MGM Growth Properties LLC
Q2 2017 Earnings Call Transcript

Published: 8 Aug 2017

[Operator:]

Good day, everyone. And welcome to the MGM Growth Properties' Second Quarter 2017 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 listen-only mode. After the Company’s remarks there will be a question-and-answer session and please do note that today’s event is being recorded. Now I would like to turn the call over to Mr. Andy Chien.

[Andy Chien:]

Thank you, William. Good morning and welcome to the MGM Growth Properties second quarter 2017 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 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 as 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 second quarter 2017 conference call. As we move beyond our inaugural year as a public company, our team here has been hard at work to continue delivering value to shareholders. During this quarter, our fixed-rent escalator went into effect, increasing our based-rental revenue by $12 million and due to our predictable cost structure, much of this increase flowed straight down through AFFO. Given that, our board approved another increase to our dividend to $0.395 per share for an annualized $1.58 per share dividend compared to $1.55 per share previously. Since the IPO, we've increased our dividends twice for a total increase of 10.5%, and we're constantly looking for ways to enhance value for our shareholders in a sustainable way. In addition, we continue to analyze growth opportunities that fit within our portfolio and remain committed to executing on transactions that make sense to our shareholders and MBP. From gaming to non-gaming, we've added number of potential opportunities coming across our desk recently. We remain very disciplined and prudent in all of these processes. And when we enter into a new transaction, it will be within the parameters which we have been communicating

[Andy Chien:]

Thanks James. I’ll now provide highlights for a few items and our financial results for the quarter starting with the income statement. For the second quarter, we recognized $163.2 million of rental revenue on cash rental revenue of $165.4 million. This is based on annual rent revenues of $661.7 million for the second lease year. Net income was $43.9 million for the quarter, or $0.18 per diluted share and net income this quarter was impacted by property transaction charges of $10.6 million and the prior quarter $6.8 million. These are primarily related to write-downs of assets being taken out of services MGM due to periodic and ongoing redevelopment projects. This quarter’s charge is primarily related to the ongoing projects at Monte Carlo. Now in terms of adjusted EBITDA, $162.7 million for the quarter with G&A expenses of $2.7 million. Net interest expense for the quarter was $44 million and AFFO was $121.6 million or $0.50 on a per share basis. As James mentioned our second quarter dividend was $39.05 per share which represented $1.58 per share annually and in terms of payout ratio represented approximately 79%. In terms of our balance sheet our net leverage remains steady at approximately five times net debt to annualized adjusted EBITDA and as we demonstrated again this quarter our capital structure remains flexible and continues to improve. At the beginning of May, we were able to complete another repricing of our $1.8 billion term loan B to LIBOR plus 225, a 25 basis point improvement from the prior level and a 400 basis point improvement from what we put the term loan in place last April. We are also able to move LIBOR floor, which gave us an opportunity to improve our interest rate swap pricing by a few basis points as a result. And as James mentioned we have been seeing a wide range of opportunities come across our desks recently, and our balance sheet remains well-positioned to execute on these opportunities. We remain consistent in underwriting approach and prudent in our capital allocation strategy, since it's a long-term value of any potential acquisitions. Overall, our acquisition strategy as well as our capital structure strategy are underpinned by our goal of delivering long-term, sustainable growth. With that, operator, we would like to open up the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be Robin Farley with UBS. Please go ahead with your question.

[Robin Farley:]

Thanks. I wonder if you could just, really, give us your best guess of probability of the potentials with your transaction outside of MGM properties, sometime this year.

[James Stewart:]

Well, we have seen, I would say, a marked uptick in potential opportunities, some of which would probably not be MGM's couple of tea. We are constantly analyzing such things and trying to make a determination as to whether or not we think will be value enhancing for us, and many of those would involve or any of the ones that were not MGM's cup of tea, would involve another operator. I don’t want to give any kind of probabilities, et cetera, because everyone is so unique in its own nature. But we're pretty aggressively pursuing some of these, so I remain hopeful that something will come over the finish line.

[Robin Farley:]

And maybe just any color you have on whether, you think the Pennsylvania market any risks to – other competition and your competition at Pennsylvania make that market not your cup of tea, right now? I guess…

[James Stewart:]

I wouldn't say anything so definitive as that, it is. It’s a very big market with a number of great properties in it. Clearly, the uncertainty around the regulatory framework makes it a little harder for us to analyze the properties there. But they have a number of fantastic properties there in a big state that would generally fit our parameters and I guess I'd leave it at that, unless you have anything to add to that.

[Robin Farley:]

Great. Thank you.

[James Stewart:]

Thanks Robin.

[Operator:]

And our next questioner will be Rich Hightower with Evercore ISI. Please go ahead.

[Richard Hightower:]

Hi, good morning to you guys.

[James Stewart:]

Hi Rich.

[Richard Hightower:]

Couple of questions to you. So first, regarding National Harbor. I think you guys have been out there publicly before talking about sort of a loose target of a 4Q possible acquisition date, in terms of the ROFO with MGM, just wondering, if you have any updated timing on that, or any other thoughts since, maybe, last quarter?

[James Stewart:]

Well we've been pretty consistent in telling the market that we thought – we'd start taking a very hard look at that come Q3, Q4 this year. We've been watching the property pretty closely and watching the ramp and I think, have a good handle on what's going on. And just given both MGM's and MVP's interests, I would have to say that I think that we're still on target with our prior statements to something in the back half of the year is probably a good time to transact, just given all the different myriad of things that one has to look at in considering that. So no real change from what we are communicating here all along.

[Richard Hightower:]

Okay. Thanks for the change. And then my second question, as you think about potential third-party acquisitions, and we've seen the share price appreciate pretty dramatically since the IPO, I'm just curious for your view on the posture of potential sellers. Has their behavior changed vis-a-vis your cost of capital, and maybe the cap rate, let's say, at MGP could afford to pay today versus what might have been possible around the time of the IPO? And have you experienced any retrades, or anything along those lines?

[James Stewart:]

Well, people that are the management and ownership of the facilities in this industry are typically very savvy in terms of calculating what they think they're own properties are worth, and what they think we could pay. So as our own cost of capital has changed, it's not lost on them that just the potential to pay more. But just like anything, the fact that you could doesn't mean that you should. We really analyze every single one on its own and I think the posture of sellers hasn't – potential monetizes, I would say, hasn't really changed, except that many of them are savvy, sophisticated businesspeople and a penny doesn't roll by that they don't try to grab. So they will try to ask as much as they can. So we try to pay as much as later we can and somewhere between that as deals get done.

[Richard Hightower:]

All right, thanks for that color.

[James Stewart:]

Thanks Rich.

[Operator:]

And the next question will be Carlo Santarelli with Deutsche Bank. Please go ahead.

[Carlo Santarelli:]

Just two and I’ll ask the first one, which is a little bit quicker. With respect Andy, to the property transactions, is that something that you kind of expect to go away as we move towards the year? Or is that something we should kind of continue to think about is being a couple million dollars?

[Andy Chien:]

Like the remodel and rebrand in Monte Carlo into the park MGM is a large feel project and very complex, and property transactions will likely be a result of various actions that occurred as part of that project. Given the scale and complexity of it, be difficult item to forecast go forward. But it will come and go as the project continues. But that's probably not the last project that MGM undertakes of properties within the MGM portfolio. So there's go-forward, there will be an amount there, and the quantum will vary quarter-to-quarter.

[Carlo Santarelli:]

Great, and then just in terms of your thought process around the deal, and let's think it about from the perspective of any transaction that does not include MGM, would you guys be willing to do something similar to what GOPI did with the Meadows, i.e. make an acquisition and then subsequently look for an look for an operator, which you kind of require now operator at the table at the time of completing the transaction?

[Andy Chien:]

I think we would strongly prefer the last year, because one we don’t want to add the volatility into our earnings stream of owning the property outright, really for any period of time. Two, I think that the predictably of what operator would pay becomes less predictable if you do that kind of scenario, because it's just not clear to me that the auctioning offer. However, you look around for operator holding facility is going to be one that maximizes value. If we could, we would far rather prefer to have something set up ahead of time. So that we both party’s really what they’re getting and I appreciate with that way.

[Carlo Santarelli:]

Great, thanks guys.

[Operator:]

And the next question will be Dan Donlan with Ladenburg Thalmann. Please go ahead.

[Daniel Donlan:]

Good afternoon. Good morning. Just kind of curious if you could talk about maybe the pipeline in terms of – investment pipeline in terms of non-gaming kind of versus gaming, you talked about an uptick. Is that more just on the gaming side, or have you seen kind of maybe, some non-gaming stuff progress as well.

[James Stewart:]

No, I would say it’s both categories. There has been – I think lot of it just function of economy and stock prices, interest rates, all these types of things that people have been sitting on properties for period of time, become more interested monetizing, because things feel good right now. So it’s been across the board, gaming properties, big integrated resorts to other leisure assets and so on.

[Andy Chien:]

Dan, I think just given that previously, there was a various finite or a set, universe of breeds and other entities that would be interested in these types of properties, now that we've been out a little over a year. The various entities that are looking to sell the real estate, they realize that we're out there. So we're getting a lot of those calls. We're in and around those conversations and being at the various conferences, talking to those would-be sellers of real estate, across the board. So I think part of the pickup is just familiarity with our name and our desire to look at transactions.

[Daniel Donlan:]

Okay. That’s helpful. And then maybe on kind of to your housekeeping questions here. What's the thought process behind – I realize that you could be on the cost of a large transaction, but any thought around, potentially, paying down the term loan with the cash that you have? And then just maybe re-cashing that upon acquisition or something? Or any thought process there would be helpful. It is a little bit drag of on FFO, I'm just kind of curious on your thoughts.

[James Stewart:]

Yes, I think your first since there, Dan, is right on the head as far as – I think, as we look at the opportunity to pay that down and to increase the amount of fixed versus floating, primarily through transactions and to the extent we have an upcoming use of cash, I would prefer to deploy that towards the acquisition to the extent we can kind of upsize any kind of fixed-rate debt issue as part of those transactions, we look at the opportunity to paydown some of those term loan B.

[Daniel Donlan:]

Okay. And then, maybe, if you could update us on your conversations with the rating agencies, kind of, potentially, moving to investment graded in that category, that would be helpful as well.

[James Stewart:]

Certainly. Over the past few conversations, it's been pretty consistent as far as where we sit relative to MGM. And as MGM improves, and they have been improving, I think, we will follow soon and so as far as trying to push, kind of, an advanced of MGM going investment grade, we continue to do that. Although, we're at least being told that there is somewhat of a kind of a ceiling as a result of the percentage ownership of the ownership. So for the time being, we're cheering on MGM and their investment-grade desires, and I think we'll follow this very shortly behind that.

[Daniel Donlan:]

Okay. And then just maybe lastly on G&A run rate. You kind of looks like you've been averaging somewhat $2 million, $2.4 million a quarter here. If you were to require something in the back half, would that have any type of impacts? Is it maybe a $0.5 million a quarter? Just any thought process around kind of G&A and how that may move towards the back half of the year and maybe post-acquisition would be helpful.

[James Stewart:]

Certainly. Most of the G&A, we try to put in there is more or less, the recurring aspects. When we did Borgata, we called out what was considered acquisition related expense, and to the extent we move down the road and get further along, and any of the acquisition-type processes, we'll be able to kind of re-cash. Those aspects of G&A is acquisition related. So we'll evaluate that each quarter, and we'll try to call that out as we proceed.

[Daniel Donlan:]

Okay. So come just $2.5 million to maybe $3 million is a good gate rate, regardless of -excluding acquisition costs, you feel that on a go-forward basis right now?

[James Stewart:]

Yes, I think as far as an annual number, at IPO, I think, we were anywhere 10 to 15 and we are still pretty comfortable in that range on an annual base.

[Daniel Donlan:]

Perfect thank you very much. Appreciate it.

[Operator:]

And the next question today will come from John DeCree with Union Gaming. Please go ahead.

[John DeCree:]

Yes, guys, thanks for the question. Just wanted to, James, kind of update the parameters on the kind of $40 million EBITDA threshold that you've spoken before today and in the past. I'm just wondering, a little bit more specifically, if that would be a hard threshold or might you consider, perhaps, an asset that's a little below that but has opportunities to get above that with, perhaps, the right operating partner? And then second part of that, if a small portfolio of assets could kind of get you to that threshold, or if it's more a single-asset threshold?

[James Stewart:]

Sure. It is a self-imposed soft target and it really it’s developed out of a number of factors but a couple of them all highlight one is just to make a difference on a $10 billion enterprise value company you have to have something that's reasonably sizable and getting through a transaction is a lot of work and if you spend your time on ones that are very small you don't get much bang for your buck and you might miss out on one that that would really move the needle. So that was one component of it. And the second is with larger properties you know typically come the broader customer base et cetera a broader range of total market and that is in our estimation the property higher degree of stability than one that is smaller. So those are two things are really we really look for. Now that said it's certainly not a hard line. If something was a little lower and we really like the property we wouldn't say no to looking at it and certainly if there was future upside due to the operator of the regulatory environment there whatever you know it isn't so hard and fast. So we would want to look at all those types of things, but generally speaking if it is something that’s going to move the needle and we feel it's stable it's not going for us.

[John DeCree:]

That’s helpful. And I guess, perhaps, a subjective question on the types of deal flow that you're seeing and a couple questions today about the improvement in your cost of capital. Would you think a lot of the inbounds you're getting are from really serious potential sellers or are you seeing, maybe, perhaps, a greater mix of folks that might just feel opportunistic and testing the potential opportunity, given where your cost of capital has improved to? Just kind of your color on the real deal flow that you're seeing relative to maintenance.

[James Stewart:]

Yes. I would say it’s really more along the line of the former. The latter, we got – that's a part of the constant discussion that we have of certain people. We're just kind of trying to figure out where something might get done, et cetera, but don't really have a strong desire. We were talking about, in terms of our prepared comments, it's really more along the former line of – I think, people who are pretty serious about wanting to get something done.

[John DeCree:]

Got it. And last one for me. A lot of focus on the opportunity with MGM National Harbor, given the commentary that could be in the back half of this year, but wanted to gauge kind of a longer-term view and the other potential opportunities for you guys within the MGM and their partners' network. Is there anything else that should be on the radar? Maybe, excluding MGM Springfield, given that's a ROFO opportunity as well, but anything else, capital improvement project or maybe, typical acquisition that might or should be kind of on the radar for us to be thinking about, potentially down the line?

[Andy Chien:]

John, I think, you hit him on the head as far as Springfield being the next sizable opportunity as a National Harbor. There are some capital improvement projects that are underway as kind of related to as far as Monte Carlo, the Park Theater, and that has yet to come to completion as well. So there's other things that MGM is working on that we continue to look at. But Springfield is probably the most obvious that comes to mind, and the timing of others are still a bit up in the air. But we'll continue to evaluate as the projects continue.

[John DeCree:]

Thanks Andy, thanks James. Appreciate the color.

[Operator:]

And the next question today will come from Patrick Scholes with SunTrust. Please go ahead.

[Patrick Scholes:]

Hi, good morning here.

[Andy Chien:]

Hi Patrick.

[Patrick Scholes:]

There is certainly speculation out there that there's going to be another gaming REIT coming out. And I'm just – in that regard, its looks they may have a bit more leverage than you, folks. I'm just curious, sort of a high-level question for you folks, what convinced you that 5, 5.5 times leverage over the past years, is the right level to be at? And have you – did you consider a more leveraged capital structure at one time and why did you not choose that?

[James Stewart:]

The way that we came around our own targets was really based on our cumulative experience in dealing with REITs, REIT investors over a multiyear period. And these structures, unlike a C Corp, are unable to retain much capital. You have to pay out 90% of their net income to investors in the form of a dividend, in order to maintain your REIT status. So you never can build up some big war chest of cash or shock absorbers, so on. So given – so the way that you pay down debt is effectively through, maybe, saving a little bit of cash and then doing equity offering. So given that, we thought – well, now you make one other point, which is in our discussions, as breed investors levered REIT equity, has never been something that, in our view, attract sort of the premium REIT investor, and which is – who we were going for. So given those things, we thought the right level is within our 5 to 5.5 times range. It is a judgment call, and it's kind of gray around the edges of that, but – meaning, is 5.6 the number, 5.5 or 5.4? You can never make such a call with such granularity and frankly, just due to markets in well conditioned, it probably changes every day by a little bit. But that's the primary reasons behind our own thought process, unless, Andy, you want to add anything?

[Andy Chien:]

The only thing I’d add to that is cost of capital is extremely important for all reasons and remains competitive in the acquisition environment. That cost of capital is near and dear to us from a debt and equity perspective, because each transaction that we do will be in the capital market. So keeping both markets at their most optimal and efficient for a REIT is to not have that high leverage. When the market sneezes, the high-leverage names start to suffer first, and there's a flight for safety. So we want to be that safety. And that's where we felt this 5 to 5.5 times would be.

[Patrick Scholes:]

Great. Very clear. Thank you.

[Operator:]

And the next questioner today will be Shaun Kelley with Bank of America. Please go ahead.

[Shaun Kelley:]

Hey guys, good morning. You have covered plenty of ground. So I'll just try and keep it fairly short. First one was on National Harbor. Is there any way in whatever structure you guys are looking at or considering that to, sort of, account for future stabilization? And is that something you guys are pretty actively thinking about, in terms of, if the product is – if the project is not fully ramped up yet, preserving some of the upsides or some sort of revenue share, something? How are you thinking about structuring?

[Andy Chien:]

Yes, Shaun we look at all of that. I mean we look at what the – yourself, the analysts are going for the property go forward. And clearly, what the potential it might have. But we also take into account that more likely or not, this will be part of the mass releases and so we have the additional MGM properties and the cash flow generated by some of the non-lease properties, the dividends and cash flows from the joint ventures that contribute to the safety and security of the mass lease as a whole as part of our analysis as well. So there's – it's multifaceted, and we aren’t looking only at this quarter and next quarter, but it’s – all of those factors combined.

[Shaun Kelley:]

So Andy it’s not a last point then does that mean, in theory and again, appreciate all of this is going to be subject to negotiation with you and MGM. But in theory, would you be willing to accept slight lower – possibly a lower theoretical rent coverage on a single asset like this? If a, you though there's room to ramp; and b, you have the cross guarantee, because it's part of the mass releases that's sort of the read there?

[Andy Chien:]

Broadly speaking there's other factors, but those definitely help.

[Shaun Kelley:]

Okay, great. My second question would just be, after the MGM earnings call, we've gotten a few questions about some of the original deal and going back to Bellagio and MGM Grand in the future of those properties as it relates to MGP, could you just remind us – I know it would be helpful to people if you could just remind us, when the deal was originally reached, and you kind of shows, which properties were chosen to include both in the REIT and not. Could you remind us a little bit of why Bellagio and Grand were excluded and how that might impact a future potential around those assets.

[James Stewart:]

Sure. So there was a number different factors that came into play in terms of China determent what property should be within MGP or not and one of the major ones, it was just the absolute size of the Company’s revenue stream. So we wanted to come out with around $530 million of revenue and the reason we want to come out with that size was a number of different things, but one big one was just availability of public equity and debt dollars in order to capitalize a company of that size. So if you recall back to 1.5 year-ago to April of last year, this is was the first billion dollar IPO that had been done since October of year before, the capital markets, especially the equity markets, it was nearly seized up and shutdown mode. And the confidence level of all the underwriters around this deal was not as high as it normally would be if they had had a number of different transactions in which they could test the market. So just raw availability of capital dollars was a component was of why we wanted to get to around $550 million. So given that we have to decide what properties now go in? Bellagio is doing, at the time say $400 million to $500 million of EBITDA. So if we had put that property for example into MGP, it would become by far the largest property in the entire portfolio, in terms of contribution of EBITDA and folks like yourselves would be calling us stressing over whether or not RevPAR was up about one month and down 10 to next month and what happened and things like that. And so we thought it could just become the Bellagio REIT. With the other properties, we sort of chose between the MGM Grand and Mandalay, they were doing around the same numbers, but also if we put them both in the concentration for both those properties to be very high. So the circus sits on a very large acreage like the 110 or 115 acres and probably that the value with which that land and so on is worth would be higher than what we would be able to pay for it on a cash flow basis and we're not really a land buyer. So those are some of the reasons. The other reasons had to do with tax situation. These are taxable transactions to MGM, and they wanted to try to minimize the tax bite of all of these things as well as just from the MGM side, right. They have their own reasons in terms of they may want to do with these different properties in the future and so on. So those are some of the key reasons I think in terms of why we put it in. Andy, anything else?

[Andy Chien:]

I think about covers it.

[Shaun Kelley:]

Okay, thanks guys. This is really helpful color.

[James Stewart:]

Thanks Shaun.

[Andy Chien:]

Thanks Shaun. End of Q&A

[Operator:]

And this will conclude the question-and-answer session. I would now like to turn the conference back over to James Stewart for his closing remarks.

[James Stewart:]

Thank you all for joining our second quarter 2017 earnings call. We want to thank all of our shareholders for their continued support and look forward to seeing you throughout the next quarter.

[Operator:]

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