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Edited Transcript of MGP earnings conference call or presentation 30-Apr-19 4:30pm GMT

Q1 2019 MGM Growth Properties LLC Earnings Call

Las Vegas May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of MGM Growth Properties LLC earnings conference call or presentation Tuesday, April 30, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andy H. Chien

MGM Growth Properties LLC - CFO & Treasurer

* James C. Stewart

MGM Growth Properties LLC - CEO

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Conference Call Participants

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* Barry Jonathan Jonas

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Carlo Santarelli

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Scott Adam

Nomura Securities Co. Ltd., Research Division - Research Analyst

* John G. DeCree

Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research

* John James Massocca

Ladenburg Thalmann & Co. Inc., Research Division - Associate

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* Richard Allen Hightower

Evercore ISI Institutional Equities, Research Division - MD & Research Analyst

* Richard Jon Milligan

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robin Margaret Farley

UBS Investment Bank, Research Division - MD and Research Analyst

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the MGM Growth Properties First Quarter 2019 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 this event is being recorded.

I would now like to turn the conference over to Mr. Andy Chien. Mr. Chien, please go ahead.

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [2]

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Thank you. Good morning and welcome to the MGM Growth Properties First Quarter 2019 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 will now turn it over to James.

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James C. Stewart, MGM Growth Properties LLC - CEO [3]

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Thank you, Andy. I'd like to welcome everyone to MGP's first quarter 2019 conference call.

A little more than 1 week ago, we celebrated our third anniversary as a public company. We've accomplished what we told our investors that we would do at that time and if you had invested in $10,000 in the shares at IPO, that investment would be worth approximately $17,800 today. This represents a return of 78%, which exceeds the return of the NASDAQ Index, the S&P 500 Index and the RMZ REIT Index over the equivalent period.

We have completed over $4.7 billion of acquisitions, increased our annualized cash rental revenue from $550 million to $946 million and returned value to shareholders with a 30% increase in our annualized dividend.

We are building on the momentum of the last 3 years and believe the future will bring continued success and growth to MGP.

On January 29, we completed the acquisition of Empire City Casino's real estate assets for $625 million, expanding our footprint to the New York City Metropolitan area. This transaction increased rental revenues under the master lease by $50 million and provided us with an additional growth opportunity with the right to first offer on future gaming developments at the property.

On March 7, we completed the transaction for the renovations undertaken by MGM Resorts at the Park MGM and NoMad Las Vegas property for a total consideration of $637.5 million. We funded the transaction with approximately $606 million in cash and the issuance of approximately 1 million Operating Partnership units to MGM. As part of this agreement, the annual rent under the master lease increased by another $50 million.

Subsequent to the quarter end, we completed the sale of the operating assets of Northfield Park, the dominant asset we acquired in the state of Ohio, to MGM and added Northfield to our master lease. This transaction increased rental revenues by $60 million. MGM funded its acquisition with approximately 9.4 million Operating Partnership units that we redeemed. The redemption of the units enhanced our AFFO accretion without a meaningful impact to our leverage or our shareholder liquidity.

Our third consecutive rent escalator went into effect on April 1 of this year, increasing rent by another $16 million. Our top priority remains to sustainably grow our dividend and create long-term value for our shareholders. Our rent is supported and backed by our master lease and from the significant operational and financial strength of our tenant, MGM Resorts, the $15 billion market cap company, which guarantees our rent.

We continue to evaluate multiple opportunities that fit within our criteria on the M&A front and continue to be very optimistic about the growth prospects available to us.

I will turn it over now to Andy to discuss our financial results.

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [4]

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All right. Thank you, James. I will now provide some highlights for a few items in our first quarter financial results.

We recognized $196.9 million of rental revenue on a GAAP basis or $204.7 million on a cash basis. Net income was $66.4 million for the quarter. G&A expenses were -- for the quarter were $4.2 million, which included approximately $500,000 of cost incurred for transactions that are not signed or closed in the quarter. As a result, adjusted EBITDA and AFFO were $223.9 million and $163.8 million, respectively.

AFFO per share for the quarter was $0.57. Our TRS, the Northfield Ohio property, earned $22.8 million of adjusted EBITDA, which is after $2.7 million of management fees and license fees paid.

Northfield Park, the largest gaming property in Ohio, continued its success hitting on all cylinders. Hit a Q1 record for coining the OP revenue, operating revenue and adjusted EBITDA. This asset is another great addition to the master lease portfolio and we look forward to the property continuing to improve on its momentum with MGM's operational expertise.

The company this quarter also adopted ASC 842 for lease accounting as of Jan 1. Accordingly, the master lease for which we are the lessor continues to be classified as an operating lease. Additionally, on the balance sheet that accompany, it is also a lessee under certain ground leases on our properties, which we continue to be reimbursed through the master lease. As a result of this adoption, we recorded an operating right-of-use asset and a related operating lease liability on our balance sheet.

On the income statement and tenant reimbursements and principal expense line items, we will only record these ground lease reimbursements and payments going forward. The leases remain triple net. There are no changes from a practical or actual cash payment on any of these line items.

Lastly, we also recorded a lease incentive asset related to the Park MGM transaction. The amount recorded on the balance sheet represents a consideration paid less a portion of our existing deferred revenue balance.

For the first quarter, our dividend increased to $0.465 per share, which represents $1.86 on an annualized basis and a 4% increase from the prior annual rate. On the balance sheet side, this quarter, we also successfully raised $750 million in senior notes and completed our second follow-on equity offering for total net proceeds of approximately $548 million.

Today, we also entered into an at-the-market equity distribution program, or otherwise an ATM program, which will allow us to offer and sell up to an aggregate volume of $300 million of primary shares from time to time. We'll be using the cash proceeds from these primary share offerings with general corporate purposes, including to help fund future acquisitions and to repay indebtedness. These transactions allow us to maintain and strengthen our financial profile and increase the financial flexibility to provide us with a strong foundation to continue to explore and execute on a robust pipeline of potential opportunities. Pro forma of all the announced transactions and capital markets activity in the quarter, our pro forma net leverage will be at the low end of our previously communicated target range of 5x to 5.5x debt to EBITDA.

With that, I'd like to turn it back over to James.

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James C. Stewart, MGM Growth Properties LLC - CEO [5]

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Thanks, Andy. I'd like to thank all of our investors for their continued support over the past 3 years. And I would turn it over now, operator, please for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Shaun Kelley with Bank of America.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [2]

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Just wondering if you'd give us maybe the sort of obligatory kind of question on the M&A backdrop, just a little bit more color. I think in the quarter, obviously, a very large Strip asset has been -- I think in press reports has been indicated for sale, just kind of what's the pipeline look like, what's the level of kind of discussion activity? I know it's a hard one to answer.

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James C. Stewart, MGM Growth Properties LLC - CEO [3]

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We have a policy of not commenting on M&A situations. But I will say, things are as busy as they've ever been and a number of the assets, at least where we sit right now that we think could come up, are attractive for us.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [4]

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And sort of one of the other big developments in the quarter was sort of a new opco partner coming in that we haven't seen before into the sort of the gaming REIT landscape, sort of a not a public operator. Just curious on your thoughts at a kind of high level about available opco partners, and what you guys are sort of able to -- kind of what's the activity level on maybe the opco side or discussion level on the opco side. Are you seeing more interest from that perspective as well?

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James C. Stewart, MGM Growth Properties LLC - CEO [5]

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It varies. There are certain opcos which are very much in growth mode, and for those, we are a natural partner to assist in their growth. There are others who are more in monetization mode, where we could assist potentially on the flip side of that. And then there are others who I would say are more in harvest mode. But -- meaning, looking to reap the fruits of their labors by running the properties more on a cash flow basis.

So for -- there is a broad gamut, I would say, that we're not kept up at night with a lack of potential partners. There's a lot of people who want to grow and we feel pretty good on that front.

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Operator [6]

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Next question comes from Rich Hightower with Evercore ISI.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [7]

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I want to follow up on Shaun's first question there, maybe from a somewhat different angle. But as we think about the opportunity set that is currently available to MGP and you would include the drop-downs from MGM, Shaun referenced the Cosmo, Great Wolf is obviously on the market and there are some other sort of nonpublic, large multi-faceted leisure-oriented resorts currently on the market as well. I mean, it all adds up to multiple billions of dollars of potential opportunities there. And so how do you balance out that opportunity set from your perspective and then also the capital constraints in the sense that you don't want to impact the market for MGP's share price, for instance. So how do we balance all that out?

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James C. Stewart, MGM Growth Properties LLC - CEO [8]

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Well, I would say it is a very, very active time and it's keeping us all very busy. There's a number of opportunities, any opportunity for us, it would have to be accretive to value on a basis that doesn't lever us through our target range of 5 to 5.5, and assets where we are sure that they're not, again, going to keep us up at night over-worrying about whether or not they're going to pay the rent. So if all of those things get met and the asset has an enduring value that we like, the industry we understand, i.e., the leisure business or the hospitality business is accretive on a basis that doesn't lever us through our targets, those are things that we're going to want to look at, whether they are gaming assets or other land-based leisure assets.

As it relates to liquidity, I would say, as evidenced by some of the really significant IPOs, equity offerings, the stock market being at a record high and the debt markets being very open, there is a great deal of liquidity that we have available to us. And we're not really feeling any pressure on that front in terms of being able to accomplish what we want to accomplish.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [9]

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Okay. I appreciate that color, James. And then one housekeeping one for Andy. Just can you give us a clean view on straight lining effect on rents in a clean quarter going forward just for modeling?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [10]

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Sure. We could take that offline, Rich. But suffice it to say, the straight line number that you're going to see posted for Q1 obviously will have partial quarters because of the closings through the quarter. Q2 will have a run rate, the escalator because its cash steps up but the straight line will remain the same. So we can get through that offline.

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Operator [11]

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The next question comes from Carlo Santarelli with Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [12]

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Andy, I just wanted to follow up on one of the comments you made in your remarks, which was I think you said $5 million of costs that was in the EBITDA number for the quarter of things that weren't changed. Could we just first clarify that I'm not mistaken on that?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [13]

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$500,000 was the number for transaction costs that did not sign or close. Apologize if I said the wrong number.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [14]

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No, no, no. You probably did say $500,000, that's my fault. Okay. And then just in terms of as you look ahead here from a landscape perspective geographically, obviously the Strip, as mentioned earlier, has some stuff. When you look out into regional markets, what would you say that the recent move in equities as well as the move in your equity and what has positioned you guys from a more powerful equity capital position, have you guys maybe potentially in a situation where you could be more aggressive for some regional portfolios that might come up?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [15]

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Yes. I think as far as regional versus Las Vegas, we're looking for tenants that can pay the rent for 30 years effectively, right? So from a geographic standpoint, we like the markets here locally in Las Vegas, but we also like the regional markets. But at the end of the day, it's really the tenant that pays the rent regardless of the market. So we don't have a strong or a set strategy for a certain percentage, but we are looking for strong tenants under strong lease structures.

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Operator [16]

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The next question comes from Thomas Allen with Morgan Stanley.

The next question comes from Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [17]

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Another REIT this morning said they're exploring gaming deals. Just want to get your thoughts if another entrant helps or hurts you and the existing gaming REIT players?

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James C. Stewart, MGM Growth Properties LLC - CEO [18]

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Thanks, Barry. I would say there are very, very few asset classes on the real estate side where you have as few owners as you find in the integrated resort business. So we are not -- it's definitely not a negative. As a matter of fact, I think it's a positive and it's just one more step in the evolution for this asset class where investors are going to realize that these buildings are immensely valuable and it's a huge opportunity. I think that having another entrant want to come in and make a move in the area is only a positive for all of us in terms of, again, validating the concept, the real estate, the opportunity and so on. So we are not negative at all. We're very positive and we think it's going to bode well for all the existing players as more and more people want to come into this class since we own the vast bulk of gaming real estate.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [19]

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Great. And then just curious on the TRS. I guess you're out of the operations game. But curious if you would structure deals using a TRS, again, like you did with Northfield, or is the preference to avoid these scenarios going forward?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [20]

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Our preference is always for the regular way transactions into a lease. At TRS, I think we had a good experience, it's not out of the question. But as I mentioned, I think the easier, quickest path to getting into a net lease structure, which is the company that we are, is to do it from the start.

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James C. Stewart, MGM Growth Properties LLC - CEO [21]

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One of the hallmarks that we have is that we have the ability given a lean decision-making structure that we can be very, very creative when it comes to any kind of transaction. So whatever -- if it's something that we want to do and it's an asset that we like, we have a lot of different dials that we can turn on a pretty quick basis in order to get something done, whether it be that kind of structure, other structuring techniques, the giving out of partnership units to help [Stellar] with their -- manage their exposure to the real estate, et cetera. We have a lot of dials we can turn in, so that's just one example of sort of creative structuring that we can do on a relatively quick basis that I think will be great for sellers.

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Operator [22]

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The next question comes from Robin Farley with UBS.

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Robin Margaret Farley, UBS Investment Bank, Research Division - MD and Research Analyst [23]

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There's probably only so many different ways to ask the same question, but maybe I'll try this angle, just with -- in terms of timing, I wonder if you could give us any thoughts on -- you've talked in the past about when a property opens maybe 12 months after it having a transaction. Springfield, I guess this summer will be 12 months. And do you think that is likely to be the next transaction that you do? Or do you think we might see something else before then?

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James C. Stewart, MGM Growth Properties LLC - CEO [24]

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It's a very tough one to really answer with any kind of real thoughtfulness behind it, because although that's definitely one opportunity and I think it will prove out to be Springfield, that is a very successful one ultimately, it will take a little longer ramp, given the newness of the property to that region. And in terms of other transactions, these things are large and complex and they really take on a life of their own. So it is really too difficult to predict what our next deal would be with any kind of certainty. But needless to say, we are -- we're pretty busy.

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Operator [25]

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The next question comes from Joe Greff with JPMorgan.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [26]

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I have a pipeline-related question to be asked somewhat differently. I heard you before loud and clear, James, that you are as busy as you've ever been. So a 2-parter related to that. One, does the fact that you've entered into an ATM program, does that in isolation indicate to you that you're warmer towards the deal than having not mentioned that today? And then another question 2 is can you talk about sort of the stuff that you're looking at, is it's skewing more non-MGM Resorts as a tenant versus MGM as a partner compared to the past 12 months? And that's all from me.

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [27]

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Joe, it's Andy. I'll take the first one. As far as the ATM, this was -- that's something that we've been talking about for a period of time and just something that we are working on and getting the right sizing and structure for our company as an inaugural program. So it's something that I think provides us the financial flexibility to access the markets when there's an attractive price and we can use -- do so intra-quarter. So that's just something that adds financial flexibility for us.

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James C. Stewart, MGM Growth Properties LLC - CEO [28]

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Yes. And in terms of partners, we're talking with lots of different potential partners, some of whom we are very close with. To the extent that we can do something with MGM, it is arguably, I mean, it depends on the specifics around the deal. But since we could potentially use the master lease and add an asset to that with all the strengths of cross-collateralization, the 6.2x coverage and the corporate guarantees that come with it as well as the fact that the lease has already been negotiated and hammered out. To the extent that we can do something with them, it's the most straightforward path.

That said, they are a picky buyer and not everything is going to fit for them. So to the extent there's deals that we want to do that we could do with one of our sort of preferred partners, that is wide open.

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Operator [29]

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The next question comes from Daniel Adam with Nomura Instinet.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [30]

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Since there has been some narrowing of your valuation gap with the traditional retail triple nets, not completely but some, do you think we're at a point yet where deals outside of the gaming space might be accretive?

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James C. Stewart, MGM Growth Properties LLC - CEO [31]

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The devil is in the details for any transaction, of course. But I would say in general, yes, as our own valuation has tightened up, and I think -- I still think, by the way, that we have a very great deal of room to go on that front. But it does open up many different opportunities that we could do accretive transactions in a larger general area and that has expanded the amount of potential deals that we're looking at.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [32]

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Okay. Great. And then just a follow-up on Joe's question and not to put you guys on the spot. But if you had to quantify, what would you say the odds are that you'll have a second tenant announced by the end of this year?

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James C. Stewart, MGM Growth Properties LLC - CEO [33]

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A second tenant isn't in and of itself a goal. To the extent that we have a transaction that we think strengthens our portfolio, strengthens our financial position, strengthens the security of the company going forward and enhances shareholder value and that occurs with the second tenant or with MGM, those are all deals that we want to do.

What we do not want to do is to do a transaction in order to achieve the goal, it's not even really a goal, to achieve the outcome of having a second tenant that we are not completely satisfied with and think will be an enhancement to our shareholders' value and our financial position.

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Operator [34]

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(Operator Instructions) The next question comes from John Massocca with Ladenburg Thalmann.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [35]

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So following up on the question with regards to kind of new entrants into the gaming REIT space or potential new entrants into the gaming REIT space, has there been any cap rate compression given the number of potential capital partners for operators may be expanding? Or has cap rate kind of remained pretty steady over, let's say, the last 6 months or so?

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James C. Stewart, MGM Growth Properties LLC - CEO [36]

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It's very, very asset and situation specific. One thing about this asset class is that you don't have dozens and dozens and dozens of comparable transactions occurring on a relatively regular basis of buildings that look exactly the same across different cities or even in the same city, which you have a number of asset classes, which gives people greater confidence because they can move with the herd and pay what other people are paying and so on. Here they are much more tailored and specific, sort of like -- really as I think about it, it's closer to an office building than other situations. Meaning, we're the A -- Class A office sort of owner equivalent here. So it's difficult to draw too many conclusions, but I don't feel like there's been that real meaningful cap rate change other than cap rates change depending on the specifics of the asset and the transaction.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [37]

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Okay. Understood. And one last one just specifically with regards to the transaction for the improvements of Park MGM in NoMad. What drove the mix of OP units in cash, just how you structured that transaction?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [38]

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As part of that transaction, there was always an option up to 5% or 10% OP units. At the end of the day, that last decision, I think it was just from a cash saving standpoint on the part of the tenant. So the $30 million or otherwise, about 1 million shares OP units were issued for that transaction to close.

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Operator [39]

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The next question comes from John DeCree with Union Gaming.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [40]

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Just one question for me. I wanted to get your opinion on your kind of thought processes, what do you think about the credit strength of your tenant and your rent coverage relative to the group? Does that give you any additional financial flexibility in kind of how you evaluate new opportunities or uses of cash flow, I guess being a little bit more aggressive going forward either with your dividend policy or how you might manage the balance sheet, given the level of security you have in your existing cash flow stream?

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James C. Stewart, MGM Growth Properties LLC - CEO [41]

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Yes. One of the things that we're most proud of and as shareholders very pleased with is exactly management, which is the strength of our tenants between coverage, low leverage levels, assets in Las Vegas, in the domestic and other parts of domestic United States, in Asia. We couldn't be more pleased in terms of our outlook and how we will perform through great times and difficult times.

We always look at things that you brought up in terms of overall how we capitalize the company, what we want to do with dividend policy and so on. So we analyze them basically on an ongoing basis and certainly every quarter with our Board. To date, we like where we are and it's an ongoing analysis that we go through all the time. I think we have a great deal of flexibility on a number of different fronts but to the extent that we think that they would create a sustainable increase in our shareholder value, then we would do one of something like that. To the extent that we think it's either not sustainable or wouldn't create shareholder value then, of course, we would not.

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John G. DeCree, Union Gaming Securities, LLC, Research Division - Director and Head of North America Equity & High Yield Research [42]

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That's helpful. And maybe just a housekeeping item for Andy, a lot of moving parts and some transactions. Could you just give us a check on where the current OP unit count stands for modeling purposes?

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [43]

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Sure. At the end of the quarter, we'll file about 299 total but then at post-quarter with the sale of the Northfield opco redeem another 9.4 million. So you subtract that off of whatever our quarter end balance would be.

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Operator [44]

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The next question comes from R.J. Milligan with Baird.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Quick follow-up on the non-gaming potential out there. How much time are you guys spending on looking at non-gaming? And what do you think the chances that you close on something that's non-gaming by the end of the year?

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James C. Stewart, MGM Growth Properties LLC - CEO [46]

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We are looking, along with just any -- as I've said, any transaction that fits our acquisition criteria we're going to look at. It's too hard to predict of any real certainty around odds.

And in terms of how we think of transactions. To the extent that something is -- is something that's attractive and we want to do, we kind of -- we rank them out in that order and we'd rather do on the margin larger deals than smaller ones within some bounds, of course, of reasonability. And so that's really sort of the lens with which we look at it.

We are very comfortable with land-based entertainment and hospitality options. And to the extent that they can hit our criteria, we -- and we think they are something we could execute on, those are something we are going to go after pretty hard. But again, fundamentally, it's not a goal in and of itself to go into those areas. It's more if it fits and is attractive to our financials and shareholders.

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Andy H. Chien, MGM Growth Properties LLC - CFO & Treasurer [47]

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And I'd just add that, yes, that market is also active and there are situations that we will evaluate and we continue to evaluate. We stay in touch with all of those potential asset owners and sellers and their agents, et cetera, in those type of transactions as well.

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Operator [48]

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

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James C. Stewart, MGM Growth Properties LLC - CEO [49]

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Thank you. I'd like to thank all of our investors for their support over the past 3 years and look forward to speaking to you next quarter.

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Operator [50]

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