VICI Properties Inc. (VICI) Q4 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties Fourth Quarter and 2022 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded today, February 24, 2023. I'll now turn the call over to Samantha Gallagher, General Counsel with VICI Properties.

Thank you, operator, and good morning. Everyone should have access to the company's fourth quarter 2022 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 the use of words such as will, believe, expect, should, guidance, intends, outlook, projects 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 certain 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 on our website in our fourth quarter 2022 earnings release, our supplemental information and our filings with the SEC. For additional information with respect to non-GAAP measures of certain tenants and or counterparties described on this call, please refer to the company's public filings with the SEC. Hosting the call today, we have Ed Pitoniak, Chief Executive Officer; John Payne, President and Chief Operating Officer; David Kieske, Chief Financial Officer; Gabe Wasserman, Chief Accounting Officer; and Danny Valoy, Vice President of Acquisitions. Ed and team will provide some opening remarks, and then we'll open the call to questions. With that, I'll turn the call over to Ed.

Thank you, Samantha, and good morning, everyone. We're excited to talk to you this morning about our results in 2022 and our outlook for 2023. John will also give you color on our operating environment and business development activities. I'll start by talking about VICI's first 5 years. A couple of weeks ago, we reached the 5-year anniversary of VICI's IPO. I want to thank every single VICI team and Board member for the incredible work they've done over this 5-year period, enabling VICI, among other things, to become the first REIT to go from IPO to S&P 500 inclusion in under 5 years. And I want to thank all of our operating partners in and outside of gaming for the amazing work they do in making our buildings, places a great experiential and economic value. In February of 2018, the time of VICI's IPO, I don't think any of you would have been very excited if I told you that the ensuing 5-year period from VICI IPO through year-end 2022 would be a period in which the S&P 500 Index would generate cumulative total return over that period of 48.5% or that their RMZ REIT index would generate cumulative total return of 27.9%. I want to emphasize those are not annual total return figures. Those are cumulative over the entire period. And that's exactly what the S&P 500 and the RMZ REIT indices produced in cumulative total return over that period. Over that same period since our IPO, VICI produced for its shareholders cumulative total return of 109.7%. I'll repeat that, 109.7%. This cumulative total return by VICI beat the S&P by more than 2x and beat the REIT index by nearly 4x. Over that 5-year period, no other REIT in the S&P 500 produced cumulative total return superior to VICI, zip, zero, none. Since 2018, VICI has produced an AFFO per share compound annual growth of 7.7% and a quarterly dividend per share CAGR of 7.9%. If we look at 2022 by itself, we see another year in which VICI produced significant outperformance. VICI was the only S&P 500 REIT that produced positive total return in 2022. And VICI's 2022 13% total return generated 31.1 points of outperformance versus the S&P 500 index overall and 37.5 points of outperformance versus the RMZ REIT index. Our stockholders have received the outperformance they've deserved over the last 5 years and in 2022, given the support they have been given VICI throughout our 5-year history of portfolio growth and balance sheet upgrading. What we're most excited about is the opportunity to continue to create value for our stockholders. In a moment, David Kieske will lay out for you our 2023 AFFO guidance. I don't want to steal all of David's thunder, but once David has shared that guidance with you, I encourage you to compare VICI's 2023 guidance to consensus 2023 S&P 500 earnings forecast which are generally trending between very low single digits and negative single digits. Compare VICI’s 2023 guidance to what you are hearing from other REITs, especially other S&P 500 REITs, which is generally 2023 AFFO growth guidance in the low single digits. And once you have made that earnings growth comparison, I encourage you to make a comparison between VICI’s multiple on 2023 AFFO and the 2023 AFFO multiples of other S&P 500 REITs. Once you've made those comparisons, I believe you'll find that VICI offers what we believe to be one of the more compelling 2023 price earnings growth or PEG plus yield ratios that you will find among all S&P 500 REITs. To help you along in that calculation, I'll give you this starting point. The AFFO growth represented by the midpoint of our guidance, plus our dividend yield as of yesterday, equals 14.5%. Compare that 14.5% figure to what other S&P 500 REITs are offering in 2023 AFFO growth, rates plus dividend yields, and I believe you will see VICI standing out. Finally, I'll give you one more comparison. With consensus estimates of S&P 500 2023 earnings per share growth running at 1% and the current S&P 500 dividend yield running around 1.6%, the combination of current estimated earnings growth and dividend yield would be 2.6% for the S&P 500. The combination of VICI's midpoint AFFO growth and our current dividend yield would be over 14%. With that, I'll turn it over to John for his remarks. John?

Thanks, Ed, and good morning to everyone. Over the past 5 years, our team has worked relentlessly to institutionalize our asset class and to deliver value for our shareholders by growing our portfolio accretively. During this time period, we've expanded our roster of tenants from just one at formation to 11 best-in-class operators who manage some of the most complex and profitable experiential assets across the globe. Our hard work has also resulted in growing our portfolio from 19 properties at formation to 49 assets today with our portfolio encompassing, what we believe, are some of the most iconic properties across all commercial real estate classes, and our real estate now crosses into international territory. Now none of this would have been possible without the effort of our dedicated team who on many occasions end up working nights, weekends and unfortunately, holidays. For that, we, as an executive management team are very, very grateful. In some ways, 2022 was the hallmark of our achievements. Early in the year, we completed the acquisition of Venetian Resort in Las Vegas, arguably one of the most iconic experiential assets in the world at a very attractive 6.25% cap rate. Those of you who have followed our story may remember that the Venetian was announced during the very unique time period. While decision to acquire that asset may appear simple today, the transaction came together in early 2021 when many believe the recovery of Las Vegas was uncertain. During our underwriting period, we allocated resources towards studying the market and performing in-depth due diligence. Throughout that process, we grew increasingly confident in our underwriting and ultimately confirmed our very bullish bet on the Las Vegas market. As we sit here today, we continue to see that the Las Vegas market is producing record results. Leisure business remains robust, meetings and conventions have returned and consumers continue to visit the city in record number. In essence, we believe consumers did not find a replacement for the experience offered by the Las Vegas market, nor do we believe they ever will. The Las Vegas economy continues to diversify catering to a broad array of consumer preferences, and the city continues to leverage vast infrastructure by hosting unique events and events of scale. We remain firm believers in the Las Vegas market and will continue to be vocal about our belief in the outlook for the city. Following our completion of the Venetian transaction, just a few months later, we completed the strategic acquisition of MGM Growth Properties, adding 15 exceptional assets to our portfolio and beginning a former relationship with MGM Resorts. These two transactions alone deliver growth that would satisfy many companies. However, as the year carried on, we supplemented those achievements with the pending acquisition of Rocky Gap Casino in Maryland and investment in our Property Growth Fund, the acquisition of Blackstone's interest in the MGM Grand Las Vegas and Mandalay Bay joint venture, which we closed in January. We closed on the acquisition of two additional regional gaming assets with Foundation Gaming. And we invested in the Fontainebleau Las Vegas alongside the renowned Koch Industries. In addition to our achievements in gaming, we deepened our relationship with Great Wolf Resorts, during the year by financing certain growth projects and we announced partnerships with Cabot Golf and Canyon Ranch, widening our university of growth opportunities for years to come. Last but surely not least, as the calendar turned to 2023, we announced our first international investment by closing on the acquisition of 4 casino properties in Alberta, Canada. We have talked about expanding our portfolio internationally on many of these earnings calls before and are thrilled to demonstrate once again that we do what we say. As we look ahead to 2023, we will be planting the seeds of growth for the next 5 years and beyond. First and foremost, we are going to continue establishing relationships that yield mutually beneficial outcomes. And as always, we intend to focus on opportunities that deliver accretive growth for our shareholders. Now I'll turn the call over to David, who will discuss our balance sheet, our financial results and our guidance. David?

Thanks, John. I want to start with our balance sheet. 2022 demonstrated the continued discipline we have maintained over our 5-plus years of existence by ensuring that we have a capital structure designed to weather all cycles and provide the safety and protection our equity and credit partners deserve. This focus provided VICI with continued access to the capital markets throughout 2022 to support our growth and just to recap a few highlights from the year. In April, we achieved our goal of an investment-grade credit rating as both S&P and Fitch rated VICI BBB- allowing us to raise $5 billion of investment-grade debt across a series of three, five, seven, 10 and 30-year tenures to fund the acquisition of MGP. VICI's ability to access the 30-year tenure was a first for a first-time investment-grade REIT issuer, and we are thankful for the support we received from our credit partners in this transaction. In June, we were added to the S&P 500 Index, marking the fastest time line a REIT has been added to the index from IPO to inclusion, deepening our access to equity capital. In November, we raised $575.6 million of net equity proceeds through a 19 million share forward sale agreement. We utilized the ATM throughout the year, raising equity very efficiently for a total of $696.6 million in net proceeds through the sale of 21.6 million shares via forward sale agreements. Those amounts include $208.3 million through the sale of 6.3 million shares via forward sale agreements that occurred in Q4. Then subsequent to year-end, in January, we raised $965 million of net equity proceeds through a 30.3 million share forward sale agreement, which remains unsettled today and available to fund future transactions. Currently, we have approximately $3.8 billion in total liquidity comprised of $426 million in cash, cash equivalents and short-term investments as of December 31, 2022. We have the $965 million of net proceeds from the January forward sale agreements and $2.4 billion of availability under the revolving credit facility. As a reminder, in January, we drew down CAD 140 million or approximately USD 103 million under our revolver in connection with our PURE Canadian gaming acquisition. We will look to term out this revolver draw in the future. In terms of leverage, our total debt is currently $17.1 billion, which reflects the consolidation of the full $3 billion of CMBS debt that encumbers the MGM Grand/Mandalay Bay JV. Our net debt to adjusted EBITDA pro forma for a full year of activity from our recent acquisitions is approximately 5.7x. We have a weighted average interest rate of 4.4%, taking into account our hedge portfolio and a weighted average 6.7 years to maturity. Turning to the income statement. Total GAAP revenues increased 100.9% year-over-year to $769.9 million in Q4 as a result of the transformative 2022 acquisition activity John mentioned. AFFO for the fourth quarter was approximately $488 million or $0.51 per share. Total AFFO in Q4 increased approximately 75% year-over-year, while AFFO per share increased approximately 15.5% over the prior year. Just as a reminder, the disparity between overall AFFO growth and the AFFO per share growth is due to an increase in our share count, which increased primarily from the equity raise and shares issued to consummate our acquisition of MGP during Q2 and our acquisition of the Venetian Resort during Q1 of last year. Our results once again highlight our highly efficient triple net model given the significant increase in adjusted EBITDA as a proportion of the corresponding increase in revenue. Our margins continue to run strong in the 90% range when eliminating noncash items. Our G&A was $15 million for the quarter and as a percentage of total revenues was only 2%, one of the lowest ratios in the triple-net sector. Turning to guidance. We are initiating AFFO guidance for 2023 in both absolute dollars as well as on a per share basis. AFFO at year ending December 31, 2023 is expected to be between $2.115 billion and $2.155 billion or between $2.10 per share and $2.13 per diluted common share. Our guidance reflects the full year of 2022 closed acquisitions as well as the acquisitions we completed in January, the PURE Canadian Gaming acquisition and the acquisition of Blackstone's 49.9% stake in the MGM Grand/Mandalay Bay JV. Additionally, the per share estimates reflect the impact of treasury accounting related to the pending 30.3 million forward shares sold in January of this year. As a reminder, our guidance does not include the impact on operating results from any announced but unclosed transactions, interest income from any loans that do not yet have final draw structures, possible future acquisitions or dispositions, capital markets activity or other nonrecurring transactions. And as we have discussed with you in the past, we recorded a noncash CECL charge on a quarterly basis which due to its inherent unpredictability leaves us unable to forecast net income and FFO with accuracy. Accordingly, our guidance is AFFO focused as we believe AFFO represents the best way of measuring the productivity of our equity investments evaluating our financial performance and ability to pay dividends. With that, operator, please open the line for questions.

[Operator Instructions] First question comes from Anthony Paolone from JPMorgan.

First question is for David, I guess. In the past, you guys have been really good at matching your investments with the debt and equity needed to complete them. As you kind of think about '23 and looking forward, just what's the appetite to either reduce leverage or look out further on the horizon and address future maturities just to give yourself room as you think about what you may buy next.

Yes. Great to talk to, Tony. Just to level set, our first maturity or next maturity comes due in May 1, 2024, for the $1.50 billion of 5.625 notes that come due. So we have no maturities due in 2023. And I think we'll continue to focus on bringing the leverage back down to 5x and 5.5x. And just to remind everybody, when we consummated the MGP acquisition we worked with the agencies and help them understand the merits of the deal, and they were thrilled with the transaction, given the diversity and allowing us to take leverage up just north of our 5 and 5.5 guidepost. And so as you saw us do at the end of last year and with the significant free cash flow we have in the business, we'll over-equitize some of the smaller acquisitions, use free cash flow to fund some of the smaller acquisitions and the loan fundings that we have. And then as we navigate potentially larger transactions, we look to match fund that as efficiently as possible. But again, with the goal of bringing leverage over time back down to 5x to 5.5x.

Okay. And then just a follow-up. As you speak with tenants and think about things like Property Growth Fund and more capital being invested in the assets, any change in the dialogue, either tapping the brakes because of the economic uncertainty or capital markets? Or just generally, what are those conversations like today? And have they changed?

John?

Hey, Tony, good to talk to you this morning. We're fortunate to have tenants right now that are doing extremely well. I think those on the phone who follow the gaming industry are watching the results coming out of Las Vegas, in particular, or if they're not all-time records, they're close to all-time records. So we continue to be thoughtful in our conversations with our tenants, and they continue to look longer term about how they grow their business, and we're there to have those conversations and hopefully be part of their growth plans with, as you mentioned, our Property Growth Fund.

We now turn to Steve Sakwa from Evercore ISI.

Maybe sort of following up on the line of question as Tony had. I'm just curious, Ed, and John, like how are you thinking about the world today maybe versus six to nine months ago? And just how are you thinking about underwriting changes and potential issues down the road. Has that sort of colored your view on kind of yield expectations or how you think about coverage ratios or business lines that you may want to go into?

It definitely has, Steve, and good to talk to you. The lack of visibility right now almost equals opacity. And you just need a week like this one in the markets to be reminded, in case you need a reminder as to how uncertain things are. So as John spoke of, we really have so much confidence right now in our operators, and we believe our gaming operators are going to continue to do very well for a host of reasons, particularly having to do with the demand drivers that Vegas enjoys for at least the next couple of years. But when it comes to the access to and cost of capital, we have to be as silver as everyone else has to be about the fact that obviously, credit conditions have tightened, we have definitely benefited from a cost advantage on cost of equity given how well we performed. But we certainly need to be careful about underwriting yields that probably do need to be higher than they've been over the last couple of years. And we also have to be very mindful if we're in consumer discretionary, which we are as to what a tenant's performance might be under different operating scenarios, should we see soft lending, hard landing, prolonged soft, prolonged hard landing. We also have -- need to be mindful of inflation. But we obviously do enjoy versus many of our REIT peers, certainly net lease REIT peers, the advantage of some CPI protections that definitely benefit our investors this year in 2023.

Okay. And then maybe circling back on the international deal in Canada. I'm just curious as you kind of look at the landscape and you sort of just look at the opportunities out there. I guess, are you seeing more opportunities internationally today? Or do you see more -- I assume the U.S. market is a bigger market, but if you kind of size it, do you see better opportunities outside the U.S. today or inside?

I'll turn it over to John in a moment, Steve. But the way we think about growth is we think about growing both categorically and geographically, -- and so as you watch us, as you actually see what we did last year and as you look at us going forward, we will always be looking for great opportunities to grow into new categories as we did last year with Cabot and Canyon Ranch. And we look to grow in new geographies as we do with Canada. But I'll turn it over to John for his thoughts on how to how to think about the way we look at the U.S. versus international. John?

Yes, Steve, good to talk to you this morning. I'd say a little bit is we've gotten more mature as a company, and we talked to you all before about adding resources to our organizations, which then allows us to go out around the world and look at opportunities. I wouldn't say there's better opportunities internationally than domestically. I'd simply say we're able to learn more about different countries and the opportunities that are out there right now. As Ed started out this answering this question, we're being very thoughtful in anything we do right now in our underwriting. But again, we've got resources now that allow us to go and look all over the world for opportunities, not only in gaming, but in certain experiential sectors that we really like.

Okay. Just a quick follow-up, and then I'll yield the floor. Just is there a yield differential when you sort of think about international and currency risk against the U.S.

Yes, Steve, that end of your question has the key, right? What's the currency risk and what's the tax leakage and then underwriting a yield that makes sense to take that into account. And we did that with the PURE Canadian transaction. And as John mentioned, we're learning about other parts of the globe and where our capital can make sense. I mean it's and then where we can efficiently structure transactions that work for both sides.

We'll now turn to Smedes Rose from Citi.

There was an activist proposal earlier around Six Flags that brought you guys in the mix. And I know you're probably not going to comment on that deal specifically at that proposal. But I'm just interested would you be interested in sort of theoretically big picture in that kind of owning theme park land or real estate? And how would you think about underwriting that versus maybe some of the other asset classes you're in?

Yes. So you're right, Smedes, we won't comment on any specific situations. But we have talked in the past on our earnings call and in our investor engagements about our interest in the theme park space. We think it has an awful lot of attributes to remind us in very good ways of our gaming investments. These are very complex assets. They're very large-scale assets. They're very capital-intensive assets. They have proven themselves over decades. What we also find interesting about the theme park landscape in the U.S. is it is really an un-networked landscape. You have hubs, obviously, in the form of Anaheim and Orlando, and you have spokes in terms of the regional theme park operators, but they're not connected and that kind of puzzles us and can't help thinking, well, geez, what would the power be if you could ever connect these things? And we'll see if anything ever comes to that. But yes, it is a category and experiential category that we believe has real investment merits for us, both strategically and economically.

And then I was just wondering, John, I mean, it sounds like obviously, Vegas is all go, go go, but I mean are you hearing maybe just a little more specifics around sort of regular sort of leisure visitation versus return of corporate groups or any kind of thing you're hearing on your tenants kind of on the different drivers of business?

Smedes, nice to talk to you this morning. I just spent time with all our Las Vegas operators over the past couple of weeks. And as you started out by saying the business continues to be very strong, robust. And the beauty of Las Vegas is that they're seeing growth and demand from all those different segments. That's what makes Las Vegas so special that they get the international gamer. They get the domestic gamer. They have the meeting business that's coming back. They have [FIT] business. And the operators there continue to add resources and add assets to their facilities. We just can't say enough about our tenants that are there and the performance that they're having, and they see -- they do not see a slowdown in their business. And then later this year, they're probably at one of the biggest weeks and weekends that they've ever had with Formula One coming and then they're going to turn the year in '24 and go right into the Super Bowl. So it's a city like no other, we talk internally is there a city performing better than Las Vegas in the world, and we're not sure we can find one. And all the credit goes to our tenants and the way they are marketing that city and their properties

Our next question comes from Barry Jonas from Truist Securities.

I wanted to keep on the Vegas theme and maybe start with Fontainebleau. Can you talk about sort of your expectations for what this relationship could develop into down the road? Have they given any intentions around sale leaseback at some point? And then how should we be modeling timing of the full loan?

Yes. Barry, I can start, and John chime in with anything I missed. But look, we went in -- we've looked at this asset over a period of a number of years, and I think it's a phenomenal asset and even better backed by the equity support of the Koch Industries. And then the Soffer organization, we’ll have the vision and get it open towards the end of this year. So there's nothing formal in terms of our relationship in terms of a path to real estate ownership. But when you act as good partners, and you'll help support other partners' objectives. That leads to more opportunities and just the size and scale of industries and everything that they have and the size of their real estate book, especially focused in leisure and hospitality, we think there could be more things to come in the future, and we're excited to partner with them and be involved with that project.

Okay. Great. And then just -- maybe just spending a minute on Hard Rock and Mirage. What are the next steps there for potential redevelopment and also the Partner Property Growth Fund loan -- potential loan there? Is there a general time line for specifics to be worked out here?

John?

Barry, it's John. Yes. Very good to talk to you this morning. really more a question for our tenant on that. But Jim Allen and the Hard Rock team just took the business over earlier this year. They're getting used to the property, understand their property, understanding demand, understanding how busy Las Vegas is right now, which is great. And the last communication is they're studying their plan, working through this year, and we'll be in contact with them over the next coming months, and we'll have a better idea of what the ultimate timing and what their ultimate plans will be. So nothing new than last time we talked about this.

We now turn to Wesley Golladay from Baird.

I just have a quick follow-up to the last question. I wonder you set the rates for these projects such as the Mirage or the Hard Rock?

Yes, Wes, thanks for the question. David is best equipped to answer this. And I don't think David heard it quite clearly.

Wes, I think I caught it, you say when we set the rates for these Partner Property Growth Funds. Is that -- did I get that right?

Yes. I mean we currently model say, around 8% or so, but I don't know if those are set at the time you mentioned the deal, at the time of the closing of the transaction, and there's always a future opportunity. But I don't know these rates are already locked in and when they can plan the project around a certain yield. Or do you get the scope of the project and then you set the terms?

Yes. The rates are not locked in, Wes, so it's part of the negotiation. When we obviously announced Hard Rock's acquisition of the Mirage, we said we'd be happy to commit up to $1.5 billion of our Partner Property Growth Fund or even more if they needed it, but that would all be subject to negotiation in terms of final terms, rate, structure, timing.

And related to that, Wes.

For the consolidation of the joint venture…

Go ahead. Go ahead, Wes.

No, no. Go ahead, go ahead.

I was just going to say, needless to say, the pricing of capital right now is an exercise that is not easy to carry out. Obviously, having a forward view of the cost of capital in the future and then pricing our capital to a borrower or a partner. It's not an easy exercise. And go ahead, Wes.

My last follow-up would be the, for the consolidation of the joint venture for the Blackstone deal that you did earlier in the year, how are you going to handle the debt for that? Would it be a mark-to-market for just the JV portion or the whole portion and any sense of the magnitude?

Gabe?

Yes. It's Gabe here. So I think we have some flexibility where we can either inherit our partner's existing basis on the debt or we can roll over that basis or we can choose to market to market. So still having that debate internally, and we'll start focusing on that in the month ahead.

We'll turn to John DeCree from CBRE Securities.

Maybe one big picture question, Ed, to push you on the spot a little bit. You gave a nice recap of VICI's first 5 years quite successfully in your prepared remarks. Wondering if you'd kind of venture a prediction or a plan kind of for the next 5 years?

Yes. David just covered the ears of Samantha Gallagher, RGC. Yes, John. Well, we -- okay, so to be really forthright, if 5 years ago, if you had said, okay, I want your prediction for the next 5 years ahead, I would not have predicted what we had done. We always had a conviction that we had a wonderful opportunity to institutionalize the real estate asset class that had not really yet been institutionalized. And we think so much of the story of this first 5 years, so much of our outperformance, 2x the S&P 500, 2x the NASDAQ. I probably should have mentioned that as well as hot as the NASDAQ was during much of that period, crazily hot at times. The NASDAQ performance over that 5 years was dead on the S&P 500 performance, and we beat them both by 2x, right? So as we look ahead, we certainly cannot base our strategy on continuing that kind of outperformance because to base our strategy on that kind of outperformance might involve -- would likely involve taking risk, so we're not sure we should take in terms of creating and sustaining value for our investors. So what you'll see us do over the next 5 years is continue to grow categorically, continue to grow geographically, do accretive deals be willing to over-equitize in the way David spoke of at the beginning and answering Tony's question and just make sure that we never put the value we've created together with our investors at risk. One of the great benefits. Or I shouldn't say one of the great benefits. One of the great drivers of our outperformance over the first 5 years is we never went backward for sustained periods. We obviously had volatility as everybody else did over that 5 years. We never went backward and stayed there for a long time. And we don't want to start doing that in the next 5 years. So I think you'll see us be disciplined in how we allocate capital. And in order to do that, we'll be disciplined in how we underwrite. And always look to learn from REITs who have succeeded in doing what we want to attempt to do. So whether it's a Prologis in terms of how they've grown internationally, whether it's great ideas and how you grow categorically. Like full marks to Sumit and the Realty Income team for the deal they announced this week on Plenty. Like that kind of deal making on the part of our peers really inspires us because it is evidence of how to think creatively and innovatively in developing into new categories. So I think that's what you can expect of us over the next 5 years, John.

Makes sense. It's great insight on a curve ball there. Maybe a softer one as a follow-up. Last couple acquisitions you've made and maybe for John or kind of from maybe lesser known tenants, a little bit smaller companies. How do you think about kind of underwriting standards different from your large public tenants relative to smaller private companies? And then is that a trend you've kind of seen emerging more this year, a little bit more activity with smaller, maybe private companies? Or would you expect to see similar kind of deal flow from the larger public cos, realizing they probably have a bit more to do. But curious how you're thinking about those kind of two different types of tenants?

Yes, John, a very good question. But it's not new to VICI, right? I mean part of what we're proud of is that we've taken the time to go talk to all the operators inside the gaming industry and hopefully, over the next 5 years and most of the experiential companies whether you're big, whether you're small, whether you're private, whether you're public, we take the time to understand how they're trying to grow their company. And is there a possibility for us in our form of capital to help them grow. And so that won't change as Ed just went through the next 5 years and what won't change. I think that's this curiosity that we have as a business development team to get to know it may be a small company, and it may be a small deal, but we're hoping that over the course of our time together with them, we take a small deal and we make it bigger, we help a small company become larger. And you're going to continue to see that. You've seen it since we started the company, and I think you'll continue to see us do deals with smaller private companies. And I believe you'll see us continue to do deals with large public companies, and that will allow us to continue to grow our business as we expect.

We'll now turn to Ronald Kamdem from Morgan Stanley.

Great. Just maybe a couple of quick ones from me. The first is just on the AFFO growth, almost 10%, which is pretty impressive compared to some of the other triple-net peers in the sort of flat to 3% range. I was just wondering if we could sort of get a breakout of organic versus external growth of that number. So how much of that is being driven by sort of the inflation escalators versus some of the acquisitions that were done in '22?

Ron, it's David. Nice to talk here. It's all driven by -- well, said differently the way, we modeled the escalator in November with Caesars is 2%. We do not make any predictions about the future. My counsel next to me would be very upset. And then -- so the acquisitions, as I mentioned in my remarks, are all baked in, including the PURE deal, which closed in early January as well as the reconsolidation in early January as well. And then it does not include Rocky Gap, which is still outstanding.

But -- and Ron, if I understand your question right, there is no question that the rent escalation that kicked in, in November for Caesars, and I believe it's January for Century definitely plays a role in generating that 10% AFFO growth. But to David's point, we obviously have -- toward the end of this year, we've only underwritten base level rent growth. We do not presume any kind of -- we do not make any CPI assumptions for forward rent, if that's of any help. And we don't include any unclosed acquisitions, just to be clear or on loans that do not have fixed draw schedules yet.

Great. That's helpful and clear. I can move on to sort of the pipeline. I think in past call, we've talked about sort of sizing the market, which we've sort of all have done. But I'm curious if you guys have any sort of quantifiable numbers on pipeline, the amount of deals that you're in talk with, if it's $10 billion, if it's $50 billion, whatever, I think that would be sort of a helpful information?

John, you want to start?

Yes, I don't have a specific number on that right now. I would tell you as I talked earlier in this call about adding resources to our organization, to our business development team. So what I would tell you is that we're active or more active in deal flow than we ever have done before. It's obviously an uncertain time. We have to be incredibly thoughtful in any type of deal that we do in the underwriting that we do. But we've been able to expand not only in gaming, and you heard me talk about public companies and private companies. But in many of the sectors that we've talked in previous calls about. So we're touching more companies, we're meeting more companies than we ever have done before. We're explaining how our capital ultimately can help those companies grow. But I don't have the exact size for you. I don't know if Danny is on the call and wanted to add anything to my answer.

John, I think you covered it well. I mean we've talked about some of the opportunities that we look at within gaming and that ranging from anywhere from $40 billion to $50 billion of potential transactions. That's not an all-encompassing blue sky numbers. Those are opportunities that we think are actionable at some point in time. But as we've talked about a lot here, the universe of opportunities is growing, especially as we look internationally, as we continue to study and explore other experiential sectors. So it's difficult to give you a single number right now, Ron.

I would just add a little bit more to that, Ron. The last time we saw that the American commercial, I want to emphasize, commercial gaming sector was about 40% REITed that would contrast, say, with the mall space, which I believe is 70% plus REITed. The other thing to keep in mind is that we do have an American tribal gaming sector that is equal in size to American regional gaming. And we are now three or four tribal relationships, John and Danny. And that is a sector where those -- that sector is led by operators. We're very eager to do more business with in all the ways we can possibly think of. The thing I'll finally add is that there are obviously new jurisdictions opening up to gaming. And we just saw a headline this morning about Governor Abbott of Texas saying, if we're going to get gaming in Texas, I want it to be -- how did he put it, John? Great Wolf Lodge type of gaming. I can't remember exactly how -- yes. And we read that headline, we go that’s great because we're already in business with Great Wolf, and we definitely are in business in gaming. So you look at a market like Texas and needless to say, we get quite excited given the capital allocation opportunities, a market like that could represent

We'll now turn to David Katz from Jefferies.

You've covered an awful lot of detail and we don't need to sort of double back over those. But what I wanted to just throw out there is a question that's come up with investors in my travels, which is the next couple of years, we spend time thinking about potential capital raising and more so equity than debt for obvious reasons on our side. Can you just talk through what you have in front of you? And obviously, the Caesars pipeline as well? And what the prospects for you could be or having to go out and raise some more equity and under what circumstances you might do that?

Well, as a starting point, David, and I'll turn this over to John in just a moment. As a starting point as a REIT, you can be confident we will perpetually raising equity. But we will be perpetually raising equity for years to come as all good growing REITs do to fund accretive growth that benefits all shareholders. And that's been our track record to date. It's evidenced by the kind of AFFO growth per share we're producing in 2023 and have on a compounded basis since our beginning in 2018. But again, so we will raise equity when the opportunities are there to do so. And we will raise equity to fund accretive acquisitions. In terms of the pipeline, I'll turn it over to John because we obviously have opportunities like the Indiana assets in our future. John?

Yes, David, good to talk to you this morning. And as Ed alluded to, in our view is the opportunity with Caesars to our put/call opportunity with two Indianapolis assets that are performing incredibly well. That put/call is kind of live right now, and we'll see how that ultimately plays out. But that is a really nice opportunity that we hope we can bring into our portfolio in the coming years. And then obviously, I've spent a lot of time on this call already talking about the numerous relationships that we're building in gaming and in non-gaming. And I hope part of our growth will be with our existing tenants, whether that's an opportunity as they grow into new jurisdictions like New York or as Ed mentioned, maybe Texas will break at some point. And I hope it's also growth with new tenants as well.

Hey, David, if I could just add one more thought...

Please.

Yes. David, if I could add one more thought in relation to this, and it's something we haven't talked about on this call. But when it comes to being a growth-oriented REIT and when it comes to being a REIT, that will likely continue to access the capital markets, there is really no question in our minds and don't think there should be any question in anybody's mind as to the advantages of scale when it comes to access to the capital markets. And I think what you could see over the next few years is an increasing bifurcation or a barbell effect emerging across the American REIT landscape, where great advantages accrue to the biggest REIT with the most compelling value-creation stories because their access to capital in large volumes will be highly superior. You'll always have the small REITs that can produce significant growth in their early years. But the problem is you can reach a no-man's land of what we'll call mid-cap REITs, where it's really -- it's tough to access capital and high volumes and it gets a little bit tougher to produce material growth year-over-year-over-year. And we think at the scale we're at now, as I believe, the ninth largest REIT in the RMZ, it definitely brings advantages when it comes to access to and cost of capital. And sorry, I'll turn it back to you for your next question, David.

Appreciate that. With respect to the Native American part, I know we've talked about this before, but building those relationships in a way where you can own hard assets? Or is it more building relationships by providing loans on reservation land that will enable you to sort of own real estate in other areas? Or are you trying to solve the code for reservation land?

We definitely worked on that, and we think there could be solutions down the road. In the near term, and I'll turn it over to John, our greatest excitement is helping them grow either off of tribal land or adjacent to tribal land. John?

Right. That's exactly right, David. I mean, we continue just as we're building relationship with commercial operators we're getting out and meeting with many native American nations just to let them understand who we are, how we could help them grow in the commercial opportunities when if that's what their mission is to. So I'm spending a lot of time on the road doing that and letting them understand VICI and we already have partners with three native-American nations

Our next question comes from Todd Thomas from KeyBanc.

I just wanted to go back to your interest in nongaming and following up on your comments about sensitizing underlying businesses and operators in various economic scenarios. Has your appetite changed around nongaming assets today just given the more uncertain macro and maybe sort of consumer backdrop? Or does it just require additional coverage and return?

I would say, Todd, that our interest in nongaming hasn't diminished at all even amidst this lack of visibility around the consumer economy because of our strong conviction around the secular tailwinds of experiential businesses. We have seen with COVID, finally, starting to leave the landscape that what had been in place for the prior 10 years or so, 15 years prior to COVID, which was the increasing consumer preference for experiences over things, has definitely reasserted itself. And we don't think that, that's going to diminish. We think the aging of the baby boom into their prime leisure years, we think millennial family formation. Those are demographic waves, together with this increasing preference for experiences over things, is going to give experiential operators across a number of spectra really compelling growth opportunities and very strong economic performance, almost no matter what cyclicality looks like.

Okay. And have you -- how have you increased your required returns as you think about underwriting investments going forward? I mean can you sort of quantify what you're seeing, what you're underwriting and also whether sellers are adjusting their expectations today?

Todd, it's David. Good to talk to you. I mean as a net lease REIT, obviously, we're a spread investor, and we have to ensure that we receive an appropriate spread for the risk of the investment and to factor the location and the asset, the tenant, the business and taking that all into account in our underwriting. And the last part of your question there is spot on, right? And you've heard this from other net lease REITs, right? There's still a bid-ask spread for a lot of folks in terms of what they think the asset is worth and what we can actually acquire that with an appropriate rent coverage and generate an attractive return -- attractive risk-adjusted returns. So I would tell you we're being more diligent in terms of underwriting the business, the proof of concept, the longevity of concept, everything that we've talked about since day one of this company. Is there an enduring experience the consumers are going to go to over time. And so we're spending more time and going deeper on some certain sectors where we think there's some opportunities and larger growth opportunities going forward in those sectors.

Okay. Do you -- when you look out over -- during the course of the year ahead here, do you expect the spread at which you're investing relative to your cost of capital? Do you expect that to be wider than it was in '22?

So we expect that to be wide. I mean we always want to generate 100 basis points to 150 basis points spread to our cost of capital. It's kind of what we set as a preliminary benchmark, now that can be higher at times or it can be lower at times depending on the quality of the asset, the operator or a riskier asset and riskier operator or locations in the country.

Our next question comes from Jay Kornreich from SMBC.

I guess I just want to start with a follow-up on the Fontainebleau Las Vegas that will be a great asset. And I guess providing construction loans is a riskier and higher return investment option that you had typically endeavor in. So just I'm curious if you saw this as more of a one-off opportunity? Or if you see providing casino and hotel construction loans as more of a path towards growth in the future?

Yes, Jay, it's David. I mean with our capital, we always want to find what makes sense at the right point in time with ideally a path to real estate ownership. And as I mentioned earlier, we do not have a direct path to real estate ownership with the Fontainebleau, but we developed a phenomenal relationship with Koch and Soffer that could lead to other opportunities. But as we've talked about with our Partner Property Growth Funds with other -- we talked with other gaming operators and non-gaming operators above ground-up development. We are doing that with Canyon Ranch. We're doing that with -- in a forum with Cabot in the golf opportunities. So the nice thing about our capital, it is flexible. It can come into different parts of the capital stack, so to speak. But again, ideally, we have a path to real estate ownership over the long term where we can continue to generate the types of returns and growth that we've done in our first 5 years.

All right. And then I guess just on the non-gaming side with some of those partners that you just mentioned, that are quickly growing and they're looking for capital kind of fund that expansion. Do you have a sense of just how large that potential pipeline is in the U.S. for these types of quickly expanding non-gaming the platforms that you feel comfortable investing in?

Yes, it category by category, Jay -- and Elliot, this is just a heads up. This will have to be the last question. These categories, there are so many of them and so many of them run into the many, many tens of millions of dollars of growth opportunities, some larger, some smaller. But it is a landscape -- an experiential landscape that we feel represents decades of growth ahead for VICI.

And Jay, thank you for that question, Elliot. I think we will close things out now. And I'll just -- for those of you who haven't heard enough about VICI today, as just flash across the screen on CNBC, I will on Mad Money in the night, in case you haven't heard enough. And with that, thank you all for your time today and really appreciate your attention to VICI and we're very excited about the value creation opportunities we have ahead of us. That's it for now. Thank you.

This call is now concluded. Thank you for your participation. You may now disconnect your lines.