MGM Growth Properties LLC (NYSE:MGP)
Q1 2017 Results Earnings Conference Call
April 27, 2017, 12:00 PM ET
James Stewart – CEO
Andy Chien – CFO
Robin Farley – UBS
Shaun Kelly – Bank of America
Steve Sakwa – Evercore ISI
Tayo Okusanya – Jefferies
Carlo Santarelli – Deutsche Bank
Thomas Allen – Morgan Stanley
Joe Greff – JPMorgan
Good day and welcome to the MGM Growth Properties’ First Quarter 2017 Earnings Conference Call. Joining the call today from the Company are James Stewart, Chief Executive Officer, and Andy Chien, Chief Financial Officer. Participants are in listen-only mode. After the company’s remarks there will be a question and answer session. Please note this event is being recorded.
Now I would like to turn the conference over to Mr. Andy Chien. Please go ahead.
Thank you, Steve. Good morning, and welcome to the MGM Growth Properties first quarter 2017 earnings call. This call is being broadcast live on the Internet at www.mgmgrowthproperties.com and we have furnished our press release on Form-8K to the SEC this morning.
On this call we will make forward-looking statements under the Safe Harbor provisions of federal securities laws. Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those forward-looking statements as contained in today’s press release and in our periodic filings with the SEC.
During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation to GAAP financial measures in the press release, which is also available on our website. Finally please note that this presentation is being recorded.
I’ll now turn the call over to James.
Thank you, Andy.
I’d like to welcome everyone to MGP’s first quarter 2017 conference call. One week ago today we celebrated our first anniversary as a public company. We have accomplished a great deal in the past year and continue to execute on all of our initiatives.
Some highlights in the last year include the successful $1.2 billion IPO of MGM Growth Properties effectively reopening to 2016 IPO markets, the $1.175 billion acquisition of the Borgata which grew our revenues by 18% and dividend by 8%, the pricing of a 10-year bond with a 4.5% rate, the tightest rates ever for a company with our rating at the time.
Going forward the first base rent escalator under our Master Lease of 2% went into effect on April 1, 2017 resulting in a new total annual rent amount of almost $662 million for our second lease year demonstrating the built in growth of our business model.
On the capital structure side to a combination of repricing and ratings upgrades we steadily the improved our average cost of debt in particular with our $1.8 billion term loan. We have executed on a total reduction of the LIBOR spread of a 100 basis points to LIBOR plus 225 basis points from the initial rate of LIBOR plus 325 basis points. Our guaranteed escalators and our Right of First Offer opportunities provide us with define growth trajectory a level of dependable transparent unique to our company.
In addition to this our conservative balance sheet and constant management of our cost of capital positions us to execute on acquisition opportunities which fit our discipline criteria. As always, all of our actions are underpinned by our goal of sustainably growing our dividend to drive shareholder value. I am proud of what our team has accomplished since our IPO and I’m excited at what lies ahead.
I’ll now turn it over to Andy to discuss our financial results.
I’ll now provide some highlights for a few items of our financial results for the quarter starting with the income statement. For the first quarter, we recognized $163.2 million of rental revenue. This is based on our annual rent revenues of $650 million and we subsequent to the quarter increased to 661.7 million which was effect of April 1. Our G&A expenses for the quarter of 2.7 million adjusted EBITDA was 160 million for the quarter.
Net interest expense in the quarter was 44 million and AFFO was 118.7 million or $0.49 on a per share basis. Our first quarter dividend was $0.3875 per share which represented $1.55 per share annually.
In terms of our balance sheet we remain committed to maintaining conservative capital structure and continued to improve our financial flexibility and cost of capital. During the quarter we executed additional interest rate swaps and the results of our upgraded credit rating to Ba3 at Moody’s.
Our term loan pricing improved by 25 basis points from where we started the year and subsequent to the quarter and as announced in our earnings release we further repriced our $1.83 billion term loan B to LIBOR plus 225 and re-pricing expect to close early next week.
As for our net leverage it remains steady at approximately 5.2 times net debt to adjusted EBITDA and as we look back over the past year since our IPO we are continuing to deliver on improving our financial profile and we remain committed to outline goals and sustainable dividend growth and believe that our strength in financial for this position allows us to deliver on this for our shareholders.
With that I’d like to turn it back over to James.
Thank you, Andy.
We’d like to thank all of our investors for their continued support and look forward to many anniversaries going forward. With that operator we’d like to open it up for questions.
[Operator Instructions] The first question comes from Robin Farley with UBS. Please go ahead.
I wonder if you could just give us your latest thoughts on maybe timing of potential transactions? And I’m curious about your thoughts on whether a potential corporate tax reduction in the U.S. Does that kind of delay the likelihood of a transaction? In other words, or would sellers now kind of wait to see what value may be created from that or maybe you can talk a little bit about how that’s impacting timing? Thanks.
We have a pretty active dialogue going on with a number of different people in the industry where I think transactions could developed from part of our normal course of business activity. In terms of the proposed tax changes on the horizon I have not seen that really seeing to impact the people that we’re talking with decision-making process. I don’t get the sense that there is any kind of acceleration or delay as it relates to tax legislation for people who are potentially interested in looking at monetizing or doing some strategic with the industry.
Okay, great. And then maybe just – my other question is for National Harbor, when you look at where the EBITDA has come in, how do you think about how you would view that kind of annualized basis? What kind of seasonality would you factor in? And sort of thinking about what you’ve seen so far it would tell you about what could happen on a full year basis next year?
It still very early days obviously for National Harbor really being open only for a little more than one quarter so it’s too early for us to really draw any kind of meaningful conclusion or have a trajectory very different then where we were prior to opening. It’s something that we’re obviously very interested in where it will end up but I think it’s just too early to tell other than to say everything seems to be completely on track in terms of I think where we thought it would be. So we still I think remain with the same profile as we did before in terms of timing and what we think ultimately was side up to.
Okay, great. Thank you.
Our next question comes from Shaun Kelly with Bank of America. Please go ahead.
Hi guys, thank you for taking my question. Was just maybe wondering if you could give us your latest thoughts. We continue to hear questions about further opportunities in Las Vegas in particular as it relates to at least one big portfolio of assets that are out there. Any sort of new or developed thinking as it might relate to opportunities that are specifically out in Vegas?
There are as anything there is a lot discussions that take place given some of the unique going on around a numbers of the asset in Las Vegas that could potential be interesting to us. It’s probably too early stage for us to really be able to make any of – have any kind of meaningful discussion on any of those.
But that said with the city where both Andy and I live as the bulk of our properties and we feel just given our relationship with MGM and our own knowledge base we have a unique insight into this market and to extent that good opportunities come up we will want to do.
Great. And the other question is really just thinking about some of the smaller opportunities that may come out of MGM. Any update or thoughts you could give us around things like the Park Theater or some of those types of smaller things that aren’t the big ROFOs, but just what else you guys may be talking to them about?
Certainly Hey Shaun this is Andy so with respect of incremental opportunities we remain in discussions with MGM about what timing might make sense for those opportunities. Definitely Park Theater something that we talked about in the past and continue to do so. Monte Carlo’s has the rebuild going on so there is several projects that we continue to discuss that and we haven’t come to a decision as far as timing but we’re stepping on our radar
Great. Thank you very much.
Our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.
As it relates to maybe non-gaming opportunities, just how has your thought process evolved? And just maybe given where the stock is trading and how well it’s traded from the IPO, does your thought process at all change or differ in how you think about pricing or the opportunity set that might be out there?
It is always been in interest in terms of I guess I would call it the broader leisure space and we have seen a couple of things which I have to-date we have not executed on but we thought it could be nice addition to the portfolio. I think that is still is a better pricing environment in the larger integrated resort market than in many of the other leisure sector activities that we have looked at that said if something can sustainably increase the dividend and we feel like we have a strong knowledge of the industry we’re certainly open to other leisure sectors.
Okay. Well, I guess that segues into my second question, which is the dividend. And how should we be thinking about kind of the dividend increase? And I presume in the second quarter we should be looking for something to change there?
Steve those will be discussion that we have with our Board when the time come and we’ve always communicated the 75% to 80% AFFO payout. We are well within that range currently. And as we mentioned with the escalator starting April 1 that moves us further down into that range. So in terms of that we will discuss and evaluate when that comes.
Okay. And last question – you’re sitting on still a lot of cash any thoughts of somehow deploying that either through debt reduction, just to create additional earnings or is that cash earmarked for things in the short term?
I think that we have a good sense that we will be needing the cash in the relative near-term in terms as we look at just the opportunities that we’ve discussed before such as the Right of First Offer opportunities and that would be our preferred path of action as opposed to paying down debt right now just because I think for shareholders that where they’re going to get the most return on capital for that cash.
Okay. Thanks guys.
Our next question comes from Tayo Okusanya with Jefferies. Please go ahead.
Yes good afternoon, I know everyone’s kind of always curious about external growth with you guys, but you put up some interesting information just about internal growth today in regards to the rent bumps and also refinancing some of your debt. And I guess, as you kind of think about opportunities to grow FFO going forward outside of acquisitions, how should we be thinking about that as growth opportunities, such that you can continue to raise the dividend?
Hi Tayo, this is Andy I think hit on a few of those obviously with our model and our Master Lease structure with the rent pumps that we do have 2% and 90% is pretty significant amount without having those annual expirations as of leases that increased rent stays in our asset. So those clearly are opportunities on the balance sheet side we continue to look at opportunities there as well.
We spent some time for fixing our [ph] some of floating rate debt so that we have those opportunities to then reduce the rate as our profile improves. So those are definitely some of the areas as far as other levers that we can pull we have the G&A line is already pretty lean and really it’s going to be on the growth and acquisition front that we see that we’ll be able grow the asset as per share.
All right. Is it worth looking at the 2024 deck, by any chance, given your improved credit rating?
We continue to look at the maturity profile the various tranches that we could potential do and that opportunity would be with the acquisition that will start to think about how we want to stagger that out and whether or not we want to put in place what maturity that we want to put in place to help create that profile to help with the cost of debt.
Got you great, thanks guys.
Our next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Thanks for taking my question. This is – it’s kind of a rudimentary question, but I just – so I understand. With the Right of First Offer, how do you guys foresee the process working with MGM, i.e., the discussion at the bargaining table, you are clearly going to look at what stabilized EBITDA would look like. And you’re clearly going to be predicated on a multiple. When you think about your side of that negotiation, what are some of the things that are important to you as it pertains obviously to the safety of the credit. But what – beyond that, how are you guys thinking about it?
I’ll start with a couple of points and then turn it over to Andy to add anything. But first it would have to be accretive to both our AFFO and ultimately our dividend. Second it would have to be non-leveraging beyond our soft target or self-imposed target of 5.5 times debt to EBITDA.
Third, we have to think about rightsizing clearly, fourth we have to think about the benefits that we get from the ability to put that into the Master Lease where we cross collateralized every act within our portfolio and have the guarantee from MGM resorts on the rent.
So all of those things have to go into it ultimately our goal is to with any be able to sustainably increase the dividend. So yes, that’s gets to the accretion component and the sustainable component is partially addressed through our leverage levels.
If I could, just as an aside to that, does your – clearly in a transaction where you would need to raise equity, does MGM’s participation in the equity raise change the way you think about the ultimate multiple you’d be willing to pay for a cash flow stream?
This is what I would say on the margin may be – I don’t think it would be a meaningful thing. We looked at the transaction like what we did with the Borgata in August of last year. Stock was approximately $23 when you build in what we thought would be the discount required to clear the market on a public pay along with the fees paid to underwriters it didn’t seem to us that was particularly attractive given the discount public at 21.
And I think our partners at MGM also viewed that as a good transaction for MGM resorts in order to take down more shares at that price. So there that was the analysis. Here depending on where we think the discount would be, the fees would be and so on builds in a component of the cost to us in the form of leakage from an equity offering that will ultimately impact our leverage levels and our accretion to that angle of it, it does impact but just slightly around the margins.
Great. Thank you. That’s extremely helpful and I appreciate that. The other question – you talked about going outside of this channel, looking at more leisure stuff, if you guys felt like you had an understanding of that channel. Could you comment if you know anything about golf?
Lot of questions around Las Vegas so actually relatively good deal certainly compared LA certainly compared to New York. We don’t want to comment just obvious reason so – anyone can sort of speak in the leisure space but you can – anything where we think again that is sustainably can increase the dividend and we know the space, we want to take a look at.
Great. Thanks guys.
Next question comes from Thomas Allen with Morgan Stanley. Please go ahead.
Hi, good morning. Related to future potential regional acquisitions, if you were not to partner with MGM on a deal, how – what kind of attributes would you look for from an operator? Thanks.
We would look for financial strength, strength in the diversity of the castle that underpin that financial strength those two things are related. And a relationship with them where we were confident that we could strike a lease contract where we know that the rent will be paid without any kind of difficulties or question which get the logistic trusting your partner and Andy I don’t know if you have anything else to add.
Sure, I think some of the same things that we have with respect to the lease that we currently have with MGM actually having some of those attributes can make it look and feel like a net lease with the organic growth I think those are some of the things that we want to achieve as well.
Then a follow-up to that question is when there is an existing operator at a property and they leave, how do you assess a potential business interruption or business change from the change of an operator?
What we really do as we run a number of different iterations through our financial models both on what we think the projected outcomes will be based on our own experience and historical outcomes. And as we run those we ultimately have to make sure that we are a 100% confident that come thick or thin that the operator is going to have the wherewithal and desire to pay the rent to pay enough CapEx into the property to keep it as a viable attractive entity.
And so it really matter of using our own knowledge and the knowledge of our rather than at MGM and the any other operator we’ll be talking with and then running it through a series of financial models just to make sure that we are confident come thick or thin that the rent gets paid.
Great, that’s all I had. Thank you.
And our last question for today comes from Joe Greff with JPMorgan. Please go ahead.
Thank you, guys. I’m all set. All the questions have been answered, thanks.
And that concludes are question-and-answer session. I’d like to turn the conference back over to James Stewart for any closing remarks.
Thanks Steve. I just want to thank all of our investors for your continued support. Look forward to seeing you on the future.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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