the outlook for growth, we are often asked how the transaction environment appears in real time. I will repeat something I often say, which is that transactions do not come together overnight. Ed touched on our Great Wolf, Cabot and Canyon Ranch partnerships and I would simply point out that the transactions we are able to discuss today represent just a fraction of the effort we undertake behind the scenes. Throughout the third quarter, our team remained as busy as ever introduced in our company to potential partners and forging relationships across a variety of sectors. In fact, our entire company is actively involved in finding ways to position VICI as the capital partner of choice for gaming and experiential operators. As you can imagine, capital market fluctuations can make it challenging to pinpoint our exact cost of capital at any given time. However, I stress that remaining discipline is core to our underwriting process. The landscape for transactions remains competitive and it’s important to understand that seller expectations do not necessarily adjust in real time. With that said, at VICI, we focus on what we can control, which is one, our partnership approach. We encourage potential partners to speak to our existing tenants and believe we can position ourselves to ultimately win the ties. Two, disciplined and rigorous underwriting, we strive for accretion in every transaction and thanks to the work of our team, believe we can remain competitive. And third, finding ways to create our own success, the landscape for PropCo transaction is not zero-sum. We have learned to adapt to a variety of scenarios and believe we can uncover opportunities that may not be obvious to our competitors. Just a few weeks ago, we crossed the 5-year mark since we started the company. We wholeheartedly believe that our track record, which includes over $30 billion of transaction, speaks to our relentless focus and dedication to create long-term value for our shareholders. We will continue to adhere to the approach that is responsible for our success to-date and will strive to grow the company accretively for years to come. Now, I will turn the call over to David, who will discuss our financial results and access to capital. David?

David Kieske: Thanks, John. We are clearly in a volatile macro environment where ongoing inflation and rising interest rates are not only dominating the financial news, but also factoring into the transaction market requiring buyers and sellers to adjust to a market backdrop we have not seen in many years. As John mentioned, VICI turned 5 years old on October 6. And since our inception, we have been disciplined in maintaining a positive spread to our cost of capital. So even in an environment where the 10-year treasury rate is north of 4%, a rate that many younger investors have never seen in their lifetime, VICI is focused on maintaining discipline in everything we pursue. We are fortunate that we have built a balance sheet to weather these turbulent times with no floating rate debt, no maturities until 2024 and ample liquidity to deploy capital accretively with leading operators like we did with Century, Great Wolf and Canyon Ranch since the second quarter. In terms of VICI’s liquidity and balance sheet, as of September 30, we had approximately $4.7 billion in total liquidity, comprised of $726 million in cash, cash equivalents and short-term investments, $490 million of estimated net proceeds available upon settlement of our outstanding forward sale agreements, $2.5 billion of availability under our revolving credit facility, and $1 billion of availability under the delayed draw term loan. During the quarter, we sold approximately 3.9 million shares with an aggregate value of $135 million after fees under our ATM program. All of the shares were sold subject to a forward sale agreement and as such are not reflected on our balance sheet. In terms of leverage, we ended the quarter with total debt of $15.5 billion, inclusive of our pro rata share of the BREIT JV debt. Our net debt to adjusted EBITDA pro forma for a full year of rent from the MGP transaction is approximately 5.8x. We have a weighted average interest rate of 4.4%, taking into account our hedge portfolio and a weighted average 6.9 years to maturity. Turning to the income statement, as Ed mentioned, we doubled our GAAP revenue year-over-year, a feat we are very proud of and I want to thank the entire VICI team for all their efforts in delivering this growth. AFFO for the third quarter was approximately $471 million or $0.49 per share. Total AFFO in Q3 increased 83% year-over-year, while AFFO per share increased 8.5% over the prior year. As a reminder, the disparity between overall AFFO growth and AFFO per share growth is due to an increase in our share count which increased primarily from the equity raised in shares issued to consummate our transformative acquisition of MGP during Q2 and our acquisition of the Venetian Resort during Q1 of this 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, and our margins continue to run strong in the 90% range when eliminating non-cash items. Our G&A was $12.1 million for the quarter and as a percentage of total revenues was only 1.6%, in line with our full year expectations and one of the lowest ratios in the triple-net sector. Turning to guidance, we are updating AFFO guidance for 2022 in both absolute dollars as well as on a per share basis. AFFO for the year ended December 31, 2022 is expected to be between $1.682 billion and $1.692 billion or between $1.91 and $1.92 per diluted common share. Our updated guidance reflects the uncapped CPI lease escalation of 8.1% that VICI will receive under our Las Vegas master lease and regional master lease with Caesars, effective for the lease year beginning on November 1, 2022. Additionally, the per share estimates reflect the impact of treasury accounting related to the pending 15.3 million forward shares sold under our ATM program during Q2 and Q3. As a reminder, our guidance does not include the impact on operating results from any possible future acquisitions or dispositions, capital markets activity or other non-recurring transactions. As we have discussed in the past with you, we record a non-cash 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 and evaluating our financial performance and ability to pay dividends. With that, Megan, please open the line for questions.

Operator: Our first question comes from the line of Anthony Paolone. Your line is now open.

Anthony Paolone: Thank you and good morning. I was wondering can you talk about just your efforts to look at investments internationally and how that’s coming on and also just your appetite around that given what happening around the world?

Ed Pitoniak: John, do you want to start?

John Payne: Sure. Good morning, Tony, how are you? Nice to talk to you. So it’s definitely been something that we have been focused on for the past couple of years, you’ve heard us talk about this that we’ve grown, obviously, domestically in our first 5 years, but we always have positioned the company to grow internationally and we’re spending time not only in the casino sector but also in the experiential sector outside the U.S. and study in markets where we think we would like to own real estate, and we’re in the middle of that process and understanding the underwriting and understanding the countries where we would own real estate and their laws and we’re right in the middle of it, Tony. Nothing to announce at this time, but it’s of interest for us to grow internationally.

Anthony Paolone: Great, thank you.

Operator: Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa: Great. Can you hear me?

Ed Pitoniak: Yes.

Steve Sakwa: Okay, thanks. Ed, I was just wondering if you could maybe talk about where you’re seeing more opportunities? Is it with sort of some of the public gaming companies that have seen a big change in their cost of capital and debt markets? Or is it more on the private side with companies like Cabot and Canyon Ranch where maybe cost of capital is even less available?

Ed Pitoniak: Yes. It’s a good question, Steve, and good to talk to you. I would say we’re seeing opportunities on both sides. I would say the private side, though, to your, I think implicit point is probably even richer fishing ground right now. And that has to do really with the state of the credit markets. As most of you on this call know, bank credit, especially to real estate credits has effectively dried up and I was reading the transcript as the Blackstone call last week, which I always do because if you don’t listen to what John Gray is saying at any given time, you’re missing an opportunity to pick up a lot of intelligence, and I thought it was telling the degree to which John was emphasizing to read it, they believe a lot of their real estate capital allocation in the near to midterm is going to be credit-focused. And you’ve seen that from us as well. I would say that we’re at a point in the cycle where would be sellers have still not gotten the memo that the world has changed radically. And as an indication of how radically the world has changed, I’ve been trading e-mails with Mark Streeter at JPMorgan, the IG REIT credit analyst, and he sent me these graphs of the volatility of credit. And if those were EKG, that patient would be in a world of hurt. And then I saw last night from Hartnett that U.S. treasury performance this year is the worst since 1788 when the United States of America was a funky little startup. So the state of the credit market is, to your point, Steve, like it’s tough if you don’t have access to capital. And as David just emphasized, we’ve got over $4 billion of liquidity. We’ve got almost $1.3 billion of effective cash, and we are very excited to put that to work. We will put it in both with private operators and public. And in some cases, it will go into credit in the near to midterm with conversion to real estate ownership in most cases. in order to, frankly, capitalize on the fact that we have capital when a lot of other people don’t.

Steve Sakwa: Okay. If I could just ask one other question, I know you’re probably not giving individual yields on, say, Cabot and Canyon Ranch, but could you help us think about the yields maybe a broad sense for those development yields, which clearly carry more risk versus kind of stabilized acquisition yields and deals that you might get on your road for. So just how are you thinking about yields on development versus maybe stabilized acquisitions?

Ed Pitoniak: Yes. Well, clearly, Steve, we do need to be compensated for the risk that is associated with development. And I’ll just go back to the 7.4% unlevered yield for the nearly 700 some million of capital that we’ve deployed in Q2 and early Q3 and I think that 7.4% unlevered yield going in to give people comfort that we have been adequately compensated for our risk.

Steve Sakwa: Great, thanks.

Ed Pitoniak: Thank you, Steve.

Operator: Thank you. Our next question comes from the line of R.J. Milligan with Raymond James. Your line is now open.

R.J. Milligan: Hey, good morning, guys. Certainly, appreciate your comments on cost of capital and maintaining discipline and certainly, the track record that you guys do only do deals that are accretive but I’m curious how you view your cost of capital today, how do you calculate it? And I guess given John’s comments that sellers’ expectations don’t always adjust with the changing cost of capital. Do you expect a pause on external growth on more of the middle of the fairway gaming assets while the bid-ask spread remains relatively wide?

Ed Pitoniak: David, do you want to start on that?

David Kieske: Sure. Great, R.J., it’s great talk to you. I mean one of the – we have this debate every day internally, right? When you see the 10-year moving 10, 15, 25 basis points, and obviously, the stock market is doing what it’s doing, hard to price a deal on a daily basis. So we look at – but we do look at the spread to our cost of capital. And right now, look, we’re getting 10-year pricing at 7%. So the $5 billion that we raised back in April, 5%, net adjusted at 4.5% with our hedge portfolio looks really, really good. But R.J., we’re going to always maintain the spread to our cost of capital. Obviously, our stock has held up well. Debt pricing is what it is. As Ed just touched on, we have $1.3 billion of liquidity that is on the balance sheet, which does not include the term loan or the revolver. Being cognizant that cash is not free and that there is an implicit cost of that cash, we are going to ensure that we continue to do the deals that we’ve done in the past, maintaining that spread. And your comment around kind of middle of the fairway deals, I think you’ll see more of the Rocky Gaps of the world were a little bit smaller deals and some of the large mega deals will probably take a pause for a while just given the uncertainty around kind of where the world is ultimately going. But we feel good about our pipeline. I think it’s busier than it’s ever been, and the dialogue is greater than it’s ever been but we’ve got to be relentless in ensuring that we can continue to deliver consistent accretion year in and year out for our shareholders.

R.J. Milligan: Thanks, David. I appreciate that. Just as a follow-up – go ahead, Ed.

Ed Pitoniak: I was just going to say, R.J. And while obviously, the cost of debt capital has been incredibly volatile. And for most REITs, the cost of equity capital has been very volatile or just simply negatively trending. We are in a unique position where our equity on a relative basis, has held up so well with us having been the best-performing S&P 500 REIT year-to-date through September 30, and I’m guessing as of yesterday, we still are. So we do have a strength to our equity price or equity cost that on a comparative basis does represent competitive advantage. Back to you, R.J.

R.J. Milligan: Thanks. Just as a follow-up, given that bid-ask spread for sort of the middle of the fairway gaming assets, do the call options that you guys have become a more attractive option to sort of bridge the gap until cap rates adjust?

Ed Pitoniak: John?

John Payne: So R.J., it’s nice to talk to you this morning. When you’re speaking – I think you’re speaking more of the one foot call we have on the Indiana assets, and we continue to watch the great performance that our tenant, Caesars, has been handling these assets. They have capital still going into the two assets in Indianapolis. They have rebranded both of those casinos and they continue to grow. So we will continue to look at those. Those – the put call is active all the way through 2024. We sit here in October of 2022. So – we will monitor them. We love those assets. We really like what Caesars is doing with them and in growing that business. And like I said, we will continue to look at those over time.

R.J. Milligan: Thank you, guys.

Operator: Thank you. Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Your line is now open.

Carlo Santarelli: Hey, guys. Thank you. David, I was just wondering, as you think about the positioning of the balance sheet and obviously 5.8x pro forma today and likely to go down in the absence of transactions. How much does the current rate environment change the parameters that you want to operate within?

David Kieske: It’s a good question, Carlo. Good to speak to you. I hope you’re well. Look, the current rate environment is it bounces around every day. And so we’ve got to run the business taking a long-term view, but being mindful of if we had to price something or if we had to close on something today or in the near-term, how that would impact ultimately accretion, right? We’ve got to drive accretive deals and be disciplined in what we’ve done since day 1. So it’s something we watch. We’ve got access to the revolver. We’ve got access to the late draw term loan. Thankfully, we have no maturities until 2024, where we have to go to the debt markets, but it’s something that we’re going to be monitoring and making sure that we continue to drive growth to the balance sheet – through the balance sheet and can maintain the balance sheet and position of strength and as you said, bringing down leverage over time through potentially funding deals with our free cash flow.

Carlo Santarelli: Great. Thanks, David.

Operator: Thank you. Our next question comes from the line of Wesley Golladay with Baird. Your line is now open.

Wesley Golladay: Hey, good morning, everyone. You guys are having a good success with follow-on deals. You seem to be in a good negotiation position with good relative cost of capital. But you did mention sellers are a little bit slow to adjust to pricing. Are you looking to potentially get some exclusivity rights to their expansion as a way to maybe bridge the gap on the pricing at this point?

Ed Pitoniak: If I understand your question correctly, Wes, and good to talk to you. I would say that when we form partnerships with the likes of Cabot and Canyon Ranch and Great Wolf and others, we’re most interested in developing relationships for the long-term that give us a steady flow of capital allocation opportunities. Obviously, we want to be properly priced, we want our investors to enjoy the yields that they deserve to enjoy off of these investments. But I would say it’s more about developing a long-term pipeline as opposed to using any kind of negotiating leverage or anything else, frankly, to enhance pricing per se. I mean, we’re very satisfied with the pricing. As I noted in my remarks with Steve, a 7.4% blended unlevered yield across both development and existing assets, we think is pretty good, pretty good yield in this environment. In fact, meaning is a really good deal. I wouldn’t say that we necessarily use these long-term partnerships in order to acquire pricing as much as we do to acquire a long-term pipeline of growth.

Wesley Golladay: Yes, I think what I was looking at is, yes, you look at – it looks like you have some – you get the initial yield, which is good, that may be a little bit slow to adjust but then you will have some kind of other value, whether it’s your embedded options, maybe an exclusivity. I was just wondering if there is anything more qualitative or more structural than an initial nominal yield that you may be able to get and it sounds like it’s just more based we’re just going to have this good relationship and it’s going to naturally lead to more deals, which is currently occurring.

Ed Pitoniak: Yes. And one factor, Wes, especially when you’ve got a team as small as our VICI team, where we’re still just a couple of dozen people with probably lowest G&A among all the big REITs as a percentage of revenue, is that one of the benefits of forming these long-term partnerships is that we create the foundational documentation that enables us to basically rinse and repeat as we continue to grow with those partners.

Wesley Golladay: Okay. Great, thanks for the time, everyone.

Ed Pitoniak: Thank you, Wes.

Operator: Thank you. Our next question comes from the line of Richard Anderson with SMBC. Your line is now open.

Richard Anderson: Thanks. Good morning, everyone. So some of these non-gaming investments you guys are taking on the role of a lone ranger, if I can put it that way, as a way to sort of step in on these things. And I’m curious, is there a situation where that sort of strategy of investing and sort of taking the pulse of these investments initially does it break down at all in this environment? And if it did, would you be willing to be a little bit higher or I should say, lower in the capital stack in any of these Great Wolf, Canyon Ranch, Cabot and so on. What’s your appetite for taking on more risk at the outset of these non-gaming assets?

Ed Pitoniak: Yes. I’ll turn it over to David in a moment, Richard, and good to talk to you. Obviously, when we go into these relationships, we really – we work hard to make sure that our last dollar exposure is a level of last dollar exposure we’re very comfortable with, such that if we ever did have to step in, we’re stepping into a situation that at that last dollar level of exposure for us is very well protected and means that there is still a lot of value left in the asset. Beyond that, I’ll turn it over to David for his thoughts.

David Kieske: Yes, Rich. Great to talk to you. The one thing that we like about these loan investments as it gives us a seat at the table. It gives us insight to the business. It gives us exposure to the operator and as you have seen with Cabot and Canyon a path to real estate ownership. And so things like the Great Wolf where we – our attachment point, as I said, is 75% LTC. I think your question is, would we be willing to go higher or potentially even provide a senior portion we would if it’s the right operator, the right sponsor and the right relationship and again, the overall cost of capital – return on that capital is commensurate with our capital. And I think the one thing to point out is, I know we refer to these as development, but they really build to suits and broader real estate parlance. And VICI is not doing the developing. We’re partnered with high, high-quality developers set GMP contracts and oversight by very, very experienced builders. So while our development pipeline is robust, I think you could potentially see it deviate, meaning we could go lower in the Captec or even higher depending on what happens with the credit markets and making sure that we are rewarded for that.

Richard Anderson: Okay. And then the second question is the U.S. REIT model is largely a function of focused strategies. If you’re a hotel REIT, you’re a multifamily REIT and so on. You guys are more of the Berkshire Hathaway model and you are understanding that there is a shared knitting of pilgrimage – what I’m saying – I can’t pronounce that word for some reason this morning. But a common thread to them all experiential. You said just before you have a couple of dozen people working for you, how do you avoid pitfalls where one or some of these investments don’t quite work out. Are you – should we expect to see a substantial increase in people with experience in these individual asset classes and so on? I’m just curious how the overall entity will adapt as you expand your horizons and experiential real estate?

Ed Pitoniak: Yes. Richard, it’s a very good question. It’s a very top of mind question for both us as a management team and for our Board. And we do have a small team. I would just say, though, this has nothing to do with your question. I would say in an inflationary environment where G&A is so screamingly low as a percentage of revenue. Inflation obviously doesn’t have an effect on our cost structure the way it will on others. What we do, Richard, in order to extend our reach is I believe we get more value out of our relationships with our advisers than anybody else we know of. From day 1, we have treated our advisers the best we possibly can so that when we go to them and say, hey, you know a lot about a category we want to learn a lot about, help us. They are right there for us. And so whether it’s experiential categories or geographies with which we’re not familiar internationally, we work with our advisers as if they are full members of the team. And that extends our reach in a way that’s very cost effective, but it’s also risk mitigating because we come up the learning curve on both categories and geographies very quickly.

John Payne: And Rich, if I can – this is John. If I can just add one other thing on this, it’s important to understand that when Ed and I started the company in October ‘17, we always position this REIT as an experiential REIT. In our first 5 years, we were more focused in the gambling space because we saw the opportunities there. But in the background, we were always spending time study in these different sectors that you now start to see investments that we’re making. So this is not a shift of our company strategy at all. It’s just you are starting to just see these new investments being made.

Richard Anderson: Okay, fair enough. Thanks, guys.

Operator: Thank you. Our next question comes from Barry Jonas with Truist Securities. Your line is now open.

Barry Jonas: Hey, good morning guys. Great to talk to you. Notwithstanding current capital market conditions and bid-ask spreads, I was hoping to get your thoughts on what inning you think you are in for U.S. gaming real estate deals? I guess just how penetrated is your addressable market here at this point? Thanks.

Ed Pitoniak: John?

John Payne: Yes. Well, it’s good to talk to you, Barry. We still think there is a lot of opportunity out there. I know we saw each other, you were in Vegas recently and you have heard me say we – there is no place. You have heard Ed say this. There is no place as busy as Las Vegas, and we obviously have great real estate on the strip. But there is many opportunities in the regional market in Las Vegas, the downtown market, there is other states that are opening that we do not own real estate. There is other locations that we do in own real estate. So, I don’t know exactly what inning it is, but I would tell you, we still see incredible amount of opportunity to grow our business in owning casino real estate.

Barry Jonas: Great. And then if I could just ask a follow-up. Do you think over time, gaming operators will or maybe should move to a full OpCo model? I mean I am assuming coverage is still the key question here, but curious if your thoughts here have evolved over time.

Ed Pitoniak: Barry, I think it’s up to each operator to determine what’s the best business model for them given the overall nature of their business. We think obviously, partners like MGM and Penn are demonstrating that they can be very successful in their capital-light, asset-light model. And at the same time, we have incredible admiration for the way Tom Reeg and Bret Yunker are running Caesars, where they maintain ownership of a lot of real estate. I think it will be interesting to tell over time. And I think the key question for anybody we partner with, whether in gaming or non-gaming, is if we do a deal, what would you do with the proceeds, right. If we do a sale leaseback with you, what will you do with the proceeds. And it’s having a compelling use of proceeds that I think is one of the key determinants when you are an asset controller, whether in gaming or non-gaming as to how attractive having a sale-leaseback relationship with us would be.

Barry Jonas: That’s a great point. Alright. Thank you so much guys.

Ed Pitoniak: Thank you, Barry.

Operator: Thank you. Our next question comes from the line of Todd Thomas with KeyBanc. Your line is now open.

Todd Thomas: Hi. Thanks. Good morning. I just wanted to follow-up on the discussion around your cost of capital and investment spreads. Your cost of equity capital has held up relatively well. Ed, you mentioned that, and it has, but it’s also been volatile. The market has been volatile in general. And I am just curious how you manage deal flow and underwrite potential investments when that investment spread and your cost of capital may be volatile during that time that you are underwriting or negotiating deals? And I guess along those lines, is there any consideration? Clearly, you have liquidity which you have outlined. But is there any consideration for doing more on the ATM or issuing equity in advance of some potential transactions to lock in your cost of capital and provide even greater certainty of seller expectations might be gradually changing here?

Ed Pitoniak: Yes. Todd, good to talk to you. And I will turn it over to David in a moment. I would say one of the benefits of having the amount of liquidity we have, the $4.7 billion that David alluded to, and especially the $1.3 billion of basically equity capital, we already know the cost of is that we have a relative degree of cost certainty. I want to emphasize relatively. We will not have an absolute degree of cost certainty that a lot of others with much lower liquidity just simply do not have at this time. But I will turn it over to David for his further thoughts to your question.

David Kieske: Yes. Todd, good to talk to you. I mean I think the implicit conversation was – or your question, excuse me, was are we shutting down our pipeline or are we pulling back. I mean I would tell you, we are busier than we have ever been as you saw on June 1st, we added a CIO, Kellan Florio from Goldman Sachs, who were thrilled about and is focused on opening more doors in the non-gaming world and has been very, very active. And so we constantly look at opportunities. But ultimately, if the opportunity doesn’t make sense or the market backs up or there is a change, we will not pursue a deal that is not accretive, right. The minute we do a bad deal, that will be our last deal we do because we will not be able to raise capital going forward from our owners, our investors, both on the equity and the credit side. And we are living in a time that’s pretty unique. Obviously, this sort of interest rate environment has not been around for many, many years, as Ed highlighted in his remarks and some of the charts that we have seen. But we will continue to be focused on raising liquidity like we did in June and August on the ATM, where we cut a little bit of tailwind in the equity markets and bolstered our balance sheet. But in terms of our intentions going forward, I can’t talk about that. And we will see what tomorrow brings. But I think we have set up a balance sheet, we have set up a cost of capital that still can be competitive in this environment, but we are just going to be even more disciplined than we have in the past.

Ed Pitoniak: Hey Todd. I just want to add to David’s remarks and I think it’s pertinent to your question. If you look at the total liquidity that David outlined for you, about $4.7 billion, that represents – that is an amount, I should say, equal to about 10% of our current balance sheet, our $45 billion of enterprise value. I don’t know how many other REITs out there have total liquidity equal to 10% of their balance sheet, especially if they are anywhere near as big as we are. And that really does represent the amount of firepower we have at a time when firepower is otherwise very hard – either very hard or very costly to achieve. The last point I would make is of that $4.7 billion of liquidity. And David, please correct me if I am wrong here, only $700 million of that $4.7 billion is actually currently on the balance sheet, the cash and the cash-like instruments that David referred to. The ATM proceeds and the delayed our term loan and the revolver, obviously, are not on the balance sheet because they all remain undrawn or unsettled.

Todd Thomas: Okay. That’s helpful. I appreciate that. If I could just follow-up real quick then on the credit investments that you have made more recently here, you talked about Blackstone and clearly, there are other credit investors out there. I am just wondering if you could address the competitive landscape for these types of non-gaming credit investments and some of the transactions that you have announced more recently.

Ed Pitoniak: I will turn it over to David in a moment. But I think the fundamental issue that we are finding in anything that’s resembling a competitive situation in terms of a would be borrower or partner evaluating our credit is, I think we are a lot easier, a lot friendlier to do business with. David?

David Kieske: Yes. I mean Todd, that’s when it comes down to it. And I know that’s hard to understand in order to put in your report, but relationships matter. You have heard John talk about it for years, if you see the clip that Ed referred to with John Goff and Jim Cramer and Ed on CNBC. He was very bullish about the opportunity to do more together. These are relationships that we foster and build and spend time with when we did Chelsea Piers back in June of 2020, it was competitive. It was a bid process. But part of our ability to win that was. One, our long-term view, we are not a fund driven. We don’t have a fund life. And ultimately, our relationships mean a lot. And it’s how you treat as Ed mentioned with respect to our advisors, we treat our counterparties extremely, extremely well because we want to do more together. We want both sides of the table to win and feel good and come back to the table to do more together in the future.

Ed Pitoniak: And just to add to that, Todd. When we are in these lending relationships, we don’t see our partners to debt. We are not a GP that needs to pay our bills by seeing or would be credit partners to debt. And that not only makes an economic difference to them, it makes a relationship difference.

Todd Thomas: Okay. Alright. Thank you.

Operator: Thank you. Our next question comes from the line of Greg McGinniss with Scotiabank. Your line is now open.

Greg McGinniss: Hey. Good morning. Just first, a couple of quick ones here. So, given that we are four days away from November, are you able to disclose the CPI-based lease escalators that you are expecting release ?

Ed Pitoniak: David?

David Kieske: Yes. Greg. Good to talk to you. It was in my remarks, it’s 8.1%.

Greg McGinniss: My apologies. Thank you. And then also, given your current cost of capital, does the high 7% call rate on the Indian assets, can you make sense to you today?

Ed Pitoniak: John?

John Payne: I talked about this a little bit earlier that we continue to watch this business grow capital from the operator. Caesars, the owner today, continues to go into the business. This call – this put call is active until the end of ‘24. So, we will continue to monitor the growth of the business. We will see the capital go in and we will determine the right time for this call option.

Greg McGinniss: Alright. Thank you. And then just a final one for me, Ed, in the earnings release, you spoke about the multi-trillion dollar place-based wellness sector. I was just hoping you could expand on what concepts are actually included within that sector. And then broadly, where you think the best opportunity for investment might be and how you are thinking about structuring those investments that does sound like it’s likely on the credit side right now?

Ed Pitoniak: Well, it’s – well, to be clear, Greg, it’s on the credit side right now with Canyon Ranch with a very clear path to own the real estate of Canyon Ranch Austin and also on real estate potentially in places like Tucson and Lennox and elsewhere that we can go together both domestically and internationally with Canyon Ranch. Obviously, we are most focused on the place-based dimension of global wellness. And I would say that based on the research we have done, one of the really appealing things about place-based wellness on a global basis is that the model from continent-to-continent is really quite similar. That’s in contrast to gaming. The U.S., Singapore, Macau are notable for having great real estate intensity to their gaming models, but that real estate intensity is not found to the quite the same degree in a lot of other areas around the globe. On the other hand, again, place-based wellness is really very much the same kind of concept as you go from the U.S. to, for example, Europe and the UK where there are many operators operating very much like Canyon Ranch at the high end with a good amount of real estate intensity.

Greg McGinniss: Okay. Thank you. So, I guess similar then to the type of model that we are seeing Canyon Ranch and the other types of operators that you would be looking to invest with in this space?

Ed Pitoniak: Yes. And I mean when you think about it, historically, think about the great European spot towns that started to become popular back in the 1700s. The spa tradition has centuries of history. And the modern spa experiences grew out of those more ancient traditions frankly, it goes all the way back to the enrollment. The – they were in the spa business, right. This is a business that’s actually now that they say it, it doesn’t go back century, it goes back millennia.

Greg McGinniss: So, you think it has the same power then, I guess is what you are saying?

Ed Pitoniak: I think that’s pretty safe. Anyway, thank you, Greg.

Greg McGinniss: Yes. Thanks Ed.

Operator: Thank you. Our next question comes from the line of David Katz with Jefferies. Your line is now open.

David Katz: Hi everyone. Covered a lot of ground, and so I don’t want to just pick up time on general principle. But one very specific question. As I talk to operators in gaming who I would have classified 12 months ago as kind of never counterparties for you? My sense is that there might be some softening to that end in those conversations. Would you concur with that?

Ed Pitoniak: John?

John Payne: Hey. Good morning David. I would. And I just think this is just a matter of time. We have been around for 5 years. And I think we have been out explaining why our form of capital can work for gaming operators, particularly as Ed said, when they have great use of proceeds to grow the company. And I think that many CFOs and CEOs of companies that said they would never do it now have spent the time to understand how our capital work and how we can be partners and are now thinking about it. Doesn’t necessarily mean they will transact. But I think if you are in the C-suite of any company, you should be thinking about all the different ways that you can work with your balance sheet and structure your balance sheet. So, not surprising at all, David, that we are hearing – you are hearing that, and we are hearing that.

David Katz: Both you and I know they should consider it until they do, that it sounds like they are. Apologies, Ed, please finish.

Ed Pitoniak: Yes. I was just going to say, David, to add on to John’s remarks. If you go back to October 21st, the yield to worst on gaming high-yield credit on a blended basis was 8.21%, right. Actually the blended yield to worst on leisure was 10.03%. So, whether it’s gaming operators or leisure operators, they are looking at current yield to worst on their high-yield credit and almost all of them are high yield, very few of them are IG. When they start to look at our cap rates, they realize that when they have to refinance this debt that’s currently yielding 8.21% or higher, our capital could look very attractive.

David Katz: Perfect. Thank you very much.

Operator: Thank you. Our next question comes from the line of Smedes Rose with Citi. Your line is now open.

Smedes Rose: Hi. Thanks. I just wanted to ask you, when you potentially have opportunities in smaller regional gaming markets where maybe they have refinancing issues coming up and you have – as we talked about, it’s a competitive cost of capital. But in a recessionary environment in smaller markets where potentially that demographic is more hit in a recession, do you think about how you underwrite your rent coverage in those? Would you expect to change that at all, or how do you kind of – I am just sort of wondering how you are sort of thinking about that as you look at these opportunities?

Ed Pitoniak: Yes. I will turn to John – John, just before I turn it over to you, I just want you acknowledge me that – we missed your friend and colleague, Michael Bilerman. We always enjoyed when Michael showed up on our calls, and we wish him the very best in his new role at Tanger. Anyway, over to you, John.

John Payne: Yes, Smedes, it’s a very good question, and we spend a lot of time in all the different markets with all the different operators as we look at deals, understanding the market, understanding their segmentation of their customers, what they are seeing. I think you know this because you follow gaming. It’s a unique time for our tenants. We have spent a lot of time on this call talking about the market fluctuations. But in the gaming business right now, depending on what market and who you are talking to, some are having – continue to have record earnings. And almost all of the operators are seeing strong – continue to see strong business. So, we are very careful in whatever deal that we underwrite and understanding the market, the dynamics, the type of consumer, how far the consumer comes from, all of those things when we underwrite. And we will be careful as we look at regional markets in Las Vegas markets. But our tenants have done an amazing job in operating their businesses and continuing to grow them during this very unique time.

Smedes Rose: Okay. And then I just – I appreciate that. And just one thing I just wanted to ask you. I mean when we look at other triple net REITs. The transaction volume has come down a lot and cap rates aren’t really moving. There is – as you have talked about, Ed, sort of the standoff between sellers and buyers. But in recent deals in gaming, I mean there haven’t been that many, but cap rates have moved from prior announcements. So, I am just wondering, do you think this sort of asset class is more sort of willing to move? Are they in a position where they sort of need to move because they are financing issues, or I mean would you agree with that, that maybe things are adjusting a little quicker or not?

Ed Pitoniak: It’s hard to tell, Smedes. Every deal is so specific whether it would be the geographic location, the asset is in, the nature of the asset itself, the tenant and its credit quality, I don’t know. I would be – I would have a tough time saying that cap rates within gaming have moved considerably up, which is implicit in what you are saying, given the market backdrop. I think it’s still a bit too early to tell, because I wouldn’t generalize the fairly limited amount of activity that we and GLPI have engaged in over the last few months.

Smedes Rose: Okay. Thank you, guys. I appreciate it.

Operator: Thank you. I will now turn the conference back over to Edward Pitoniak for any closing remarks.

End of Q&A:

Ed Pitoniak: Thank you very much again. In closing, we simply want to thank you for your time with us today. We believe we are really well positioned at VICI to continue growing our portfolio during what may be – well, no, what is a very uncertain period while driving superior shareholder value. Again, thank you and good health to all.

Operator: That concludes the VICI Properties’ third quarter 2022 earnings conference call. Thank you for your participation.