Q4 2020 MGM Growth Properties LLC Earnings Call
Okay.
Good afternoon, everyone and welcome to the MGM growth properties fourth quarter and full year 2020 earnings conference call.
Joining the call from the company today are James Stewart, Chief Executive Officer.
And then a Chen Chief Financial Officer.
Participants are in a listen only mode.
After the company's remarks, there will be a question and answer session.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Mr. Andy Chien, Sir. Please go ahead.
Great. Thank you Jamie.
Good morning, good afternoon, and welcome to the MGM growth properties fourth quarter, and a full year 'twenty 'twenty earnings call.
This call is being broadcast live on the Internet MGM growth properties Dot com and we have furnished our press release on form 8-K to the S. E. C. This morning.
On this call we will make forward looking statements on how the safe Harbor provisions of the federal Securities laws.
Actual results may differ materially from those projected on 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 a periodic filings with the S. E C.
During the call. We will also discuss non-GAAP financial measures in talking about our performance.
You can find a reconciliation to GAAP financial measures in a press release and Investor presentation, which are also available on our website.
Finally, please note. This presentation is being recorded I will now turn it over to James.
Thank you Andy I'd like to welcome everyone to M. G P 's fourth quarter and full year 2020 earnings call.
Hope you and your families continue to be safe and well I would like to start off by thanking the employees and families. If everyone's a M. G P and that our partner MGM resorts for their commitment and hard work.
We were approaching M. G P fifth anniversary since going public and couldn't be prouder of our collective ability to tackle new challenges adapt and stand resilient well.
We are pleased to report that M. G. P continues to maintain its position of strength, even as the global economy remains impacted by the COVID-19 pandemic.
We collected 100 per cent of a rent on schedule and without interruption throughout last year as well as year to date.
A rent collection record throughout this challenging time demonstrates the durability of our master lease and strong liquidity position of our tenant.
In 2020, we continued to execute on our disciplined approach to acquisitions and we remain focused on sustainably growing our dividend as evidenced by two increases in 2020, representing a 4% increase during the year and a <unk>.
36 per cent increase since our IPO.
In the beginning of 2020 M. G. P welcomed the MGM Grand Las Vegas into its premier real estate portfolio through an innovative joint venture transaction with Blackstone.
The joint venture also acquired the real estate assets, a Mandalay Bay and entered into a long term triple net lease with an initial rent of $292 million fixed, 2% escalators and robust minimum capital expenditure requirements.
As part of the transaction Blackstone also invested a $150 million directly into M. G. P common stock demonstrating their confidence in the value of our company.
This transaction highlights the growing institutional demand for gaming real estate and was another example of the attractiveness and value inherent in our assets.
Against the backdrop of the challenges of 2020 M. G. P was able to grow its adjusted EBITDA a F F O and dividend and I believe we are in the early innings of a significant cap rate compression and resulting equity valuation increase both for us and for the entire gaming REIT sector.
On December 2nd we redeemed approximately 23 and a half million operating partnership units held by MGM for $700 million on cash.
The redemption was immediately accretive to a F F O per unit, while keeping pro rata net leverage well within our long term target a five to five five times as a result of this transaction. We have completed the agreement to redeem up to $1 4 billion, a mgm's units for cash and their ownership has been reduced to 53 per cent in total.
We have redeemed $53 8 million a operating units held by MGM at an average price of $26.02 per unit.
The redemption further bolstered our tenants already robust liquidity position during an uncertain time, well being a financially attractive transaction for both of US. This is just the latest of many examples of our long term value creation alongside a tenant MGM resorts.
Our tenant has approximately a $5.6 billion of liquidity.
Excluding MGM and MGM, China pardon me, a excluding M. G P and MGM, China, providing ample access to cash to protect and grow their business for the foreseeable future.
Despite the many challenges caused by the pandemic there's light at the end of the tunnel many indicators point to a strong demand as the vaccines a distributed and restrictions are eased as MGM mentioned in their most recent earnings call gross bookings in January were the strongest since the start of the pandemic and guests are increasingly looking 90 days ahead booking.
90 days plus ahead, there are a significant rooms booked for the third quarter and currently there are more rooms on the books for the fourth quarter. This year than there were a last year at the same time.
I believe the efficiency programs implemented by MGM last year combined with the experiences learned over the pandemic will allow MGM to realize sustainable margin expansion, which will drive a quicker recovery as more and more states remove restrictions a new cases decrease.
Our successful efforts to diversify our portfolio to have an almost even exposure to Las Vegas and regional markets has paid off handsomely and has positioned us well for the recovery as.
We look forward into 'twenty 'twenty, one will receive a fixed master lease escalator on April 1st.
Which will add approximately $15 million to our annual cash rent as well as the joint venture escalator on March <unk>, which will add $6 million to the Jv's annual cash rent where.
We're optimistic for a robust economic recovery and we'll remain disciplined in our approach to a long term growth plan as we have for the last five years.
We continued to communicate frequently with a number of gaming and hospitality and leisure operators and explore a real estate transactions that would help them generate immediate liquidity provide them with an opportunity to replace financial debt with predictable long term leases and drive sustainable accretive growth for M. G. P.
We're well positioned for that future accretive growth with ample liquidity and leverage well within our long term target range I'll now turn it over to Andy to discuss our financial results.
Great. Thanks, James 'twenty 'twenty was another successful year for N P. Pes balance sheet as we completed a number of a well executed capital markets transactions at the beginning of a year, we diversified our funding sources within attractive C. M B a debt financing.
The MGM Grand Las Vegas, Mandalay Bay joint venture transaction.
Throughout the year, we completed a two upsized unsecured notes offering to permanently finance a redemption of a MTN is $1 4 billion a operating partnership units.
The first was a may when we issued 800 million a four and five eights notes. Due 2025. This was upsized from initial $500 million due to strong investor demand.
Similarly in November we issued $750 million, a three and seven eights notes due 2029.
We were able to price. These notes at the best interest rate and a history of the company and also upsize the initial operating size from $500 million.
These results demonstrate the continued confidence bond investors, having a cash flows from many years to come.
I'll now provide highlights from a few items on our fourth quarter financial results.
In the fourth quarter recognized $188 3 million a rental revenue on a GAAP basis.
Cash rents on a payments received by M. G P and a pro rata share of a joint venture cash rent was $243 5 million.
This consists of $206 9 million from the MGM Master lease and $36 six from our share of the joint venture Master lease.
Our share of distributions received from joint venture was $22 9 million.
Net income was.
It was $91 3 million on.
On Saturday day, a thought though was $169 6 million or a 57 cents per share.
Consolidated adjusted EBITDA was $240 2 million G&A expenses with a quarter with $4 million.
Dividends 48.75 cents per share, which represents a dollar a 95 on an annualized basis.
Yeah.
Moving on to full year results from.
The full year 'twenty 'twenty, we recognized 768 million a rental revenue on a GAAP basis.
As it relates to cash rental payments received from the MGM mass release of $840 million.
A decline in GAAP rental revenues from last year was due to the removal of Mandalay from Mandalay Bay, a from the MGM Master lease and a subsequent editions to the joint venture Master lease.
In the joint venture a mass release Mandalay Bay contributed initial annual rent of $133 million.
And together with MGM Grand.
Ah represents a $292 million in total initial annual rent of which we own 51 per cent.
For the year a share of distributions received from a joint venture was $81 million.
And consolidated adjusted EBITDA for the full year was $955 3 million compared to 922 8 million last year.
Representing an increase of three five per cent.
That's all day, if F. L was $703 7 million compared to $685 seven millions a prior year, representing an increase of two six per cent.
Our balance sheet is well positioned to continue to achieve a accretive growth in 2021 with a liquidity position a nearly $2 billion because this thing a 626 million a cash.
And 1.34 billion a revolver capacity.
Finally, a pro rata net leverage a 5.3 times is within our targeted range of five to five and a half times.
Was that like a turn it back over to James.
Yeah.
Thank you Andy.
Jamie would like to turn it open now for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
I'll ask a question you May press Star and then one using a touchtone telephone.
To withdraw yourself from the question queue, you May press Star two.
If you are using a speaker phone we do ask you. Please pick up the handset before pressing the numbers to ensure the best on quality.
So again that a star and then one day joined the question queue.
Our first question today comes from Barry Jonas from Truest Securities. Please go ahead with your question.
Oh, Hey, guys, maybe I'll just start from there your M&A pipeline curious if you can comment a comment on any changes.
Piece or the substance of discussions over the past 90 days. Thanks.
I'll start and then Andy please feel free to jump in I would say over that period of time. The last 90 days there hasn't been a huge amount of change.
But it is active there is.
Our fair amount of discussion going on the assets involved range a across the board from a.
All different sort of types of leisure assets, there's a lot being talked about in the gaming a space of course.
And I'm feeling pretty good about it I think as we do get to a point where were really on the other side of the pandemic, which you know we can see the light at the end of the tunnel and I can kind of see how we get there. We're just not quite there yet I wouldn't be surprised to see a <unk>.
Fair amount go on because throughout this whole period of time. The lease model has really shown itself to be very attractive for not just the debt the landlords, but for the tenants and a that hasn't been lost on people Andy.
Yeah, and I would just add debt you know.
People are looking at this juncture put a long term predictability went without a refinancing risk on financial debt.
And you have to win a a refinancing at some point in the future with unknown rates.
And on a quantum of debt I think this model has become more and more attractive and through this period of time as companies.
<unk> has seen their leverage creep up a due to government restrictions on line capacity et cetera.
You know more and more parties on looking at this as a way to fix the balance sheet in one fell swoop, but also to obtain that predictable long term a cost.
Cost structure.
Yeah.
Got it got it and then just a this is a follow up in the past you've been somewhat specific in terms of minimum requirements for properties you'd like to acquire I'm just curious to get your perspective on what has to happen for those parameters to change.
The primary parameter around size of transaction was approximately $40 million of EBIT Dar.
And that was driven by two elements and it's just it's a it is a self imposed a bar that we can you know because its self imposed we can go under a anytime we character to the extent the deal made sense Theres a couple of things that we like about properties are a little bigger one you typically find them in larger.
In centers almost by definition right you have more customers because there's more spending going on and thus more EBITDAR going on so that gives you a diversity of customer also you are able to actually move the needle on the bottom line of a company with about $15 billion, a enterprise value one of the things that we've found very starkly.
Is that the amount of work.
The team has to do when looking at a small transaction of a smaller property or a set of properties versus a big one is you know we used to think it was the same I would actually put forward the premise that a smaller properties frequently as more work because they typically don't have the.
Same level of.
Hum analysis, that's already been done etcetera around all the types of things that we would need to look at in order to make a firm offer for the lease. So one of the places that we don't Wanna be given we have limited resources.
Resources, not just a capital, but if people and a of.
Intellectual capacity is that if you find yourself working on a deal that won't move the needle at all for a company of this size and then it takes your eye off the ball for one that is attractive and does moves a little needle you know you've made a big mistake through that so we have set the bar to a 40 million EBITDA.
Its still there it doesn't mean, we can't go to 30. It doesn't mean, we couldn't go to any number if to the extent that it was attractive, but we don't want to spend our time resources and effort chasing things that don't move the needle when we and then at the risk of missing out on something that does.
And there one thing I'd add is just and I think I've talked about this on past calls but.
It's a smaller properties as part of a broader and larger master lease.
It likely has many of these characteristics James talks about and that is with a larger enterprise a larger operator that has this data and has this information.
And that credit support from being part of a master lease that.
He is important for an awkward or to continue to.
Pay the rents on a you know that.
That makes a smaller property join up into a larger property a just as attractive as.
That's a larger one so I think that's a that's another.
Element that we've continued to look at a when we when we talk about the a pipeline.
Absolutely.
Thanks, Sanjay Thanks, James Thanks.
Barry.
Yeah.
And ladies and gentlemen, our next question comes from Rich Hightower from Evercore ISI. Please go ahead with your question.
Hey, good morning out there guys.
Hi, rich a rich.
Uh huh.
MGM is now a 53% ownership of the operating partnership it's not too far away from.
The 50% threshold and I know that you know.
The b share officially dissipates at a 30%, but have there been any conversations around maybe a.
Doing away with a b share you know once you get below 50, since we're so close and since.
You, probably had plenty of investor conversations where that that might be a a sort.
The key desire among among part of the shareholder base.
Well I can't comment specifically on any conversations, but I would just say this MGM owns as you noted a 53% it's a very meaningful stake. It's you know Clos of four and a half $5 billion depending on a.
On a day and anything that increases our value.
Is all of the shareholders benefit.
And the largest shareholder being a largest unitholder being MGM, so anything that would benefit a.
Yeah.
The valuation of our stock the greatest dollar benefit almost certainly would accrue to MGM. So.
Andy in mind, you know a big part of our job is to try to find obviously ways that we can keep driving value for our a equity and other stakeholders.
And to the extent that there is something that we think is out there and available such as that we are of course going to highlight it and demonstrate why we think it's a you know what the tradeoffs are about the benefits are and what the negatives are et cetera. Ultimately ultimately it isn't enough to us it's really an MGM decision what they want to do with the units.
Day, one, but we are always in discussion just like we are with different operators on why rethink a transaction with us could be beneficial to them on anything that could drive the stock and you know those.
Types of conversations are ones that one would naturally have where it goes of course, it's a 100% in.
Mgm's decision play book, given they own the units.
Right right no I appreciate that color James and then maybe just a quick second question here I guess within the non gaming.
Categories, you're evaluating in it you know it sounds like the pipeline is a pretty robust there a potentially or are there any.
Sort of.
Segments within non gaming that you've just sort of crossed off the list given COVID-19 you know I'm thinking maybe movie theaters as an example, but there might be others. They're just sectors that you just won't touch given the experience we've had over the last year.
The most likely answer is yes, but I wouldn't quite put it into a category that we wouldn't even ever take a look I mean, one of the things that we do is basically take a look at almost a half.
Everything that crosses our desk, some things that get proposed to us so or.
Yeah, one can tell very very quickly that it is a non starter and it spends about 15 seconds on there before you know, we sort of decided to exit off and I without going into specific sectors. I think it's probably a pretty straightforward for you to see which ones would be extremely challenged on industry where a.
It has a.
The challenges from the pandemic and then you load on top of it challenges from either the extraordinarily extraordinarily swift and significant changing buyer patterns of people in the United States on around the world shifting to you know quick and easy deliveries as opposed to going into the store or.
You know a streaming services, becoming such a dominant component of how people consume entertainment and so on and so forth.
We certainly don't want to put into ourselves into a situation, which is a long term challenge is even beyond the pandemic of which I think look you know unfortunately, theres a lot of them out there so without going into any specific one those are the ones. We absolutely want a steer clear of we're not totally exclusively with the gaming I would say.
Though the.
First.
A bang for the Buck so to speak is in the gaming business. There are not as many buyers due to restrictions and due to specific knowledge on must have a around the properties historical performance likely future performance.
It fits into its jurisdiction the nature of the licensing process in each jurisdiction et cetera that really causes a number of people, who I think would otherwise want to bit shy away and you know, we're able to share that space with only a small number of Oh you know other players who are also very knowledgeable.
And I think for all of US it's led to.
<unk> transactions, which I think will feed into the very cap rate compression I mentioned during my prepared remarks.
Perfect. Thanks James.
Thanks Rich.
And our next question comes from Shaun Kelley from Bank of America. Please go ahead with your question.
Hi, Good morning, James and Andy.
Maybe just a sort of ask a strategic question or two around a portfolio obviously.
There's a lot of chatter increasing around possibility of sports betting and various expansions of gaming in New York and I just wanted to kind a get your thoughts given the Empire city exposure on.
How do you guys think about that impacting the operations you know good bad or indifferent on specifically.
Specifically as you might think about enhanced rent coverage a value of that asset.
Andy do you want to take it.
Sure.
Certainly not not just a new York, but I think many of our jurisdictions.
We're encouraged by E Omni channel presence a N G M a.
The growth in debt MGM in a no go.
The online.
Vince and online strategy.
Certainly as jurisdictions in New York included you know add to and start really ramping up.
Operations on a digital right now we believe that's going to continue to drive customers into the buildings. That's certainly from Mgm's call last week has led.
Led to pretty significant and lifestyle on ups and vice versa.
That that strategy is.
Paying off and really driving some increased.
Net revenue contributions on a on both sides.
And you know, we're encouraged by that and the.
The New York property.
You know we had always thought a next big.
Increase there was gonna be a table games, but certainly it's a sports and online comes to the market. That's another a catalyst for that market to drive visitation to drive a.
Additional investment into that property, a and as a.
A reminder, as you probably know is we have a ROFO on that property as well so to the extent there is an expansion.
A N G M.
Like they did with Monte Carlo when they rebranded and a improvement to park, Indiana.
To the extent there are additional investment dollars in there and we can buy that real estate, that's another great transaction for us.
We have a a right of first offer on so we're.
We're excited by that opportunity, but as well as other opportunities in the portfolio a enough things that MGM might be doing too.
Great and then you know Andy if I could follow up we occasionally get questions you know on a little bit more frequently now on sort of a broader thought around the sort of I gaming impact on brick and mortar operations. So obviously you know some of the a total dollar figures that are thrown out there for a kind of crossover play are really.
But if you kind of think about a brick and mortar impact on that is obviously, a particularly important to us so any thoughts or just kind of early evidence New Jersey is the most developed market on there. So anything that you guys have either looked at B, a customer surveys or you know kind of detailed demographic overlays that you've kind a get a sense of.
Potential risks around cannibalization for an asset like Borgata.
You know as far as a cannibalization you know we believe that a.
Yes, it's a brick and mortar is a malls a digital assets are working hand in glove a.
Each is benefiting them the other as MGM talked about and as I mentioned as far as debt.
M life sign ups as well as a bet MGM sign ups from the cross play.
A long term you know we believe that the real estate has continued to have value and will continue to increase in value in this portfolio and to have a.
Tentpole properties like the ones that are on a portfolio. For example, the example, I use borgata.
That's always going to drive a.
Customer engagement, there's always going to drive people to <unk>.
Want to arrive at the property have an experience a core.
For those large events.
You know March madness, or whatever the right you know next big event there were a lot all gathered for you know.
That customer engagement a that live experience you know it is being replaced by a digital currently but I think there's gonna be a pent up demand for those people, who want to come back and gather and experienced that together so that's something.
Something that we believe in a portfolio that's going to work very well with a digital assets.
MGM has a.
And that's just going to create more customers that are going to want to come to the properties and experienced that and had that kind of activity.
Just building on that for one second the one of the a tenants of the company.
Upon formation and for the last five years has been that we want larger assets with multiple things going on inside the building that isn't just because when you go in and its much more.
Fund or a pleasant to on that building, it's because that's what keeps people coming in to the extent you have a room filled a slot machines and that's the extent of your offering that debt offering probably is vulnerable to alternative forms of gaming on a phone or whatever but to the extent you have a property that is unto itself a death.
The nation with sports events boxing events Hockey games, you know a football games at T mobile I mean, not at Allegiant a concerts.
Fine dining fun dining all these type shows all these types of things, they're not happening right now, but they'll come back and my own sense is and this is both anecdotal and just from general surveys that I've seen there is a very very significant pent up demand and it's from our own knowledge as to the bookings of both the M.
P M properties and other experiential properties really significant pent up demand from people, who want to get out and have a little fun and that is going to burst.
Onto the scene very significantly once we get to the other side of this and it just isn't something that goes away because you have access on your phone it to the experience and the debt.
The fun of going into the building on the you know a whole feeling of it that people go for in addition to the gaming, which is a part of it and that's.
The very way that we have set up our portfolio.
Nokia a late start yourself from a lot of the issues that I think one would have to the extent you buy you know you're looking at you know properties with very limited offerings, where youre basically, allowing somebody to come into play a slot machine that will be a little more vulnerable I think two potential cannibalization for us that is like number 28 on a list of.
It's a really isn't one.
Thank you both.
Thanks, Sean Thanks.
Thanks, Ken.
And our next question comes from Daniel Adam from a loop capital. Please go ahead with your question.
Hi, James Hi, Andy Thanks for taking my question.
Then I guess.
So you ended the quarter with $626 million in cash on a balance sheet and that's after redeeming $700 million a L. P units in a quarter.
I guess what are your plans for deploying excess cash at this point.
Yeah.
A we are in a very very good spot as it relates to a our overall liquidity and balance sheet position.
That cash position as well as a.
A revolver capacity of a.
About 100 million.
Yeah 350.
So you know almost $2 billion a total liquidity.
And look right.
We are looking to deploy that.
Playing offense right, we think there's going to be some fantastic transaction opportunities coming up and we want to be ready whether it'd be a.
One such a springfield or expansions on existing properties or properties from other tenants you know we're sitting in a position where we can deploy a significant amount of capital very very quickly to the extent that the right thing comes along in addition to that our borrowing costs are at all time lows.
For us with our debt complex trading most of it in the three some of it down into the twos. So situations times like this we don't think they're going to come around you know every a every day, we want to be ready to a position ourselves for offense and I think debt we are Andy.
And I think that covered a james.
Okay.
Great.
And then a my second question is if I recall, you MGM master leases subject to a few minimum coverage thresholds, including on a trailing EBITDAR to rent a ratio of one one times.
Just given MGM reported a consolidated EBIT Dara law for 2020 can you just remind us how that a minimum coverage threshold works.
And that's it for me thanks.
Sure sure so the minimum coverage as a a one one to one a given the dynamics of the pandemic.
It's a at a point where a that.
That ratio doesn't currently apply and so.
Given the governmental restrictions and things like that at the various properties.
So once we get on the other side of this a that EBITDAR ratio can will be recalculated again.
And a two two tests and so other than that there is no excuse MGM continues to pay rent in full on on time and for us and our shareholders. Obviously, that's the most important thing.
Okay, great. Thanks, guys.
Thanks.
Sure.
And our next question comes from Joe Greff from Jpmorgan. Please go ahead with your question.
A.
Hey, guys.
You've talked about this in a in a couple of different ways, but you know on trying to assess your external growth opportunities.
Maybe I'd love to hear your thoughts maybe explain it this way and talking about the likelihood of a day.
Deeming asset transactions occurring in 'twenty, one or is it a moral but.
On a 22 event and how does that enter a deferred when youre looking at strip assets versus regional one.
And then in general how does a Las Vegas strip asset transact right now if it involved in up though in a REIT.
Yeah.
Uh huh.
Trying to just make a note of each of those parts.
Ah so as it comes to 'twenty, one versus 'twenty two we're only a.
The middle of February obviously, 'twenty, one so theres a long time to go to the end of the year.
So I wouldn't be a I'm not.
It would be a <unk>.
Too difficult to predict specifically, whether it would be a 21 deal or would have to fall into 'twenty. Two I see nothing that would get in a way of a <unk>.
Transaction happening in 'twenty and 'twenty, one with the exception of a meaningful reversal of the progress that we've made in terms of reopening the economy and battling back against a key.
Covid, so I I am I'm hopeful something does get done in 'twenty, one that said on the other side of it.
Each of these transactions for us are large and they're a complex. This is not like buying a.
You know a a cvs.
Branch in a strip mall for a five or $6 million, she's a very big and complex properties with lots of.
Things that one must look at before pulling the trigger on what will be you know potentially a billion dollar capital investments the smallest deal we've ever done a $638 million. So you've got to make absolutely sure every t's crossed never yards started.
Making the right call here because you have to live with this lease in the building for a 30 to 50 years.
And you have to make sure it can pay the rent so a they take time and on top of all the investigations that we have to do around ensuring that our capital a securely invested then you have a at least that you have to agree with with other parties now Luckily we have bid on properties with a.
Obviously with MGM at all and have a leased them do you have a work with a number of other third parties. So the lease component of working out the.
You know hundreds of different decision points. One has to make is largely water under the bridge at least with a a number of preferred kind of operators that we're close with so I don't see anything.
Particularly that could get in a way a a 'twenty one deal, but that said you know if you probability weight any one transaction, it's very unpredictable to see when these things.
We'll get done at a frequently takes multiple years to get over the finish line as it relates to regional versus strip, where when I say, we're in different it's very very we are in different along but we're very property and location specific or a certain if the property is a dominant property.
A large metropolitan area like we have with MGM Grand Detroit.
That's one type of analysis, you would want to do versus maybe a gold strike tunica right, which is another asset that we obviously owned versus a strip asset, but what we really look at is the power of that building either because of its customer base. Its operator, its fit and finish you know all these things come together to determine how many are our own view of the.
The ability to withstand the ups and downs of the economy, the ups and downs, a competition et cetera, and not just survive, but thrive and be able to pay a rent no problem, So Andy and I don't Miss one night, a sleep a nor do any of our large shareholders. Because we just aren't that confident that that's going to get done and whether that be on the strip or whether that be in.
You know Washington D C area. It is.
At least on what we want to look at the same type of analysis, although obviously each jurisdiction has a very much as you know Joe it's on.
You know its own animal when it comes to just multiple different facets of customers city size regulatory it's that tax regime et cetera.
On the strip with an Opco. There's many ways you can get done it's not so different than how we would look at any of our other transactions.
We would there's lots of different ways that one can approach it but at the end of the day you operator has the right to run the building for a long period of time, our shortest was 30 years, our longest is 50 years.
So they have the right to run that it's typically and you set the rent at a level, where we're confident they can get paid and not only that we're confident that the operator has significant free cash flow above that so they can reinvest in the building earn a return on their own capital on both parties are happy and we put the lease in a drawer and never have to worry about it.
But it's it's basically the same model of what I would put forward what we've done on any of the transactions we've done whether it be in Ohio with a hard rock and then eventually with MGM or the Borgata, which you bought from Boyd and so on.
Yeah.
Thank you.
Thanks, Joe.
Yes.
Our next question comes from Jay Kornreich from F. N. B C. Please go ahead with your question.
Okay. Thanks, very much I'm going back to MGM opening on a redemption cause a new formula agreement needs to be established before units can be redeemed and AD units will get redeemed how do you think about dividend increases.
Andy why don't you take it.
Sure Hey, Jay No a new agreement does not need to be established the original a formation agreements on already has a construct and its a no different from any other Reits.
Agreement with LP unit holders debt, if MGM has additional units it we'd like to redeem and this is.
The traditional where original method.
They come to us from the company the REIT.
That makes a decision as to whether or not a issue.
B shares or cash a.
We're able to satisfy that you're going to a redemption.
At our option and so that's a what it reverts back to and is currently.
On the current state of a unit redemptions.
Okay, and and as you know get redeemed in the future. How do you think about dividend increases related to that.
Well look at those are those situations come along certainly it's a we have an opportunity to redeem.
Choose a cashed out and then it is accretive.
On an asset per share a that's something that we can review with our board.
That makes sense to increase the dividend thereafter.
If we can deliver shares then the accretive aspect of that is a.
Les a parent obviously is just a a unit per share a transat.
Transaction without a change in the total number of units.
In that case, there's likely not any assets all per share benefit and that's a and we'll still reviewing a with our board at that time see if there's another.
A value, creating a aspects that have come into the fray a during that time questions, an escalator or transaction.
Okay.
And then if I could just add one more.
Just regarding sports betting and gaming do you pursue ways to participate with MGM in this growth maybe through financing the real estate for MGM acquisitions in a newly legalized state or financing the physical sports book development at casinos.
We could do either of those types of things I think one of the.
A great benefits from the wild.
You know a significant growth expansion area that is represented by online sports betting and I gaming is that.
There will be I think more transactions a fallout of this as people want to a.
Gain access to all the different state jurisdictions. So yes, all those things are on the table, we don't want to participate in some form of like participation rent or something like that.
Because from a very started the company you know our philosophy has been an individual investor can diversify on a one share $33 a share basis as to whether they want to own. The you know operating side of the business with the ups and downs that come from that the potential growth, but also the potential downfalls.
They want to own the.
Real estate return side of the business and so we don't want to start mixing that model, but yes to the extent that there are new acquisitions from any anyone who wants to get into a a market that we think you know.
Are attractive to us or build outs, just like Andy mentioned with park MGM or what we could we have a ROFO on a similar structure for Empire. Those are always debt will be I think ultimately be accretive growth fast for us and we're pretty excited about it even though we're still on the very early stages of that development, but I think it.
It's the most exciting thing to gaming in a long time and will generate some really significant growth for the operators, which will be which we are a 100 per cent for.
Got it okay. That's it from me thanks very much.
Thanks.
Our next question comes from John Decree from Union Gaming. Please go ahead with your question.
Good morning, James Good morning, Eddie Hey, do you want a discussion.
I wanted to talk about it on another industry dynamic that a that we've been experiencing since casinos reopen and that's the kind of a substantial margin enhancements and cost savings that.
You're a tenant has talked about as well as most of their peers. You know on it's interesting that a you know the number of assets haven't necessarily increased but the potential rental pool, given where EBITDA growth could go is could be substantially higher so your addressable market might be expanding a I guess, it's a question of sustainability your views on a cost.
That have been extracted from the business I think more more obvious on the regional markets today, but presumably in Las Vegas when demand returns. So your view on sustainability in that in the context of the M&A landscape has that impacted the bid ask spread a in.
In your discussions with potential sellers and how do you think about your underwriting standards in terms of rental coverage and things of that nature.
Kind of all of a renew and a could be a bunch a larger rental pool going forward or you know it could be could be temporary I guess, everyone have a different view. So curious your thoughts on on that industry trend and how it impacts your underwriting.
It has been really really amazing to see and I certainly would never have wished such a terrible thing on to the country the industry or the world too.
You don't have every you know people.
Being forced to stay at home due to a virus in every property shot but through this.
Time.
I would say a couple things have really sort of been.
So a surprising on amazing to me on a.
The positive side of the business side of things, which is one MGM started on its own efficiency program. A you know over a year ago and continuously moved up the targets as to what they viewed that they could bring out of the system and when you take that and then you combine it with the lessons learn.
And from having to shut properties down entirely on a short notice and these are big complex properties reopen them on a short notice and then in certain situations shut them during the week and reopen them on the weekend I think that if there's one thing what well one thing that has really been showing from this is just the incredible efficiency and well run.
Of this business versus almost any other I've ever been involved with a particularly in Vegas, but I would put it across the whole country, where their ability to react to the market is just incredible shut something down as big as the MGM Grand Hotel on a moment's notice reopen it again on a short notice it's a it's amazing.
Multiplied across every property.
So it's really incredible, but I think that.
Starting with real zero based budgeting going from being on employee being a property being shut to opening up in small stages and so on has generated a lessons to the very savvy operators at MGM.
To understand exactly what costs are driving revenue and what aren't the regional expansion.
Expansion in margin, which drove record EBITDA is on smaller revenue numbers.
Was a amazing and fantastic I think some of it is sustainable but it won't be all sustainable some of the costs of a cut of the business where loss leaders in order to generate customers. So to the extent that you're in a competitive market and you were trying to bring a customer into that market there.
You know take a proverbial customer, where you're making a $500 off of that customer and profit would you be willing to spend a $100 to bring him or her in from a a rival properties, yes, because you'll make 400 right and on the rival property, we'll try to bring that person back again that offer them $200 a benefits.
Or whatever so the fight for customers, which was a natural outcome of just a competitive market will continue but the way that operators are operating I think a so much savvy earn out and if I look at MGM again.
The.
Power that came from their own very thorough efficiency measures that were already in place combined with this knowledge.
That you're absolutely down the right track and we see it pretty significantly they won't all be like on the entire margin expansion won't be sustainable, but enough of it well, where our addressable market will go up by you know a pretty meaningful amount exactly what I don't want to say I'm not close enough to it to say is at 4% three per se.
On a 5% margin expansion I mean, I don't know, but it is it's significant I do think part of it will be permanent and I think that you're going to see the same type of thing in Vegas. That's what you saw on the regions.
As the customer base that is here, which is more visitation oriented as you know starts to really return.
That's helpful. James a quick follow up to that.
And again, it's probably not something you can find on a too directly but when we think about the bid ask spread do you suspect as everyone has a different opinions on how much a sustainable yeah, it'll probably take a few more quarters as we start to see values.
Evaluation discussions with you and potential sellers a play.
Play out so as soon as a kind of like a story is a little bit of a wider bid ask in some of the stuff that youre looking at given there's a probably a different levels a view on the sustainability of margin.
Yeah.
I would actually say no it really hasn't been that way I've not seen a meaningful change in terms of sort of what.
Each of the parties you know the debt.
And a potential operator sees a sustainable or where we think it goes I think we're being pretty much aligned with most of the people that we've talked to maybe all the people that we've talked with and yeah. We have the normal back and forth that business people do over what one should pay and what the terms of the lease on could be and so on but but I would say you havent real.
<unk> seen a GAAP out on that and it's a significant part of it as you know, but Andy and I've covered this space for 20 years I mean, it's been for a very very long time and the power.
The cash flow generating power that would come out of any one particular building I think we have a very good sense of the operators themselves. It's it's unusual to find an operator, who wants to set a rent number on a number that they feel are even if they have any question about the sustainability of it said it so high because.
As you know they they do have a very significant stake left in the property. After you do a deal with us.
The right to run one of these properties for 30 40 50 years, it's very valuable to the extent you set a too high and you roll under that rent amount such that youre not covering it with the property when we go into a downturn in X a number of years or whatever.
That's really a position none of them want to be in that we have ever dealt with and if there's someone who is willing to take that and you know there was a view that they would then just toss a keys back to you that.
That's a tenant that we don't want them, so a well.
I really havent found it Andy what do you think.
I agree a you know the pricing hasn't changed as a result, a higher margins than I think anybody who is experiencing these higher margins on lower revenue.
There is a day when that revenue probably comes back and they get to keep those high margins. So it's even higher.
EBITDAR number then the market has seen that hasnt, yet really experienced yet, but they can model it.
So there is upside potential on that kind of goes on your addressable market question.
So that potential hasn't been a cheese and so I think that's a.
An aspect that.
Operators, one experience and they want to make sure that they set their rent not too high as well a.
To make sure they can experienced a cash flow that comes above and beyond and so it doesn't change pricing that might just change you know where you set the rent, but it isn't going to go too far above as James talked about such that there isn't enough free cash flow.
Yeah.
Understood. That's really helpful guys I appreciate the a insightful comments. Thanks again thanks.
Thanks, John.
Our next question comes from John Masako from Ladenburg Thalmann. Please go ahead with your question.
Could you maybe at a drill down on some of those pricing discussions has there been any change in conversation given some moves we've seen in <unk>.
Interest rates, particularly on a long into the curve.
You'll have that meet those made parties more receptive to some of the pictures around limited refinancing risks around net lease transaction and the impact that's having on from a cap rates being discussed and any potential deals.
Just some color there would be helpful.
Yeah, it's been very interesting and we're still sort of in the early stages and some of it is.
We know where rates are now, but you never really know where they go in the future I mean, we ever own guesses of course as does everybody. So we're sitting with very very attractive borrowing rates and reasonably I mean, I think our equity is as I mentioned in my prepared remarks, I think we have a significant cap rate compression that's going to <unk>.
[noise] itself here in the.
Coming periods of time, so, it's probably not where I think it should be valued but it's not so far off of where we had been valued historically that has a.
It's it's been hard to tell for certain assets that are very attractive of course, you are going to pay on a cap rate reflective of that assets value and thus with assets that are maybe a less attractive it's given us a little more flexibility maybe to move on things you know move on transactions, which will be a little on the on the price.
On your side, but a lot of it also is just driven by supply demand and depending on the different risk tolerances of the potential buyers and the knowledge of the buyers on that property et cetera, you know that really comes into it too. So I guess at the end of the day I would say that.
Yes, it plays into it a little but the flip side is also the debt. The operators all are facing somewhat the same pressures right, maybe not as a low borrowing rates as ours, but the same type of reduced rates, so everything kind of falls into alignment around.
Relative attractiveness of deals there could be a little pressure upwards to the extent it was a hot auction for a really great asset.
Because we have a little more flexibility, but a more than that its just driven by risk tolerances.
Desire of the operated out of a particular partner.
Desirability of equity cash equity component that you may or may not provide to a seller.
All of that comes into it so much I Wouldnt you can't.
Isolated strictly on that one point.
Spot, we havent it Hasnt express itself, yet, we'll see if it does in terms of if there ever was a really hot auction for a hard asset.
Okay and then.
On the investment side kind of excluding the opportunity set in Yonkers, I mean, how much development risk on a on a transaction would you be willing to take on I mean, specifically would you be willing to kind a purchased assets that are still being developed kind of you know a.
What's kind of a target opening date, a couple a years out or is that something you know when you think about an investment you want on assets already essentially producing the cash flow debt.
Pay the underlying rent.
I'll start and Dan Oh go ahead Ed.
Yeah.
This one I think in terms of just pure development projects were more on the on a ladder you know a preferences and ASIC is already generating cash flow. So they can have a better sense in real sense of what the cash flow generating power.
That property is but at the end of the day, we've gone through a James talked about you know we've been through this industry for the last 20 years, and we'd seen properties opened well and to expectation, but certain ones below or potentially even above expectations. So you know, we're well versed in different structures too.
You know make deals a.
<unk>.
Better for both parties and to protect ourselves and protect our capital to make sure. These properties can open and do well, but are a preference is certainly a properties are already open and have a some.
Some kind of a track record as to what is true, earning power is as opposed to just a model on paper and then I'm trying to underwrite it from there.
Okay.
That's it from me thank you very much share.
Uh huh.
Our next question comes from Greg Mcginniss from Scotia Bank. Please go ahead with your question.
Hey, good morning out there.
Yeah, Greg.
Looking at the a master lease escalator and the variable rent reset in 2022 have there been any conversations with MGM on maybe amending or adjusting those calculations because meeting the escalator threshold and not reducing available a rent implies a fairly significant recovery from here.
So just your thoughts on that and whether you've been having those conversations place.
Okay.
Sure as far as a the upcoming escalators.
March 1st week into a joint venture as a matter of this year.
A april 1st we get the master lease escalator.
This year and those have no tests from Recalculations.
But you're correct starting in 'twenty two a both the percentage rent as well as to a fixed escalator rent they have ratios to meet.
As far as the percentage rents we have for another five years that now have been calculated.
Results for that certainly this year a will contribute to those resolved. So we don't obviously know yet how that's going to shape up not theres a good recovery at the.
The latter part of the year in the second half of a year.
From here on out and certainly that will improve.
You know the as a percentage rent calculation on what that number will become a.
And for the full year, a escalator, whether or not we get 2% or a stays flat on the a larger amount.
That'll depend on 'twenty and 'twenty ones a revenue calculation. So obviously, we're starting a year off a slow.
On January 3rd things tend to come back in the coming quarters. I'm you know I think there's certainly still a possibility, but its still yet to be seen.
And you know whether or not we have discussions on them.
Justin that's a you know it will.
Debt those are conversations that we would have and you know behind closed doors, but certainly we're always looking to create value for our shareholders. A we look at everything and if it's something that has a good possibility and a good return you know we'll look at those in priority and so if it's a transaction.
Or it's a you know as we talked about earlier in a call it fits a.
As it relates to ownership or it's escalators prioritize high return high probability things.
On to look at some of our shareholders.
Okay. Thanks, and then just on the a dividend a last call you mentioned being comfortable with the 10 on the top end of the peer group on the pay out around that 85% level is it fair to expect a dividend kind of right in step with the lease escalators this year.
Well, we'll evaluate that with our board coming up here certainly as I just mentioned.
The two lease escalators are coming in and the next a 15 in 45 days and so once those kind of flow straight through to assets per share and and really improve that ratio and gave us additional room for a potential dividend raises a will.
Evaluate that with Ford on the sea.
What do we want to take that but.
It is as we alluded to before and as you did as.
Well, Greg you know, where we're comfortable where we are in terms of pay out you know our leases are long term, there's no explorations theirs.
You know very high level of a certainty as far as the the level of rent, it's gonna be a regardless of the.
The escalators that we talked about earlier and so we're we're very comfortable at a more payout ratios.
Alright, Thanks, Andy.
And our next question comes from Robin Farley from UBS. Please go ahead with your question.
Great. Thanks for taking the question I guess, just a follow up on I know you talked a bit earlier about the potential timing of transactions. This year and I guess you know.
I guess, that's the one thing for an operator to tell investors that margin improvement is going to be sustainable, but it's another thing if they are willing to kind of commit that to future rent that they'll have this higher price. So I guess.
How is it that a transaction would happen this year I guess I'm just wondering if you know as everybody has too.
No underwrite some kind of rate of recovery and then you know whether margins are sustainable or not is it really reasonable to think that.
Anybody who's going to have enough visibility on that.
In 2021 to actually be willing to commit to those terms in a permanently.
Permanently in a transaction.
Well one of the things to.
Call us.
Every one of our properties is within a master lease.
And we have a corporate guarantee on every single aspect.
Every single property that we have so they're all cross collateralized.
Cross default it if one isn't carrying its fair share.
All the others have to kick in or else everything within that Master lease group is lost to the operators, so and there's a corporate guarantee on it.
And the and the right to run these contracts for 30 40 50 more years is incredibly value. Both so there's a huge incentive to pay the rent and then anyone in any deal that we would look at the likelihood of US just signing a single assets lease on the hope that something comes back.
<unk>.
Is much less likely we have shied away from single asset leases like that just for these very young environments.
Environments and types of reasons. So there's lots of ways that one can structure around some of the issues that you've highlighted to the extent that it was a.
A a corporate goal from the operator to get a hold of a set of assets or to do a sale leaseback on a set of assets.
Most of the offer is really all of the operators, who we have talked with our sitting on extraordinarily significant amounts of liquidity with very limited maturities coming up in the near term.
And I this model not so much as a some sort of stopped GAAP to a.
Stop a maturity coming up in a very near term, but it is a more permanent way a financing the company, which is frankly, much more efficient and generate as much more value for their shareholders.
So when you look at a transaction like that what types of things that we would want to look at would be or the assets are there other assets in such a structure that will compel the operating to make sure. They pay do they have enough liquidity to pay through all sorts of ups and downs.
Et cetera, so although if one was looking strictly at a single asset from them on from a from an operator, who had such a little capital, but they were relying on next month's EBITDAR to pay the rent I think that that would be a concern and a is a concern for many of our brother and in a particularly in the retail world right.
We look at things much more akin to that for US typically the type of deal that we've looked at just it's a it's a much longer term much more strategic play for an operator, who sees us as a key capital component too.
Unlocking a future value through their plan and you know the idea that you know what what the what the EBITDAR generation is versus a rent for the next six or nine months just.
Isn't a big enough component of it for them to stop a deal from happening.
Okay, Alright, Thanks, and then my other question is.
How quickly does MGM have to get back to that one one to one ratio. It sounds like you kind of gave them some forbearance or something so how long is that waived kill or would you actually just sort of keep rolling that you know what when.
But at the moment I guess, how quickly do they have to get back to that level.
There's a required timing, it's just so long as there's governmental restrictions on.
Yeah, the 1.1 isn't like debt.
And there was no forbearance, it's just a part of the existing structure of the agreement that was always there to the extent you have a.
Government induced.
Shut down.
You know until that is not there.
It kicks in I think you'd see the same though on virtually any leased cross country.
And so if if there arent a restrictions, let's say by June or whenever you see radical day.
Then starting June one.
That ratio to send a is there a sort of 12 months for them to get back to that I assume.
Debt that measure would kind of start on that day, so you'd have actually 12 months after that.
Yeah generally speaking that's a that's how it works, but there's there's additional provisions in there that a has to be calculated but generally speaking yes.
Okay, great So a lot.
So on.
From there for sure Okay, great. Thank you and looked at that as a protection for a it's it's you know that's something that on to.
To the extent, a there's nonperformance that just another.
You know tool that landlord has so if the rents being fully paid on time no changes then we're more than happy to keeping a rent space.
Yeah, Yeah, no a fair enough okay, great. Thank you.
Our next question comes from Smedes Rose from Citi. Please go ahead with your question.
Hi, Thanks, I just had one question on sorry.
All of a.
A native American a try to move into commercial.
I'm just wondering.
Now that there's a couple in there do you think this might be a trend and you see a.
That area is it on.
Or maybe potentially a new tenants going forward or other complexities there that you'd look to avoid.
Yeah, it's an interesting a interesting thing it's been going on.
Sort of behind the scenes for some time that we've been aware of as the native American facilities have become a you know a sophisticated very capable operators unto themselves in many of these regions, they're not surprisingly looking to expand with their expertise on.
Side of their you know very localized operations at least initially so a.
So, yes, I think that that they've been looking various groups have been looking for some time, there's been a handful that a pulled the trigger I think that you will see more of that as they look to expand and diversify their own.
Cash flows for their tribal members and stakeholders.
Yeah, I think that you will see more on I think it is a potential a growth area for us and a potential new tenant base. Each deal has to be evaluated obviously in the same sort of ways that I spoke about before but I think that you will see a growing expansion in that and that buyer base.
Due to the natural and very wise decision to diversify out from a you know what are typically single property a single location holdings initially.
Okay, Alright that was a thank you.
Thanks Pete.
And our next question comes from Spencer Alley from Green Street. Please go ahead with your question.
Yeah. Thank you and maybe just one more on your opportunity set them on a JV side, just curious if theres been any.
A more interest from private equity or others and potentially working together on a transaction I'm on to what you are executing with Blackstone.
Yeah, it's interesting Spencer.
There is a a significant and growing interest from some of the larger sophisticated private equity firms and capital providers in this space.
Actually given one Blackstone, obviously validated just a a degree.
When they bought the cosmopolitan further with the blogs, you'll further with the grant and a Mandalay JV that we have with them, but as we went through this period of time and I think if you went back if you went back a year ago. We had just closed on the Grand transaction and people did not see this coming a at least not anywhere close to how it actually.
[noise] unfolded and then give you a told a lot of people in a very sophisticated fan a series of this what happened they would've been very nervous about what the outcome would be a the model and as I talked about in our prepared remarks, I mean, the model has come through.
Just absolute flying colors versus any other a.
Industry that other than maybe data centers or something like that storage I suppose a has so the interest in the space either in terms of you know what they're doing similar types of transactions or so on I think has increased.
It's typically large very sophisticated institutions, who have the ability to a.
Put extremely cash.
<unk> and hard working folks against a problem to figure out the ins and outs and a offset some of the potential capital risks that they would employ through a deployment of cash by partnering with us. So I think it's a great trend I'm couldn't be happier that we have already have this JV in place, which can act as a blue.
Print for what we're willing to do and not do a in terms of an agreement a Blackstone has been just an absolutely class act through all of this and just a excellent partner and you know there's others in the space, who are who want to try to emulate what they've done I'm not concerned, particularly as it relates to competition around any one asset.
Because it's a transactions for the type of assets at these firms are looking at which they typically seem to like.
High value a.
A high fit and finish assets given just the amount of capital they have to deploy a.
Lends itself to sort of a joint venture type structure with someone who lives in Vegas can go see the asset every single day, you know so on and so forth versus making a multibillion dollar deal just on their own you know a.
It just is a it's just a natural to sort of go that way so.
A.
I think that you'll see you know excess returns you know excess rents excess returns will bring in capital and I think we're in inning.
Maybe a you know the first half of the first year still in terms of that moving but I think that's a lot you know a component of what will ultimately drive our own cap rate compression I talked about in our prepared remarks.
Okay. Thank you.
Thanks Spencer.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the conference call back over to management for any closing remarks.
Thank you Jamie Thank you to all of our investors and partners for a being there for us through this past year look forward to 'twenty 'twenty. One we think it's going to be fantastic. Thank you.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.
Yeah.