MGM Growth Properties LLC
Q2 2018 Earnings Call Transcript

Published: 7 Aug 2018

[Operator:]

Good morning and welcome to the MGM Growth Properties Second 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. 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 conference over to Mr. Andy Chien.

[Andy Chien:]

Thank you, Denise. And good morning and welcome to the MGM Growth Properties second 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 second quarter 2018 conference call. MGP has continued to build upon the momentum we have at the beginning of the year by executing on our long-term growth strategy. In this quarter alone, we have announced over $1.7 billion in acquisitions, the highest quarterly or annual deal volume in our Company's history. This represents one of the highest net acquisition figures amongst all net lease REITs. On April 5, we announced our agreement to acquire the Hard Rock Rocksino Northfield Park for approximately $1.06 billion. On July 6, almost three months to the day after announcement, we completed the acquisition, closing into taxable REIT subsidiary. Simultaneous with the closing, we entered into a new agreement with Hard Rock to continue to serve as the manager of the property. We have received many inquiries from a number of high-quality potential operators about a partnership there. We are prudently evaluating the best long-term triple net lease structure for our shareholders for this beautiful property. In the meantime, we are very comfortable holding the property in the TRS. On May 29, we announced the acquisition of the real estate of Empire City Casino in Yonkers, New York. This acquisition, in partnership with MGM Resorts International, further diversifies MGP's regional portfolio and allowed $50 million of initial rental revenue, which we negotiated based partially on potential synergies MGM expects to achieve. The 97-acre Empire City Casino site sits only 15 miles from Times Square in a high density New York City area. This financially attractive transaction is a great example of the power of our partnership with MGM Resorts to accretively acquire valuable real estate assets and deliver value for our shareholders. Equally as important, MGP has negotiated ROFO, Right of First Offer, with respect to undeveloped land adjacent to the property to the extent MGM Resorts develops additional facilities, which provides for additional future built-in growth opportunities for us. These acquisitions further geographically diversify our portfolio. The Las Vegas regional split now stands at approximately 50-50 versus 70% contribution from Las Vegas at the date of our IPO. Further demonstrating the strength of our Company's position, the latest 12 months property EBITDA for our portfolio of assets today versus the date of our IPO has improved by approximately 8%. This figure includes Park MGM, formerly known as the Monte Carlo, which is currently undergoing a major $550 million renovation at this time and experiencing a disruption that comes with such a project. If we exclude the impact of Park MGM, the LTM property EBITDA has improved by approximately 16% since our IPO. While MGP does not participate in the improvement and performance dollar for dollar of course, being triple net REIT, this improvement in results demonstrates the resiliency and growth of the underlying property performance. The continued financial performance of these properties only further strengthens the security and stability of our rent, an aspect that should not be overlooked by investors. In addition to this activity, MGM increased its dividend for the fourth time since going public in April of 2016. This increase to $1.72 per share represents a 2.4% increase over the prior annual rate and a 20.3% overall increase from our initial annual rate of $1.43. We are looking forward to the second half of 2018 as we continue to actively pursue the opportunities in our pipeline that fit our acquisition criteria. I will now turn it over to Andy to discuss our financial results.

[Andy Chien:]

Thank you, James. I’ll provide highlights for a few items in the financial results. For the second quarter of 2018, we recognized $186.6 million of rental revenue on a GAAP or $192.6 million on a cash basis. G&A expenses were $2.8 million and acquisition related expenses were $2.1 million for the quarter. Net income was $48.1 million for the quarter. Adjusted EBITDA was $190.4 million and AFFO was $145.6 million or $0.55 on a per unit basis for the quarter. Our second quarter dividend increased to $0.43 per share, which represents $1.72 on an annualized basis. Our quarter-end net leverage was approximately 4.8 times prior to the close of the Hard Rock Rocksino acquisition. In June, we successfully completed an increase in extension of our term loan A and revolver by amending our credit facilities. The revolving credit facility now provides an additional $750 million of capacity and now has an aggregate capacity of $1.35 billion. The maturity of our existing $270 million term loan A, the revolver and the new $200 million delayed to our term loan A are all now 2023. Additionally, the revolver and term loan A facilities were repriced to provide some pricing step downs based on a leverage grid that will save us 75 basis points undrawn amounts in the coming quarters. We appreciate the support of our lenders to provide this financial flexibility to fund our strategic growth through accretive real estate acquisitions. For the Empire City Casino acquisition, we intend to finance the $625 million purchase price with the issuance of OP units and debt with a likely Q1 2019 close. And subsequent to this quarter end July 6, as James mentioned, we closed on the Hard Rock Rocksino. We funded the acquisition of the Rocksino with a $200 million delay draw term loan A, a $655 million borrowing under the revolving credit facility and the remainder of the purchase price paid with cash on hand. Our net leverage is expected to be approximately 5.5 times on a pro forma basis. Given our plans for a long-term triple net lease structure, we will not be publishing guidance for the operations of Hard Rock Rocksino at this time. In addition to our acquisition activity during the quarter, our second annual 2% rent escalator went into effect in April. The $13.6 million increase to rental revenue is a great example of MGP's embedded contractual growth that raises AFFO and complements our acquisition strategy to achieve our goal of growing our dividend to our shareholders. We will continue to work hard to keep our strong financial profile and improve our balance sheet to be able to add high-quality real estate assets to our portfolio, a diversified regional and Las Vegas Strip properties. And with that, I'd like to turn it back over to James.

[James Stewart:]

Thank you, Andy. I want to thank all of our investors for their continued support. And we'd open it up now for questions.

[Operator:]

Thank you, Mr. Stewart. We will now begin the question-and-answer session. [Operator Instructions] Your first question will be from Robin Farley of UBS. Please go ahead.

[Arpine Kocharyan:]

Hi. Thank you. This is actually Arpine for Robin. Thanks for taking my question. Could you talk about Rocksino potential sale of operations and timing of it? You had said that you received strong interest for the operations of that asset. If you can just update us on the timing. And then in terms of transaction activity, it seems like all indications are that there is higher volume of activity, but in your view, are these discussions or more sort of imminent transactions that could come to fruition for the back half?

[James Stewart:]

Sure. So regarding question one, so we only closed this acquisition on July 6, three months after announcement. And we currently have the Hard Rock acting as our manager. Now it isn't in the structure that we ultimately will have. So we are going to turn that situation into a say, roughly $50 million to $60 million rent stream to us with an expected coverage just on a four-wall basis of about 1.8x. We have received many highly – incomings from very highly qualified and well respected potential partners who want to be part of that and we are taking our time, reacting prudently. We want to do the best thing for the company – for our Company, for the property, for our shareholders. And I don't want to give any sharp indication on timing just because when you want to get the best deal that you can, you want to make sure that you take your time and proceed down the path thoughtfully but I think it's very safe to say that it's one of our key objectives is to shift the weight of that properties held out to be more consistent with the rest of our portfolio. And then on Question two about activity, it is – it has been a very, very busy time. I challenged someone to find a triple net – someone in the public triple net REIT space who's cranking out $1.7 billion of acquisitions in a single quarter, all accretive. And it does not seem to show any sign of abating whether or not the transactions where go from discussion to actionable and closable is impossible to predict, but it's a very busy time. There's a lot of activity.

[Arpine Kocharyan:]

Thank you. And just one quick one if I could, do you have a view on Vegas outlook in sort of the underlying strength or weakness in that market? I know that quarterly performance of the operator there does not impact you as much, but overall 12 months to 24 months basis, it basically does. Do you have a sort of a Vegas outlook that you could share? Thank you.

[James Stewart:]

We do and I guess it’s some – I would say we are – we have a 30-year lease. So whether one quarter has a little bit up or one quarter is a little bit down and I've used this example before if RevPAR is up two points or down two points, I think that there is a tendency for people to miss the forest for the trees. Just since IPO, which wasn't a great time for Las Vegas, if you sort of normalize the properties on our portfolio, we're up 16% in the underlying performance of those properties. And living here in Las Vegas and just walking through these buildings all the time, we are both as it relates to Las Vegas and again I think as you look at this over the long-term, this city is a juggernaut of future potential visitation with all of the things there are to do here already and it's only getting additional things being brought to the city that will drive visitation that will help our tenant and everybody else in the city. So I guess I look much, much longer term i.e. we have to think about things over a 30 year lease, not sort of what's happening in any one particular quarter.

[Andy Chien:]

The other thing I’ll add to that is, if you look at our rent coverage relative to any other net lease company out there, we're at the high 3s as of 2017 full-year. There's not a comp out there that is in that area that has full master lease off from a credit worthy tenant that's public, so just a comparison to any other company out there, the safety and stability of our rent is one of the best in the industry.

[Arpine Kocharyan:]

Thank you very much.

[Operator:]

The next question will be Rich Hightower of Evercore ISI. Please go ahead.

[Richard Hightower:]

Hey, good morning out there guys.

[Andy Chien:]

Hi, Rich.

[James Stewart:]

Hi, Rich.

[Richard Hightower:]

I guess that just means you'd have to recut the rent if you could, right? We recut the contract I mean…

[Andy Chien:]

We’re always looking for ways to grow. Grow things for our shareholders. I don't know how well that when it go over but…

[Richard Hightower:]

I get it. Okay, so a couple of questions here. So on MGM's call the other day, they made pretty strong reference to the idea that their ownership would be below 50% in the next three years. You obviously made some comments just now in the acquisition environment. I mean how likely do you think that prospect is especially given the fact that ownership, I believe, is going to go up pro forma for Empire City?

[Andy Chien:]

I will comment, but it’s probably a question better directed to them. But my own sense is that if they say what they mean, generally, and I think it's pretty likely. One of the things that I would say is another thing that they were very clear about on that call, which I think is not going to be any secret to any investor on our stock but is that they have an increasing desire or strong desire to go further down the path of asset light. So what that means is that the assets that are wholly-owned, will ultimately, I believe, find their way into the REIT as the natural owner of the real estate to the extent they sell those assets for cash i.e. we're doing offerings or whatever to fund those, that will believe me drive down the ownership number. But I think MGM does have a goal to reduce its ownership to below50 within three years. Most likely and most, the most attractive way this happens is for us to grow through acquisitions with third-party operators and through MGM's selling assets to us for cash. I think just to make sure it's clear, the least likely and least attractive option for MGM is to sell their OP units.

[Richard Hightower:]

Right. Now I mean, and they did make reference to the tax consequences, maybe not driving the equation there but there are obviously tax consequences if they sell for cash, correct? I mean that would leverage some of the flexibility here?

[James Stewart:]

Yes.

[Richard Hightower:]

Okay. And then I guess, just a quick housekeeping item, at least as far as you can tell pro forma for Empire City, what would their ownership go up to?

[Andy Chien:]

It's still be in the zone in the 70s. Richard, it doesn't really change too dramatically there.

[Richard Hightower:]

Okay.

[James Stewart:]

That’s about the same.

[Richard Hightower:]

Got it. Okay. Thank you guys.

[Andy Chien:]

All right. Thanks Rich.

[Operator:]

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

[Thomas Allen:]

Just on the Empire City deal. I know you announced this earlier but the rent has curved 2% until 2022. I believe that lines up with your MGM leases in general. But is there – as you think about getting into new leases, I mean how are you thinking about like the length of those contracts?

[Andy Chien:]

In terms of new leases, we wouldn't have those negotiations with future tenants, same way we had it with MGM. We want these to be long-term leases. There's an accounting aspect that drives initial terms and renewals and those will be in negotiation between ourselves and them. And we want them to be 30-year leases. And the longer we can get them the better, from an initial standpoint as well. So with the 2022, that's not the end of the lease, that's just when the reset for the variable starts and the tests on the fix start. So where we structure future leases doesn't really have too much bearing on the 2022 timeframe.

[Thomas Allen:]

Okay. And then I guess at least to write – to ask the question is as I think about your negotiations on the Rocksino deal, are you looking for – what's the biggest priority? Is it price? Is it terms of the contract? Is it escalators? How are you thinking about it?

[James Stewart:]

Each one of those things is a value component in our mind, right? It isn't – and it terms of tenant diversification – for us, to the extent that we can somehow either – it's really when you come down to a two goals that we have ultimately. One is to grow accretively, the other is to maintain or enhance the security of our dividend and rent stream and thus dividend stream. So any one of the points that you mentioned along with probably 100 others impact – could impact, one of those two things, which one is more important? What you have to do is put it all into a holistic mix and take a look at that mix – outcome and see which one is the most attractive. But those are the two things that we drive for, to either enhance or maintain our very high level of rent stability or give us future growth. So to the extent that someone wants a tweak to the lease that's a little different than our master lease, would we consider that? Sure. But it all comes in down to ultimately to value, which is of course, not just the price but all of those things mixed together. Which one is more important? Impossible to say, really comes down to each agreement is a carefully balanced agreement and there's gives and takes for all of them.

[Andy Chien:]

And as far as the tenant, the tenant diversification, that's just another one of those factors as far as where the credit quality of that tenant and what the fact that it's a different tenant or if it's MGM, that's not the issue. The issue is the credit quality of the tenant.

[Thomas Allen:]

What kind of multiples are you getting offered for the operating contract?

[James Stewart:]

We are not going to discuss that, Thomas.

[Thomas Allen:]

Okay. Thank you.

[Operator:]

The next question will be from Shaun Kelly of Bank of America. Please go ahead.

[Shaun Kelly:]

Hey guys. Good morning out there.

[James Stewart:]

Hey Shaun.

[Shaun Kelly:]

James, maybe to stick with the whole kind of MGM dropping below 50% discussion point. I think you're pretty clear on sort of the prioritization or pecking order of pass to do so. Could you just remind us, I mean, are there any specific barriers or timeline issues around specifically dropping down some of the MGM assets that were not originally included in the REIT structure? Obviously, I'm speaking primarily about Bellagio and MGM Grand since that's where the bulk of the cash flows are.

[James Stewart:]

Other than you have to negotiate the terms, obviously, which is probably the biggest "barrier". There are no real barriers that I see to do it. The number one thing that we would have to manage was just making sure that we're very thoughtful of our own shareholders around the securities pricing environment, to make sure that we don't end up overwhelming the market with too big an offering, et cetera. But no I don't think there are

[Shaun Kelly:]

Okay. So around the two – if we're thinking about the tax consequences specifically, that sounds like going to be much owners doing the direct OP unit sale than it would be by doing some sort of dropdown here. Is that a fair characterization?

[James Stewart:]

That's really a question for Dan and team at MGM.

[Shaun Kelly:]

Okay. Got it. Last thing I have, but this is sort of – it's along the same lines would be, have you guys ever looked at or thought about the idea of actually going the opposite direction and possibly trying to have MGM increase the stake? I believe there's sort of a rule around. You could actually look at a full tax-free spin-off if you were above 80% ownership. But have you guys looked at those rules? And what the characterization of that might look like?

[James Stewart:]

No, that sound like – I'm trying to deflect anything. But again, it's really that's a pure MGM question.

[Shaun Kelly:]

Okay. Well, I'd figured I'd just sort of go down that road. I think we got bogged down some other discussion points on MGM at the time of the conversation. One last thing, you mentioned the very significant growth and I think at least implied coverage, given the organic growth rate that happened at MGM. Can you just remind us of – while you don't have any clearly anything upcoming right now on the rent reset feature, is there anything down the road on a rent reset that could be beneficial to you given the significant improvement in cash flows underlying what's going on with MGP?

[Andy Chien:]

Shaun, that will be based on the 2022 and 2022 will look back five years to the average revenue, multiply that by 1.4% and that will be the reset for the variable component. And as a reminder, that's 10% of our rent. Thereafter, it's another five years that we'll wait to recalculate that portion of the rent. So we're really only two years into that five-year average that we're going to calculate, so I don't know that we can really draw a trend line off of that just yet.

[James Stewart:]

There’s a lot of things that I see coming up potentially that could increase our rent aside from obviously, some of like the big deals that we're doing. I mean Springfield opens up in a couple of weeks, right. On which we have a Right of First Offer. We've negotiated the Right of First Offer on all the improvements at Yonkers, which sits only 15 miles away from you right now. There's all the improvements going on in Las Vegas, including the one we mentioned that $0.5 billion at Park MGM, et cetera. So there's a lot of different pathways for us to continue to grow even alongside sort of the deal pathway.

[Shaun Kelly:]

Great, thank you very much guys.

[Andy Chien:]

Thanks Shaun.

[Operator:]

[Operator Instructions] Your next question will be from Carlo Santarelli of Deutsche Bank. Please go ahead.

[Carlo Santarelli:]

Hi, guys. Thanks. Just a quick one to start, the 5.5 times pro forma leverage that was noted, is that number just strictly pro forma for the transaction? Or is that where you expect to exit 3Q?

[Andy Chien:]

That’s strictly pro forma for the transaction as we said today.

[Carlo Santarelli:]

Got it. And then just in terms of the Hard Rock deal, was there, and pardon me if this was in some of the documentation and I might have missed it, but was there a stipulation that regardless to finding an operator you had to close at a specific date?

[Andy Chien:]

We intended to close as quickly as we could. And regarded we were more than comfortable with the existing situation with the operator. So there was no – this was all part of the plan.

[Carlo Santarelli:]

Okay, understood. Thank you.

[Operator:]

The next question will be from John DeCree of Union Gaming. Please go ahead.

[John DeCree:]

Hey, James and Andy. My question is on something you had just brought up I think in a prior question, James, about the redevelopment of Monte Carlo to the Park MGM and that's $0.5 billion plus reinvestment that could be growth potential for you. I was wondering if you could talk a little bit how that could or would look for you in terms of folding that into the master lease. And if there's kind of, it's a wait and see of how it ramps or I guess, how do you – how should we think about that – what that opportunity might look like after it opens and ramps a little in terms of folding it into the lease?

[James Stewart:]

Well, that or any of the improvements that are done to properties that drive EBITDA above and beyond where they were sort of at the initial rent setting time. You could do, just as I'll just do a straw man with rough examples versus any one specific example, but say there was a project and I'll use round numbers, $100 or $100 million or whatever number you want to put at the end that it makes $20 million, to the extent that we purchased half of that additional $20 million as a rent stream, that will be $10 million rent stream in for us. And if we bought that now, no, I'll throw it at a price that we could never get, but a $10 million cap that would be a check coming from us for $100 million. That would mean the operator, and in that case would be our existing operator, MGM, would get a check for all of the money that they money that they've put in and still have $10 million of income above that rent numbers. So of course my just trying round numbers for you to do math but that's the kind of thing that I think of it when I look at some of these improvements and how it could be a joint win for both companies?

[John DeCree:]

Got it, and that’s helpful as a scenario. I wanted to circle back to some of the discussions about MGM and the potential of, at some point, selling or monetizing some of their owned assets like the Bellagio and MGM Grand. If you could talk a little bit about how you would balance, I think one of the pillars of valuation for you has been strong rent coverage and some of that coming from those own properties as well, some of the JVs and Macau at the MGM level. But would there be a scenario, would you be interested I guess at a high level the remaining assets or would you need to think about balancing your kind of expected rent coverage over time and to the extent you could talk about that a little bit?

[James Stewart:]

Well, it gets back to the growth versus security of rent stream discussion. And we're lucky we're sitting for it with a great hand on both fronts. I guess, all I would say is we always have in mind wanting to be an incredibly safe stock for anyone looking for great stability and predictability of earnings streams. And that a lot would have to go into the mix of figuring out exactly how one gets these deals done along with the meaningful enhancements that would come from bringing reasonably large transactions into the fold. So it isn't lost on us that we need to balance these two things of course. And I think under any scenario, we would always want to be very, very strong versus any other triple net on the security of front – rent stream front.

[Andy Chien:]

And to add to that, John, as far as you mentioned that, Macau, we're focused on domestic and that's one of the benefits of a tenant like MGM Resorts is that international operations that we will likely would not get involved in, nine terms of the real estate and that would add to the coverage that some of the other operators that are domestic only, wouldn't have that additional coverage and credit support.

[John DeCree:]

That’s helpful color. Appreciate the hypothetical questioner, but helpful to here how you guys think about it. Thank you.

[Andy Chien:]

Sure.

[Operator:]

And the next question will be from John Massocca of Ladenburg Thalmann. Please go ahead.

[John Massocca:]

Good afternoon. So does having Northfield in the TRS limit you from doing a similar type transaction where you don't have a tenant in place already? If you're looking to buy an asset?

[Andy Chien:]

John, it's Andy. So in terms of the TRS, there is a certain level that we can go up to potentially as far as how much we can have in the TRS. We still have pretty significant cushion on that front. Now do we plan to do everything in that structure? Probably not. This is unique. This is a very attractive asset that we are very comfortable with it, and ahead of price-specific timeframe that we wanted to transact. So that's how we ultimately structured this one, and we're happy doing so. Now other transactions going forward, we'll evaluate the structure but obviously, the long-term plan is to have the pure triple net lease structure and so that's how we'll kind of look at each deal and whether or not it's appropriate but there's no limit. I mean, there is a limit from a tax standpoint but we do have room.

[John Massocca:]

That sounds basically strategically and legally and another Northfield size and type transaction could essentially be done initially in the TRS?

[Andy Chien:]

Yes from that standpoint.

[John Massocca:]

And then kind of given the current position of portfolio, where do you ultimately want to see your geographic mix with regards to kind of regional versus Las Vegas? I mean, Empire is probably going to move you over 50% regional. And is that even something you guys really care about given kind of the nature and the length of your leases?

[James Stewart:]

Yes. I’ll tell you it is not a primary focus of ours at all. Any potential transaction that we look to underwrite, we really focus on the individual characteristics of that property and the market. And we like to back test it through the hard times we had starting 10 years ago and beyond that, if we can. And then run all sorts of different scenarios, thinking up what could happen if multiple different events occurred with us owning that property, the real estate of that property. And to the extent that we are very comfortable that the property as a whole is going to be able to pay the rent through thick and thin without any of us around here missing a single wink of sleep, then that's something we want to transact on. If that's something in Las Vegas, fantastic. If it's something in the regional market, fantastic. It isn't really a fundamental driving goal to get to any kind of split and where we sit right now at 50-50 with by absolutely a country mile the best assets in every region and the best assets in Las Vegas. We're very, very pleased with where sit.

[John Massocca:]

Make sense. That’s it from me. Thank you guys very much.

[Andy Chien:]

Thanks.

[Operator:]

[Operator Instructions] We do have a question. This will be from Komal Patel of Goldman Sachs. Please go ahead.

[Komal Patel:]

Hi, thanks for the question. I guess this is a bit similar to the rent coverage question earlier but I wanted to ask you about your target leverage range and kind of over the long-term does not having MGM as a majority owner in the future affect how you think about leverage? Or just – in other words, how do you kind of balance the value of MGMs ownership and support versus benefits to the diversification away from that concentrated tenant? So would you update leverage target potentially with these changes?

[Andy Chien:]

Hi, Komal. This is Andy Chien. As far as leverage, we've always target 5 to 5.5 times debt to EBITDA and that target wouldn't change whether or not MGM Resorts has an OP unit ownership or not and having their ownership I think is a benefit more from a gross standpoint as well as alignment of interest standpoint and doesn't have much bearing on where we target our balance sheet.

[Komal Patel:]

Okay, fair enough. And then just quick follow-up, on Rocksino, can you share what the split was between cash and revolver for the funding of the deal?

[Andy Chien:]

The revolver is $655 million, delayed draw term loan was $200 million and the balance was in cash.

[Komal Patel:]

Got it. Okay, all right. Thanks so much. End of Q&A

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to James Stewart for his closing remarks.

[James Stewart:]

I just like to thank everybody for continued support and look forward to speaking soon.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.