MGM Growth Properties LLC
Q2 2021 Earnings Call Transcript

Published: 6 Aug 2021

[Operator:]

Good day, and welcome to the MGM Growth Properties Second Quarter 2021 Earnings Conference Call. Joining the call from the company today are Mr. James Stewart, Chief Executive Officer; and Mr. Andy Chien, Chief Financial Officer. Participants are in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference call over to Mr. Andy Chien. Mr. Chien, the floor is yours, sir.

[Andy Chien:]

Great. Thank you, Mike. Good morning, good afternoon, and welcome to the MGM Growth Properties Second Quarter 2021 Earnings Call. This call is being broadcast live on the Internet at mgmgrowthproperties.com, and we have furnished our press release on Form 8-K to the SEC this morning. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation to GAAP financial measures in the press release and our investor presentation, which are also available on our website. Following today's remarks, there will be no question-and-answer session. Finally, please note that this presentation is being recorded. I will now turn it over to James.

[James Stewart:]

Thank you, Andy. I would like to welcome everyone to MGP's Second Quarter 2021 Earnings Call. Although this quarter had a number of achievements and noteworthy items to discuss, I will also spend some time addressing what is even bigger and more exciting news that happened after quarter's end, the announcement of our combination with VICI. On May 11, we announced the acquisition of the beautiful MGM Springfield casino resort. This first class property was a greenfield development by MGM Resorts and opened in August 2018. We entered into an agreement to acquire the real property for $400 million in exchange for $30 million of annual rent. Springfield will be added to our existing master lease with MGM Resorts, providing investors with the safety and security that comes from the cross collateralization of 13 other master lease properties. We acquired MGM Springfield for an attractive initial cap rate of 7.5%, implying a 13.3x multiple on initial rent. Upon closing, it will be immediately accretive to our AFFO per share as has been the case with every single acquisition we have ever completed. We anticipate the transaction will close in the fourth quarter of 2021, subject to regulatory and customary closing conditions. During the quarter, we also raised our annual dividend to $2.06 per share, an increase of $0.08 on an annualized basis, which represents an increase of 4% on the previous quarter. MGP has a great track record of consistent dividend increases. In fact, we've increased our dividend 13x of 21 quarters since formation, from a starting point of $1.43 to $2.06 today. We accomplished this while maintaining a consistent payout ratio in the low 80% range as we have grown our AFFO. Our payout ratio currently stands at approximately 80% based on second quarter AFFO per share. Now moving to the most exciting news this year for MGP. On August 4, we announced that we would be combining with VICI in an all-stock deal for MGP Class A shareholders. This transaction values the company at an implied 17.5x EBITDA multiple and a 5.8% cap rate. This represents a roughly 16% premium to MGP's closing stock price on August 3, 2021, and a significant premium to MGP's previous all-time high. MGP Class A shareholders will receive 1.366 shares of newly issued VICI stock in exchange for each Class A share of MGP. Fixed exchange ratio represents an agreed-upon price of $43 per share of MGP Class A shares based on VICI's trailing 5-day VWAP of $31.47 as of July 30, 2021. This exciting resulting company will be transformational for our shareholders. It will be the largest triple net REIT on an adjusted EBITDA basis, have best-in-class governance and a much broader index fund shareholding that MGP did on a stand-alone basis. Prospects for the combined company are extremely great. Gaming asset cap rates have compressed significantly over the past 5 years as investors have learned more about the power of this iconic and enduring real estate asset class. I am very confident that this cap rate improvement will continue in the years to come for the benefit of our shareholders as part of the combined company. For our investors, MGP's returns have been frankly incredible. We went public at $21 per share a little more than 5 years ago. We have paid over $9 in dividends so far and will receive $43 of value based on the previously mentioned exchange ratio. IPO investors will have more than doubled their money at the $43 deal price and earned another approximately 50% of their investment in income through our dividends. MGP returns from IPO to the deal price put us near the top of any major triple net REIT over the same time period. And in addition, in terms of total return, we have outperformed the RMZ, the S&P 500 -- and the S&P 500 since our IPO to date. I will now turn it over to Andy.

[Andy Chien:]

Thanks, James. I'll start with providing some highlights for a few items in our second quarter financial results. For the quarter, we recognized $188.3 million of rental revenue on a GAAP basis. Cash rental payments received by MGP and our pro rata share of joint venture cash rent was $243.7 million, consisting of $210.7 million from the MGM master lease and 37.3% from our share of our MGP BREIT joint venture master lease. The share of distributions received from the joint venture was $31.8 million. Consolidated net income was $73.7 million. Consolidated AFFO was $171.8 million or $0.65 per diluted operating partnership unit. Consolidated adjusted EBITDA was $244.3 million. G&A expenses for the quarter were $4.3 million, and our dividend was 51.5 cents per share, which represents $2.06 on an annualized basis. The current pro rata net leverage of 5.5x is in line with our targeted range of 5x to 5.5x. Our balance sheet positioning over the last 5 years was always optimized to be as flexible as possible and to be able to prudently allocate capital to achieve accretive growth, maintaining ample access to meaningful amounts of liquidity to be key as we navigate the varied economic circumstances over the last 1.5 years. Ultimately, our thoughtful decision-making was reflected in our significant dividend growth and price appreciation over the years. From our IPO through today, we have raised over $13 billion in equity, unsecured notes term loans and CMBS to fund the company and our growth. We'd like to take this time to thank the investment community, our lenders, our banking relationships and the research community for all the support that has given us in helping to build and grow MGP. It's been a pleasure working with you all to develop this real estate sector into what it is today. With that, I'd like to turn it back over to James.

[James Stewart:]

Thank you, Andy. Now I would like to say a few words about the VICI senior management team, Ed Pitoniak, John Payne, David Kieski and Samantha Gallagher. They are experienced, thoughtful and great strategic thinkers. I also believe they are great people. We have at times been fierce competitors. But through that process, my already high level of respect and trust in all of them only grew. I am the first ever employee of MGP. I have put a great deal of my energy and my soul into making this company a success. Along with my friend and our CFO, Andy Chien, we spearheaded MGP's highly successful IPO. The offering was both the largest triple net REIT IPO of all-time and the third largest REIT IPO of all-time at completion. We were honored to have the IPO recognized for its innovative structure and strong investor reception, winning the IFR 2016 U.S. IPO of the Year Award by Thomson Reuters. I have never sold a share. I care very, very deeply for this company, our team and our shareholders. With that as background, I want to emphasize how confident I am in Ed, John, David and Samantha. I know they will continue to be exceptional stewards of capital for the combined entity. Our shareholders will benefit from enhanced tenant diversification, increased scale and improved cost of capital as a result of this transaction. It will be thrilling to see what new heights the combined company will reach. We will be America's largest owner of experiential real estate with an enterprise value of approximately $45 billion. Catalysts for the future include the potential to obtain amplified index inclusion and trading liquidity as well as to achieve investment-grade status. These bode well for the company's cost of capital, which will ultimately fuel further accretive growth. It will be a compelling opportunity for investors looking for exposure to the best portfolio of experiential real estate assets assembled in the world. I'd like to end this earnings call by thanking everyone involved in helping MGP become the company that it is today. Our company was the first time in history that investors could meaningfully allocate their capital to integrated casino resort real estate, and it has been a pleasure to be able to work with our shareholders to execute on our business strategy. We have built a tremendous company over the last 5.5 years, with a committed team laser-focused on creating the highest quality real estate portfolio in the gaming and entertainment space. I'm proud to have been part of the collective effort to get MGP to this point and the team that we have built here. I truly appreciate all of the support from our investors, Board of Directors, partners of MGM Resorts and my incomparable team. Thank you all.

[Operator:]

We thank you, sir, and to the rest of the management team for your time. The conference call has now concluded. At this time, you may disconnect your lines. Thank you, everyone. Take care, and have a great day.

[End of Q&A:]