Recently I interviewed VICI Properties (VICI) CEO, Ed Pitoniak. We began covering this gaming REIT in 2018 just after they went public by way of raising $1.4 billion and acquiring the real estate of Caesars Entertainment.
41 months later, VICI has used its scale and cost of capital advantages to carve out a dominating position in the net lease REIT sector.
In this 22 minute interview, we cover a range of topics including the recently announced Venetian Hotel in Las Vegas, VICI’s balance sheet, and growth prospects.
Enjoy the video (and transcript below):
Interview Transcript:
Brad Thomas:
Hi everyone, this is Brad Thomas with The Ground Up, and I’m back again with another CEO round table interview. Of course today it’s St. Patrick’s Day, and it’s a day that everybody should feel lucky. I feel really lucky to have Edward, Ed Pitoniak, who is the CEO of VICI Properties with me, ticker symbol, (VICI). Of course, the casino REIT so you’ve got to feel lucky today or the gaming REIT, I should say. So Ed is good to see you today.
Ed Pitoniak:
Good to be back with you, Brad. Always good to be back with you.
Brad Thomas:
Well, listen, I’ve got a lot to talk about here. So we’ll try to get to the chase. You just announced fairly recently, along with Apollo, take down an acquisition. If you will, of the Venetian. Which I’ve stayed there, maybe a couple of times, $6.25 billion transaction. VICI’s funding about $4 billion on the real estate and then Apollo stepped in. So tell us a little bit about that new deal.
Ed Pitoniak:
Yeah. So this is a deal that when we first started working on it, Brad, when I first started to get the sense, “Hey, this could actually happen.” I was literally kind of beside myself. The reason I was beside myself… and you’ll appreciate this as a guy who knows American real estate as well as anyone. Is if you look at American real estate and you look at the apex of the American commercial real estate period pyramid, there are certain assets at the top of that pyramid that define their categories.
GM building, defines for many people. The office category. Ala Moana Mall in Honolulu defines the mall category. Right? You can look at some of the assets that Prologis owns. Like they’re amazing asset occupied by Amazon, outside of Seattle, known as that Georgetown Crossroads.
So when we looked at the Venetia airlines, this is the top of the pyramid, not only in gaming real estate, but in real estate broadly. Let me just rattle off for you a view of superlatives.
It has over 7,000 hotel rooms making it the largest single hotel complex in America. It has 2.3 million square feet of convention space making it the largest privately owned convention center in America. It has 8 million total built square feet making it one of America’s larger assets in terms of square footage. We bought those square feet for $489 per square foot land in. Now Brad, I know you’ve built some buildings in your lifetime.
I don’t know how many of them you were able to build at this scale and this quality for $489 bucks a square foot land in. We did all this for a 6.25% cap rate, right? As your followers know, within the grand scheme of APEX American commercial real estate, nobody buys anything for six and a quarter cap rate.
The kind of assets that I just put this in the company of, assets like the GM building, like Ala Moana, as you know they traded cap rates to start with a three handle or a four handle. We are giving our owners, our equity owners, an opportunity here to participate in this cap rate comparison story that a gaming real estate represents.
But I should again emphasize, we didn’t really buy a gaming real estate per se. We bought 8 million square feet of which only a little over 5% is actually occupied by casino space. The rest of it is this massive, massive physical complex. The most important customer in 2019 of this asset pre-pandemic was not a baccarat player. It was one of America’s large corporations that spent nearly nine figures, nearly nine figures in this building because of its centrality to their business as a place where they gather.
Brad Thomas:
Congratulations. Again, full disclosure, I’m a shareholder and had been a shareholder at VICI for quite a while. In fact, the company is about 41 months old a REIT, when you listed. Just looking at this before we got on the call, $12 billion of acquisitions. You’ve raised more equity than any other REIT out there. So a tremendous growth spurt.
So we’re starting to see really this scale advantage starting to take effect, right? I mean, you did take down the Venetian, which is one of the trophy assets there in Las Vegas, really in the country, in the world. So using that scale advantage. So can you kind of reflect a little bit more on kind of those 41 months since you went public through today?
Ed Pitoniak:
Yeah. I kind of get tired, Brad, just thinking about it because man, we’ve done a lot of work. But it’s been exhilarating. It’s been so exhilarating to tell a story about a new asset class. Right? You’re somebody who’s worked in real estate who covers real estate. You know how exciting it can be when you bring a new asset class to people’s attention and they realize there’s value to be had there. They’re not able to find elsewhere. Right?
That’s been one of the key reasons we’ve been able to access so much equity. We started raising equity in I guess it was late November, early December 2017, through a pipe at $18.50 a share. We did our IPO at $20. We did our first follow on at $21. We did our second one at $21.50.
We did a fourth raise that I think it was $22.15. To finance the Venetian, we announced two weeks ago today we were raising 60 odd million shares, a couple of billion dollars. That’s pretty real money. Over the course of the day, we were able eventually to price this offering at a 1.8% premium to the prior days close.
That is how avid equity holders, equity investors were to get in on the action of buying this real estate at still are what very, very attractive terms. Again, it has to do with this recognition, that number one, man, did we come out of COVID strong. Right? As you told your followers before we collected a 100% of our rent in 2020 in cash, on time. Growth profile, we have what we think is one of the strongest growth profiles in American REITs.
We grew 10 point. We grow our AFFO per share 10.5% last year. Our consensus AFFO growth based on our guidance… and we were one of the first rates to restore guidance, which we did back in February with our year end earnings call. Midpoint of guidance is going to give you about 12% AFFO growth per share. Right?
If you’ll indulge me for another minute or two Brad, I want to talk about one of my favorite metrics when evaluating an equity investment opportunity. Which is not only what earnings am I buying today? What are the future earnings I’m buying based on the growth?
One of the best ways to capture that dynamic of today’s earnings plus tomorrow’s earnings is to look at that old fashioned price earnings growth ratio, or in returns, add the yield component as well. So if you take our AFFO growth of nearly 12%, you add our dividend yield of about 4.5%, you get a total of about 16, right? Numerically.
Our AFFO multiple right now, which is as your REIT followers know is basically the equivalent of a price earnings multiple… Is 15.5. So our peg plus yield ratio is under one it’s about 0.97 or 0.98, right? There’s no at the REIT in America where you can get that. The S&P 500, right now has what looks like attractive peg ratio of about 2.4 to one, but the S&P 500 has a 43 times price earnings, multiple, offset by what looks like attractive growth for 2021 at 23%, 24% growth and earnings per share.
The only problem is earnings per share last year declined 35%. So you’re paying 43 times to only get part way back to 2019. We gave you a 10.5% last year. We’re going to give you almost 12% this year. Because of the Venetian, which we just spoke about, we’ll give you a very nice AFFO for growth next year. Then we get into our embedded pipeline, which we can talk about perhaps later in this conversation.
Brad Thomas:
Sure. By the way, while were speaking, I just looked at… So you know, VICI has now hit all time highs this week, over $29 a share. Pre-pandemic shares were trading at just over $28. So really all time high here. So in terms of your cost of capital, you went in at a six and a quarter cap rate… By the way, I think that lease is 30 years. So a longer lease term on the Venetian deal. But can you talk about kind of that your cost of capital today?
Really a lot of my subscribers and followers always asking me about inflation and how REITs are going to be impacted. So with it, can you talk a little bit about how you’ve got kind of an advantage, I guess, with your lease terms, and how have you structured these master leases and so forth. Because obviously even in a rising rate environment you’re able to grow your income stream with these rent bumps, and locking in those spreads over a long period of time.
Ed Pitoniak:
Yeah, exactly. So just to start with that’s what we’ve worked on every single day since we started. Which is improving our cost of capital. It has obviously to your point, continually improved. The deal we did for the Venetian, even though that cap rate is low by gaming real estate standards, it is still very creative to us on an earnings per share basis.
It gives us a very nice cash on cash yield out of the gate. But to your point, Brad, every REIT investor should ask if I’m really truly buying to hold what’s my cash and cash yield look like 10 years from now? So to your point, once we close on the Venetian 95… Well, let me start, every one of our leases escalates at a blended average of about 1.6%. But when you lever that up, it turns into over 2% AFFO growth per share.
Probably the more important thing to focus on right now is that once we close on the Venetian, 95% of our rent roll has a CPI component, meaning the rent escalates at the higher of whatever the lease calls for or CPI. Right?
So as your followers look ahead and as they contemplate a period where we’re going to see really wonderful economic growth with perhaps some inflation, our ability to give you that in that AFFO growth plus dividend growth, plus inflation protection is way more exciting than buying a T-Bill and that it’s value is only going to decline. Because rates and inflation are going to run and leaving me with no real return.
Brad Thomas:
Yeah. I guess the last thing I want to touch on is that growth, that external growth. I mean, obviously we talked about the Venetian. I know that you’ve gone into some alternative spaces, you bought the Chelsea Pier, which I’m very familiar with there on the West side there in Manhattan.
Which I know is a financing deal, not a pure equity deal. But you have moved outside of the circle a little bit into other spaces. But can you talk about what’s the pipeline of gaming product within the U.S.? It looks like there’s still a significant amount of opportunity. If you could touch on that, the ROFO or the right of first refusal pipeline as well.
Ed Pitoniak:
Yeah. So yeah, let’s start with what we call our embedded growth pipeline. One analyst who follows us has estimated that our embedded growth pipeline represents somewhere between $325 million and $450 million of incremental rent.not transaction dollar volume, incremental rent. Which means anywhere from $5 to $7 billion of actual acquisition volume. Right?
So if you stretch that out over the next four to five years, which is the timeframe in which either these ROFRs or put call arrangements, are there. You’re going to continue to get steady AFFO growth, if we do nothing else than just simply execute or embedded growth pipeline, right?
Beyond that to your point, there is an addressable market within gaming, in North America, frankly, and potentially even outside of North America it’s substantial. But as we’ve talked about in the past, Brad, we positioned VICI as an experiential REIT from the beginning. So no one was totally taken by surprise by us doing the Chelsea Piers deal you referred to that we did last summer.
We will continue to look for experiential real estate that has the right investment attributes: low cyclicality, no secular threat, healthy supply demand balance, and a durable end-user user experience. We think that the next 10, 20 years for experiential real estate, having been strong years coming into this crisis are going to be even stronger coming out. Because, oh my Lord, are we all sick of sitting at home, just doing business with Amazon and having UPS or FedEx come to our door.
We want to go out and we want to have experiences. You’re going to see that in Las Vegas this weekend with March Madness. The crowds in Las Vegas are going to be much bigger than anybody has anticipated. It’s reflected right now in the room rates. So again, we love the fact that we have this embedded pipeline, because it enables us to be disciplined in what we go after, whether in gaming or outside gaming. But I do think our track record of $12 billion of deals in 41 months is pretty promising that we’ll stay pretty busy from here forward.
Brad Thomas:
Great. Last question Ed, is going to be… I think I always try to end with the most important, at least from a retail prospector lens. That is the dividend. VICI has had a again, pretty successful, relatively short history of dividend growth. You’ve already touched on the fact that it looks like the guidance for ’21 is about 12% growth at that mid point, roughly. Then how do you feel about that in context to your dividend policy?
Ed Pitoniak:
Yeah. So, we’ve been determined from day one to make sure we have a dividend policy that enables our owners to count on that dividend through thick and thin. When we succeed in growing the company, they will benefit through the growing dividend. So, Brad, here’s a question for you. How many other REITs of any size increased their dividend by 10.9% last year in 2020 in the midst of the pandemic? Not too many. Right?
Brad Thomas:
In fact, I don’t think we saw… I mean, I’m trying to think, probably no double digit. We’ve got Cannabis. I don’t know what his numbers were. IIPR, but, but certainly that’s probably the only exception.
Ed Pitoniak:
Yeah. Again, we grew the dividend 10.9%, but while doing so we also maintained our turn and payout ratio, annualized of about 75%. Right? So VICI’s not over overgrowing, if you will, the dividend at the risk of the payout ratio, and the sustainability of the dividend. We’re growing it responsibly. I do think you can take our growth rate and you can probably then… Okay, take VICIs growth rate multiply it by 0.7 i.e., three quarters. That’s probably a pretty sustainable dividend growth pattern going forward. Right?
Brad Thomas:
Yeah.
Ed Pitoniak:
So needless to say then if a REIT is going to be a leader, especially among large cap rates and AFFO growth, it pretty well stands to reason we have the opportunity to be a leader in dividend growth.
Brad Thomas:
Yeah. Are there any other indexes that we should look for in terms of your size? What’s kind of the next index for you to look at?
Ed Pitoniak:
Yeah. So Brad, by the time we closed on the Venetian, if you take the rent that we add through the Venetian, and you annualize it, which is to say probably our 2022 rent levels. Given our triple net structure, that turns into 100% into NOI and because of our very low G&A… I should % % point out that since 2018, we’ve grown our cash G&A by about $2 million, but we’ve grown our rent by a billion, right?
Brad Thomas:
Mm-hmm (affirmative).
Ed Pitoniak:
So we’re talking about 20 basis points of G&A expansion to fund a billion dollars of rent growth. Anyway, sorry, I’m getting a little off topic here. Well, when we close on the Venetian deal, when you annualize that rent, we will have what we estimate to be about the 10th largest EBITDA production of any four wall REIT in America.
So leave aside the cell towers, which aren’t in the RMC. The way I should put it Brad, is we’d be about the 10th largest REIT in the RMC by EBITDA production. Now nobody can predict… at least nobody I’ve met, can predict how, and why, and when you get included in the S&P 500, but as the 10th largest REIT in the RMC, we feel our chances of eventually getting added, we hope, are strong.
Brad Thomas:
Yeah.
Ed Pitoniak:
Also, I have to point out Brad, that our two largest tenants on the March 22nd here will be added to the S&P 500, Caesars and Penn will be added to the S&P 500. So I do think the equity markets are coming to recognize that we are big companies with big market caps. Once you count for all the forward equity that we’ve issued almost $2.6 billion of it, we’ll have a market cap that’s, if we continue to trade well, will take us up toward the $20 billion mark.
Brad Thomas:
Yeah.
Ed Pitoniak:
As you know, there’s not a lot of REITs up that high in elevation.
Brad Thomas:
That’s what I was thinking about the S&P 500, we cover of course WP Carey, which is an indirect peer, and they’re not on that list yet, but you’ve surpassed WP Carey in size, market cap, and total enterprise value. So I agree. I think that’s kind of the next place I would be looking for sure.
Ed Pitoniak:
When the day comes if it does come, Brad, you can be among those people who are able to say, “I knew VICI when there were scraggly little punk, trying to fight their way into the big leagues.” We really appreciate the fact that you recognized much earlier than most people did that, hey, there might be something going on here.
Brad Thomas:
Yeah. Well, next time I stay at the Venetian, which is hopefully soon, I’m just going to say, “Look, I’m a shareholder and I need a VIP room up there in the very top suite.” So anyway, I love to throw that all around when I travel and say, “Hey, I actually own part of this”-
Ed Pitoniak:
[crosstalk 00:20:46] What we all need to be grateful, Brad, is that when Sheldon Adelson created the Venetian, I think he put himself among the great place makers in American history. I mean, the audacity of what he did hasn’t been rivaled by many. 8 million square feet’s a lot of square feet.
Brad Thomas:
Yeah.
Ed Pitoniak:
Again, the thing to remember is Mr. Adelson, didn’t come into this from gaming. He came in having made his first fortune in the business of Americans gathering, through conventions, business conventions, association conventions, and trade shows. What he built and its scale and its quality is really unlike anything else out there. We will be very, very proud of perpetuate the legacy of what he built.
Brad Thomas:
Great. Well listen Ed, I want to thank you for your time today. Very helpful to me, and I’m sure every our audience as well. So I want to wish you the best and we’ll definitely be back in touch with you again, very soon to discuss the first quarter earnings. Congratulations on the now all time high VICI Properties. Thank you so much.
Ed Pitoniak:
Thank you, Brad. Don’t forget NAREIT in Las Vegas in November, see you there.
Brad Thomas:
Okay.
Happy Investing
Brad Thomas is Senior Research Analyst at iREIT and CEO of Wide Moat Research LLC. With over 30 years of real estate experience, he is also long-time Editor of Forbes Real Estate Investor, a monthly subscription-based newsletter that dives deep into the vast world of profitable properties, and since 2021, he has served as an adjunct professor at New York University.
Thomas has also been featured on or in Forbes magazine, Kiplinger's, U.S. News and World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. And he was the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021 based on both page views and number of followers.
Thomas is the recently-published author of The Intelligent REIT Investor Guide (2021), co-author of The Intelligent REIT Investor (2016), and he wrote The Trump Factor: Unlocking The Secrets Behind The Trump Empire (2016) - all available on Amazon.
Thomas received a bachelor of science in business/economics from Presbyterian College and is married with five wonderful kids.
