MGM Growth Properties LLC
Q4 2016 Earnings Call Transcript

Published: 16 Feb 2017

[Operator:]

Good morning, and welcome to the MGM Growth Properties’ Fourth Quarter 2016 Earnings Conference Call. Joining the call from the Company today are James Stewart, Chief Executive Officer, and Andy Chien, Chief Financial Officer. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the call over to Mr. Andy Chien. Andy Chien.

[Andy Chien:]

Thank you, Kate. Good morning, and welcome to the MGM Growth Properties fourth quarter and full year 2016 earnings call. This call is being broadcast live on the Internet at www.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 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's Fourth Quarter and Full Year 2016 Conference Call. 2016 was the year, which contained a number of significant milestones for the Company and I’d think it's fair to say we delivered on everything we talked about with investors during our IPO road show. We completed our initial public offering on April 20, 2016. We priced the IPO at the high-end of the range and closed our first day of trading up 5%. About 40 days after that, we announced the acquisition of the real property of the Borgata, which we closed in August. That transaction grew Company rental revenue by 18% and AFFO and our dividend by over 8%. We issued a 10-year bond a couple of weeks later, at a 4.5% rate, which was amongst the tightest rates ever achieved for a Company with our rating. In October we repriced our term loan B initially saving 50 basis points. Then upon receiving a ratings upgrade in February, saved an additional 25 basis points for a total savings of 75 basis points on our $1.8 billion term loan B. We have further strengthened our balance sheet to support our business model through swap transactions to fix out a larger portion of our floating rate exposure resulting in approximately 75% of our debt now being fixed. As a result of careful Capital Management, if you step back and look at the balance sheet through a combination of the rating agency upgrades, bond issuance and swaps. We have both reduced our cost of debt and strengthened our balance sheet. We continue to be active evaluating transactions of both MGM Resorts and new potential operators as well. We are encouraged by MGM’s financial results and also by the successful opening of National Harbor a property on which we have a right of first offer. MGM’s financial results continue to strengthen not only MGM’s balance sheet. But our financial credit profile under the master lease as well. We added a third independent Director earlier this year in Bob Smith formerly with T. Rowe Price. He is a highly regarded leader in the investment community with a tremendous background. And we look forward to working with Bob as our new Board member. We are pleased with the Company's accomplishments in 2016 and remain focused on continuing to execute on our strategy to sustainably grow our AFFO and dividend. The Company is currently in the strongest position since we went public last year and has many unique competitive advantages as a result. Ranging from our attractive cost and access to capital, our low leverage level, our scale and our historical relationships and expertise. Our focus remains on domestic assets with gaming as a primary focus but remain open to other leisure assets as well. Our universe of targets remains robust and we anticipate that over time we will have multiple tenants. We have the framework in place, conversations and process and commit to responsibly growing the Company, our AFFO and ultimately dividend. I will now turn it over to Andy to discuss our financial results.

[Andy Chien:]

Thanks James. I’ll provide a few highlights on items in our financial results for the quarter starting with the income statement. For the fourth quarter, we recognized $163.2 million of rental revenue. This is based on our first full quarter of rent at the $650 million level, which includes Borgata for a full quarter. Adjusted EBITDA was $159 million for the quarter, with G&A expenses of $3.4 million. Net interest expense for the quarter was $43 million, which accounted for a full quarter of our 10-year unsecured notes, which were issued in August but also the repricing of the term-loan from LIBOR plus 3.25% to 2.75% effective on October 14. As well as interest rate swaps that we entered into on December 06. FFO was $114.8 million or $0.47 per share. AFFO was $118.7 million or $0.49 per share. Our fourth quarter dividend was $0.3875 per share, which represents a $1.55 per share on an annual basis and for the fourth quarter represented a payout of approximately 79% of AFFO. In terms of our balance sheet, we continue to position our balance sheets to improve our capital structure efficiency and flexibility, which we believe will improve our cost and access to capital to ultimately drive shareholder value. Our net leverage remains steady at approximately 5.2 times net debt to adjusted EBITDA. As James mentioned interest rate swaps that we entered into during the quarter and subsequent to the quarter helped ensure the predictability of our AFFO and dividend. As our fixed floating ratio is now approximately 75% fixed. But the repricing of our term in October, our term loan rate initially went from LIBOR plus 3.25% to LIBOR plus 2.75% but with an additional step down that was negotiating in an event of our ratings achieving Ba3 and BB- or better. And subsequent to the quarter on February 02, we were able to obtain this rating level with an upgrade by Moody's to Ba3, which put into effect additional step down in our term-loan pricing, which is now LIBOR plus 2.50%. In total a 75 basis point saving from where we started the fourth quarter. The sum total of the repricing and subsequent ratings upgrade will save approximately $14 million per year. We gave some of the savings back to fortify our balance sheet from interest rate moves. In summary, we have better aligned our capital structure with our long-term strategy. We continue to have a conservative leverage profile and improving tenant credit profile excellent liquidity and continued access to capital, which all bodes well for our strategic and financial goals. With that I’d like to turn it back over to James.

[James Stewart:]

Thanks Andy. I’d like to thank all of our investors for their continued support and look forward to hosting many more of these calls going forward. With that Kate we'd like to open it up for questions.

[Operator:]

[Operator Instructions] The first question comes from Shaun Kelly of Bank of America. Please go ahead.

[Shaun Kelly:]

Hi good morning guys. Just wondering as we think about sort of the near term or medium term acquisition landscape, as the tax situation starts to move influx probably both for individuals and corporations. Do you think that has any impact, or what are your thoughts on how that might impact potential seller behavior?

[James Stewart:]

Hi, its James. I think it's probably still too early to really know, given that the rules are influx but on a couple of points that we were very interested in and didn't look at them now just from this early stage of vantage point. There's been a lot of discussion around like kind exchanges. We don't see that is really impacting us particularly because we can provide OP units to any would be seller who wishes to defer taxes. So you know I don't think that's going to be a big impact. And then on the cash flow front to the extent that someone can and expense all of their capital expenditures immediately as opposed to having to recover those costs overtime through the form of depreciation, our structure is actually going to be on the margin beneficials for that person because in a triple net structure, we don't really pay any CapEx and the operator is responsible for it. So to the extent that the REIT was paying the CapEx and then that tax shield would just be lost in the tax reform and in this structure on the margin it's still beneficial. I would say it's still too early to tell. We're looking at it pretty closely. We'll see where it goes.

[Shaun Kelly:]

Thanks very much.

[Operator:]

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

[Thomas Allen:]

Hey, has there been a change in tone in terms of your conversations with potential sellers since the election. Thanks.

[James Stewart:]

I would say the answer is not really. It's basically similar in terms of tone there is uncertainty around what might happen. Shaun just had it around taxes and other potential policy changes but I would say that tone has remained basically consistent.

[Thomas Allen:]

And has anything changed in terms of your thoughts on potential timing around National Harbor. Thanks.

[James Stewart:]

Now we couldn't be more pleased with how our National Harbor is opened up. We still are in the early stages of trying to assess what ultimately that property will do as we heard on the MGM call. So timing would still be likely back half of this year. Realizing of course there's a lot of guesswork in giving that estimate but that's where we sit now in terms of our best thoughts.

[Thomas Allen:]

Great thank you.

[Operator:]

The next question is from Rich Hightower of Evercore. Please go ahead.

[Rich Hightower:]

Hi, good afternoon guys.

[James Stewart:]

Hi Rich.

[Andy Chien:]

Hi Rich

[Rich Hightower:]

So couple of questions here. First question for Andy. Congrats on the repricing of the debt and the ratings upgrade. Do you guys have an idea of where in MGP’s debt shakes out in terms of spreads versus the base rates et cetera against what other net lease REITS have on their balance sheets today.

[Andy Chien:]

Certainly we, that’s something that we continue to evaluate as far as where we can improve the balance sheet. We do have a – still have a continuing floating rate component as I mentioned. We still have about 25% of it floating. We don't have an opportunity to re-price until probably sometime in the second quarter to the extent that's available. But longer term we would move towards more of a fixed rate balance sheet and so through acquisitions and through other refinancings we would probably go into the unsecured market for the most part. And as you probably saw in August where were priced the 4.5% 10-years, that's definitely traded a little bit wide since then. So if you kind of looked on a market basis for that 10-year money is probably in the 5% for where we are today versus there's another net lease company that might be investment grade, might be 75 or 100 basis points inside of that. So longer term we're going to work towards a better investment, better rating and ultimately when MGM achieves an investment grade rating we hope to be also in that neighborhood to claim that advantage.

[Rich Hightower:]

Okay great. Then second question back on the topic of transactions. I think one element of this thesis at the time of the IPO was that, with the introduction of a second gaming and leisure focused REIT out there. With currency to buy real estate you might be able to bring more sellers into the fold with price discovery and so forth. Have you noticed an uptick in the number of potential sellers out of the universe of transactions, you're evaluating is that sort of played out as expected.

[James Stewart:]

I think that it has I think that people looking to monetize either part or all of their assets that fit our profile do feel more comfortable because there are at least two, real estate players looking at the assets and I think that it has increased their relative comfort level.

[Rich Hightower:]

Okay thanks.

[James Stewart:]

Thanks Rich.

[Operator:]

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

[Robin Farley:]

Great thanks, kind of a similar topic. What would you say is likelihood of a transaction involving a property outside of MGM, in other words what specifically you may do something before National Harbor, kind of at the end of this year. Would you, if you were to put odds on that?

[James Stewart:]

Well it is not going to go as far as that. But we have a list of potential acquisitions that I think would all be well received and are attractive. We are in conversations on many of them. Whether the conversations result in something occurring before National Harbor or not we'll have to see. In anything, any transaction that we're looking at there's gives and takes from buyers and sellers. And the way that things move along takes its own pace. So we are always looking for ways that we can sustainably increase the AFFO and dividend. And if that can happen before National Harbor terrific. But if we wait till after National Harbor because we think that's the right thing to do for our stakeholders then we’re going to do that as well.

[Andy Chien:]

And Robin I’d just add that it's fair to say that transactions that we're looking at do include transactions that would be with third party sellers, with potentially third party operators as well as opportunity with an MGM, included that we have many different avenues in which we could grow here.

[Robin Farley:]

Okay great that's helpful. And then for National Harbor, do you have an expectation about what that EBITDA level might ramp-up to from kind of what the initial weeks have been.

[James Stewart:]

Having just listened to the MGM call I will defer to Jim and Dan to give you guidance on that one.

[Robin Farley:]

Okay, alright thank you.

[Operator:]

The next question is from Joe Greff of JPMorgan. Please go ahead.

[Joe Greff:]

Good morning guys. A lot of questions and topics have been exhausted but one final one from me. How do you think about growing the dividends from here absent any M&A. We modeled that you guys will grow AFFO little over 4% a year is that enough growth for you to grow the dividend.

[Andy Chien:]

As far as the dividend, I think we've stated in the past, I would like to be in a 75 to 80 kind of high 70’s to 80% AFFO payout ratio. As I mentioned we're at about 79% in Q4. Q1 assuming the same level of dividend would be pretty similar, our first escalator would kick in April 01, in which case Q2, we would begin to start see that AFFO payout ratio is going to come down a little bit into the mid to high-70’s. And so from that point forward I think we're going to start evaluating whether or not we want to adjust the dividend on that basis and that's something that we’ll be discussing with our Board to make that determination if we think that is a prudent move absent M&A as you mentioned.

[Joe Greff:]

Great thank you.

[Operator:]

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to James Stewart for any closing remarks.

[James Stewart:]

Thank you Kate. I would like to thank all of our investors for their continued support. We look forward to hosting more of these calls. Thank you.

[Operator:]

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