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Edited Transcript of VICI.N earnings conference call or presentation 2-May-19 2:00pm GMT

Q1 2019 VICI Properties Inc Earnings Call

May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of VICI Properties Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Andrew Kieske

VICI Properties Inc. - CFO

* Edward Baltazar Pitoniak

VICI Properties Inc. - CEO & Director

* John W. R. Payne

VICI Properties Inc. - President & COO

* Samantha Sacks Gallagher

VICI Properties Inc. - Executive VP, General Counsel & Secretary

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Conference Call Participants

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* Abhishek Kastiya

Citigroup Inc, Research Division - Associate

* Barry Jonathan Jonas

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

* Bradford Gordon Dalinka

Morgan Stanley, Research Division - Research Associate

* Carlo Santarelli

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Scott Adam

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

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* 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

* Richard Jon Milligan

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

* William H. Ketelhut

Goldman Sachs Group Inc., Research Division - Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties First Quarter 2019 Earnings Conference Call (Operator Instructions) Please note that this conference call is being recorded today, May 2, 2019.

I will now turn the call over to Samantha Gallagher, General Counsel with VICI Properties.

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Samantha Sacks Gallagher, VICI Properties Inc. - Executive VP, General Counsel & Secretary [2]

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Thank you, operator, and good morning. Everyone should have access to the company's first quarter 2019 earnings release and supplemental information. The release and supplemental information can be found in the Investors section of the VICI Properties website at www.viciproperties.com.

Some of our comments today will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements, which are usually identified by use of words such as will, expect, should, guidance, intend, project or other similar phrases are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Therefore, you should exercise caution in interpreting and relying on them. I refer you to the company's SEC filings for a more detailed discussion of the risks that could impact future operating results and financial condition.

During the call, we will discuss non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measure is available in our first quarter 2019 earnings release and our supplemental information.

Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; and Gabe Wasserman, Chief Accounting Officer. Ed and team will provide some opening remarks, and then we will open the call to questions.

With that, I'll turn the call over to Ed.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [3]

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Thank you, Samantha, and good morning, everyone. We're very excited to be here and appreciate you taking the time to join us for our first quarter 2019 earnings call.

We released our first quarter results last evening. John and David will walk you through the quarter and recent activity, but first, I want to provide some context on how we view the start of 2019 in terms of our progress against our long-term strategic goals and how we continue to build on our foundation to be the next great American REIT.

The first quarter of 2019 was the first full quarter in which the rewards from our significant transaction and capital markets activity in 2018 were reflected in our financial results. The Q1 2019 net of the effects of the new lease accounting standards, which David will address in a moment, our revenue increased by $13 million, and our operating income increased by $13.1 million, meaning we achieved 101% flowthrough of revenue growth to profit growth.

Our ability to turn acquired revenue into new profit and free cash flow is one of the hallmarks of our triple-net business model. All told, this resulted in our shareholders' net income growing nearly 35% year-over-year, while AFFO was up almost 22% on an absolute dollar basis and approximately 3% on an AFFO per share basis. The increase in our AFFO was the result of the lease modifications we completed in the fourth quarter with Caesars, annual rent increases embedded in our leases, ownership of Harrah's Philadelphia for an entire quarter and almost a full quarter of rent from Margaritaville, which we closed on January 2. Our AFFO per share growth was reduced by the short-term diluted impact of our very successful first follow-on equity offering we executed in November of 2018.

As we have discussed with you, we are focused on building a leading REIT portfolio and corresponding balance sheet that can weather all cycles. As a result, we elected to overequitize the balance sheet with the November follow-on offering in raising $724.5 million of growth equity proceeds. These additional proceeds have a near-term dilutive impact on our per share results but position us for long-term success.

Just to touch on Margaritaville for a moment. We have been very clear in building VICI, and we are laser-focused on providing our shareholders with best-in-class income quality, income resilience and income transparency. A key element to achieving this vision is tenant diversity. In January, when we closed on the acquisition of Margaritaville, we bought great real estate. But just as important, we officially launched our partnership with Penn National Gaming, one of the best gaming, leisure and hospitality operators in the business. We have also partnered with Penn to acquire Greektown, which, as Penn noted this morning on their own earnings call, we anticipate closing by the end of May.

Continuing on this diversification theme, John will provide additional details, but thanks to his deep industry connections, on April 5, against the backdrop of decreasing overall commercial real estate transaction activity, we announced the first gaming transaction of the year in which we are partnering with Hard Rock International to acquire the JACK Cincinnati Casino. We are excited to partner with Hard Rock, a global investment-grade leader in gaming, hospitality and leisure and an experienced operator in the Ohio market. We look forward to expanding this relationship over time as both companies continue to execute on their growth strategies.

We have achieved tenant diversification faster than any other gaming REIT through our relationship with Hard Rock, Penn and our foundational tenant, Caesars. As it relates to Caesars, we are honored to be Caesars' real estate partner at the 21 properties where we currently do business together. As you heard on their call last night, continues -- Caesars continues to produce industry-leading results, demonstrating their strength as one of the top leisure and hospitality operators across the globe.

As it relates to Caesars' valuation of paths for enhancing shareholder value and the potential impact to VICI, we would remind you that our leases and our call options are obligations of the entity and transfer with the entity should any transaction occur.

In regard to the transaction committee that was formed, our fundamental thesis and our fundamental commitment, which we have expressed to Caesars, is that we are always here to help Caesars grow the performance and value of their business as we are for any partner we will do business with.

We feel great about our start to the year and how we continue to progress on our strategy based on the 3 key drivers of value creation to our business model: namely, number one, our ability to deliver portfolio income of the highest character and quality; number two, a best-in-class and fully internalized governance and management structure; and three, one of the best embedded/internal and external growth profiles across the REIT sector. Through these advantages, we believe we will provide our shareholders with superior returns.

With that, I'll turn the call over to John to discuss our recent transactions and what we're seeing in the market. John, over to you.

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John W. R. Payne, VICI Properties Inc. - President & COO [4]

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Thanks, Ed, and good morning to everyone. While it's only been a couple of months since we last spoke to you all, you can see that we remain very busy.

On April 5, we announced our sixth acquisition with our third operating partner since we started VICI just 1.5 years ago. With the pending purchase of the JACK Casino in Cincinnati, we're extremely excited to enter the Ohio market, which is one of the fastest-growing regional markets in the country. We will acquire approximately $43 million of annual rent for a purchase price of $558 million, representing an attractive 7.7% cap rate.

Similar to the Greektown transaction, the acquisition of JACK Cincinnati will expand our geographic footprint into a strong urban gaming market and further diversify our tenant base. Now in addition to Caesars, our foundational tenant, we've built long-term partnerships, that Ed has said, with Penn National through our acquisition of Margaritaville and Greektown and Hard Rock, with our announced purchase of JACK Cincinnati. We are proud to partner with Hard Rock as they truly are one of the most recognized experiential operators worldwide with a very strong track record of success operating in the Ohio market.

As you've witnessed in VICI's first 18 months, we've announced $3.2 billion of transaction, and we believe there remains an abundance of potential acquisition targets in the gaming space. So we do not see ourselves slowing down anytime soon. We will look to add to our momentum while opportunities for accretive transactions of all shapes and sizes remain in the marketplace. Additionally, we have the option to take down any of our 3 call option properties with a 60-day notice.

We retain one of the best internal and external growth profiles in the REIT sector, and we will continue to put your capital to work, growing our portfolio and progressing toward our goals. Those goals include diversifying our tenant base, expanding geographically in attractive urban and regional markets and growing our Las Vegas exposure, all while creating value for our shareholders.

With that, I'll turn the call over to David, who will discuss our balance sheet and financial results. David?

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David Andrew Kieske, VICI Properties Inc. - CFO [5]

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Thanks, John. I will cover a few of the highlights from our quarterly financial results published last night. As you'll see on the income statement starting on January 1, 2019, under ASC 842, the new lease accounting standard, we are no longer required to present real estate taxes and the related tenant reimbursements on a gross basis since they are paid directly by our tenants to the relevant taxing authority. Therefore, neither of these items appear on our March 31, 2019, statement of operations. The prior period will not be retrospectively adjusted, and therefore, the historical financial statement presentation remains unchanged and continues to include the gross-up of the real estate taxes and related tenant reimbursements.

Our revenues in Q1 '19, excluding the tenant reimbursement of property taxes, increased 6.5% over Q1 '18. Our G&A was $6.2 million for the quarter and as a percentage of total revenues, was only 2.9% for the quarter, which is in line with our full year projection and one of the lowest ratios in the triple-net sector. We did incur $889,000 of transaction expenses in the quarter, primarily related to the legal and accounting costs associated with documenting the JACK Cincinnati acquisition. These costs are required to be expensed under the new leasing guidance. Our AFFO for the quarter was $151.5 million or $0.37 per share for the first quarter. As Ed mentioned, total AFFO increased almost 22% year-over-year, and AFFO per share increased approximately 3% over the prior year.

We'd like to draw your attention to our quarterly financial supplement, where we strive to provide additional transparency and information. The supplement is located in the Investors section of our website under the menu heading Financials, and we value any feedback you may have on the information presented.

Now moving on to our balance sheet and capital markets activities. During the first quarter, we issued 6.1 million shares of common stock through our at-the-market equity program at a weighted average price of $21.28, raising net proceeds of $128.1 million. We view the ATM as an extremely efficient tool to shore up our balance sheet outside of transaction-specific capital raises.

Our balance sheet continues to be in a phenomenal position to execute. As of March 31, our net debt-to-LTM EBITDA was approximately 4.3x, below the low end of our stated range of 5 to 5.5x. This does includes the impact of the excess cash on our balance sheet we raised in our November equity offering as well as the recent ATM issuance that will be used to fund the Greektown and JACK Cincinnati transactions.

Our total outstanding debt at quarter end was $4.1 billion with a weighted average interest rate of 4.97%. This includes the impact of the 2 interest rate swap transactions we entered into on January 3, having an aggregate notional amount of $500 million. These have an effective date of January 22, 2019, and a termination date of January 22, 2021, and effectively fix the LIBOR portion on $500 million under our Term Loan B Facility at a blended rate of 2.38%.

Taking into account our swap agreements, 98% of our debt is now fixed rate debt, providing clarity to our future interest expense. The weighted average maturity of our debt is approximately 4.8 years, and we have no debt maturing until 2022. We ended the quarter with approximately $1 billion of cash [in] short-term investments and an unfunded $400 million revolver, providing us liquidity for future growth.

To follow up on the acquisition front that John discussed, on January 2, we closed the acquisition of Margaritaville for $261.1 million, adding approximately $23.2 million in annual cash rent. The transaction was funded using cash on the balance sheet. For Greektown, we will use the proceeds from our November equity offering to fund the transaction, which we anticipate closing by the end of May.

Subsequent to quarter end, we announced the acquisition of the real estate of JACK Cincinnati for a purchase price of $558 million, adding $42.75 million of annual rent. The combined Greektown and JACK Cincinnati transactions are expected to be funded on a leverage-neutral basis, utilizing debt and existing cash on hand. We are reaffirming our 2019 AFFO per share guidance with a range of $1.47 to $1.50.

As a reminder, our guidance does not include the pending acquisitions of Greektown and JACK Cincinnati that have been announced and not yet closed. We paid a dividend of $0.2875 based on the annualized dividend rate of $1.15 per share on April 11 to stockholders of record as of the close of business on March 29.

In closing, we continue to make tremendous progress as we execute on our strategy, and we remain well positioned with significant liquidity and access to capital to keep growing our portfolio of driving shareholder value.

With that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Carlo Santarelli from Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [2]

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Ed, in your prepared remarks, you made the statement that you guys were able to execute on some transactions in a commercial real estate market that has seemingly gotten a little bit more challenging. When you think about the nuance of the gaming REIT business and model relative to the backdrop of broader activity in commercial real estate, do you view it as a net positive, maybe for valuation as investors seek areas where there could potentially be more growth as -- from the standpoint of maybe thinking about it just from a stock level as opposed to a slowdown in the environment where you guys are kind of operating in an environment where we're not really seeing any kind of slowdown in transaction activity?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [3]

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Yes. No. I think you picked up on something very important, Carlo. If you look across -- and again, we approach this as the real estate people that we are. As we look across all of the other American commercial real estate sectors, whether it be industrial, multi-res, office, medical office, single-family housing, in so many of the sectors, the prevailing wisdom, and it remains to be seen whether that prevailing wisdom is correct, is that most American commercial real estate sectors are in the late innings of the cycle that they are in.

We believe the gaming real estate is still a very early inning story. It is a story that has really developed, we believe, over the last 12 to 18 months in terms of, especially, the dedicated REIT community, understanding the alpha that they can obtain by investing in publicly traded gaming real estate.

So we believe that this will continue to be a sector that gets a lot of attention, growing attention because of that, if you will, off-cycle characteristics. This is a place that the active manager, we believe, will continue to find value, especially when compared to so many of those other late innings commercial real estate sectors.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [4]

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That's very helpful. And then, John, you mentioned in your comments that you guys did want to remain focused on growing your Las Vegas exposure, unless I misheard that, but let's assume I heard that properly. Clearly, there is one large asset out there, I'm not going to ask you to comment on that specifically. But I will ask a bigger picture question as it pertains to Las Vegas, clearly, a market where real estate has been valued at a little bit more of a premium. Would you guys, in any way -- I don't want to say jeopardize but maybe sacrifice some of the discipline you've shown to date to do an acquisition such as a large kind of, let's call it, third-party type of deal that might be a little bit more expensive and might not be out of a gate accretive if it meant potentially opening up new avenues for deals down the road with a new partner, something along those lines?

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John W. R. Payne, VICI Properties Inc. - President & COO [5]

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Yes. Carlo, I'll jump in there, and Ed or David will. I don't think we'd ever sacrifice the way we think about underwriting and ensuring that it's accretive at the beginning. As you know, we -- the way we're structured, it's imperative that it's accretive to us as we do the deal. You didn't mishear me at all, in that -- and I think we've been clear on this, we would love to have more Las Vegas real estate, whether that's on the Strip, where we continue to believe there is limited amount of supply of invaluable real estate on the Strip, but we've also said that there's some great assets and some great real estate in downtown and also in the locals market that if they should ever come for sale and there's an opportunity to do a transaction, we'd look at that as well. It doesn't mean that, that is our sole focus as we continue to look at opportunities outside Las Vegas where we -- as you've seen us, we love the urban real estate that many of these casinos have. But David, Ed, you want to add to that answer that Carlo ask?

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David Andrew Kieske, VICI Properties Inc. - CFO [6]

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Carlo, it's David. And John, I think you did it. I mean, we'll not -- as everybody knows, we're a triple-net REIT. So the accretion that we underwrite day 1 and we live with, we don't have the ability to asset manage, property manage or improve operations in our model and part of the reason we're able to achieve such high revenue flow-through, but we'll be very disciplined in the way we approach any asset and any acquisition depending -- regardless of how large it is and where it sits.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [7]

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And I will just add one more thing, Carlo because you touched on it -- on an important element, an element that's strategically important to us, when you did cite the fact that we will put value in our underwriting on developing strategic relationships that can grow over time. It would not become a factor that causes us to accept dilution going in, but to your point, it is a very important point in how we evaluate any given transaction.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [8]

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Great. That's very thorough. And then, John, if I could, just you mentioned obviously the locals market and the downtown market. To the extent that you've thought about certain transactions within either of those markets, I'm going to assume that there's unlikely to be any gating issues that would make transactions in those markets any more difficult necessarily than transactions on the Strip or in any regional markets. Is that fair?

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John W. R. Payne, VICI Properties Inc. - President & COO [9]

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Based on what I know, I think what you said is accurate, but it's hard to give a general comment on that when you got to look at the specifics of a current transaction.

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Operator [10]

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Your next question comes from the line of RJ Milligan from Baird.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Given the fact that the stock is sort of pushing up at near all-time highs, I was curious, how do you think about using your more attractive cost of equity to possibly expedite pulling in the call option properties?

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David Andrew Kieske, VICI Properties Inc. - CFO [12]

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RJ, it's David. Thanks for joining us. Look, we love the call properties because it gives us that embedded growth and, as we talked about, that ability to drive consistency to this sector that I don't think has been demonstrated in the past. And so we still layer in the call properties. One in each year is base case scenario, one in '20, one in '21 and one in '22. And each one of those delivers $40-odd million of rent to VICI, and that is at our discretion.

There's a lot -- as John mentioned, there's a lot going on out there, so we don't -- we haven't deviated from that kind of base case today, but it is something that we are always mindful of. And you do highlight where the stock is and that we've had to [downsize] cost of capital and the accretion that we can achieve on each of those.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [13]

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And I would just add, RJ, that obviously that improving cost of capital that you're referring to also gives us the ability to make whatever else we may be working on other than the call properties even more accretive as time goes by.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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Okay. That's helpful. And I guess, David, can you talk about sort of your expectations for additional ATM issuance throughout the year to fund -- I don't know if you need additional capital to fund Greektown or want to bring down leverage. But can you talk about what you expect the cadence of ATM issuance to be for the rest of the year?

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David Andrew Kieske, VICI Properties Inc. - CFO [15]

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Yes. RJ, it's a good question. As we sit here today, we do not need any additional equity for Greektown or JACK Cincinnati. So we're fortunate to have executed a very successful follow-on offering in November. And then as we view the ATM, look, it's one of the most efficient tools that -- equity tools that we have available to us, with any REIT [has] available to it. And we will evaluate numerous considerations, including the trading environment of our stock, investor demand around our stock and kind of what the long-term outlook of our pipeline is. Obviously, with the timing that it takes to close these deals and making sure that we have prefunded the balance sheet, we have put the balance sheet in the best position as possible to drive as much optionality for us is very important to us. So we'll assess the ATM kind of opportunistically as we have with all the equity offerings that we've done.

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Richard Jon Milligan, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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And I'm not sure that -- if you can disclose, but the ATM issuance in the first quarter, was that just general way, or was that a incoming inquiry for a position?

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David Andrew Kieske, VICI Properties Inc. - CFO [17]

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We opened it up in the first quarter, and it was a general way issuance throughout the quarter.

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Operator [18]

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Your next question comes from the line of Daniel Adam from Nomura.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [19]

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So I guess a follow-up related to the call option properties. The more I think about it, my question is why doesn't it make sense to call them in now? I mean, wouldn't calling them in sooner rather than later enable you to maximize the net present value that you achieve from the accretion?

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David Andrew Kieske, VICI Properties Inc. - CFO [20]

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Yes. Dan, it's a fair question, and look, it's one that we've gotten since day 1. I mean, we know they're always there. We're not going to let them go. And the stock continues to work in the right direction, with, as Ed alluded to, the understanding of the merits, and you've been a big proponent of helping people understand the merits of the sector. And so I think there remains a lot of activity out there, third-party acquisitions, and they will always be accretive, and they could potentially be more accretive tomorrow as the stock continues to head in the right direction. It's not something that we want to engineer our financial growth, so to speak, financial AFFO growth, but again, we look at them layering one in 2020, one in 2021, and one in 2022.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [21]

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Yes. And again, I would just reemphasize, Daniel, that, I mean, here we are, we're basically -- we're in our seventh quarter as a company, if I'm doing my math right. And in those first 6 quarters, we did, as John's already spoken of in the prepared remarks, $3.2 billion of acquisitions. So that averages out to about $500 million a quarter. Obviously, it hasn't layered in exactly like that, but you get a sense for the velocity at which we've been able to grow the business. And as we look forward, we continue to see an opportunity to continue to grow the business at or close to that velocity, and thus, we are not faced with a situation where we really need to bring down the call properties in order to continue that kind of velocity. And thus, given the opportunity to choose when and how we do it, we will continue to prioritize those opportunities that are right in front of us.

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Daniel Scott Adam, Nomura Securities Co. Ltd., Research Division - Research Analyst [22]

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Okay. Great. That makes sense. And then just one follow-up. So yesterday, EPR acknowledged that they're now more open to exploring deals in the gaming space. I'm just wondering what your thoughts are of this, pluses and minuses?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [23]

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I think, net-net, Daniel, it's very much a plus. The guys at EPR are very smart real estate investors. And in their recognition, the gaming real estate can represent real value and truly institutional quality real estate. We see it as an important step in the validation that any commercial real estate sector needs to ultimately realize its full institutional value, right? In other words, as we've become fond of saying, validation drives valuation. And any new entrant into the sector is another step in that validation process, which is to say, another step in the revaluation or rerating process.

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Operator [24]

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Your next question comes from the line of David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [25]

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I just wanted to ask -- and Ed, in your opening remarks, you made some commentary about Caesars, about your largest tenant and the degree to which there may be actions or strategies that you can take, whether it's stepping up on any optionality that you have ahead of any change of control or any specific outcomes, and I don't expect that you may have detail to share with us specifically, but are there strategies that you can consider to protect or add value in that context, given where Caesars sits today?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [26]

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Yes. Maybe just as a starting point, David, though you didn't ask about it per se, I think everyone in this call saw the Caesars' results yesterday, and we do not -- we must emphasize, we do not rely on Caesars' quarterly performance to solidify the security of our rent, but we were very happy to see, for the sake of Caesars' team, that those results were as strong as they were. So that's -- sorry, that just -- I wanted that to be a preamble.

In terms of how we approach any sort of engagement with Caesars, we are very mindful of the rights we have. We're very mindful of the obligations that we have. And we will be looking at anything that arises in our relationship with Caesars through the filter of how does it make Caesars even stronger, which thus further securitizes the quality of our rent, and then how do we make sure that obviously the interest of our shareholders are being carefully preserved as well.

Above and beyond that, we take a lot of confidence in the fact there's a lot of very smart people involved at Caesars. There's a lot of energy and a lot of urgency to create value. And we're actually excited about the opportunity we have to work with them to increase the value and the strength of both of our businesses.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [27]

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And just one follow-up on another matter and on the -- regarding the prior question around other real estate funds looking within gaming. And I know it's been somewhat of an early-stage discussion about you're looking outside of the gaming realm. I suppose a fair question is, has anything changed in that regard? There certainly has been some news about contiguous businesses coming up for sale and so forth. Any updates there?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [28]

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Yes. We -- from day 1, we've positioned VICI as an experiential REIT. And from day 1, we've always been engaged, both as a Board and a management team, in learning all we can about experiential sectors that share what we believe are the key characteristics of what we love so much about gaming. And as we've talked with you, David, we love about gaming that it's fundamentally a business in which great operators offer diverse experiences to a diverse clientele across diverse geographies. And as we look at adjacent sectors, we are seeing in some of those sectors those same characteristics. And it's that diversity of experience, clientele and geography that we think greatly improve the risk profile of any experiential sector. And to your point, there are certainly some names coming up in adjacent sectors that have characteristics we're very interested in.

We obviously have to -- we are obligated to learn all we can, we're obligated to invest very carefully, and we're obligated to make sure we never lose sight of the fundamental opportunity right in front of us right now, which is to continue to grow our gaming real estate asset portfolio very accretively.

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Operator [29]

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Your next question comes from the line of Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [30]

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I guess, just following up on the non-gaming question. I mean, do you analyze those deals the same as gaming or different? And do you think diversification away from gaming ultimately helps your valuation and maybe your cost of capital?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [31]

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Barry, I'll take the first crack at this, and I'll let John and David pitch in. It will improve our business and our cost of capital, and this is obviously belaboring the obvious if we make fundamentally good real estate investment decisions. And we -- if we're willing to do this, we need to make sure that we understand not only the general, but the highly specific characteristics of any sector, such that we understand, among other things, its supply/demand characteristics not only now but going forward, is it a sector that's going to be favored or disfavored by demographic, cultural and social trends over the next 10, 20, 30 years. Again, we're investing basically in multigenerational assets, and we need to have confidence that there will be a durability to the experience that then yields a durability to the rent. And again, the factors that come into play in those sectors may be different than the factors that come into play in gaming, especially given the highly regulated nature of gaming, which you generally don't find in these other experiential sectors and thus don't have, if you will, the built-in, if you will, supply growth constraints that the intense regulatory regime of gaming does provide.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [32]

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Got it. And then, look, I think early on, investors were very focused on you having a single tenant, you've addressed that twice now. At this point, are you somewhat agnostic about adding an additional tenant relative to those initial concerns, or you're happy just working with the ones you have?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [33]

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John?

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John W. R. Payne, VICI Properties Inc. - President & COO [34]

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No. Barry, I'm very active in continuing to build relationships across all the platforms, and it's been great to finalize deals with Hard Rock and Penn and of course, Caesars. But we continue to meet other companies, understand their growth strategies, what are they trying to achieve over the coming years, and is there a place where we can be a part of that. So I think you'll see, Barry, over the coming months or years that we continue to add more tenants to our portfolio.

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Operator [35]

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Your next question comes from the line of Mike Pace from JPMorgan.

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Unidentified Analyst, [36]

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This is [Colin] on for Mike. Our funding question already got asked.

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Operator [37]

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Your next question comes from the line of John DeCree from 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 [38]

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Just wanted to get high-level thoughts, maybe Ed or John, on the behavior that we've seen in some of the corporate companies and potential partners. Early on, I think there was reluctancy and probably still to some extent for some of the operators to partner with a REIT, but we've certainly seen just across your portfolio more folks willing to work with you guys and even your peers. I was wondering what you thought has changed. Or is it just the education, people getting more comfortable? And how do you kind of see that going from here? Is it just -- are your conversations with potential operators getting easier about partnering?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [39]

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John?

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John W. R. Payne, VICI Properties Inc. - President & COO [40]

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Yes, I'll take that, and then Ed can jump in if I don't completely answer. I think you've described it well. I mean, when we started, I think, at times, there was a misunderstanding of how a REIT like us could help many companies to grow. So again, it's a relatively new sector, probably only 5 or 6 years old compared to many others in the REIT business that are decades old. So I think we've been on -- and you know this, John. We've talked to you about this. We've gone on a mission to make sure at least in our first 18 months that everyone knew who VICI was, how we could help them with their growth plans, how we do fair deals, that we're an independent company and how we can, again, be there available to them should they want to do any sale-leaseback or a sale of their company. And I just think it's a little bit of an education process where folks better understand how we can be part of their team, so to speak. And it's -- you are correct, more and more folks are starting to understand. It doesn't mean we'll necessarily have this structure, but I think they understand how we can be a partner. I think VICI's played a big part in helping to educate and get out there and tell people about our company and the REIT space in general. Ed, David, anything on that?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [41]

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Yes. I'll just add one more thought, John. And I added as an open question that we would not pretend to have the answer to, and I think that open question, John, is, to what degree will a gaming asset becomes to market to be sold here in the future? To what degree will a holdco be able to win the bidding if a REIT is interested in the real estate of that asset that has come to market, and an operator is interested as well? In other words, to put the question in the most distinct terms, will there be circumstances when a holdco can outbid the combination of an opco and propco, right? That, I think, is the question going forward, that fundamentally ends up tying to the degree to which gaming REITs can continue to grow.

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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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Ed, I think that was my follow-up question that I was going to present to you on just competitiveness as the REIT stay involved. So perhaps a slightly different question for you guys as a follow-up. How do you think about when you're underwriting an acquisition, particularly some of the single-asset stuff that you're looking at or have done on a 4-wall coverage basis? I know there's been a clear preference for some corporate guarantee or credit support from your opco partner, but do you think about just kind of the 4-wall coverage even if there's a -- some type of credit enhancement involved kind of as you underwrite at this point in the cycle? Or how do you think about that going forward?

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David Andrew Kieske, VICI Properties Inc. - CFO [43]

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And John, it's David. I can start, and John, chime in. Look, I mean, as Ed and I have appreciated and John's realized over the long term, there is such a resiliency to the gaming revenues and cash flows that come out of these assets. So as we underwrite assets, ultimately, over the long term, we want to try to get to kind of a [2-wall] coverage. But as you've seen us do with the 6 deals that we've announced to date, the coverage ratio is going in at a range from a 1.7%, 1.8%. We did much lower in Harrah’s Las Vegas, knowing that there was significant capital going into that asset. But the Margaritaville, as you heard this morning, we did that at a 1.9%. And Penn made the comment this morning that they're having the best quarter ever in that asset.

So it's a combination of knowing what the operator can do, what they can do with synergies and the conviction that we have and the partnership with that operator and their ability to continue to drive revenues obviously EBITDAR for rent coverage in there.

So it's a little bit of a long-winded kind of rambling answer, but I think it's -- it depends. But ultimately, if we -- I don't know, 1.7%, 1.8%, getting up to a 2.0% over the long term is where we'd like to be.

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Operator [44]

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Your next question comes from the line of Stephen Grambling from Goldman Sachs.

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William H. Ketelhut, Goldman Sachs Group Inc., Research Division - Associate [45]

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This is Bill on for Stephen. So following up on Daniel's question earlier, do you expect as the gaming REIT space becomes more appealing to diversified REITs, there will be a pickup in industry consolidation? And are there any barriers to entry associated with gaming licenses?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [46]

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Bill, yes, good to hear from you. In terms of what you're talking about in terms of industry consolidation, could you just clarify what you meant by that?

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William H. Ketelhut, Goldman Sachs Group Inc., Research Division - Associate [47]

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Yes. It's like a -- maybe a higher propensity for diversified REITs or even gaming REITs to acquire and consolidate within the industry.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [48]

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Yes, yes. So again, I -- we would look at the increasing interest in gaming real estate as a sign of validation. And as to what the impact of that will be on bidding, as to what the impact of that will be on the incumbent gaming REITs in terms of their growth, their consolidation, again, an open question at this point. It would stand to reason that the arrival of new entrants, the validation that they bring should lead to a rising tide that should rise -- raise all boats when it comes to improving your cost of capital. And needless to say, as cost of capital improves, to a point that was raised earlier, it does make the available suite of investment opportunities, gaming and non-gaming, more abundant.

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William H. Ketelhut, Goldman Sachs Group Inc., Research Division - Associate [49]

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That's helpful. And there was recently announced closing of a lease gaming property. Do you expect this to have any ripple effect on regional casino underwriting?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [50]

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John, you want to take that?

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John W. R. Payne, VICI Properties Inc. - President & COO [51]

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I don't think so. I assume you're talking about the small asset that Penn and GLPI have in Tunica?

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William H. Ketelhut, Goldman Sachs Group Inc., Research Division - Associate [52]

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Yes.

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John W. R. Payne, VICI Properties Inc. - President & COO [53]

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Yes. I don't see that affecting regional underwriting.

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Operator [54]

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Your next question comes from the line of John Massocca from Ladenburg.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [55]

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So is there any thought process on your guys' end to maybe keeping the leverage below target levels over the next couple of years, just given particularly because the call option properties are so accessible for you guys that it just gives you more flexibility of not being reliant on your position in the capital markets to take down those deals in the most accretive manner?

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David Andrew Kieske, VICI Properties Inc. - CFO [56]

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Yes. John, it's David. Look, the leverage is something that we're very mindful of. Obviously, this entity started at 10.5x, and we've worked really, really hard to take a lot of leverage out of the system. And then with the size of the deals and the timing of the close, we never want to be in a position where our funding -- there's funding uncertainty around our acquisitions. So specifically with the call properties, we've got internal funding capabilities out of having a lower AFFO payout ratio, around 75% of our AFFO. That in itself provides a nice funding capability for the call properties. We will keep the balance sheet of 5 to 5.5x, and so that does provide us some optionality with the call properties. So we don't specifically keep the balance sheet under-levered for those call properties. We want to make sure that we are -- we have funding certainty around anything that we've announced or anything that we potentially may acquire here in the future.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [57]

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Okay. And then shifting gears to the 2 kind of pending transactions. How should we think about timing and maybe size of a potential debt raise to help kind of fund those without putting too much of a burden on the line? I know you talked about doing some debt around Greektown. I mean, is that just going to grow kind of pro rata for the additional acquisition in Cincinnati? Or was kind of the original contemplated issuance around Greektown sufficient for both acquisitions?

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David Andrew Kieske, VICI Properties Inc. - CFO [58]

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Yes. John, it's a good question. As Penn said this morning, and we are reiterating obviously it's subject to final regulatory approval, Greektown should close by the end of May. The plan would be to use cash on the balance sheet to close that asset, and then it sets the debt markets later in the year to acquire both Greektown and JACK Cincinnati on a leverage neutral basis. So Greektown, $700 million, Cincinnati is $558 million, so $1.2 billion, $1.3 billion of total value, total assets that we're adding to the portfolio this year. So rough number is $500 million, $600 million of additional debt that we will need to fund those on a leverage-neutral basis. And again, the markets are there today. And as we get through the Ohio regulatory process, we'll make -- and we have certainty around closing, we'll look to add incremental leverage onto the balance sheet.

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John James Massocca, Ladenburg Thalmann & Co. Inc., Research Division - Associate [59]

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Okay. And then touching maybe on the regulatory side, I know it's kind of a broad question, but are there any markets or states where you think you guys may have the structural difficulties pursuing additional acquisitions because of regulatory concerns around competition? Or given kind of the diversity, your portfolio, is it pretty wide open right now?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [60]

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John, you want to take first crack at that?

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John W. R. Payne, VICI Properties Inc. - President & COO [61]

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Yes, it's hard to say, but I don't think there is any regulatory restrictions that I see in front of us of deals that we're looking at and where we may be. So the answer right now is I don't see any impediments for us to be able to grow from the regulatory.

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Operator [62]

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Your next question comes from the line of Bradford Dalinka from Morgan Stanley.

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Bradford Gordon Dalinka, Morgan Stanley, Research Division - Research Associate [63]

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Brad on for Thomas Allen. Wanted to ask you guys yet another one on the call options. Some articles indicate Caesars is looking to renew its license in New Orleans and potentially put some capital into that property. Could that situation impact the timing or the structure of the economics on that call?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [64]

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Thanks, Brad. John, you want to take that?

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John W. R. Payne, VICI Properties Inc. - President & COO [65]

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Yes. Brad, this is John. So you are right that Caesars continues to look at extending their operating agreement, which expires in 2024. They're going through a state process right now, and we continue to monitor and work with them on that option. We'll have to see how it ultimately plays out and how the -- how it gets finished and what the capital commitments are. So we're in contact with them, as Ed said earlier, and we'll see how it plays out, and then we'll be able to give some clear direction on where that's going. I don't know, Ed, David, if you have anything to add to that?

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [66]

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I mean, I would just add that obviously, as we talked about in the announcement of the JACK Cincinnati acquisition, and as we talked about in the announcement of the Greektown acquisition, there are relatively few downtown regional casinos across the U.S. landscape. New Orleans represents yet another one and obviously, we believe is a really wonderful place to own a property. So we're obviously supporting Caesars in every way we can to ensure success in this process.

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Operator [67]

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(Operator Instructions) Your next question comes from the line of Smedes Rose from Citi.

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Abhishek Kastiya, Citigroup Inc, Research Division - Associate [68]

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This is Abhishek on for Smedes. I just want to ask how -- can you comment on how the current transaction pipeline looks and how it's changed over the past 6 or -- 6 to 12 months?

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John W. R. Payne, VICI Properties Inc. - President & COO [69]

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Yes, I'll take that. Someone asked me yesterday on a plane how things are going. I said, "I'm busier than I ever have been," and -- but we've been saying, since we started 18 months ago, that we've been busy. So the activity is good. I think that the work we did in 2018 to build relationships and let folks know who we are, hopefully will continue to pay off in '19 and being able to do some work with those companies. So I'd say it is quite busy, we're quite active, and it's pretty exciting time in this space.

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Operator [70]

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And there are no further question at this time. I will turn the call back over to the presenters.

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Edward Baltazar Pitoniak, VICI Properties Inc. - CEO & Director [71]

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Thank you, operator. Thanks to everybody again for your time today. We look forward to providing an update on our continued progress in the summer when we report our second quarter results.

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Operator [72]

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This concludes today's conference call. You may now disconnect.