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VICI Properties Inc
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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the VICI Properties First Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Please note that this conference call is being recorded today, May 5, 2022.
I will now turn the call over to Samantha Gallagher, General Counsel of VICI Properties.
Thank you, operator, and good morning. Everyone should have access to the company's first 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 the words such as will, believe, expect, should, guidance, intend, 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 and our first quarter 2022 earnings release and our supplemental information.
For additional information with respect to non-GAAP measures of certain tenants and/or counterparties described herein, please refer to the respective 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 Finance. Ed and team will provide some opening remarks, and then we will open the call to questions.
With that, I'll turn the call over to Ed.
Thank you, Samantha, and good morning, everyone. Happy Cinco de Mayo. When we held our last earnings call in late February, we had just closed on our acquisition of The Venetian, one of the largest scale and highest quality single assets in American commercial real estate. As we speak with you today, we have just closed on our acquisition of MGM Growth Properties, MGP, one of the largest scale and highest quality portfolios of Class A real estate in American real estate investing. VICI's story over the last 14 months since we first announced our acquisition of The Venetian, is a story of transformation.
We have transformed the scale of our portfolio, our tenant and geographic diversity and very importantly, the character and quality of our balance sheet. We've also become the leading real estate owner on what we believe is the most economically productive street in the world, the Las Vegas strip. In a moment, John Payne will talk further about the transformation of our portfolio, and David Kieske will talk further about the transformation of our balance sheet.
But let me first spend a few moments talking with you about what's been proven about our business model over the last 2 years and how timely our current transformation may prove to be from both offensive and defensive perspective over a coming period of economic uncertainty. Over the last 2 years, COVID-19 proved the resiliency of VICI's business model because COVID proved the resiliency of our tenants' business models. VICI collected 100% of our rent in cash and on time throughout the COVID-19 crisis because of the operating excellence and operating liquidity of our tenants.
Our operators have shown their ability to operate through thick and thin. The economic outlook for the next year or 2 may be murky, but we firmly believe that our operators' prepared their operating revenue, cost and liquidity models for whatever may be coming. What about our view on VICI's ability to continue to grow in the coming period? There are 5 key capabilities as we see it to growing as a net lease REIT in all cycles, including whatever cycle may be about doing 2.
Number one, same-store NOI growth based on key lease terms regarding escalation and CPI protection; number two, internal funding capability based on cash retention; number three, the capability and opportunity to invest incrementally in existing assets and return for incremental rent; number four, the ability to source acquisitions when the frequency and intensity of asset marketing processes lessen; number five, access to investment-grade credit when high-yield markets may be constricted or costly.
Let me say a few words about VICI's growth capabilities in each of these 5 areas: point number one, same-store NOI growth. Green Street in the September 2021 analysis showed that VICI generates same-store NOI growth more than 4x higher than net lease rates on average. And in terms of higher -- in times, sorry, of higher inflation, VICI's same-store NOI superiority versus other net lease rates expand when factoring in the CPI owned into our leases. Point number two, internal funding capability.
Pro forma for the annualization of VICI's net income and debt service, having enclosed Venetian and MGP, if we maintain a dividend payout ratio between 75% and 80%, that would leave between $400 million to $500 million of retained earnings available to us for investment annually, a competitive advantage during periods when market may be constricted.
Point number three, investing incrementally in existing property in return for incremental rent. Our assets measure, on average, over 2.5 million square feet and sit on many acres of land. That scale of building and land enable us to invest incrementally in our existing properties in ways generally not available to net lease REITs whose stores generally average around 25,000 square feet, 1/100 the size of our assets. Point number four, sourcing acquisitions when asset marketing processes lessen. You've heard us say before that we grow our business at VICI and our portfolio by growing our relationships.
As we pursue both gaming and non-gaming investments in the coming years outside of marketing processes, we are confident that our ability to generate new relationships with operators who operate in net lease white space will give us growth advantages. Point number five, in -- just to investment grade with high-yield credit markets tighten. Through the great work of David Kieske, Erin Ferreri and other members of our finance team, we achieved investment-grade status with S&P and Fitch about 2 weeks ago. We may be in the early stages of a challenging period for the high-yield credit markets and CMBS financing.
We believe that the relative competitiveness and attractiveness of our capital could increase during the coming period as experiential operators look to refinance their existing businesses and/or fund their growth initiatives. To sum up, VICI has gotten bigger and moreover stronger at a -- we believe advantages will accrue to those REITs that are bigger and stronger.
I'll now turn the call over to John, who will talk about our new portfolio and operating conditions and to David, who will talk about our financial results and balance sheet upgrade. John?
Thanks, Ed, and good morning to everyone. The first 4 months of 2022 were very productive for VICI. In February, we completed The Venetian Las Vegas transaction. And just last week, as Ed noted, we closed on the acquisition of MGP adding 15 Class A market-leading assets with over 33,000 hotel rooms, 3.6 million square feet of convention space and hundreds of food and beverage outlets to our portfolio. As a management team, having the opportunity to acquire the MGP portfolio in a master lease structured where the cash flow is cross-collateralized with inflation protection beginning in lease year 11 and a corporate guarantee from MGM Resorts is something we are very proud to have accomplished on behalf of our shareholders.
Our 43 asset portfolio is unmatched in size, scope and quality in the triple net sector, and we plan to continue to grow our asset base with our best-in-class tenant roster as well as new operators. As some of you may know from recent data that has been released, Las Vegas continues to be a top destination choice by consumers and the Las Vegas Strip remains one of the most economically productive streets in the world. Gaming revenue in Las Vegas in March alone came in at $746 million, approximately 35% above 2019 levels. I'm going to repeat that, approximately 35% above 2019 levels.
Additionally, the outlook for room revenue is very strong as midweek business continues to normalize with convention business returning to the city. On their first quarter earnings call, both MGM and Caesars cited 90% hotel occupancy in March and Las Vegas room rate surveys published by the Sell Side have pointed to second quarter ADRs that are tracking 30% above 2019 levels. The City of Las Vegas with its diversified entertainment economy that is no longer just about gambling, but centered around business, sports, and entertainment, continues to prove to be the top destination in the U.S. and possibly the world.
As a real estate investment trust in the business of owning and leasing integrated entertainment resorts within a triple-net structure, we are big believers in Las Vegas for decades to come and are incredibly excited to now own 10 world-class assets and a total of 660 acres along the Las Vegas Strip. Our regional casino assets with regional markets in general also remained extremely healthy. In case you somehow missed the first 4 months of 2022, I'll give you the cliff note version. In a nutshell, the casino industry is in amazing shape right now.
Several operators, including Boyd Gaming, Churchill Downs, MGM and Caesars have made it quite clear with their quarter 1 earnings releases and conference calls that the reports of the decline of the U.S. regional casino margins have been greatly exaggerated. April results have continued the March strength and not only is the gaming consumer healthy, wealthy and wise, they are still choosing to spend money on gambling despite having many other entertainment options. As we think about what comes next for VICI, we are fortunate to have executed some of the largest and most complex transactions in the net lease industry, and we will continue working relentlessly to execute compelling opportunities that deliver accretive value for our shareholders. Now I will turn the call over to David, who will discuss our financial results, our balance sheet and our guidance. David?
Thanks, John. I'll start with our balance sheet. At the beginning of 2022, encapsulates the energy we have brought to transforming our balance sheet since VICI emerged in October 2017. We have discussed this relentless balance sheet focus with you over the last 4.5 years. We believe it is important to ensure that we have a capital structure designed to weather all cycles and provide the safety and protection our equity and credit partners to -- deserve. Not to spend too much time on 2021, but is a good reminder of how we take the long-term view to safeguard our company.
We raised a combined total of $5.4 billion of equity at the time of the announcement of The Venetian acquisition and shortly after the announcement of the MGP transaction. These equity offerings derisk the equity funding well ahead of closing on our $21 billion of announced acquisitions and allowed us to repay all of our secured debt last September. These actions set us up for success in early 2022 and for years to come. On February 8, we closed on our new $2.5 billion unsecured revolving credit facility and $1 billion delayed draw term loan, increasing overall liquidity with highly efficient bank capital.
On February 23, we closed on the $4 billion acquisition of Venetian through the settlement of 2 outstanding forwards, bringing 119 million shares onto the balance sheet for total proceeds of approximately $3.2 billion. We also drew $600 million on our revolver, and used cash on hand to fund The Venetian. On April 18, VICI's debt rating was upgraded to BBB- by S&P and Fitch, greatly broadening our access to permanent debt capital. On April 20, we priced $5 billion of investment-grade senior unsecured notes, executing on the largest REIT investment-grade bond offering ever.
The blended cash interest rate for the senior unsecured notes was 5%. The effective interest rate after taking into account our hedge portfolio, which was comprised of $2.5 billion in notional amount of forward starting swaps and $500 million in notional amount of treasury locks is 4.51%. On April 29, we closed on the acquisition of MGP as well as a $5 billion bond offering. We used $4.404 billion of the bond offering proceeds to fund our redemption of a majority of MGM's MGP OP units. Following the MGP acquisition, the company has approximately 963 million shares of common stock outstanding and VICI OP has 12.2 million additional OP units outstanding held by MGM that were received in the merger. The remaining proceeds from the bond offering plus cash on hand were used to repay the $600 million outstanding under VICI's revolving credit facility.
In terms of leverage, we ended Q1 2022 with net debt to adjusted EBITDA of 3.6x. This highlights the fact that we significantly over-equitized the balance sheet ahead of the closing of the MGP acquisition, positioning our balance sheet to raise the incremental debt to complete the funding and bringing on the associated income with that transaction. As we sit here today, pro forma for the MGP transaction, we have total debt of $15.5 billion, inclusive of our pro rata share of the BREIT JV debt on a run rate net debt to adjusted EBITDA -- excuse me, on a run rate, our net debt to adjusted EBITDA is approximately 5.8x. We have a weighted average interest rate of 4.38%, taking into account our hedge portfolio and a weighted average 8.4 years to maturity.
Just touching on the income statement. AFFO for the first quarter was $305.5 million or $0.44 per share. Total AFFO in Q1 2022 increased 19.8% year-over-year, while AFFO per share increased approximately 5.1% over the prior year. The disparity between overall AFFO growth and AFFO per share growth is due to an increase in our share count. Our fully diluted share count increased approximately 26.3% primarily as a result of the regular weight portion of the September 2021 equity offering, which added 65 million shares to our balance sheet, the settlement of the June 2020 forward sale agreement last September, which added 26.9 million shares to our balance sheet and the settlement of the March and September 4 sale agreements in February of 2022, which added 119 million shares to our balance sheet.
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 and our margins continue to run strong in the high 90% range when eliminating noncash items. Our G&A was $9.5 million for the quarter and as a percentage of total revenues was only 2.3%, in line with our full year expectations and one of the lowest ratios in the triple net sector. Turning to guidance. We are updating our AFFO guidance for 2022 in both absolute dollars as well as on a per share basis.
As a reminder, our guidance does not include the impact on operating results from any possible future acquisitions or dispositions, capital markets activities or other nonrecurring transactions. And as we have discussed in the past, we recorded 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 and evaluating our financial performance and ability to pay dividends.
Our guidance incorporates the recently closed MGP acquisition, including the issuance of 214.5 million shares of common stock to former MGP stockholders and the $5 billion bond offering we executed subsequent to quarter end. We expect AFFO for the year ending December 31, 2022 will be between $1.66 billion and $1.69 billion or between $1.89 and $1.92 per diluted share. With that, operator, we ask you to please open up the line for questions.
[Operator Instructions]. And our first question comes from Anthony Paolone from JPMorgan.
Congratulations on everything you guys have gotten done recently. My first question is, just given everything that you've all done and getting past all that, what has it done to just the conversations you're having on future growth and opportunities? Has it expanded sort of your discussions and just increased the profile and stuff that you're looking at? And how are you organizing all those thoughts?
John, you want to start?
Sure. Well, Tony, thanks for the comments, and it's always nice to hear from you. There's no doubt, Tony, that we've changed quite a bit as a company from when we started the company back in 2017 just due to size, scale, scope, magnitude of assets, and it has got the attention of folks that I think when we started the company, did not know exactly who we were and what we were doing. So the funnel is definitely as wide as it's ever been for us. There are numerous opportunities.
You've heard us talk about, obviously, gaming opportunities, we'll continue to pursue in markets where we want to own more real estate or we don't own real estate. And then there are a lot of companies that have noticed what we've done in the experiential space. You've heard Ed and David and myself, Danny, others talk about making real estate investments outside of gaming and in experiential and we've been in contact with. And so as Ed in his comments, we build relationships, and we build relationships that we hope turn into real estate ownership. And so we are organizing, we're meeting, we're traveling. We're doing all that right now, Tony. And we'll see how it plays into our growth, but we feel really good about the magnitude of opportunities that we see in front of us.
Tony, I'll just add to that. I think sort of a truism across every real estate asset class that there are benefits in owning marquee assets that are well known to whatever category or well known within whatever category you're in because it increases your visibility. And we were fairly invisible when we got going 4.5 years ago. And there is no question that in owning assets like Caesars Palace Las Vegas, like The Venetian, like MGM Grand, Mandalay Bay, like National Harbor, like Caesars New Orleans, we are teaming a visibility that is very, very helpful, as John points out, and giving us greater top-of-mind status when people think about who they'll call.
Got it. Okay. And then with regards to the opportunities to reinvest in the asset base, including things like the Mirage. Can you talk about timing and around maybe hearing more about a project like that? And also, just does anything in the rate environment or macro volatility change the thinking or prospects for some of those investments? Or do the trends on the ground there kind of win the day right now?
David, do you want to start with answering the second half of Tony's question and then John can add.
Sure. We -- look, we're very cognizant of the macro trends, right? We were fortunate to get our bond offering off a couple of weeks ago just -- and execute what we were able to execute. Every day brings something new volatility with the Fed speak yesterday. So we're going to work to ensure that our partner property growth loan is ultimately what we're talking about here, delivers accretive returns. And that's -- I touched on that being able to invest in these magnificent assets of size, scale and complexity that rivals nothing other out there. We will make sure that the capital that we deployed generates an incremental return that's accretive to us.
As it pertains to the Mirage, Tony, the Hard Rock team is going through the licensing process in the state of Nevada. They're amazing developers and operators. And we obviously are already partners with them in our Cincinnati asset. And so we're excited with what they are going to have planned for the redevelopment of the Mirage and the Hard Rock Las Vegas. But no timing yet as they need to go through that process.
Tony, I just want to add one more thing. And that is that we -- often in the early years, we're often told by would be partners that, oh, I can borrow money cheaper than your money, VICI. And we are very humble about admitting. We are learning every day how to tell our story better. And what we've really focused on of late is helping people understand that our capital and the cost of it should not be compared simply to the cost of their debt, but to their blended cost of capital, accounting for both the cost of their debt and the cost of their equity. And even before we saw the recent widening of credit spreads and before we saw the recent multiple contraction of many operators across experiential both gaming and non-gaming, our cost of capital versus their blended cost of capital is already very attractive. It's only grown more attractive in the last couple of months.
Okay. And then just last one very quick, I guess, somewhat related to that. Like what is your preference or thinking right now as you think about yields and contractual growth? Like do you want more inflation protection or more upfront yield? Or how do you think about the balance of that? Or are you solving for an IRR? What's the thought process there?
David, do you want to take that?
Yes. Tony, I mean, ultimately, we're solving for a spread to our cost of capital. And like every deal is different. Obviously, inflation and CPI discussions are more relevant today than they were when we started VICI. But ultimately, as a net lease company delivering an attractive 100 basis points, 150 basis points, sometimes less, sometimes more spread to our cost of capital is what we strive for. We also look at our underwriting in terms of cash-on-cash returns and the IRR over a period of time to ensure that we are delivering incremental accretive deals to our shareholders.
Our next question comes from Spenser Allaway from Green Street.
Maybe just going back to external growth for a minute. Just in regards to the ROFRs and other put-call agreements you have in place with operators, has there been any discussion on those eligible for execution? And how do you think about the relative attractiveness of these?
John?
Yes, Spenser. As you -- as it pertains to the ROFRs, I assume you're referring to the Las Vegas ROFR. I'll just refer you to the CEO of Caesars, Tom Reeg, who during his earnings call was very clear on what is going on, which he said, look, Caesars has started the process in early '22. He expects there to be another update by the middle of the summer, and the sales process really is governed by the VICI agreement documents. And so that process is in the works. We're aware of the agreements we have with them.
Today, as I said in my opening remarks, we do own 10 great assets on The Strip in Las Vegas, which make up about 600 -- we also have 660 acres that those assets sit on as well as vacant land. It is a market that is truly incredible. As I stated, when you have business up 35% gaming revenues is simply amazing, and it really is as their new ad campaign says the greatest arena on earth. And so that is a market that we are big fans of. We'll continue to study. Do we want to own additional real estate? If we do, it needs to come to us in a very accretive manner. And we'll continue to follow our process on that.
Okay. That's great color. And I know you just mentioned, obviously, Vegas revenue has been strong, but just curious if in conversations with the operators, have you guys gained a sense of how regional and/or Vegas operating margins have held up with the inflation pressure?
Yes. It's another good question, and many have released their earnings. I just -- a friendly reminder that for us, rent is paid with margin dollars not necessarily not margin percentage points. So, if you take a company like one of our tenants, Penn, which generated almost $50 million more in margin dollars year-over-year with the earnings that just came out. So the businesses continue to be incredibly strong, especially when you compare it to other businesses around the United States. So we couldn't be happier.
As Ed said in his comments about our tenants, how they've adjusted their business, how their margins are up. Most importantly, their margin dollars are up. Many are seeing record EBITDA. I think Caesars announced that 18 properties set all-time records in Q run EBITDA. So Spenser, I could go on and on about our tenant's bit. It's exciting to see that the -- even with the macro issues going on, they are about continuing to perform very well.
One point answer that Spenser that I'd like to add -- Spenser I was just going to say one more point I want to add on top of what John just rightly said, is that with all the focus on inflation, I think it's important to note that, obviously, we, VICI, enjoy superior CPI protection in our leases versus other triple nets. But I also want to make sure everyone understands that our tenants are in the business of nightly leases, and in some cases, even hourly leases, and that pertains to their ability to constantly reprice in respect to demand and in respect to inflation. And I think that, going back to John's point, is a key factor in ensuring they continue to produce all the margin dollars they can possibly produce given their ability based on nightly -- the lease business to constantly reprice.
[Operator Instructions]. Our next question comes from Smedes Rose from Citi.
I wanted to ask just a little bit as you look at potential opportunities, are you seeing any change at this point in potential transaction cap rates just with the rising cost of capital, but kind of weighing that against the continued kind of institutionalization of this real estate space and improving operating trends that you pointed out? Or is it too soon to sort of see any meaningful changes?
Yes. It's a very, very good and very timely question, Smedes. In my experience, and I guess this is one of these rare occasions when it actually pays to get old, what I've seen over the years is it when you enter a period of tightening, when the cost of credit and/or equity go up, it usually takes sellers longer to recognize the change in reality than does it for the buyers, right? And so I think right now, we're probably in somewhat of a situation of a slack tide where there's really -- on the part of would be sellers or would be buyers a bit of hesitancy as to well, what is market, right?
We are fortunate that we have a number of discussions going on that have a momentum to them that can carry both us and our potential partners past this hesitation regarding the future cost of capital. But I do think we'll probably see a period as we have in so many cycles where it will take some time for buyers and sellers to recalibrate. It will take some time to re-find equilibrium, but it's pretty axiomatic that if the cost and the availability of capital goes up, so -- sorry, the cost of capital goes up and the availability goes down, cap rates tend to go up accordingly.
Now -- sorry to go on so long. In gaming, it may end up adding to somewhat of a more or less a stasis in cap rates because this is a category that as you were saying, Smedes, has been seeing cap rate compression, perhaps the velocity of compression slows or maybe even stops, but it may be a category where you won't see cap rate expansion given the increasing interest in the category as we've seen over the last year or 2.
Great. That's interesting. I just wanted to switch gears, John, again, switch and go through the transcript of operators. But I'm just wondering, it sounds like the leisure customer is still very strong in Las Vegas. Do you have any thoughts on how the convention business is lining up over the next year or so, I guess, or however you think about it?
Yes. I mean based on what we've heard, we now have Caesars, MGM and The Venetian running assets in Las Vegas who run the largest convention business there that they are seeing that business planning to return later this year and very strong, as you've heard them say in their earnings in 2023. Smedes I was quoting the gaming revenue, but what I haven't quoted yet is another thing Caesars said in their earnings, their Las Vegas properties in the month of April had record room revenue. So that's pretty amazing in a place where they're also getting strong gaming revenue.
So you can see the consumer, I mean, most importantly for our tenants, the consumer simply has not found a substitute for their entertainment dollars, that Vegas continues to be, again, the #1 destination in America. I've argued with my colleagues, it's the number one destination in the world right now. And not only is the customer coming who wants to gamble, but we're seeing that they diversified these resorts, and they're getting business travel. They're getting room revenue, they're getting food and beverage revenues, spa revenue, pool revenue. And it's the beauty of these integrated resorts. And all the credit goes to our operators and how they're running these facilities.
Our next question comes from Barry Jonas from Truist Securities.
Given the scale and size of VICI to date, how many strategy or perhaps your minimum requirements change at all?
I would say generally not. And if I guess at what might underlie your question, given that VICI has gotten so big, will VICI sort of establish a red line below which we do not go in terms of asset size or NOI. And I think the answer is no. Again, as a triple net REIT, we enjoy rent per asset that's up over $50 million. The average triple net store produces about $250,000 a year rent. We will always evaluate the materiality of a given asset not unto itself, but really as part of a larger relationship with whomever may either currently own and want a sale leaseback that asset or an operator with whom we partner in the acquisition of that asset.
So we will be much more focused on the long-term growth potential of a given category or opportunity or partnership than we would on individual assets. And that's how we believe over time, we'll develop a more sustained and sustainable business model of deal flow.
Great. Great. That's really helpful. And then just as a follow-up question, are you seeing a wider group of REITs out there now looking at gaming deals? And maybe to what extent are you competing with operators looking to do holdco deals?
David, you want to take that?
I'll go ahead and jump in. I mean, obviously, we've seen with the Wind transaction in Boston Realty Income getting into the casino space. But for us, ever since we started the company, we always knew there was going to be competition in this space. Clearly, people have seen the resiliency of the model. They've seen the high quality of the assets. They've seen how it's performed in the toughest time ever, which was COVID with the business shutdown and rebounding with all the records that I've been talking about today.
So that obviously has attracted more potential owners of the real estate or of the holdco as you mentioned. So we go into every transaction, expecting that there's going to be competition. And we are not surprised at all that there are more folks that are interested in this just incredible real estate space.
Our next question comes from Jay Kornreich from SMBC.
Thanks again for getting MGP done and everything else. Just going back to interest rates, but in a different question that as the rising interest rates are putting pressure on what was previously expressing cap rates, can you kind of walk us through how you think about the puts and takes in structuring new leads of such items like cap rate, rent coverage, inflation, CPI kickers and what opportunities there may be for you to potentially get more aggressive?
David, do you want to take that?
Yes. Jay, thanks for the question. I mean as I mentioned a little bit earlier, each deal is unique and not every -- not one size fits all. So what is critical for us is that any transaction that we ultimately underwrite and ultimately announce and then sign up is accretive day 1, right? You saw some hotel REITs in the last day or 2 announced a 4 cap and they're going to turn it into an 8 or 9 yield. We can't do that under our structure. And if we ever did that, that would probably be our last deal that we ever did. So obviously, CPI is a very hot topic these days, but it's important for us to have escalators that are: one are reasonable for the market that we're in, whether that's regional, super regional, Vegas destination and then annual bumps that work for us and work for the operator. And we ultimately want to push for no CPI caps and the operators are pushing back on that a little bit.
And so it's always a negotiation in terms of value, duration of lease the cap rate that we can pay. There's a few levers that we underwrite with to make sure that we are underwriting a strong credit and a strong operator that has conviction that coming into the market. But obviously, we want to -- our fundamental goal is to make sure that we -- what we sign up is accretive from day 1 because we live with that for 30 years plus.
Jay, I will just add that a bit of wisdom that one of our most important and valuable Board members, who many of you know, Craig Macnab, one of the first adages he shared with us is that gentleman, the rent should be as low as possible. And we absolutely believe in that. We want our rent to be as low as possible in regard to the economics of the tenant's business because the lower the rent as a percentage of their economics, the more successful they will be, the better at credit they will be and the more willing and able they will be to occupy the building for a very, very long time to come.
Yes, absolutely. I mean certainly, the portions of the tenant accrued to the landlord. That makes a lot of sense. And then I guess just as a follow-up, we previously spoke about the benefits of becoming investment grade and the lower cost of capital that comes with it, which may open up the door for more non-gaming opportunities. So just curious about how you're thinking about that at this time now that you've achieved the investment-grade status.
David?
Yes, Jay. I mean we're thrilled to be here, and we'll continue to, as we talked about on the debt roadshow and the debt marketing process, we'll continue to migrate up to BBB curve over time. We'll continue to diversify our tenants, bring our leverage back to the 5x and 5.5x that we've always been very focused on from day 1. Thanks to Erin's great work with the -- Erin Ferreri and her team. Thanks to her great work with the agencies, we're able to get that rating upgrade on April 18. But that does definitely broaden the funnel as another question that was asked earlier.
At the end of the day, we're spread investing. So if we can lower our cost of capital, not only through the debt markets and as we migrate up the credit curve, obviously, the cost of capital can be reduced. And then with the index inclusion that has occurred with the MGP Class A shareholders being converted to VICI Class -- to VICI shareholders and then potentially one day S&P 500 inclusion, we can continue to lower our cost of equity capital to -- as you said, Jay, and frankly, so broaden that funnel and continue to diversify both in and outside of gaming.
Our next question comes from David Katz from Jefferies.
I just wanted to talk about kind of the next phase, if I'm characterizing it right, where some of the acquisitions that you may pursue, come from internal -- or funded by internal capital sources or cash flow and the accretion that comes out of that. How big of a trend is that? And is that something we should be thinking about this year?
David, do you want to start? And…
As Ed mentioned, and we've talked about our free cash flow after dividends and that's true free cash flow is somewhere $400 million to $500 million of run rate. So you kind of think about levering that 1:1 up to $1 billion of buying power. And so small gaming deals like the Century deal that we announced in June of '19, $278 million that can be done with cash on hand. And so all that accretion dropped straight to the bottom line. And some of the non-gaming stuff that you see us do is obviously smaller just by the opportunities that were presented in front of us at the time.
And so those -- that's free cash flow. We don't have to go to the equity markets and do what we did last year and raise $5.4 billion of equity for the transformations that we undertook. We're thrilled to have done them, and we wouldn't know looking back. But I think as we continue to grow, as Ed said, that's sustained and sustainable flow business as you'll see more of that going forward. Hopefully that answers your question, David.
David Katz, I would just....
Just a follow -- please go ahead.
Yes, David Katz, I was just going to add that when we look at retained cash as a capital source. We are very cognizant that is the shareholders' money and our obligation to produce a superior return and investment spread on the use of that cash is every bit as strong as it would be if we're going out into the market raising equity.
Right. And if I can -- just follow up. I think the last part of my question is, is there a landscape that you could see some of these kinds of opportunities happening next 12 months-ish?
Yes. I'd say, John, we're very confident of that. Are we not?
We are. We are. Obviously, David can't tell you when our next transaction, Sam's smiling at me -- that I can't tell you when our next transaction will be. But in all seriousness, I -- we're as -- you've heard me say, we're as busy as we've ever been. The funnel is wider than it's ever been for numerous reasons that we talked about earlier of our size, our scope. And so I think that's very realistic within the next year or so.
Our next question comes from Greg McGinniss from Scotiabank.
So last night The Flamingo is currently being marketed by Caesars. There's also the information that some investors have not been interested at the marketed $1 billion plus valuation, which -- and it leads us to 2 questions. The first is the fact the property is being more widely marketed, I mean you also passed on that initial price. And then two, what kind of cap rate would you target for an investment of that size, given cost capital they imposed, leverage limits and your desire for immediate accretion?
Well, Greg always been good to talk to you, and you definitely get the award at least so far for asking the questions that we can and will not answer on this call. I think John did a good job of describing what Tom Reeg was on record saying the other day, and I don't know, John, I think we just -- we leave it there.
Couldn't agree more.
Well, I figured, I had to shoot my shot there. But maybe as a second follow-up.
You absolutely do. Full marks for asking.
So separately then. So based on current inflation numbers, can you just give us some indication as to what's being -- assuming guidance for the escalators for the remainder of the year?
David?
Hey, Greg, it’s David. Similar to but not including unannounced acquisitions or dispositions or capital markets activities, guidance includes this, the base case escalators.
So does that mean where it could be greater of 2% in CPI or assuming 2%? Or how should we think about that?
It doesn't include any CPI, estimates around CPI because that's a guessing game, and so we can't predict the future. If we could, we'd probably be doing something else. So the base rate in the leases that's in the guidance number.
Okay. And the CPI numbers...
And then Greg -- I was just going to say, Greg, the key period for CPI measurement for us comes in the early second half of the year, isn't that the right way to think about it, David?
Yes. For the bump in November, we look at September, August and July numbers and compare that to the prior year, and then that's what gets factored into the increase November 1. For the 2 Caesars leases, the Caesars master lease and the Caesars Las Vegas lease.
[Operator Instructions]. And our next question comes from John Massocca from Ladenburg Tallman.
So given some of the kind of new stories or prints we've seen on Las Vegas land prices or even assets that maybe have more of a redevelopment component to them. How are you thinking about your landholdings in Las Vegas? And maybe can you kind of remind us what the process would be for either monetizing those or kind of turning them into development, if opportunities arose on that front?
John and perhaps Samantha, you want to take that?
Yes. Just as a reminder, we have really 34 acres in Las Vegas that are underdeveloped, 7 are in front of Caesars Palace. Those -- that sits inside the Las Vegas master lease, and then there are an incremental 27 acres that we own. Caesars also owns some acreage next to our 27 acres. As it pertains to development, as you can imagine, as you -- and you are alluding to or as you mentioned, there have been some significant sales of real estate acreage on the Las Vegas Strip or near the Las Vegas Strip. It continues to make our land very valuable.
And the process would work if we were to develop would be with Caesars on the land, particularly in front of Caesars Palace as well as the land that is behind The Flamingo, behind Paris and Bally's. We would work in partnership with them should there be an appropriate development. But we sure do like the prices that are coming out, if they are completely true. I think there was one that just took place, small acreage of almost over $30 million an acre. So we're excited to see that. And it's not that surprising when you heard the statistics. I went through in my opening remarks about this city and the success of these resorts and how the operators have turned them into incredible places of EBITDA generation.
Okay. And then in terms of the competitive set, you talked a little bit about public REITs in the marketplace. Have you seen any change in either private investors in casino real estate or maybe some of the kind of not publicly traded players that are out there, given some of the moves in cost of debt capital. I mean, has that competitive set changed at all? Any color there would be helpful.
Yes. So I think, John, there's actually 2 interesting things going on. One is the increasing institutional interest in net lease generally. Any of you who read PERE would have seen yesterday the publication of an article as to how new names like KKR and Aries and Carlyle are coming into the net lease space. And there's obviously been other PE firms and credit firms that are focusing on net lease generally. And then within that lease, there is exactly as you're saying, or suggesting increased interest from publicly non-traded REITs and net lease-focused private equity firms on what is, we believe, one of the most compelling forms of triple net real estate there is, which is to say, gaming real estate.
And I think it's important to recognize, too, that in focusing on gaming -- actually I'm losing the point there. I think the key point is yet that absolute increased interest because of both the superiority of the net lease model generally and the incredible attractiveness of gaming real estate.
But I guess maybe over the short term, given what we've seen interest rate moves since the beginning of the year, has that demand change at all? I understand long term, you've seen kind of institutional capital gravitate towards this. Has some of that had to fade away because, frankly, their cost of debt financing has gone up?
Yes. Again, I think it goes back to the answer I gave to Smedes, John, and that is the degree to which there may be a bit of a slack tide right now because, to your point, as an example, the CMBS market has tightened up quite a bit. And there is probably not quite the gold rush fever as there might have been 6 months ago, but it has not gone away because these people are sitting on an awful lot of dry powder.
This concludes our Q&A session. And now I'd like to pass back over to Ed Pitoniak, CEO, for any final remarks.
Thank you, operator. In closing, we thank you for your time with us this morning, especially given how busy all of you are. It is insane how much earnings reporting is going on this week in the REIT sector. With your support, VICI has become one of America's leading REITs in portfolio scale and quality and in economic magnitude. We will continue to work hard for you every day. We look forward to connecting again when we report our second quarter results. Bye for now.
Thank you, everybody, for joining today's call. You may now disconnect your lines.