MGM Growth Properties LLC
Q1 2018 Earnings Call Transcript

Published: 26 Apr 2018

[Operator:]

Good morning and welcome to the MGM Growth Properties' First Quarter 2018 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. [Operator Instructions] After the company’s remarks, there will be a question-and-answer session. Please note this event is being recorded. I would now like to turn the conference over to Mr. Andy Chien.

[Andy Chien:]

Thanks, Brian. Good morning and welcome to the MGM Growth Properties First Quarter 2018 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 the 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, which is also available on our website. Finally, please note that this presentation is being recorded. I'll now turn it over to James.

[James Stewart:]

Thank you, Andy. I’d like to welcome everyone to MGP’s first quarter 2018 conference call. MGP is off to a strong start in 2018, continuing to successfully execute on our long term business strategy. We successfully repriced a $1.8 billion term loan B facility in March and subsequent to the quarter, the second base rent escalator under our master lease of 2% went into effect on April 1, 2018. In addition, on April 5, we announced our agreement to acquire the Hard Rock Rocksino Northfield Park, a top producing gaming asset in the entire state of Ohio. MGP is excited to join the Northeast Ohio gaming market and further diversify our portfolio geographically. Similar in profile to our other regional properties, the Hard Rock is a market leader and has established itself as the premier gaming and entertainment destination in Ohio. The property consists of 200,000 square feet of gaming space, featuring over 2300 video lottery terminals, a variety of retail and food and beverage outlets, a 1900 seat music venue, and a 250-seat event space. The property is also home to a year round horse racetrack and sits on 110 acres. This transaction was financially attractive and is expected to generate mid to high single digit percentage accretion to our AFFO per share. We’ve received a number of incoming communications from potential operators and anticipate retaining ownership of only the real estate assets, resulting in an expected $50 million to $60 million of annual rent. We're looking forward to closing the transaction in the second half of 2018 and adding another high quality asset to our portfolio. This acquisition is an example of MGP’s strong position in the gaming REIT market and access to a broad and robust potential acquisition universe. I'll now turn it over to Andy to discuss our financial results.

[Andy Chien:]

Thank you, James. I’ll provide a few highlights to our first quarter 2018 financial results. For the quarter, we cognized 186.6 million of rental revenue on a GAAP or 189.2 million on a cash basis. G&A expenses were 3.9 million for the quarter, which included approximately $1 million related to deals that were not signed or closed as of quarter end. Acquisition related expenses related to the Hard Rock Rocksino acquisition were 500,000 for the quarter. For the quarter, net income was 58 million. Adjusted EBITDA was 186 million and net interest expense was 48 million, resulting in AFFO of 140.6 million or otherwise $0.53 on a per unit basis. Our first quarter dividend remained constant at $0.42 per share, which represents $1.68 on an annualized basis. In terms of our balance sheet, our quarter end net leverage remained steady at approximately five times. As James mentioned, in March, we successfully repriced our term loan B. We were able to reduce our interest rate to LIBOR plus 2%, which is a 25 basis point reduction from our prior levels. Additionally, the company will receive a further reduction in pricing to LIBOR plus 175, upon a corporate rating upgrade by either S&P or Moody's. The amendment also include an extension in the maturity of the term loan B facility by two years to March 2025, which is subject to certain conditions and expected to close in the coming weeks. Regarding the Hard Rock transaction, we intend to finance the transaction with cash on hand and debt. Our leverage is expected to remain within our target range of around 5.5 times when the transaction closes, which we anticipate in the second half of this year. And that's prior to any potential acquisition with an operator for the operating assets. In summary, our balance sheet continues to improve and our strong financial profile allows us be in position to continue to execute on our long term strategies to sustainably growing our dividend, including acquisitions on an accretive basis. This was the debt maturated with the Borgata and National Harbor and we closed the Hard Rock Ohio transaction. With that, I’d like to turn it back over to James.

[James Stewart:]

Thank you, Andy. We’d like to thank all of our investors for their continued support. Brian, we’d open it up now for questions.

[Operator:]

[Operator Instructions] Our first question is from Sean Kelly of Bank of America.

[Sean Kelly:]

To start with the Rocksino transaction. Obviously, we caught up a little bit on this, but was curious any more color you could provide around likelihood or certainty on finding that operating partner before the deal closes and just how those discussions are going at a high level.

[James Stewart:]

We've had a lot of high quality incomings. We are trying to figure out the best path for us and our shareholders as it relates to that. I don't want to speculate too much in terms of when that component of the transaction would close because there's a lot of inputs that are not really in our control, including the various regulatory approvals that we have to go through. And so, I think there is a reasonable chance that we do something prior to close, but there's also a very reasonable chance that we do something post close. So it's hard to handicap.

[Sean Kelly:]

Got it. And sort of the other question on that transaction that’s come up a little bit is, obviously, you gave some broad brush rent targets that you expect the property to generate, but just the question I have is, were the numbers that you gave, are those post synergy type numbers or are they pre-synergies for what you would think it opco or an operator can deliver in that market.

[Andy Chien:]

Hi, Sean. It’s Andy. In terms of the rents and the coverage, that’s the ultimate landing spot that we’d see from a real estate acquisition. In terms of the opco, that's going to be up to them in terms of determining what level of synergies they can see as they plug it into their systems. So, that's work that will be done by each individual party as we proceed here.

[Sean Kelly:]

I think Andy, as you get into the coverage number that was given, I mean, you kind of have to make some assumption there or maybe?

[Andy Chien:]

The range kind of covers, what we see at least from where we sit today without having identified operator of a broad range of possibilities there.

[Sean Kelly:]

And then last question would just be on sort of the high level obvious one for these types of calls or just, on your basic update, there's been a lot of M&A activity out there, kind of what you make particularly of the thing that you're seeing in your type of assets, which are tend to be higher quality and a little bit chunkier as it relates to total EBITDA generated.

[Andy Chien:]

I would say activity levels remain certainly higher than they’ve been at any other time since the company had its IPO. And we are busy executing our plan.

[Operator:]

Next question comes from Steve Sakwa with Evercore ISI.

[Steve Sakwa:]

I guess just a kind of follow up on Sean's question, just in terms of kind of deal flow and activity with more public companies sort of focusing on the space. I'm just curious what the maybe the deal points or sticking points or hot buttons are with some of the sellers today and maybe how has that changed over the last six months.

[James Stewart:]

I would say they are ones that you would expect in any buy-sell transaction, price is always an important consideration. The availability of equity has been an important consideration for many. The structure of the deal, which sort of, I think, it's the -- both of those points are really thinking more around sort of how one facilitates for different types of owners, a deal that kind of makes sense for them, some people want to stay involved, some people do not and so on. It hasn't really changed over the past six months I would say or even over the past year in terms of the primary points that people are looking at. It's just that the amount of discussions and I think the relative seriousness of the discussion seems to have gone up. Anything else, Andy?

[Steve Sakwa:]

Yeah. I guess maybe just as a follow up on that, with the tax law changes in effect or any different discussion or is it kind of really just more about there being more buyers and potentially bidding up pricing, as that just kind of brought more potential sellers out of the woodworks.

[James Stewart:]

I think it's a component of all of those things, but the tax changes has not been a – the change in tax hasn’t been what's driven the increase in activity. I think it's just been a period of what started off as education amongst many sellers that has now developed into -- that developed into a minor interest that now and they're out into a more significant interest and the tax -- there are certain tax angles that make, with this tax law changes, make our deals I think much more attractive than other alternatives that they were looking at now, although as I would say, I think that's more of a marginal benefit than anything that was driving, but the other factors that are driving it.

[Steve Sakwa:]

Okay. And then maybe just a question on the balance sheet, I mean I know that you’ve kind of refinanced the term loan B, and this is longer term. What’s the company sort of strategy philosophy around keeping the term loans outstanding versus moving now to maybe more long term secured or unsecured fixed rate debt.

[Andy Chien:]

Hi, Steve. It’s Andy. That is our plan is to move it more towards a long term fixed rate debt structure. We do have a significant portion of that term loan B hedged on the interest rate side, so we’re comfortable with where we sit today. As we proceed here and as we close on transactions and finance them long term, we will continue to use the fixed rate debt as you’ve seen in Borgata, as you saw in National Harbor as well. So we'll be opportunistic about that timing and we’ll always be trying to wrap up the funding for acquisitions when we need to close them and then evaluate the market to confirm that out long term.

[Operator:]

Our next question comes from Robin Farley with UBS.

[Robin Farley:]

Just looking at the news from MGM Resorts today about the sale of the Mandarin hotel, is there anything to conclude from that about their partner in city center maybe getting more ready to monetize those assets?

[James Stewart:]

I would not draw any conclusions from that specific transaction on the potential for monetization at the city center.

[Operator:]

Next question comes from Thomas Allen with Morgan Stanley.

[Thomas Allen:]

So on your discussions with potential operators over the Rocksino, what’s the general feedback on the type of contracts. I mean you had similar contracts with MGM. It's kind of been this 85%, 90%, 2% rent escalator and then the reset after five years, but obviously some of your peers have shorter resets or different formats. So kind of what do people want.

[James Stewart:]

I would say it is generally consistent with what you see with the MGM lease, although, we want to tailor it for each – for the specific needs for a party other than MGM, because there's a lot of MGM specific stuff that would be in our lease, but for the key terms, it is generally aligned with what you’d see in the MGM lease.

[Thomas Allen:]

Okay. And then in the quarter, MGM in particular has also announced they’re retiring their grand, is that something you guys looked at and what stopped you from doing it.

[James Stewart:]

It was an asset that would not have been requalifying as well as one that I think just on the sort of the nature of the assets that we want to buy didn't necessarily fit with exactly what we have in our sites. So I think both of those things kind of turned us away from that transaction.

[Thomas Allen:]

And why was that requalifying?

[Andy Chien:]

It's about – at the end of the day, there's a number of tests that need to be satisfied to be considered, qualified assets and it would have been significant investment required to get it to that point and the sense that we were interested in.

[Operator:]

Next question comes from [indiscernible] with Ladenburg Thalmann.

[Unidentified Analyst:]

So going back maybe to the Rocksino transaction, if you guys don't have an operator employees at time of close, would you operate that yourself by a TRS or would you potentially maybe utilize a relationship with MGM to have them operated on a temporary basis. Just any kind of color you can provide there would be helpful.

[Andy Chien:]

It’s Andy. I think both our potential options and alternatives that we're penciling out to the extent we don't have somebody identified right at close, both are viable. From that perspective, whether or not we -- it likely will be in a TRS structure and it's just a matter of who's kind of managing it day to day, whether it's somebody we put in place or if it's a temporary contract we have with MGM on that basis.

[Unidentified Analyst:]

Okay. And then maybe switching gears a little bit with all the kind of news flow coming out of Massachusetts, is there any reason you guys could foresee from a regulatory perspective that you guys couldn't own two assets in that market and I know they would have to be separate operators, but is there anything you think that would restrict you from holding two properties.

[Andy Chien:]

As far as Massachusetts, that's not something that we've kind of really approached in terms of real estate ownership and I don't know that there's that many examples of that either in other jurisdictions we’re clearly comfortable and have gone through that process. So that's just something that we’ll have to look through to the extent we need to.

[Unidentified Analyst:]

Understood. And then last a little housekeeping option, there was a pretty significant uptick in -- a relatively significant uptick in non-operating expenses and you guys ended up backing that out of your AFFO calculation. What drove that?

[Andy Chien:]

A large portion of that was the term loan B repricing and obviously that's something that we're -- we don't intend to do all of our time, so that's not a regular charge. And from an accounting perspective, on a non-up, that's always been something that, I think, as you roll up our financial, that's something that's excluded.

[Operator:]

[Operator Instructions] At this time, this will conclude our question-and-answer session. I would like to turn the conference back over to James Stewart, CEO for any closing remarks.

[James Stewart:]

Thanks, Brian. I would just like to reiterate our thanks to all of our equity investors on the phone who have been so supportive. Thank you.

[Operator:]

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