VICI Properties Stock: The ‘Experience’ Of A Lifetime (NYSE:VICI)

Gaming REITs own entertainment and experiential real estate assets, including casinos, resorts, and hotels.

This can also include assets like water parks, golf courses, and a wide range of other facilities that facilitate some form of entertainment.

Usually, they operate under long-term triple-net lease deals, which shift costs like maintenance, taxes, and insurance to the tenant.

Because gaming properties are increasingly important, Nareit launched this new sector, which covers two REITs, which were previously part of the specialty REIT sector:

1. VICI Properties (NYSE:VICI)
2. Gaming and Leisure Properties (GLPI)

These REITs not only benefit from protection against the increasingly dominant e-commerce sector but from what the World Economic Forum essentially calls the human need for entertainment.

“The human need for movement, spontaneity, interaction, variety, and other experiences hardwired into us as hunter-gatherers are only possible when we have access to multiple places and settings.”

That’s why we like VICI Properties, which has become one of our favorite REITs for a number of reasons.

• It has focused on the hotspot of entertainment: Las Vegas.
• It has fantastic financials, providing fertile ground for growth and consistently growing shareholder distributions.
• Its dividend is juicy at 6%.
• It has a highly attractive valuation.
• It focuses on low-risk, high-reward growth opportunities.

Although some readers complain about the REIT’s poor performance since 2021, we have a slightly different view.

REITs, in general, haven’t done well in recent years due to investors preferring other sectors in times of sticky inflation and elevated rates.

The Vanguard Real Estate ETF (VNQ) hasn’t gone anywhere since early 2020 – including dividends!

Besides that, buying high-quality REITs at great prices with elevated yields allows us to get paid while waiting for more favorable sector tailwinds.

Hence, in this article, we’ll update our views on VICI and explain why this gaming REIT is one of our favorites going forward.

So, let’s get to it!

VICI’s Brilliant Business Model

Las Vegas was settled in 1905 and officially incorporated in 1911. However, it took many decades until growth really took off.

Between the 1990s and 2000, the city’s population almost doubled.

Nowadays, it’s one of the biggest entertainment hotspots in the world, which includes world-class resorts, a wide variety of restaurants, countless shows, fascinating buildings like the Sphere, and sports teams, including the relocation of the Oakland Raiders and (eventually) the Oakland A’s.

Moreover, did you know:

• Due to the many lights of the city, it’s the brightest spot on earth.
• Roughly 300 weddings happen every day.
• Consumption of shellfish in Vegas is more than 60,000 pounds per day, which is more than the rest of the nation combined.

Adding to that, despite economic challenges like poor consumer sentiment, the city continues to do well.

According to the latest report from the Las Vegas Convention and Visitors Authority, 3.5 million people visited Las Vegas in April, which is 3.8% more compared to April 2023.

In fact, all stats were up, with convention attendance rising by 36%. Revenue per available room rose by 8% as total room inventory underperformed total visitor growth.

This bodes well for its operators, many of which are tenants of VICI Properties.

VICI Properties’ history goes back to 2017 as it’s the result of Caesars Entertainment (CZR) spinning off its real estate after a Chapter 11 reorganization. This means VICI only had one tenant to start.

In the years after that, it quickly grew, adding key assets from operators like Harrah’s, Penn, and Hard Rock. In 2021, it acquired MGM Growth Properties, which added assets like The Venetian.

In fact, since 2017, the company has grown its adjusted EBITDA by 330%.

As of March 31, it owns 93 properties that pay it $3.1 billion in annual rent. 74% of this comes from just two operators: Caesars and MGM Resorts (MGM).

That number rises to 83% when we include The Venetian, which accounts for almost $270 million in annual rents alone.

Generally speaking, I’m not a big fan of landlords who are highly dependent on a few select tenants. After all, it shifts power to tenants.

However, this is not the case here. I would even argue it’s a benefit as the gaming industry is highly competitive. Having the biggest operators in gaming as tenants brings a lot of safety to the table.

Using the data below, the company has fantastic benefits over other net lease REITs.

• It operates in a segment with high entry barriers. This is extremely rare in the REIT sector. Bear in mind that it’s extremely hard to compete with VICI as it owns some of the most iconic buildings in Las Vegas, including Mandalay Bay, MGM Grand, New York-New York, Luxor, Caesars Palace, The Venetian, Harrah’s, and others.
• Its buildings are highly differentiated instead of commoditized.
• Even during the pandemic, it collected 100% of its rent – despite widespread lockdowns that impacted all of its tenants.
• The average remaining lease term is roughly 42 years, which adds more safety to the table.
• 96% of the company’s (future) rents come with CPI escalators. Currently, that number is 50%, which will gradually increase to 96% by 2035.

It also needs to be said that the company is extremely efficient.

As of 1Q24, it spent 1.7% of its revenue on general and administrative costs. That’s the lowest among all major net lease REITs.

It also has a fantastic balance sheet.

At the end of the first quarter, the company had 99% fixed-rate debt, a weighted average time to maturity of 6.8 years, a net leverage ratio of 5.4x, and an investment grade credit rating of BBB- (or equivalent) from all three major rating agencies.

On March 7, the company sold more than a billion of new debt at a 5.9% rate, which is a great number, as the U.S. 10-year yield was trading at roughly 4.2% back then.

Moreover, this bond was 12x oversubscribed, which shows massive demand for VICI debt (a sign of confidence).

It also has $3.5 billion in liquidity. Roughly $520 million of this is cash.

With that said, roughly half of the company’s properties are not located in Las Vegas as it also owns a wide variety of gaming assets in other states and sectors. This includes 38 locations of Bowlero’s bowling alleys, Harrah’s in New Orleans, the MGM Detroit, Hard Rock Cincinnati, and others.

In general, the company has positioned itself as a leader in diversified leisure real estate, supported by its recent investment in the Homefield Kansas City sports training complex, which will soon come with a Margaritaville resort.

This investment follows the company’s acquisition of Chelsea Piers at the end of 2023 and marks its entry into the sports and recreation sector.

At this point, it’s important to mention that VICI needs to diversify as growth on the Las Vegas Strip is limited. After all, the battle for prime real estate is fierce, and unless a major owner is willing to sell, VICI won’t be able to add more significant real estate on the Strip.

However, that’s fine. By diversifying, the company is mitigating risks and entering into new growth areas.

For example, the Homefield Kansas City investment is not just a standalone project but part of a broader strategy to penetrate the youth sports and recreation market, which is an industry with strong demand and limited supply, according to the company.

Even better, during its 1Q24 earnings call, the company explained that its strategy is supported by strict investment criteria that are focused on sectors with low cyclicality, low secular risks, improving growth trends, and favorable supply and demand dynamics.

Essentially, these investments are expected to generate stable long-term returns.

Great News For Shareholders

Speaking of consistent growth, the company’s dividend is highly attractive.

Since its IPO in 2018, VICI has achieved a CAGR of 7.9% in dividend growth.

The most recent hike was 6.4% on Sept. 7.

Currently, the stock yields 5.9%, which is 1.7 points above the Vanguard Real Estate ETF’s 4.2% yield.

Moreover, while the company’s stock price performance has been lackluster, it has opened up new opportunities.

Using the FactSet data in the chart below:

• The company is expected to grow per-share adjusted funds from operations (“AFFO”) by 5% this year.
• In 2025 and 2026, growth is expected to average roughly 4%.
• Currently, VICI trades at a blended P/AFFO ratio of 12.9x, which is a mile below its normalized 16.2x multiple.

Although it will require lower interest rates and a sustainable decline in inflation to get investors to apply higher multiples to REITs, in general, we believe VICI offers a terrific risk/reward, with a high likelihood of double-digit annual returns going forward.

Hence, as we said before, while this is not a fun environment to own REITs that show no serious attempt to rally, we’re happy to buy great assets at fantastic prices.

On a long-term basis, that’s the best way to build wealth and income-focused portfolios.

In Closing

VICI Properties stands out in the gaming REIT sector as it owns top-tier entertainment assets in Las Vegas and beyond.

Despite recent market challenges, VICI’s robust financial health, long-term lease agreements, and strategic diversification position it for consistent long-term growth.

With an attractive 6% dividend yield and low valuation, we believe it’s an excellent buy-and-hold investment.

Moreover, by leveraging its unique properties and expanding into new sectors, VICI continues to offer significant growth potential and reliable income for shareholders.

We believe all of this makes VICI Properties a compelling choice for any long-term, income-focused portfolio.

Author’s note: Brad Thomas is a Wall Street writer, which means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.