MGM Growth Properties LLC
Q2 2020 Earnings Call Transcript

Published: 4 Aug 2020

[Operator:]

Good morning and welcome to the MGM Growth Properties' Second Quarter 2020 Earnings Conference Call. Joining the call from the company today are James Stewart, Chief Executive Officer; and Andy Chien, Chief Financial Officer. Participants are in a listen-only mode. After the company's remarks, there will be a question-and-answer session. Please note this event is being recorded. Now, I would like to turn the call over to Mr. Andy Chien.

[Andy Chien:]

Thanks Kate. Good morning, good afternoon, welcome to the MGM Growth Properties second quarter 2020 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.

[James Stewart:]

Thank you, Andy. I'd like to start off by welcoming Katie Coleman and Chuck Irving to our Board of Directors. Katie and Chuck's diverse backgrounds in real estate and broad transactional experience will complement the existing skills of our directors, while providing us with additional expertise as we continue to further drive the company's growth and return value to shareholders in the coming years. Despite the current economic challenges brought by the COVID-19 pandemic, second quarter was a highly successful one for MGP. On May 18, we redeemed 30.3 million of our operating partnership units held by MGM Resorts for $700 million in cash. This transaction was immediately double-digit accretive to our run-rate AFFO per unit, while keeping leverage below our long-term pro rata target of 5 to 5.5 times. As a result of this transaction, MGM's ownership in MGP was reduced to 57%. We’re pleased with the execution of the redemption, which is not only financially attractive for our shareholders, but have the added benefit of simultaneously bolstering our tenants' liquidity position. There's also an additional 700 million of operating partnership units that we have agreed to redeem from MGM in cash that if exercised by them, will continue to reduce their ownership level on us, strengthen their liquidity position, and drive further accretion for MGP. Our continued confidence in our company and our tenant was demonstrated when we increased our second quarter 2020 cash dividends to an annualized rate of $1.95 per share. This represents a 36.4% increase since our IPO and the 11th dividend increase out of the 17 dividends paid to-date. This raise in dividend is also our second increase since the start of the economic shutdown that began in March, illustrating the strength of our business model throughout all types of economic cycles.

[Andy Chien:]

Thanks, James. I'll start by providing some highlights for a few items in our quarter financial results. We recorded $188.3 million of rental revenue on a GAAP basis. Cash rental payments received by MGP in our joint venture relating to pro rata share were $243.5 million which consists of $206.9 million from the MGM master lease, and $36.6 million from our share of the joint venture master lease. Cash received in distribution from joint venture was $23.1 million. Consolidated net income was $97 million. AFFO was $177.7 million or $0.56 per diluted operating partnership unit. Adjusted EBITDA was $240.3 million. SG&A expenses for the quarter were $3.7 million. For the first quarter our dividend increased to $48.75 per share, which represents $1.95 on an annualized basis. As James mentioned, we completed the $700 million redemption of operating partnership units from MGM Resorts pursuant to the $1.4 billion waiver agreement which will be permanently financed with proceeds from our $800 million issuance of 4.625% senior notes due 2025. The bond offering was upsized from the initial offering size of $500 million due to the significant investor demand and we're able to price the notes at our second best interest rate in the history of the company. This demonstrates the confidence bond investors have in our cash flows despite these challenging times. This transaction simultaneously allowed us to significantly reduce the level of secured debt in our capital structure. We have no debt maturities until 2023 and maintain adequate liquidity to meet our financial commitments. Our liquidity currently stands at approximately $2 billion consisting of over $700 million of cash and cash equivalents and $1.15 billion of revolver capacity. Our pro rata net leverage of 4.6 times is below our long-term target of 5 to 5.5 times, providing funding flexibility for future accretive opportunities, including the redemption of the remaining 700 million of operating partnership units from MGM. The breakdown of our pro rata net leverage can be found in a newly published quarterly supplemental presentation on our website. With that, I'd like to turn it back over to James.

[James Stewart:]

Thanks, Andy. MGP currently sits in a very enviable position. We have access to approximately $2 billion of liquidity which is enough to run our operations and pay our current interest and dividends for about two years. Our tenant has nearly $4.8 billion of liquidity at their domestic operations which gives us confidence they'll be able to pay the rent for the foreseeable future and we continue to pay our dividend 100% in cash as a result.

[Operator:]

We will now begin the question-and-answer session. . The first question is from Joe Greff of J.P. Morgan. Please go ahead.

[Joe Greff:]

Good morning, guys.

[James Stewart:]

Hi, Joe.

[Joe Greff:]

James, Andy, I'd love to hear your thoughts on any sense of timing of MGM's potentially redeeming the last 700 million of op units, as well as your thoughts on how long before we may see transaction activity in this sector, both redemption and acquisition-related growth topics are outside of your control. But one thing that is within your control and the board's control is corporate structure. My real question is this, where are you in terms of considering moving from your current LLC structure to the C-Corp re-subsidiary similar to most of the other triple net lease peers? Thank you.

[James Stewart:]

So as it relates to redemption timing, it is exclusively the option of MGM Resorts. And there's different factors I think that one would think through in terms of whether or not to cause redemption to happen. One is I think there's a broad view that MGP stock has very meaningful upside to it. And that the yield that we're paying is likely to become increasingly valuable in the future, as interest rates appear to be staying low for some time and that the strength of our business model really will become increasingly reflected which will drive our price up. On the other hand, they’re completely committed to their asset-light strategy and part of getting to their asset-light strategy in the deconsolidation of MGP from the MGM financial statements is, would be partially accomplished through the redemption. So you have different things pulling on the decision there, all of which they would have to consider. And that's just a long way of saying they have approximately a year-and-a-half to complete it, when exactly is very difficult to tell and it's a sort of a balancing act that MGM management team board will have to think through in terms of as they think about that process.

[Andy Chien:]

No, I think that was pretty well covered.

[Operator:]

The next question is from Jared Shojaian of Wolfe Research. Please go ahead.

[Jared Shojaian:]

Hi, good morning everyone. Thanks for taking my question. Maybe just a follow-up on that last point, you talked about how the cost of debt is so cheap. Does that make you reconsider the 5 to 5.5 times leverage ratio? How are you thinking about that? And then if MGM were to pursue more aggressive sell down of its stake, will you consider taking leverage higher to fund a transaction?

[Andy Chien:]

Thanks, Jared, this is Andy. So in terms of the cost of debt relative to our leverage targets, at the current time, we have no intention to change the target, we've had been at 5 to 5.5 times for a long haul and that's primarily due to just providing that safety security for the investors on the balance sheet side and so just because it's low now, it doesn't mean when it comes to refinancing time that it stays low, right. So we stand by that leverage target range.

[Jared Shojaian:]

Great, thank you. And then just as a unrelated follow-up, MGM is making a big push on the online gaming and support side. Can you just talk about how that impacts your thought process because on one hand, there may be some cannibalization from iGaming at the property level, but then, on the other hand, your tenant has better coverage including owning a 50

[James Stewart:]

I think online represents a really significant opportunity. And I think when the dust is settled, MGM is going to be one of the real winners in that space. We see it as a positive primarily on two fronts. One, I think that it will, as you said, just enhance the business expand the customer footprint. The ability that MGM has to tie their M life Rewards program into the online sports betting and iGaming app is something that's going to be pretty powerful and I think it's going to enhance not only our coverage, but I suspect will also drive increased traffic into the casino itself, be around both the sports book and the gaming floor over time as just the customer base expands as a result of having the app on your phone. So, for us, it isn't -- yes, I don't think it's going to be a huge needle mover in terms of our own AFFO line. But I think it provides increased security to our investors in the form of both coverage and likely increased traffic. Andy?

[Andy Chien:]

Yes, I think that was worth it.

[Operator:]

The next question is from Spenser Allaway of Green Street Advisors. Please go ahead.

[Spenser Allaway:]

Thank you. I'm assuming it's still too early to tell how business travel is going to be impacted longer-term due to the pandemic and the work-from-home phenomenon. But as the owner of a considerable amount of convention and trade show space, have you guys spent any time contemplating alternative uses of that space in the event that there would be in fact a higher and better use of that real estate pandemic?

[James Stewart:]

Andy, you want to take it?

[Andy Chien:]

Sure. In terms of alternative use for us to contemplate, we can certainly have a discussion with MGM, as tenant, but ultimately it's their decision to determine what's the best use of all the space that they leased from us. So I think the convention calendar as MGM discussed on their call last week for next year, for the most part remains on the books, Q1 cancellations are just starting, but Q2, Q3, Q4 et cetera they are still on the books and a lot of the canceled events have been moved to those quarters. So I think people are meeting planners are still hopeful that there is a solution and a way to have their meetings still happen here in Las Vegas. And so I think there certainly are -- there still a demand assuming that we can get back to some sense of normalcy here. But in the meantime, there's press reports about what different things could happen whether sports teams would come here or leagues and do the bubble, et cetera. So there's a lot of ideas out there. But certainly, there's an execution to those and but also a long-term business that we believe is still viable and MGM please go live on just large meetings and event planning.

[James Stewart:]

Just to follow-up on that, I would say there has not been a single industry that I can think of that has been more responsive to changing customer tastes than the Integrated Resort business and whatever is desired by the customer, the industry has been able to very, very quickly change or more fit sort of positioning and buildings to make that work. And so if there's any place that -- any industry that can figure out how you reposition space and drive profitability through that space if needed, it's a gaming business and I put MGM at the top of the pile for that skillset.

[Operator:]

The next question is from Carlo Santarelli of Deutsche Bank. Please go ahead.

[Carlo Santarelli:]

Hey guys, thanks and good afternoon. Could you guys talk maybe just qualitatively about what you saw kind of in the aftermath of the closure from an insurance perspective or a potential yield perspective, as it pertains to obviously a lot of capital during that time at rates that in some cases were north of where you guys, what the cost of capital would have been in the transaction you hypothetically would have done. So could you talk a little bit about kind of what's on your blog kind of three months post the outbreak of the pandemic?

[James Stewart:]

Sure. I'll start and then Andy, please jump in. At the outset, after people realize that this was not something that was just going to be a one-week phenomenon or two-week phenomenon, the number of conversations increased rather dramatically. And the need for capital by certain potential partners of ours, I think was pretty high. Our own cost of capital, although higher than where it is now was also quite a bit lower than there. So it felt like there was a reasonably good likelihood that something would happen. As the government's stimulus programs and so on, sport programs, the debt markets so on kicked in, cost of capital of almost everyone who we could think of, anyone who we would deal with dropped very significantly, particularly the cost of debt, and was very, very available to them. And given the speed with which one can tap the bond market even the lowest rated companies can tap the bond market incredibly quickly and efficiently at rates that were very low. I think that filled in as the stock gap for any company that really needed capital as opposed to doing a deal with us. That said, I think that many of the operators as they look at their own balance sheets and cash flow producing power are going to find it really interesting to do something with us and get their leverage levels back down to more reasonable levels, given the future earnings power the business, just because we don't -- our leases are very, very long-term incredibly predictable and will prove out to be attractive option to them versus constantly being in a position of fear over having a piece of debt coming due any one point in time and worrying that if that happens at a point in time when the market is closed, you could end up financing it some really exorbitant rates. Andy?

[Andy Chien:]

And I would add that, I think in those early days, once the cost of capital is figured out; there was support in the bond markets for a lot of these companies and they got that liquidity. A lot of the conversations were had the operators return towards operation and innovating and trying to think through how they can open their properties, so the liquidity box was checked, and maybe for the time being then moved on to operations. And I would say even in today's environment, a good portion of the mindshare of the operators and the folks that we talk to, is on operations and health and safety of the employees, the guest making sure that they are able to stay open. Transactions I believe will come and these balance sheets will need to be rightsized and having long-term predictable leases without maturities is certainly an attractive element and I think some of the folks that about more expensively and they look at what that means from a sale leaseback standpoint, they're finding sale leaseback to be more and more attractive.

[Carlo Santarelli:]

Understood, thank you for all that color guys. And if I could just one follow-up, given everything going on in clearly Massachusetts work a little bit slower to kind of reopen and maybe some of the other states or some of the properties currently do own the real estate under open. How does all of this change and everything else that's going on quite frankly that factors into a change your approach to the timing of thinking about the MGM strong build transaction?

[Andy Chien:]

You're speaking to the right of first offer?

[Carlo Santarelli:]

Correct.

[Andy Chien:]

Specifically, okay. Yes, certainly in terms of Massachusetts is a little bit slower to open. The EBITDA ramp there was just starting to get take hold prior to the shutdown. So we'll certainly want to evaluate how the property opens under the new conditions and how it continues to ramp. At the end of the day for us it's going to go into a mass release and so it's a evaluation of MGM as a tenant, not a single-property lease. And I think this environment shows, highlights master lease relative to single-property leases, which is you had a single-property lease on something, anything that is the one that keeps you up at night. But I think the timeline will certainly be extended here given the circumstance.

[Operator:]

The next question is from Steve Sakwa of Evercore. Please go ahead.

[Steve Sakwa:]

Thanks. Good morning out there. I guess kind of follow-up on that last question. I guess, James, I guess what lessons have you sort of learned, I know at the beginning of this people were sort of pushing you to kind of diversify away from your one tenant and to have other tenants. And I'm just sort of trying to think how you guys have thought about that. And kind of the pros and cons of having other structures and other leases and just, what would you or not do kind of moving forward?

[James Stewart:]

Well, I think if ever there's been an environment that shows the benefits of having a very strong tenant, it's this one, it would be -- if you'd asked me a year-ago, what would be my concerns for the 2020 year, having every property shutdown for multiple weeks would not even have popped into my mind as a possibility. And yet that is what occurred. And the decision to go with -- with us, to go with a tenant in every scenario that we could have the best credit profile in the business is really showing out to be very, very positive for us right now. Again, and I know I've said it before, but we've collected 100% of the rent in full. I haven't modified any economic term of the lease. That's all because we have a very strong tenant. Had we made the decision to diversify our tenant base at an earlier time with almost no exceptions, other than maybe one in the Integrated Resort business, the tenants have a credit profile that is not as strong as MGMs. And I think those would be the ones that we would be the most worried about. So I think it's proven out to be a very wise decision in hindsight to go with the tenant that has the best credit profile and the most incentive to pay the rent, which in our case is MGM. As we go forward, we evaluate every transaction on a standalone basis and the evaluation takes many factors into consideration. One being the quality of the asset, and does it have the enduring value to pay the rent or generate cash flows for 30 straight years, which is the term generally of a lease with us. The other is the ability of those operations on just a standalone basis to generate that income. And then is the tenant an entity that we think has the balance sheet and the earnings power and so on as well as just do we have the trust in them to pay the rent over that period of time from thick and thin. So all of those things come into an analysis and to the extent that we're confident that the tenants -- that a tenant is going to pay the rent and that the asset itself will have value. That's it and it's accretive to our AFFO on a non-complex leveraging basis. That's a transaction we should do and each one is evaluated on its own, and for any time where we have the ability to choose a tenant, we want to choose the one that we think is the most able and the most desirous of paying the rent.

[Steve Sakwa:]

And I guess maybe sort of a derivative follow-up on that. In terms of other product types, I know you've heard us talk broadly about potentially doing things outside the gaming world, has this pandemic and the way you've seen other sectors maybe the impact has kind of changed your thoughts about broadening the net in terms of other areas to go into whether it's traditional hotels, or built-ins or Waterpark or anything like that, has that pertains your view at all?

[James Stewart:]

It's -- it's been very interesting certainly to see. And I think it is not only because it gets back to just one of our -- the fundamental ways we look at a transaction whereas if we think something can enhance our AFFO line without adding risk to the overall portfolio and thus increase the dividend that's something we should do whether that be adjacent space or in the gaming space. But if there is one thing that is really, I think highlighted through this very difficult economic time, it's the fundamental strength of the gaming business. It has been really gratifying to see the ability of the tenants in that industry, to be able to adjust extremely quickly to a very quick changing economic environment, derive their portfolios to reasonably high-levels of success when you consider the backdrop, and basically with all of the REITs that have any kind of meaningful gaming tenant exposure have, if not 100%, virtually 100% of the rent get paid for all of them, really highlighted the strength of the business which is very gratifying for us. Andy, anything else that you would think on that?

[Andy Chien:]

The only thing I'd add is just as we look at the financial result of companies, whether it's gaming or otherwise and added an important factor now which is access to capital, right. How did they perform in terms of their ability to attach bond markets, leverage loan markets, equity markets? And what kind of liquidity options do they have, cash on hand, revolver availability, things like that across all spaces and obviously the gaming space showed that they had that availability and access in space, so that that put more emphasis on the importance of the strength that's in.

[Operator:]

The next question is from Shaun Kelley of Bank of America. Please go ahead.

[Shaun Kelley:]

Hi, good morning James and Andy. Just two questions for me. One is we sort of tackled this from a few different perspectives, but kind of curious on the balance of the portfolio in Las Vegas which obviously many of the assets skew towards today and then what are you doing on the regional side, especially in light of the fundamentals, so any kind of preference and obviously everything's going to be underwritten based on the individual facts and circumstances but kind of anything you just provide about, maybe your own surprise and your own experiences about kind of the balance what we've seen fundamentally play out between Las Vegas and regional, how that might impact your underwriting going forward?

[James Stewart:]

It's -- well, it's certainly been a very amazing to see all the different relative performances here. And we sit with the portfolio that is about a little more than 50% regional and a little less than that in Las Vegas, which I think is going to prove out to be a very nice mix, Las Vegas is currently a little slower to recover given increased historical group business component versus the drive to regional market. But these things have a tendency to balance out and come back to historical trends. So the margins at all the properties are very enhanced. The ability to operate incredibly efficiently, particularly as things come back I think it's going to be really pronounced. And I think that things will come back into balance, but it's going to take a little bit more time for the Las Vegas market versus the regional market. I wouldn't -- I think our portfolio mix where it sits right now a little more than half regional or roughly 50

[Andy Chien:]

Yes, I think you said it all, James.

[Shaun Kelley:]

And then sort of again, a bit of a follow-up from prior question, maybe just ask slightly differently. So you've talked about different property types, sort of maybe different industry verticals, but what about just kind of slightly less traditional ways to invest in gaming, so those would be things like investing directly in the capital stack or like so possibly making loans to people who might need help out there even if they're shorter in duration then but they might be opportunistic or things like, we saw a kind of CapEx financing to build a project, but obviously with an enhanced rent structure to kind of come out there, are those types of things intriguing to you, or there's opportunities you would underwrite or you have a baseline amount of capital you want to deploy like a size kind of requirement that you need to make it worth the time and effort, just kind of how are you thinking about those?

[James Stewart:]

You want to take it, Andy?

[Andy Chien:]

Yes, I'll take it James. And certainly those are transactions that we've looked at in the past and continue to look at yes; it does get to be a sized level that that makes sense for us. We don't have a specific number that we have or pick but we evaluate each transaction as they come. And we've looked at different structures and obviously with the CapEx type transaction, we did it on Park MGM. A loan transaction, those are things that we can do and we have looked at in the past, but we haven't transacted on mainly because we haven't needed to do in that structure most times it's due to structuring that it's required to kind of go down that route. And for us, we have a tenant base that is extremely safe, secure, if you look at MGM's liquidity position, the cash on hand, their ability to cover their costs are pretty significant. So with MGM, we haven't had to explore those avenues because we don't need to. And with other tenants, we're more than happy to discuss those things than we have in the past and preference is a regular way transaction, but certainly we are -- we have the availability and knowledge to do some of those other structures.

[Operator:]

Your next question is from Barry Jonas of Truist Securities. Please go ahead.

[Barry Jonas:]

Hey, guys. I wanted to ask about M&A in other angle. Has the pool of potential OpCo partners that you would work with widened or narrowed here?

[James Stewart:]

It hasn't narrowed. It would either be the same or potentially a little bit wider. I think that the performance of the space through this period of time and the potential for other people to get in the business through restructuring of -- re -- not restructuring in a balance sheet way, restructuring of someone's portfolio like Eldorado has done with talking about potential divestitures, they're either have done or are doing in order to affect the merger is going to permit others who have looked at the industry and now are anxious to get in to participate. So if anything, I would say is likely a little bit larger than what it was, certainly isn't narrower.

[Barry Jonas:]

Great, that's really helpful. And then just a second question, look we're seeing instances of some properties not reopening in markets which notably includes Vegas, do you think we'll see more contraction in gaming supply? And how does that influence your strategy, if at all?

[James Stewart:]

Andy?

[Andy Chien:]

Sure. In terms of the properties that are not reopen at in Vegas, in particular, mostly I think that's on one hand demand driven, I think there's other opportunities that are being or have been evaluated. And so that's why certain properties have been reserved from opening but I do believe that some of those properties are not yet open or taking reservations in the short-term here. And that as was discussed on the various operator calls at, as properties open it's not cannibalization, but it's a growth in the business to satisfy that demand. So for the short-term with properties closed, I don't think that's any sign that there would be a contraction of supply. I think the industry is hopeful that that demand will come back at some point, whether it's Q2 of next year or summer of next year at some point that demand will return and those properties will be fully utilized. And so in the regions, obviously there's still certain properties that are closed, but those are state or regulatory decisions that haven't allowed for their openings. And so I think that will come in that demand obviously, as you see and across the operators that have reported on regional demand.

[Operator:]

Your next question is from Jay Kornreich of SMBC. Please go ahead.

[Jay Kornreich:]

All right, thanks very much. Just in your opening comments, you mentioned you still believe cap rates compression will occur. So just thinking big picture as that part of the story was a focal point pre-pandemic. What do you think need to happen to buyers to not only come back to the table for an asset class that was forced to close for several months, but even at lower cap rates than before the pandemic?

[James Stewart:]

I think what -- I think that what will need to happen would be for the industry the Integrated Resort REIT industry to get through this intact without any kind of major issues going on with their ability to generate AFFO and net dividend. And I think as we get through to the other side of the extreme business impact of this pandemic, that people are going to look at the performance of us and our other colleagues in the business, they're going to compare it to the performance of other REIT categories, other triple nets, other hotel REITs, leisure REITs, and so on. And they're going to be hard pressed to say that this structure and industry isn't one which has proven itself not only able to grow more quickly, but able to grow more securely as well. And that will thus generate an inflow of investor capital away from some of these other spaces and into ours thus compressing the cap rate.

[Jay Kornreich:]

Okay, appreciate that. And then one other question just in terms of MGM Springfield, as MGM is seeking their asset-light strategy, is there any likelihood they would try to sell that asset before redeeming for their OP unit?

[James Stewart:]

I think it's probably more of a question for MGM. Although I think that -- I think the timing of both of those different things will be driven by their own needs and goals and I wouldn't really think of those two was tied together in any way.

[Operator:]

The next question is from Thomas Allen of Morgan Stanley. Please go ahead.

[Thomas Allen:]

Thanks. Just one for me, can you talk to us about your latest thinking around your dividend strategy? Thank you.

[Andy Chien:]

Sure, Thomas. In terms of the dividend, we continue to pay out around 80%. These last couple of quarters little elevated given the changing share counts due to the redemption as well as the issuance back in Q1. But on a run rate basis, we're comfortable in that range across the net leased space, payouts range anywhere from the mid-60s to the mid-80s. And for those other companies that we sample from that range, they have had experiences of rents not being collected. And so given that our rents are 100% collected, we can be and could be more comfortable at the higher end of the range given our cash flows are secure, relative to the dividend payment. So we're comfortable where we are, but we evaluate every quarter and we discuss that with our board for those dividends are approved.

[Operator:]

The next question is from John Massocca of Ladenburg Thalmann. Please go ahead.

[John Massocca:]

Well MGM has no real liquidity base needs to renegotiate it massively. But is there may be an opportunity here given some of the volatility around Vegas and a combination of fact, you have variable and the fact you change your components so lease coming into effect in 2022 kind of reach a mutual transaction that maybe makes those rental stream steadier going forward, provide some relief to MGM or any other kind of negotiation there. Maybe there's something maybe strategic that you guys can both come through on the lease front?

[James Stewart:]

There's certainly to the extent that there are things that we wanted to clean-up or change that were perceived as a win-win, just like in any transaction, right, if there is something that both parties want to do when it's beneficial then they'll likely do it. For us, it would be not driven as you mentioned at the beginning of the question not driven by any meaningful liquidity need or need for some kind of a relief that you see in so many other businesses but would be driven only from both parties' desire and willingness to engage in such a deal. So the answer is yes, there's always something available like that. But there isn't any immediate driving force to bring the parties to the table to make a change and to-date there's been no discussions on changing any economic lease term. Andy?

[Andy Chien:]

No, I 100% agree.

[James Stewart:]

Okay.

[John Massocca:]

You guys mentioned earlier on the call, some of the value that you're having in master leasing space. I guess, if you look out on the acquisition environment, what kind of cap rate premium would you be looking for kind of broadly, if you were going to do a single asset deal, I mean especially given there seems like there's some momentum, some operators to do some transactions on the strip. And that's kind of where you did a one-off deal that would really move the needle for MGP?

[Andy Chien:]

Just to clarify I think from master lease to us more valuable than single property lease, and so there's for a single asset deal that probably would be discounted on what that range would be right now it's fully dependent on the tenants credit quality, their financial wherewithal, what kind of lease restructure, what level of rents relative to past and potential current and future performance. So those are things that we would evaluate deal-by-deal.

[John Massocca:]

Okay. I was eyeing, it was higher cap rate kind of low-end multiple. But all things being equal, I guess I know, it's a little bit dependent on deal-by-deal. But if you were all things being equal, what's kind of the broad premium you would need or higher cap rate you would need to do a deal.

[Andy Chien:]

That's for us to negotiate, so I'm not going to put that out there publicly.

[Operator:]

The next question is from Nick Yulico of Scotiabank. Please go ahead.

[Greg McGinnis:]

Hey, good morning. This is Greg McGinnis on with Nick. James, this is actually kind of a follow-up to John's question, but in terms of the sale leaseback discussions that you've had or been having, even if there might be too difficult to underwrite currently, are those generally single asset discussions or is the potential for more comprehensive master leases, looking for any color on the potential structure or volume of deals being discussed be appreciated?

[James Stewart:]

It is for a broad set of potential alternatives. One of the things that as I think been generated maybe or accelerated maybe a little bit from this current period of time is the willingness of; I think one of the operator parties to engage in discussions in around very creative solutions around things. So, I would say that the potential volumes have been pretty -- would have been -- would be pretty significant. Most of the discussions are around either a large asset or more than one asset, but it's really a broad set of potential alternatives we're talking about here that has been really too hard to put a direct point on as to what it would be.

[Greg McGinnis:]

Okay, that's fair. And just I guess a follow-up on that, what do you need to see from an operating metric or underwriting perspective before becoming more comfortable with potential acquisitions?

[James Stewart:]

I think we need to have stability on sort of the governmental or regulatory front to know what the rules of the game are going forward as well as predictability as to the cash flow generating power of the asset or assets and the tenant. One of the things that I think we were very adept at historically is being able to predict within a pretty tight margin, how much cash flow an asset would be able to generate and make a good prediction even with some meaningful change potential to that asset such as new competition and regulatory change or things like that, being able to underwrite thoughtfully and be pretty good at figuring out what the EBITDA and cash flow generated power of an asset would be. Right now, it's not so much that the skill of knowing that is limited because there's other barriers put in place which affect it such as capacity constraints issued by a State or Gaming Control Board and meaning the facility have the inability to meet the demand that's out there, which is a very unusual circumstance to be in. So, I think what has to happen is we have to know sort of what that, with some degree of certainty how the governmental authorities are going to be operating, sort of going forward to some degree of certainty, which does then allows us to, I think underwrite it pretty quickly, the ultimate EBITDA and cash flow generating power of the asset, at which point we can assess what that's worth to us and if that's going to be something that can help us transact on and sustainably grow our AFFO and dividend.

[Operator:]

The next question is from Smedes Rose of Citi. Please go ahead.

[Smedes Rose:]

Hi, thanks. I just wanted to ask you, you've talked a few times on these calls about evaluation discounts fairly relative to other triple net and an expectation that cap rate for gaming will compress particularly coming out of this. So given that you're in 20% discount to consensus NAV, you're at 4.6 times leverage according to your deck that you filed today would you consider buying back stock here before that kind of compression starts to take place and presumably your stock price gets higher?

[James Stewart:]

Well, we -- in a sense, we are through the redemption agreement with MGM. So we bought back in a sale of equity, it's not technically stock, it's units, the 700 million which generated double-digit AFFO accretion and still has a sitting with a four six debt-to-EBITDA level. And we have another 700 million that we have agreed to with them to repurchase if they put it to us over the next year-and-a-half. So I think that that is likely going to be, how we would accomplish such a thing versus going out into the open market. That said, we evaluate our own position on a basically daily basis as to what we want to do, but I think that the redemption is how we would accomplish. So taking advantage I think of some of the long-term trends in what we think will happen to the stock.

[Smedes Rose:]

Okay. No sort of open market transaction?

[James Stewart:]

Unlikely.

[Operator:]

The next question is from Robin Farley of UBS. Please go ahead.

[Robin Farley:]

Great, thanks. Two questions. Most of my questions have been answered, but just circling back on the idea of future transactions and M&A, you somewhat talked about escalators being tied to revenue could be hurt by operators that are kind of now reducing the lower margin revenue or in profitable parts of their revenue. And maybe I'm looking ahead a little too much here, but if anything, I would expect that as revenues come back, the lower margin revenue is going to come back to because it's a function of competition. I guess, I'm wondering in your discussions with potential new tenants how you're thinking about escalators based on rent versus EBITDA? I've got a question to follow. Thanks.

[James Stewart:]

Andy?

[Andy Chien:]

Yes. Generally speaking our discussions in terms of potential new leases look more like the Mandalay MGM Grand Lease does not have any revenue ties to the escalator. The revenue ties for our original master lease that remain only on $78 million out of the $828 million of our rent. That's based on a five-year average. Our escalator next April is fully contractual. There's no test for the next April 2% escalator. So we'd like to leave kind of that performance escalator or performance participation in gaming to the operators, and that's generally how we've looked at transactions.

[Robin Farley:]

Okay, And maybe last question is in discussions for new leases, do these discussions now include lease breaks for things like mandated closings or things that maybe hadn't been anticipated when previously as leases were being done in this industry, it seems likely that that would be part of the discussion. So I'm kind of wondering if that for MGP and other REITs, you kind of lose that coverage of risk, if those types of lease breaks are included?

[James Stewart:]

Without getting too much into the detail, no, for us to put multiple billions of dollars of capital to work on which we pay obviously an interest rate if to the extent that we borrow that capital. And for us, the cost of equity isn't a theoretical inverse of our PE or something like that. There is a hard cash dividend that we have to pay. So with any deal that we underwrite, we have to make sure that -- one of the fundamental question at the end of the day is, is the tenant going to pay the rent through the lease term? So we have real cash, cash requirements on that capital put out and minimizing the risk around that factor is the key point of what we do when need in return for providing the operator with multiple billions of dollars at a pretty good multiple or cap rate in exchange for the real property.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to James Stewart for closing remarks.

[James Stewart:]

Thank you, Kate. I'd like to thank all our investors and the financial community for your continued support and look forward to talking to you next quarter. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.