• In a few weeks, I will provide a keynote speech at The MoneyShow in Las Vegas and conduct research on the casino sector.
• This article compares two gaming REITs, Gaming and Leisure Properties and VICI Properties in terms of their portfolios, tenants, debt metrics, and financial performance.
• So, who’s rolling the dice with me?

In a few weeks, I plan to fly to Las Vegas to give a keynote speech at The MoneyShow.

This is my first keynote (at the MoneyShow) since Covid-19, and I’m extremely excited to get back into the speaking groove again.

In addition, I’m thrilled to see many of my Seeking Alpha friends as well as Steve Forbes and Charles Payne.

While in “Sin City,” I plan to conduct a “boots on the ground” series, which means I’ll be playing a few hands of blackjack.

Don’t worry, I know the difference between gambling and investing, which simply means I’m researching the casino sector.

As you may recall, in December I received some positive feedback on my article comparing Realty Income (O) and Agree Realty (ADC).

So, today I thought that I would follow that up with another piece comparing the only two pure-play gaming REITs: Gaming and Leisure Properties, Inc. (NASDAQ:GLPI) and VICI Properties Inc. (NYSE:VICI).

Both of these real estate investment trusts, or REITs, are internally managed and invest in experiential properties with a portfolio of premier gaming assets that feature luxury hotels, restaurants and bars, as well as an assortment of other entertainment venues.

Both REITs lease their properties to leading operators in the gaming and hospitality industries such as Caesars Entertainment (CZR) and PENN Entertainment (PENN).

So, without further ado, and as a warmup for my trip to Vegas, let’s see where the chips fall…

Gaming and Leisure Properties – GLPI

Following its spinoff from Penn National Gaming in 2013, Gaming and Leisure Properties became the first REIT with an exclusive focus on gaming properties.

The gaming REIT now has a market cap of approximately $12.0 billion and a 28.7 million SF portfolio comprised of 61 geographically diversified gaming properties featuring approximately 14,800 hotel rooms across 18 states.

Gaming and Leisure’s portfolio has high-quality gaming properties including several that are ranked #1 in their respective markets. Some examples of their market-leading properties include:

• Ameristar Bally’s Black Hawk (#1 Casino in Colorado)
• Ameristar Vicksburg (#1 Casino in Central Mississippi)
• Hollywood Casino at Penn National Race Course (#1 Casino in Central PA), and
• L’Auberge Baton Rouge (#1 Casino in Baton Rouge).

Since its formation, GLPI has operated at 100% occupancy and currently receives approximately 88% of its rent from top gaming operators including Penn Entertainment, Boyd Gaming (BYD), Caesars Entertainment, and Bally’s (BALY).

Additionally, it should be noted that the company collected 100% of its rents during the covid pandemic.

While VICI and GLPI both have high tenant concentration, wide tenant diversity in the gaming space is practically impossible to achieve as there are only so many state-licensed gaming operators that VICI and GLPI can lease their properties to.

While I always prefer a well-diversified tenant base, it is not always possible in all sectors, particularly those which require tenants to be specially licensed to operate specialized properties, for example in the cannabis and gaming industries.

However, I’m not too concerned with either gaming REIT’s tenant concentration for the following reasons:

• Gaming facilities and their related amenities tend to be trophy properties that cannot easily be replaced.
• Municipal and state regulations make it more difficult to build or relocate a casino property when compared to more traditional types of real estate.
• Both gaming REITs receive the majority of their rent from Caesars & MGM, or PENN, all three of which are nationally recognized and established publicly traded gaming operators.

Moreover, state and local governments have an incentive to see gaming properties succeed as many of them rely heavily on tax revenues from the casinos in their state or locality. This dependence on tax revenues adds a layer of protection that most other real estate sectors do not enjoy and, in general, limited license jurisdictions that are protected by the state tend to have higher tax rates.

GLPI achieved a cross-over investment grade status in 2018 and currently is rated BBB- by S&P Global, BBB- by Fitch, and Ba1 by Moody’s.

The company has solid debt metrics with an EBITDA to interest expense ratio of 4.32x and a trailing twelve-month (“TTM”) net debt to EBITDA of 4.8x as of the end of 3Q-23. Plus, as of their most recent update, 100% of GLPI’s debt is unsecured.

VICI Properties – VICI

VICI was formed out of Caesars Entertainment’s bankruptcy in 2017 to become the second, and to date, one of only two publicly traded REITs with a primary focus on gaming properties.

VICI currently has a market cap of approximately $30.8 billion and a 127 million SF portfolio comprised of 54 gaming properties and 39 non-gaming / experiential properties. Additionally, the gaming REIT owns 4 championship golf courses and 33 acres of developable land adjacent to the Las Vegas Strip.

Its gaming assets include several recognizable trophy properties and features over 60,000 hotel rooms, approximately 500 retail outlets, and roughly 500 restaurants, nightclubs, bars and sportsbooks across the U.S. and in Canada.

Its non-gaming experiential properties primarily consist of family entertainment bowling centers that VICI acquired from Bowlero (BOWL) in 2023.

Many of VICI’s most iconic properties are located in Las Vegas and include:

• Caesars Palace
• MGM Grand
• The Venetian Resort
• Harrah’s
• The Mirage
• Luxor
• Mandalay Bay
• New-York-New-York
• Park MGM, and
• Excalibur.

Outside of Las Vegas, the gaming REIT owns several notable casinos including Caesars Atlantic City, Beau Rivage located in Biloxi, Mississippi, and Empire City Casino located in Manhattan NY, just several miles from Times Square.

Like Gaming and Leisure Properties, VICI has high tenant concentration with a total of 12 tenants.

The vast majority of VICI’s annualized cash rent comes from its two largest tenants, Caesars and MGM Resorts (MGM), which make up 39% and 35% of VICI’s annual rent, respectively.

When including extension options, both of VICI’s top tenants have extremely long weighted average lease terms (“WALT”), with Caesars having a WALT of 31.9 years and MGM Resorts having a WALT of 51.5 years.

VICI has an investment-grade balance sheet with a BBB- rating from S&P Global.

The gaming REIT has solid debt metrics including a net leverage ratio of 5.7x, a long-term debt to capital ratio of 42.02%, and an EBITDA to interest expense ratio of 4.07x.

Additionally, VICI’s debt is 99% fixed rate, 83% unsecured, and has a weighted average term to maturity of 6.1 years.

Comparison: VICI Vs. GLPI

By the Numbers

The chart below lists a side-by-side comparison of the gaming REITs total revenues from 2019 to 2022. What jumps out to me is how much revenue growth VICI has achieved in its relatively short existence.

Total Revenues

AFFO per share

When looking at the bottom line, or adjusted funds from operations (“AFFO”), GLPI has had a blended average AFFO annual growth rate of 3.23% since 2019.

The gaming REIT delivered strong AFFO per share growth in 2019 at 8%, had flat growth in 2020 & 2021, and then increased AFFO per share by 3% in 2022.

For 2023, analysts expect AFFO per share to increase by 4% and then by 2% in 2024.

While GLPI has had fairly consistent AFFO growth over the past several years, its blended average AFFO growth rate of 3.23% is more than doubled by VICI.

Each year since 2019, VICI has had positive AFFO per share growth and has a blended average AFFO annual growth rate of 6.74%. Once all of the numbers are in for 2023, analysts expect VICI’s AFFO per share to increase by 11% and then increase by 5% in 2024.

In terms of total revenue and AFFO per share, VICI has delivered superior growth since 2019 when compared to GLPI.

Dividend Growth

In the chart below, I’ve removed the special dividends paid in 2021 and 2023 to normalize GLPI’s dividend history.

Gaming and Leisure increase its dividend each year since 2019 with the exception of 2020, when the quarterly dividend was cut from $0.70 to $0.60 per share.

Dividend increases resumed in 2021, and since 2019 GLPI has had an average dividend growth rate of approximately 2.62% when removing the special dividends.

Like revenues and AFFO per share, VICI has delivered superior results in terms of its dividend growth.

Each year since 2019, the gaming REIT has increased its dividend by over 7% and has an average annual dividend growth rate of 10.11% over the past 5 years.

Dividend AFFO Payout Ratio

Both GLPI and VICI have adequate dividend coverage with a 2023 AFFO payout ratio of 85.37% and 74.88% respectively.

While both gaming REITs have a respectable AFFO payout ratio, I would consider VICI’s dividend safer as its AFFO payout ratio of 74.88% is much more conservative than that of GLPI.

GLPI pays a 6.42% dividend yield and trades at a P/AFFO of 12.31x, compared to its average AFFO multiple of 12.98x. Analysts expect AFFO per share to increase by 2% in both 2024 & 2025 and then increase by 7% in 2026.

We rate Gaming & Leisure Properties a Spec Buy.

VICI pays a 5.43% dividend yield and is currently trading at a P/AFFO of 14.15x, compared to its average AFFO multiple of 16.29x.

Analysts expect AFFO per share to increase by 5% in 2024, and then increase by 4% and 3% in the years 2025 and 2026 respectively.

We rate VICI Properties a Buy.

In Conclusion

I believe my article in December comparing Realty Income and Agree Realty ended with something like “why not just own them both.”

In this case, however, I think there is a clear winner here.

VICI was formed years after GLPI, yet its market capitalization is almost three times that of GLPI (~$30 billion vs ~$12 billion).

VICI has delivered superior revenue growth, AFFO per share growth, and dividend growth in its short existence and I believe it’s on track to continue this trend.

VICI trades at a higher absolute AFFO multiple of 14.15x, compared to GLPI’s AFFO multiple of 12.31x, but VICI is trading at a larger discount relative to its average AFFO multiple.

Both companies have similar balance sheet metrics and business models, but I believe VICI is the better investment at this point given its superior growth, safer dividend, and a deeper discount relative to its average AFFO multiple.

One last thing…

A few things to remember before heading to Las Vegas…

• Always remember not to put all of your eggs in one basket.
• Scared money never wins.

I look forward to your comments below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI, O, ADC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post VICI Properties Vs. Gaming and Leisure Properties: Game On! appeared first on Up2info.com.

• VICI Properties is a popular real estate investment trust with eye-catching dividend metrics and high-quality tenants.
• The lease structure of VICI Properties, with triple net leases and CPI-linked escalation, provides predictable and stable cash flows.
• VICI Properties is undervalued compared to comparable REITs based on AFFO multiples and dividend discount model valuations, presenting a long-term opportunity for investors.

Editor’s note: Seeking Alpha is proud to welcome Dividendology as a new contributor. It’s easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »

Introduction and Background

I believe VICI Properties (NYSE:VICI) is poised for long-term growth due to their lease structure, valuation, and quality tenants. VICI Properties is a real estate investment trust that has skyrocketed in popularity over the past few years for a multitude of reasons. The REIT has eye-catching dividend metrics — Yield: 5.46%; 3 YR Dividend CAGR: 9.04%; and AFFO Payout Ratio: 74.88%. Not to mention, the REIT also owns what some consider the highest-quality real estate, located on the iconic Las Vegas Strip including Caesars Palace Las Vegas, MGM Grand, and the Venetian Resort Las Vegas. They say a REIT is only as good as their tenants, and in the case of VICI, their top 3 tenants make up 83% of their annualized rent roll.

And while some may argue this is a potential risk, I’d argue that having Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Las Vegas as your top tenants is a strength for VICI. I believe Las Vegas tourism will continue to increase in the coming years. In fact, comparing January through October of 2022 to 2023, we can see Las Vegas has already seen a 5.8% increase in total visitors through 2023. This is an advantage for VICI.

So from a dividend perspective, tenant perspective, and valuation perspective (as we’ll see later), there appears to be a lot to like about VICI Properties. But the magic of VICI Properties isn’t in any of these things. It’s in the lease structure. Let me explain.

Lease Structure

VICI Properties is a triple net lease REIT. Triple net leases are leases in which the tenant is responsible for paying all of the property’s expenses, including real estate taxes, building insurance, and maintenance. This makes the REITs very attractive to investors because they offer a steady stream of income with very little risk. The risk is transferred to the tenants instead. 100% of VICI’s tenants operate under a triple net lease agreement. The makes the cash flows coming from their tenants extremely predictable. The second element of VICI’s lease structure that makes them a great REIT is how they have protected themselves from inflation. And with inflation rates spiking over the last 3 years, it’s becoming more and more clear why this is so important long-term.

As of 2023, 50% of VICI’s rent roll has CPI-linked escalation. The even better news? By 2035, it’s estimated that 96% of VICI’s rent roll will have CPI-linked escalation.

Not to mention, the remaining lease term (inclusive of all tenant renewal options) for VICI tenants is 42 years. (Wow!) And while, 2020 was a difficult year for REITs as tenants struggled to pay rent, VICI was still able to collect 100% of their tenants rent in 2020.

So, for investors looking for a REIT with predictable and stable cash flows, it’s easy to see why VICI is so attractive. Now VICI is currently down 5.82% over the past year, but they aren’t the only REIT bleeding. Vanguard’s real estate index fund VNQ is currently down 0.73% over the past year as well.

There’s no doubt that REIT’s have felt the pain from the rising interest rate environment as investors seek out less risky assets. But in my opinion, this creates long term opportunities. So let’s approach VICI from a valuation perspective.

Growth

VICI recently inked a $432.9 million sale-leaseback agreement with Bowlero, bolstering its portfolio with 38 bowling centers. Bowlero will guarantee $31.6 million in annual rent, generating around a 7.3% cap rate. The lease boasts a 25-year initial term with tenant renewal options extending for 30 more years. This again shows VICI’s focus on ensuring long-term income stability, which continues to make them attractive in my opinion from an investor standpoint.

VICI further secured the right of first offer for future Bowlero acquisitions, unlocking potential for future portfolio expansion.

Risks

The best way to get a better understanding of a company’s risks is to look at their form 10-k.

After carefully reviewing this document, I’ve narrowed down what I believe to be the main risks of the business to 4 key points:

• Because a concentrated portion of their revenues are generated from the Las Vegas Strip, VICI is subject to greater risks than a company that is more geographically diversified.
• VICI is and will always be significantly dependent on their tenants for substantially all of their revenues. An event that has a material adverse effect on any significant tenants’ businesses, could have an adverse effect VICI.
• VICI is somewhat dependent on the gaming industry and may be susceptible to the risks associated with it, including changes in consumer behavior and discretionary spending as a result of an economic slowdown.
• VICI and their tenants face extensive regulation from gaming and other regulatory authorities.

These are the main risks investors need to be aware of when considering VICI. But as someone who is bullish on the company, I also believe that some of the risks listed above, can also be a strength for the company. The real estate is unlike anywhere else, Las Vegas tourism continues to increase, and gaming/gambling continues to become more popular in the United States.

Q3 Earnings

VICI’s Q3 beat was fueled by $0.54 FFO, exceeding expectations by $0.01. Revenues also landed above estimates at $904 million. Their fortress-like portfolio continued its streak, maintaining 100% occupancy and collecting all rent. Notably, AFFO surged an impressive 10.2%, highlighting the enduring strength of VICI’s business model.

With VICI’s upcoming earnings on February 22, 2024, the FFO estimate is $0.65. Within the last 90 days, 8 analysts have given down revisions with 0 up revisions.

But to be fair, we can see earnings misses have been a somewhat common occurrence for VICI’s peers over the past couple of years. In fact, when it comes to revisions and projections, VICI seems to be the REIT that analysts are most bullish when considering short-term earnings projections. This should come as no surprise, as VICI leads the way (along with EPR) with 8 revenue beats in the last 2 years.

One quote from VICI CEO Edward Pitoniak Q3 earnings call that has me especially bullish? Check the following statement: “Finally, in a year in which REIT earnings growth has generally been difficult to come by, VICI’s AFFO per share earnings in Q3 grew 10.7% year-over-year. VICI announced within and subsequent to quarter-end, about $1.1 billion of new capital commitments”. To be fair, he makes it clear that the VICI team is fully aware of market risks at this time as well, when he also said – “And with the market movements of especially the last few weeks, we are sober and cautious about what the market conditions for capital allocation could be from here for how long, no one knows.”

So while I’m not expecting to a short term jump from VICI in part due to the interest rate environment, I still expect to see steady FFO growth in the coming years.

Valuation

The first valuation we’ll use is an AFFO multiples valuation. We will essentially see how the market is valuing comparable REITs using a price to AFFO multiple. And as we can see below, the median P/AFFO for the comparable REITs is sitting at 18.10 , while VICI’s P/AFFO is currently sitting at 13.35, indicating that it is undervalued. If we apply the median P/AFFO of the comparable companies to VICI, we come to a fair value $41.66 per share.

The next valuation we’ll utilize is the dividend discount model. The idea behind the dividend discount model, is we should be able to value a company based on how much they are paying out in dividends, and how much that dividend is projected to grow over time. In this scenario, we’re projecting:

– 4% dividend growth

– 8.5% discount rate

This leaves us with a fair value for VICI of $38.36, according to the dividend discount model. This again leads me to believe that VICI is a victim of the high interest rate environment, creating a solid long-term opportunity for investors looking to start a position in the stock. VICI’s dividend payments and growth continue to attract investors, and rightfully so. Their dividend growth far outpaces the majority of their peers, including the popular Realty Income (O).

Final Thoughts

While investors seem to currently be running away from REITs and turning to safer assets due to rising interest rates, this creates a solid long term opportunity for people looking to buy a great REIT at a solid starting price. The dividend metrics are strong, the REIT has stellar tenants, and the price is right. VICI will continue to be a major position that I hold in my portfolio over the next decade as it currently makes up around 3% of my portfolio. It may take time for us to see VICI revert to its fair value, but in the meantime, I’ll be adding shares.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: Trading At A Great Value With Promising Long-Term Potential appeared first on Up2info.com.

• VICI Properties recently touched below $30, presenting a great buying opportunity.
• REITs have made some nice gains since October but are seeing their prices retract with the surge in the 10-Year treasury bonds.
• There is also uncertainty surrounding if interest rates will be cut sometime in 2024 or not.
• However, I do think interest rates will be cut sometime this year. And if so, REITs will likely see some nice upside as investor sentiment changes.
• Bowlero is expected to continue expanding and growing for the foreseeable future which will only benefit VICI positively.

Introduction

With my upcoming trip to Las Vegas in a few weeks, I felt compelled to write another article on one of my favorite REITs and biggest holdings in my portfolio, VICI Properties (NYSE:VICI). Since the beginning of the new year it seemed like the market became optimistic with hopes of interest rate cuts.

But in the last week prices have retracted, more so in the REIT sector (VNQ). I’ve been added to my REITs during this short-term volatility and with VICI touching below $30 briefly, the stock remains attractive at the current price level. In this article I give reason why I think VICI is still a buy and a stock to own for 2024 and beyond.

Previous Thesis

I last covered VICI Properties back in early October in article titled: I Pity Anyone Not Buying This REIT. It was just a play on the line from the famous Mr. T, “I Pity The Fool.” The sector was experiencing a lot of volatility then and the stock was a strong buy.

The stock was trading around $28 and even touched the $27 level before quickly bouncing back. Treasury yields had reached a level not seen in 16 years which caused REITs to sell off. At the time, Wall Street & Quant rated the stock a strong buy and I also upgraded the stock to a strong buy because of the share price decline.

What Happened?

Since that article, VICI went on to post some nice price appreciation before seeing its share price retract to roughly $31 where it currently trades at the time of writing. In the chart below you can see the stock reached near $33 in early January before retracting. One reason for the negative sentiment in the sector and overall market is the anticipation regarding interest rates. The (US10Y) has also risen to 4.13% at the time of writing since touching 3.79% briefly in late December.

Will they be cut or not? Some have said as early as March we will see the first rate cut, but I think the market is starting to second guess if they will or not. However, I do think they will cut rates sometime this year. With inflation dropping, some are now saying we will see five rate cuts starting in March. In my opinion, I don’t think REITs will see some sustainable price gains until the first rate cut.

Strong FFO & AFFO Growth

VICI Properties reported Q3 earnings back in October and posted some strong growth beating both on FFO and revenue estimates. FFO of $0.54 beat estimates by $0.01 while revenue of $904.3 million also beat by a small margin. Despite the minor beat, FFO & AFFO have grown by double-digits during the fiscal year 2023. The REIT is expected to post Q4 earnings in late February and I expect AFFO in a range of $550 million to $553 million.

Since the beginning of the fiscal year VICI has more than doubled their FFO from $520 million in Q1 to roughly $1.7 billion in Q3. AFFO has also grown from $528.6 million to $547.6 million over the same period.

This growth allowed VICI to raise their full-year AFFO guidance. Management expects this to be in a range of $2.17 billion to $2.18 billion, up from $2.115 to $2.155 billion in Q1. In lieu of the headwinds REITs have faced in the past year with the rise in interest rates and the volatility, VICI Properties continued on its path to deliver 10% AFFO growth. They’ve also managed to raise the dividend while still maintaining a safe payout ratio of roughly 77%.

Bowlero’s Growth Outlook

VICI also closed on its deal with Bowlero (BOWL) which is expected to be immediately accretive to their AFFO. Many readers commented they didn’t know what to think of the deal. One reader also stated that they didn’t like the deal because “bowling was dying a slow death.” And that it was too expensive for a night of entertainment now.

While things being expensive is true, the part about bowling being a dying sport is not. Since COVID, bowling has not only recovered, but is expected to grow slightly by the end of this year to $4.4 billion in revenue.

Albeit slowly, growth is still growth. This is up from $4 billion in 2022. Bowlero is also expected to continue expanding and growing for the foreseeable future. The company currently has 350 properties in diverse markets across 30 states, Canada, Puerto Rico, and Mexico.

Furthermore, they expect there is opportunity to acquire 500-1,000 additional properties, convert 150+ existing properties, and build an additional 200 properties. I know some may be worried that VICI is going down a path similar to Realty Income (O) with acquisitions seemingly out of their wheelhouse, but I think the deals with Bowlero and Canyon Ranch were attractive additions to their already stellar portfolio.

Strong Balance Sheet

The REIT has grown at a rapid pace since going public and their debt has also grown a sizable amount. But the company still maintains a healthy net-debt-to EBITDA ratio of 5.7x. This is a healthy range for REITs and management has stated that they plan to target a range of 5.0x to 5.5x for the foreseeable future. They also sport investment-grade ratings from both the S&P and Fitch. And if they can focus on deleveraging, I think the REIT may see an upgrade from Moody’s Ba1.

They do have roughly $1 billion in debt due this year and $2 billion in 2025. Both had a weighted average interest rate of 5.625%. In Q3, management entered into a swap agreement for an additional $200 million in anticipation of their upcoming debt, which gave them a total of $450 million swap protection. They also had $430 million in cash and $2.3 billion available under the revolving credit facility.

Undervalued

Using management’s full-year AFFO guidance midpoint of $2.145 and the current share price of $30.56 at the time of writing, this gives the REIT a P/AFFO ratio of 14.2x. Which I think is an attractive price point right now. Especially since the REIT’s 5-year average is 16.5x. Furthermore, they also offer some nice upside of nearly 18% to their price target.

Using the Dividend Discount Model and an expected growth rate of 4.0%, I have a price target above the average and closer to the high of $43. Although VICI has a higher growth rate than the typical REIT, I decided to be a bit more conservative. I do think with the fast growth rate the company has seen since its IPO that the growth will eventually start to slow.

Risks/Catalysts

Since a lot of VICI’s properties are dependent on consumer sentiment and Las Vegas being the entertainment capital of the world, a recession could suppress VICI’s profits in the coming months. Las Vegas depends on tourism and a slowdown in the economy will likely cause less foot traffic at their properties. This would also affect their deals with Canyon Ranch & Bowlero as well. Especially the former. Canyon Ranch is not necessarily cheap either so these could also see a drop in revenue.

Catalysts for the REIT are the exact opposite. If the economy manages to avoid a recession and interest rates decline, I expect VICI to see an uptick in foot traffic at its locations as consumer sentiment eases. The President also recently forgave an additional $5 billion in student loans. This coupled with lower interest rates could also help as more Americans get back to traveling with less debt to worry about.

Bottom Line

With the recent decline in share price from early January, I think VICI’s price is attractive and is poised for some double-digit upside when interest rates do decline. Furthermore, the company has impressively grown its FFO & AFFO despite headwinds the entire sector faced in the past year. The company remains committed to growth with the Bowlero deal which is expected to be immediately accretive to AFFO.

Additionally, the bowling company expects to take advantage of growth opportunities in the foreseeable future, which will only benefit VICI positively. With their strong upside potential, double-digit FFO & AFFO growth, I still think VICI is a strong buy at current levels.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: Still A Great Buy Here appeared first on Up2info.com.

• VICI Properties Inc. is a concentrated real estate investment trust with a large portfolio of entertainment properties.
• Despite the cyclical nature of its earnings, VICI Properties’ dividend is well-protected and likely to continue growing even in a recession.
• The trust’s low pay-out ratio and inclusion of trophy assets make it a compelling investment in 2024.

One of the best yields and passive income streams that investors can buy, in my view, relates to VICI Properties Inc. (NYSE:VICI) which is a concentrated real estate investment trust with a large portfolio of entertainment properties.

Despite the more cyclical nature of VICI Properties’ underlying earnings, I think that the dividend is well-protected and will probably continue to grow even if the U.S. economy were to slide into a recession in 2024.

The low pay-out ratio, which is on-par with the AFFO-based pay-out ratio of dividend champ Realty Income Corp. (O) and the inclusion of trophy assets supply two justifications for buying VICI Properties in 2024.

My Rating History

My inflation-themed article about VICI Properties VICI Properties: Don’t Miss This 4.5% Dividend Yield was published almost a year ago. The core argument for buying and owning VICI Properties’ stock was that the trust included rent escalators in its lease contracts which effectively provided the trust and passive income investors with an inflation hedge.

This has played out well as the trust’s FFO is growing organically and I see rent escalators as a good reason to invest in the trust moving forward also. I update my thesis and think that VICI Properties, even in a low-rate environment with receding inflation, is a compelling passive income instrument as the trust maintains a moderate pay-out ratio and raised its dividend by a respectable 6% in the third quarter.

VICI Properties’ Real Estate Concentration: Opportunities And Risks

VICI Properties is a net lease real estate investment trust focused on the entertainment industry. Thus, the trust owns a portfolio that contains a large number of casino properties, particularly in Las Vegas. As was the case last year, the trust’s real estate portfolio is anchored in gaming/casino properties of which the trust owned 54 as of the end of 3Q-23.

Other core assets besides casinos and gaming properties include convention space, a considerable number of hotel rooms (60K plus) and even golf courses.

Included in the gaming portion of VICI Properties’ real estate portfolio are casino properties that stand out with their universal name recognition and that are associated with Las Vegas itself. VICI Properties’ core Las Vegas trophy assets include the Mirage, Caesars Palace, Park MGM and The Venetian Resort.

Las Vegas needs no introduction and has been a tourist attraction for decades. The city attracted 41 million visitors in the last twelve months (as of September 2023), from inside as well as outside of the United States many of whom are spending a boatload of cash in Las Vegas and, of course, in the city’s main attraction: It’s casinos. As such, Las Vegas’ tourists are an extremely important revenue source for the city as well as for VICI Properties’ casino properties.

While this presents a big opportunity for VICI Properties to produce above-average funds from operations and dividend growth moving forward, the trust’s Las Vegas-anchored gaming portfolio is vulnerable to a decline to a recession-driven decline in tourist traffic.

A key strength of VICI Properties’ portfolio focus is a relatively high barrier to entry. Building a new casino is expensive and requires a lot of capital while land supply is also limited at the Las Vegas strip.

Related to this, VICI Properties have an exceptionally long weighted-average lease term of 42 years (including renewal options) compared to the more conventional triple net lease retail real estate investment trust.

Growth In Adjusted Funds From Operations

VICI Properties is enjoying robust growth in its underlying cash flow which for real estate investment trusts is most often expressed as FFO or AFFO with the latter adjusting for certain non-cash income and expense items.

VICI Properties’ adjusted cumulative FFO since January has risen 34% YoY to $1.62 billion while its EBITDA (adjusted) has soared 38% to $2.16 billion. The underlying business trends are therefore healthy and the portfolio maintained a 100% occupancy rate in the third quarter.

The portfolio is perfectly leased, so I don’t expect this to change in the near future either. I expect VICI Properties to continue to grow its FFO, both organically and through acquisitions.

I can see the trust getting more aggressive with acquisitions, possibly during a recession which is typically when bargains become available and real estate prices are cheap.

Acquisition-driven FFO growth is therefore something that I will think will play a major role in VICI Properties’ evolution moving forward.

How Safe Is VICI Properties’ Dividend?

I would say the trust’s dividend is reasonably safe and I think that the combination of a growing dividend with a moderate dividend pay-out ratio makes VICI Properties a quite compelling passive income investment.

It was only in the last quarter that VICI Properties raised its dividend pay-out from $1.56 per share per quarter (annualized) to $1.66 per share per quarter, reflecting a dividend raise of 6.4%. The dividend pay-out ratio in 3Q-23 was 72%, based on adjusted funds from operations and in the last twelve months VICI Properties paid out 75% of its AFFO.

Realty Income Corp. (O), which is a retail-oriented and not an entertainment-focused real estate investment trust that is often considered to be the gold standard in the dividend growth investor community, had a 12-months dividend pay-out ratio of approximately 76%, based on adjusted funds from operations, so the argument could be made quite convincingly that VICI Properties offers top-of-the-class dividend safety.

What Is VICI Properties’ AFFO Multiple?

VICI Properties sees $2.14-2.15 per share in adjusted funds from operations in 2023 and could probably produce 4-5% AFFO growth in 2024 if the U.S. economy keeps out of a recession. Based on $2.145 per share in AFFO this year and taking into account a stock price of $31.88, VICI Properties is selling at an AFFO multiple of 14.9x.

My thoughts on valuation over time have not changed since VICI Properties is selling for virtually the same multiple. With that said, I think a 17x multiple of VICI Properties may be appropriate given the strength of the underlying dividend and portfolio performance. This estimate would imply a target value of $36.

Another experiential REIT is EPR Properties Inc. (EPR) whose stock is selling for an AFFO multiple of 9.4x, but the trust has a spottier dividend growth record and has large exposure to struggling movie theaters.

Realty Income is selling for an AFFO multiple of 14.4x. Though Realty Income is not a direct competitor to VICI Properties (though it now owns some gaming properties), I use the trust as a reference point for the dividend pay-out ratio since Realty Income is often regarded as one of the safest blue-chip REITs in the industry.

What Headwinds Must Passive Income Investors Be Prepared To Deal With?

VICI Properties is a more cyclical REIT investment than other real estate investment trusts, particularly those that run a core residential strategy.

Las Vegas itself is a city that has risen and fallen many times as it is very dependent on tourism and a strong economy. Thus, VICI Properties’ profits may fluctuate more than profits of residential-focused real estate investment trusts during bad economic times.

By that same token, VICI Properties also has the chance to produce stronger profit and dividend growth during good economic times compared against real estate investment trusts that compete in less-cyclical REIT sub-sectors like residential or retail.

My Conclusion

VICI Properties is a solid choice for passive income investors in 2024 with or without an inflationary backdrop that provided the original justification for me to buy the entertainment-focused real estate investment trust in 2023.

Amongst the reasons that I think are particularly convincing to own VICI Properties is the moderate pay-out ratio, which stacks up the best REITs in the market, the 6% dividend hike and the focus on long-term lease contracts.

Even in a low-rate environment, obviously, I think VICI Properties is a compelling investment and I expect the experiential REIT to grow its dividend in 2024 as well.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: A Strong Growth REIT With A 5% Yield appeared first on Up2info.com.

• I bought my VICI shares on November 30, 2021, at around $27 per share and the investment was a success.
• After holding it for two years, the position now came up for a review.
• The recent venture into bowling centers and golfing makes sense, but I am not sure if I want to accompany VICI down this path.
• Using a NAV and a more traditional approach, I think VICI is overvalued at the moment.
• I still rate VICI a hold for now because the REIT sector could outperform in 2024 (due to sentiment) and because I think we will keep seeing heightened inflation in 2024.

Introduction

In this article, I will review one of my portfolio positions, VICI Properties Inc. (NYSE:VICI). Similar to my Starbucks (SBUX) article a month ago, VICI came up for a portfolio review now that I have been holding it for a bit more than two years.

With 30 published articles in the past six months, VICI is a stock that is seeing quite some coverage on Seeking Alpha. My fellow analysts are rather bullish on VICI, with VICI getting only 2 “Hold” ratings while getting 18 “Buy” or “Strong Buy” ratings (out of the past 20 articles).

VICI is currently the only REIT in my portfolio. The structure of this article will be different from my previous works. I will start with an overview of my 2-year history with VICI, including my initial investment case, the performance since I have been holding it and how everything has played out this far. I will then continue by valuing VICI using two different valuation approaches before finishing with some words on risk and a conclusion.

My history with VICI

I bought my VICI shares on November 30, 2021, at around $27 per share. VICI currently forms around 2.5% of my portfolio. If you are not that familiar with VICI:

VICI is a Real Estate Investment Trust (REIT) and owns gaming, hospitality and entertainment destinations. The majority of VICI’s properties belong to the gaming sector, especially casinos. The properties are subject to long-term triple net leases, meaning that the contract counterpart is responsible for most of the expenses while VICI collects rent. According to VICI’s FY22 10-K filing, 29.2% of VICI’s Casino square feet were located in Las Vegas (at the end of 2022). The next four locations by square feet size were Philadelphia (14.1%), Detroit (6.0%), Cleveland (5.5%) and New Orleans (5.4%).

Now let’s talk about my initial investment case. VICI was able to collect 100% of rent throughout the pandemic, a strong sign of solvent contract counterparts and stability. At the time I bought it, VICI’s AFFO (Adjusted Funds from Operations – a cash flow substitute) for the trailing twelve months (TTM) stood at $1.02 billion. With 628,944,887 shares outstanding at the end of September 2021, AFFO per share stood at $1.62 at that time. So the AFFO yield was around 6% which was not that attractive at first glance. The problem was that VICI already issued new shares for cash proceeds without closing two big deals. VICI bought the Venetian on March 03, 2021, and MGM Growth Properties on August 04, 2021 (more on these two deals later). The dilutive effect of the newly issued shares came into play before the additional cash flows from the new investments, ultimately making VICI look less appealing than it truly was. I assumed that once these deals close, VICI should be able to earn between $1.90 and $2.00 per share in FY22 and clearly above $2.00 per share in FY23. The annual dividend was $1.44 per share for a 5.3% dividend yield back then.

The lease terms VICI had with its contract counterparts were another reason for my investment in VICI. As of today, most of VICI’s leases include an annual escalator of at least 2% (in some cases 2% or CPI if the CPI exceeds 2%). So VICI should be able to increase rents and subsequently AFFO without spending a penny on new objects. This is built-in growth at zero added costs.

Summing it up, I thought VICI was undervalued, had a nice dividend yield of 5.3%, a very stable and predictable business model (casino owner with 100% rent collection) and built-in growth through the annual rent escalators, making it a perfect defensive investment for a time of heightened inflation.

How it played out

VICI was able to report AFFO of $1.93 per share in FY22 (the low end of my estimated range) and currently stands at $2.07 AFFO per share for the TTM (in line with my estimate back then).

VICI was also able to outperform the broader market since my buy:

The dividend was hiked two times over this time and now stands at $1.66 per share, so my yield on cost currently sits at 6.1%.

The investment was a success. So far, so good. Since my initial investment thesis played out, I now have to ask myself if I want to hold onto VICI for the long term or not.

So let’s turn to the negative developments around VICI. As I described earlier, VICI traded at around 7.2% forward AFFO yield as I bought it. Assuming an annual rent escalation of 2% going straight to the bottom line (because extra rent doesn’t incur extra costs), AFFO should have been able to grow around 2.5% from rent escalators alone. So at that valuation, VICI should have been able to generate returns of a bit below 10% in the future, excluding additional property acquisitions.

This is where things get a bit problematic. For VICI to be a market-beating investment, it needs to perform accretive property acquisitions. These acquisitions also need to be big enough to “move the needle”. Here is a screenshot of a slide from the Q3 23 Financial Supplement document showing VICI’s recent investment activity:

Excluding the MGM Grand /Mandalay Bay JV deal (more on that deal later), recent investment activity amounted to around $1.8 billion (including the mortgage financing and preferred equity investment with Canyon Ranch). Now let’s put this in relation to VICI’s portfolio:

VICI’s real estate portfolio currently amounts to $41.3 billion. So the most recent investments only make up around 4% of VICI’s portfolio. In conclusion, the acquisition activity will most likely not move the needle for VICI.

Another negative point for me is that I invested in VICI as a casino operator. The recent ventures into other areas like the Bowlero deal (sale-leaseback transaction of 38 bowling centers) or the Cabot partnership (golfing) show that VICI has a hard time finding accretive acquisition targets in the casino space. These transactions are still small compared to VICI’s casino operations but I am not sure if I want to accompany VICI down this road.

How to value VICI?

Valuing a REIT is not the same as valuing any other company. I will use two valuation approaches: (1) Net Asset Value (NAV) and (2) A more traditional valuation approach using future growth estimates plus payouts. Let’s go over both approaches separately.

#1 – NAV Approach

This one is pretty straightforward in the beginning and gets more difficult at the end. Let’s start with the easy part. How does the market value VICI’s real estate portfolio?

Here is a screenshot of VICI’s Q3 23 balance sheet:

VICI’s cash and other assets amount to $1.5 billion while the total liabilities stand at $18.3 billion. With 1,016,827,883 shares outstanding at the end of Q3 23 and a price per share of $31.92 at the time I am writing this, VICI’s market capitalization currently stands at $32.5 billion. Now let’s sum this up:

Click to enlarge

So it seems that the market values VICI’s real estate portfolio at around $49.3 billion. Now we need to look at the annualized rent we would get if we buy VICI’s whole portfolio. Here is another screenshot from the Q3 23 Financial Supplement document:

The total annualized rent + income from loans currently stands at $3,045 million. So by buying a share of VICI today, we are paying a 6.18% Cap Rate (Annual rent divided by the price we pay) for VICI’s real estate portfolio. This was the easy part.

Now we need to form an opinion if this is cheap or expensive. I will try to answer this question by looking at some of the bigger transactions that we know about:

• VICI announced a deal to buy the Venetian on March 3, 2021. According to VICI’s presentation, this deal was done at a 6.25% cap rate.
• On August 4, 2021, VICI announced the acquisition of MGM Growth Properties. According to the presentation, VICI paid $17.2 billion (total consideration) and got $1,009 million in annual rent in return. So the deal took place at a cap rate of 5.87%.
• VICI then bought the remaining 49.9% interest in the MGM Grand Las Vegas & Mandalay Bay JV from Blackstone on December 1, 2022. The total consideration amounted to $2,767 million for an increase in annual rent of $155 million. The cap rate was 5.60%.
• Lastly, Realty Income bought a stake in the Bellagio at a cap rate of 5.2%.

Let me highlight that all of these transactions took place in Las Vegas.

If we use the average for all of these transactions, VICI’s current valuation at a 6.18% cap rate looks reasonable. However, Blackstone (BX) was the selling party in the last two transactions. Blackstone belongs to the best deal makers in the real estate industry. So when Blackstone is selling, I always consider it a bad deal for the counterpart. In the two cases above, I think that Realty Income (O) made a mediocre deal with the Bellagio while VICI came out “okay” because they already owned 50.1% of the JV before the deal.

But even when we exclude these two transactions, the MGM Growth Properties transaction seems to be the closest comparable to buying VICI’s portfolio and this transaction took place at a 5.87% cap rate.

The problem lies in what I wrote at the very beginning of this article. “Only” 30% of VICI’s portfolio is located in Las Vegas. The aforementioned cap rates are only applicable to Las Vegas properties. I will reuse the slide regarding the investment activity here, this time for another purpose:

Here we can see that the cap rates for other casino acquisitions range from 7.6% to 8.0%. Another thing that I want to highlight is that VICI deliberately doesn’t show the “Cap Rate / Yield” for the 49.9% JV deal, probably because it wouldn’t look good to put “5.6%” here (the deal was still okay because VICI assumed the JV’s debt that was priced at a very low rate). In conclusion, the cap rate for the “Non-Vegas” portfolio should be closer to 7% (maybe even higher), Ultimately making VICI overvalued from the NAV standpoint using realistic cap rates for the portfolio.

#2 – “Traditional” Approach

This approach will be closer to how I usually value companies and it will be a lot of numbers crunching, so be warned before reading any further. I always say that the long-term returns of any stock should be the sum of the cash flow yield (what the company could pay out to us) and the cash flow growth rate.

Let’s start with the first part, what VICI could pay out to us. For Q3 23, VICI reported $547.6 million AFFO. So annualized AFFO currently stands at $2.19 billion (in the case of REITs, we need to look at annualized values because once a property is added to the portfolio, it usually stays there and consistently generates AFFO). With the market cap at $32.5 billion, the AFFO yield currently sits at 6.75%. I will assume a payout ratio of 100% to make things easier. So VICI could pay us out 6.75% of our investment per year.

Now let’s turn to the cash flow growth rate. The growth rate consists of two parts and we covered one earlier: (1) AFFO growth through rent escalators and (2) additional AFFO growth through accretive property acquisition.

For (1), I assumed 2% annual rent increases and 2.5% AFFO increases per year because additional rent doesn’t incur additional costs and goes straight to the bottom line.

And here comes an important factor: This assumes a CPI of 2%!

As long as we see heightened inflation, this growth rate will be higher than my assumed numbers because some leases are not capped (the Caesars Master Leases for example have an annual escalator of 2% or CPI, whichever is higher, and are not capped to the upside). Let’s be conservative though and calculate with 2.5% AFFO growth through rent increases.

So now we would sit at 6.75% AFFO yield + 2.5% AFFO growth through rent increases = 9.25% return potential. This makes VICI a sleep-well-at-night (SWAN) investment for dividend investors. If we want a market-beating investment though, we need some more growth. I will just assume a return target of 11%, 100 basis points above the 10% nominal return the broader stock market has delivered over a very long timeframe.

Now we have to turn to (2), additional growth through acquisitions. Earlier, I assumed a 100% payout ratio. So for new investments to be accretive, VICI needs the cap rate of the acquisition to be above the cost of capital. I will start with the cost of capital. I will assume that VICI finances future deals with 40% debt and 60% equity, in line with the recent balance sheet numbers.

The cost of equity is equal to the AFFO yield, so 6.75% (the dilutive effect of new share issuance for existing shareholders). Now we need to assume the cost of debt. Here is a snippet from VICI’s latest 10-Q filing:

In April 2022, VICI issued several senior notes, with interest rates ranging from 4.375% (due 2025) to 5.625% (due 2052). Now this was back when interest rates were much lower but let’s be very bullish and assume that VICI can borrow debt at 5%. In this scenario, VICI’s cost of capital should be (6.75% x 60%) + (5% x 40%) = 6.05%.

Now how should we calculate cap rates? As I have shown earlier, VICI’s recent casino acquisitions took place at 7.5%+ but they were small. For larger investments that could move the needle, we need to assume lower cap rates (real estate portfolios are usually more expensive than single properties). I will just assume 7% for now.

So now we can sum it up: 7% Cap Rate – 6.05% Cost of Capital = 0.95% Investment Spread. What I call “Investment Spread” is just accretive AFFO per invested Dollar. So if VICI makes a transaction of $1 billion, the accretive AFFO improvement (already taking into account the dilutive effect from the issuance of new shares and added interest expenses) should be by $9.5 million.

And now we can finish this up. To reach 11% returns, we are missing 1.75% because 9.25% already comes from payouts and rent increases. With an annualized AFFO of $2.19 billion, 1.75% growth off of this $2.19 billion means VICI has to add $38.4 million AFFO to reach our target. Knowing that the Investment Spread is 0.95%, VICI needs to add $4 billion to the portfolio per year ($38.4 million divided by 0.0095). With the portfolio currently at $41.3 billion, VICI would need to increase the portfolio by 10% per year.

In my opinion, this seems very unlikely. VICI tries to handle this situation by venturing into other areas like bowling or golfing where the cap rates are higher (7.3% for the Bowlero transaction). The problem is that while these investments have a higher cap rate, they are just too small to move the needle for VICI.

In conclusion, I think that VICI is also overvalued from a traditional valuation point of view. To safely generate market-beating returns, we would need an AFFO yield closer to 7.5%, indicating a price per share of a bit below $29.

So what now?

So what to do with all these numbers? I will start by saying that I personally would not buy VICI today. I don’t see VICI being a market-beating investment at the current prices. At the very least, the possibility of market-beating returns is heavily reliant on VICI performing several BIG transactions and I don’t see that happening (at least not consistently over the next few years).

From the sight of a retired dividend investor though, VICI is still attractive. You get a company with a very stable business model that can handle heightened inflation very well, built-in growth through rent escalators and a safe 5.2% dividend yield that should grow at least in the low to mid-single digits. Total returns will probably be in line with or minimal below the broader market which is fine when you mainly invest for dividend income. If I were a retired dividend investor, VICI might be a bigger part of my portfolio.

But as I have around 20-30 years ahead of me until retirement, I only care about total return potential and don’t have to look at dividend yields. So I have to decide between holding and selling. After thinking about it for quite some time, I decided that I will hold onto my VICI shares for now for the following two reasons:

• REITs had a mediocre year in 2023 because of the rising interest rates and I think REITs could outperform (mainly due to sentiment) on a broader basis once interest rates come down again (which I think is more likely than not).
• If we keep seeing heightened inflation as we have seen since the start of 2021 (see chart below), VICI is still set up for better returns (in the near term) than I expect over the longer term because the uncapped rent escalators will push AFFO per share by more than my assumed 2.5% per year.

While inflation has come down, it is still well above the 2% mark that sets the lower end of VICI’s rent escalators.

I will review my VICI position at the end of this year and it is very possible that I could decide to sell my shares then.

Conclusion

In this article, I reviewed my portfolio position VICI. VICI mainly owns casino properties with the biggest part of the portfolio being located in Las Vegas.

Most of VICI’s leases have a built-in rent escalator of at least 2% or CPI (if the CPI is higher than 2%). This is growth at zero added costs. I assume that AFFO per share should grow at a rate of 2.5% per year in a year of “normal” inflation (the U.S. inflation target of 2%). Coupled with the AFFO yield of 6.75%, VICI should be able to generate total returns of about 9.25%, excluding possible accretive effects of additional investments.

However, VICI’s “Investment Spread” (Assumed cap rate of new investments – cost of capital) seems to be around 0.95%. To generate market-beating returns, I think that VICI needs to grow its real estate portfolio by $4 billion next year or 10% per year going forward. I think that this is very unlikely given VICI’s recent investment activity and the size of the portfolio.

VICI tries to keep the added growth through investments high by venturing into other areas like bowling centers and golfing. Since I invested in VICI as a casino operator, I am not sure if I want to accompany VICI down this path.

VICI also seems to be slightly overvalued from the NAV perspective. Using reasonable cap rates for the real estate portfolio, the cap rate of 6.18% we would need to pay to buy VICI’s whole portfolio seems rather expensive.

To generate market-beating returns, I think VICI would need to trade in the range of $29 per share.

However, I decided to hold on to my VICI shares for now because I think that (a) the REIT sector is in a good position to outperform in 2024 due to the possibility of rate cuts and (b) I think we will still see heightened inflation in 2024 which is a tailwind for VICI (due to the rent escalators).

Summing it up, I rate VICI a “hold” at the moment and will probably review my points made in this article sometime at the end of this year.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BX, VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: Reviewing My Position appeared first on Up2info.com.

• This article explores whether VICI is undervalued to the degree that many authors seem to think.
• VICI’s forward growth rate of AFFO/sh is likely to be much less than its past growth rate.
• VICI is a quality REIT, worth owning for some investors but not others.

If VICI Properties (NYSE:VICI) had dropped further this year, the stock would probably be in my portfolio. I was actively seeking opportunities to diversify into other quality REITs without loss of income.

Ultimately though it was NNN REIT (NNN) rather than VICI that got my diversification this year. Here are their recent yields. Please note that while I do not use yield as a criterion for investability, I do use it to select among options I consider investable.

[Here the gridlines are confusingly labeled by TIKR using only one digit. The yield for NNN peaked at nearly 7%.]

This comparison to NNN is relevant because both it and VICI are “Net Lease” REITs at their core. Neither of them operates properties or has significant ongoing capex.

Their leases are all “triple-net” leases under which the tenant pays all maintenance, insurance, and taxes. One key difference is that NNN invests in relatively small, retail properties while VICI invests primarily in much-larger, gaming properties.

Over the past year, the price of VICI is flat while NNN is down 14% and Realty Income (O) stock is down 24%:

My conclusion, discussed here, has been that typical triple nets have dropped just as far as interest-rate increases implied they should. That is to say, they are priced near where they were a year ago as a fraction of Net Asset Value based on reported market cap rates.

In that context, the plot just shown suggests one of three things. One is that VICI has created 20% of new value within the past year. Another is that the stock was undervalued relative to the others by 20% a year ago.

The authors on SA would seem to think that one of these is true. There have been more than 40 articles on VICI this year, with all but the six Holds either saying Buy or Strong Buy.

The third possibility is that the market has become over-enthused about VICI relative to other triple nets.

One sees a similar comparison in growth of earnings and in earnings multiples. Here are data on Adjusted Funds From Operations, or AFFO, and on market multiples for these three:

VICI today is valued at a significantly higher multiple than NNN or even cult favorite O. Looking backward, VICI has grown AFFO/sh at a much higher rate.

If this were the forward expectation, then a higher multiple might be justified. But is it?

My task in the research for this article was to do a deeper analysis, in order to see whether VICI is actually the great investment that all those authors thought it to be.

Introduction to VICI

VICI exploded onto the REIT scene with an IPO in 2017. Their announced focus was casinos.

By the end of March 2018 their Enterprise Value was ~$10B. They began with a commitment to good governance and good disclosures, which they have maintained.

That said, their initial properties were spun out of Caesars to help Caesars manage their bankruptcy. As usual that bankruptcy was more about debt than about operating viability.

In 2021 VICI announced their acquisition of the Venetian in Las Vegas and their acquisition of MGM Growth Properties. This gave them more scale and at least a bit of tenant diversification.

Like many REITs, VICI runs with a ratio of Debt to Total Assets near 40%. Unlike most other REITs, GAAP depreciation is very small because their (long-duration) leases are classified as “sales-type” leases under GAAP.

Across the pandemic and since, VICI has collected 100% of rent due. No operator wants to risk losing access to a casino.

The VICI balance sheet is solid, though not a “fortress”. Some specifics:

• In April 2022 VICI got their first investment-grade ratings, with S&P and Fitch both rating them at BBB-.
• However, even today Moody’s still has them at the equivalent of BB+. That is still well short of NNN REIT at BBB+ and of Realty Income at A-.
• The Debt/Adjusted EBITDA ratio is near 5.7x. Moody’s says they would need to see that come down near 5.0x to support an upgrade.
• VICI does have their debt nicely spread out, with annual maturities typically at $1.5B to $2B. In the context of their AFFO near $2B per year and their liquidity of $3.7B, this is not concerning.
• The weighted average debt maturity is 6.1 years, much shorter than their weighted average lease term of 13.2 years. By comparison NNN has debt maturities longer than lease terms.

In recent years, though, VICI has strayed from casinos, investing for example in water parks and bowling alleys. More on that later.

VICI Earnings Growth

Many REITs grow like crazy in the early years after their IPO. They size themselves to be able to add properties at some rate. So in year 2 the portfolio doubles and in year 3 it goes up 33% but by year 10 it is only growing at a 10% rate.

What’s more, if that portfolio growth is being accomplished by issuing stock and taking on new debt, the growth of cash earnings per share is slower. So far here is what VICI has done:

We see a CAGR of 30% for assets and debt. This is supported by 22% of annual dilution, leaving an 8% (8.4%) CAGR of AFFO/sh.

So this is again a classic external growth model driven by stock issuance and new debt. The cash flows tell the same story but don’t capture everything:

You can see the net investing, mainly in those sales-type leases, as yellow bars. They are largely balanced by funds from stock issuance (red) and new debt (gray). Retained earnings (green), the difference between Cash from Operations and Dividends, is a small fraction. [Here 2023 is TTM from Q3.]

But on top of the investing of cash shown in the graphic, VICI has made acquisitions, notably from MGM, that involved the exchange of newly issued stock for other stock along with the assumption of debt. These push the total assets and debt up to the levels shown in the table above.

The VICI business model and their past success now puts VICI in the same bind where Realty Income finds themselves. To keep growing at the same rate, VICI now needs to close more than $10B of new investments per year.

They are certainly not doing that in 2023. Here is their current list, as of early November:

This totals less than $5B. What is more, it includes a departure from their gaming wheelhouse.

Bowling alleys are a different property type, as are the water parks. And these are too small and inexpensive to drive meaningful growth for VICI. My view is that diversifying their property types for the sake of very little growth adds risk to their ability to grow. [From a credit perspective, though, Moody’s likes it.]

In particular, broadening into other classes of property with high cap rates adds the risk of slower forward growth and occasional headwinds. I like and own EPR Properties (EPR), but also have emphasized in my coverage of them that owning high-cap-rate, experiential properties carries comparatively high risks.

From the above, it would seem likely to me that VICI will grow more slowly going forward, move to lower-quality assets, or both. But as we will see, the full story is actually more challenged.

[We will get to some things to really appreciate, in addition to those mentioned above. This company is a high-quality REIT. The question is one of relative valuation and relative enthusiasm.]

Returns on New Investments

At one point VICI management did have expectations that they would drive very high growth in per share earnings. In an interview Jussi Askola posted for members in 2021, CEO Ed Pitoniak said “what we get compensated for and earn our equity as managers are delivering compounded 12% annual total returns over rolling three-year cycles.”

That threshold surprised me. While 12% did fit their backward-looking results at the time, it would have taken a lot to acquire enough huge properties to keep it going.

And indeed that did not happen.

The VICI Board responded to this, so that in a similar June 2023 interview Pitoniak explained that now the management’s compensation at VICI is largely a function of two things: their ability to grow their FFO per share by at least 6% per year over a 2-year rolling period and reaching at least 10% compounded annual total returns for shareholders over a 3-year period. If they fail to grow their FFO per share by over 6%, they don’t get their bonuses.

That 6% target is hit over time only by a few of the most successful REITs. From that perspective, it is tough but not crazy.

Growth is tougher than it used to be, though. The fundamental driver of growth for any REIT is the Return On (newly invested) Equity or ROE.

ROE is (NOI/New Equity) x (AFFO/NOI).

(NOI/New Equity) is Cap Rate/ Equity Fraction. For a triple net like VICI, (AFFO/NOI) is obtained by subtracting G&A costs and interest expenses, as fractions of NOI, from one. [Here NOI is Net Operating Income.]

By far the most important driver of ROE is (cash) Cap Rate. The orange dots here show what has happened to that, based on earnings calls.

VICI came onto the scene talking of 10% Cap Rates. But by 2019 their actual deals were at 8% to 9%.

Cap Rates compressed across 2020 and the Venetian deal, in 2022, was at 6.25%. That property was highly valuable. By 2023 we are seeing Cap Rates back up between 7% and 8%.

I dropped the gray line onto this plot as a very rough trend. The dashed green curve shows the corresponding ROE (for 7% G&A), using the 5% interest rate that has been in the ballpark throughout. [This reflects improving credit against a backdrop of increasing interest rates.]

So we see that ROE has dropped 50% from the 12% that seemed imaginable five years ago to the 8% (if not less for the highest-quality properties) that can be done today. This obviously impacts potential earnings growth.

Growth from Rent Bumps, Reinvestment, and Issuing Stock

VICI pays out about 75% of AFFO as dividends. There are always frictional costs, so they likely can reinvest 20% of AFFO. At an 8% to 12% ROE (which includes the impact of the proportional new debt), that generates AFFO/sh growth of 1.6% to 2.4%.

Their rent escalators are very clearly disclosed in their filings. They are in the 2.5% ballpark. Add that to growth from reinvestment, and we should see 4% to 5% growth rates, and nearer 4% today from these sources. That is to say, without issuing any stock.

This is a good result for a REIT. If they do expand the share count by 20% seeking more growth, however, the contribution from these internal sources gets diluted down to just over 3%.

What’s more, the returns from investing the equity raised must yield more than the returns lost by the dilution. If you sell 20% of the company this dilutes the AFFO/sh of existing shareholders by that much.

With a dividend yield near 5% and a payout ratio on AFFO of 75%, the AFFO yield is about 6.7%. The spread that actually matters is the one between the AFFO yield and the ROE.

Today that spread is in the ballpark of 1% on the 6.7%. So if you sell 20% of the company, the increase in total AFFO is (20% x 1% / 6.7%), or 3% on net. This increased AFFO is spread over 20% more shares, however, so one ends up with about 2.5% of AFFO/sh growth by selling that much stock.

A lot of REITs are not issuing stock this year because it does not pencil out to produce a gain in AFFO/sh. VICI can still get such gains by investing funds raised from selling stock, so no wonder they did so in Q1.

The numbers here give an AFFO/sh growth rate of 5.5%, but this value is not so precise. It would seem that management still has a shot at doing the 6% they need to get their bonuses.

For me the bottom line on growth is that VICI may or may not grow more rapidly than other triple nets. Positives include higher cap rates and better escalators than most. Negatives include higher debt costs and the challenges of their scale.

Risks on the Horizon

This, however, may be too cheery. At current stock prices, the Venetian deal would dilute AFFO/sh.

VICI showed the world how to work the casino space, and there is increasing competition today. Realty Income has shown up to play and no wonder.

But Realty Income bought the Boston Harbor Casino at a 5.9% cap rate and a piece of Bellagio at a 5.2% cap rate. It sure seems to me like they overpaid. More important here, though, is that VICI could not have made either of those purchases without significant shareholder dilution.

So competition seems like a challenge for VICI and they may get priced out of the market they invented. But if the answer is to buy bowling alleys, then managing that 6% growth rate seems a real stretch. (Bye bye bonuses.)

There is another angle, though, that might come around to bite VICI, Realty Income, or any landlord that owns big casinos. What if the operator goes and gets themselves in financial trouble?

For REITs that have their portfolio spread over thousands of properties, the answer is easy. Shed the property, and it almost does not matter how. Do whatever you must to be rid of it. But if one property is around 10% of your portfolio, and is operationally troubled, will there be a buyer and if so, at what price?

The issue here is not that casinos are risky. They have proven to be very stable operationally. The problem is that such stability invites an operator to leverage up to dangerous degrees.

Tenant and property concentration also are highlighted by Moody’s as a source of credit risk.

Putting it Together

In sum VICI is not a perfect REIT.

• There is too much tenant concentration.
• Competition for casinos has markedly reduced their ROE.
• Today the ROE from casinos is not far enough above the AFFO yield to support fast growth.
• Moving into other property types that support higher cap rates delivers slower growth and more risk.
• So their rate of growth may well be lot smaller going forward than it was in the past.

But still there is a lot to like.

• Perfect history of rent collection
• Nicely structured debt maturities
• Clear path to modest AFFO/sh growth in the 4% ballpark
• While an earnings retreat is possible it is very unlikely.

The thing is that these aspects worth liking are not that different from those of NNN and Realty Income. Putting this together with the comparison above, it appears that VICI is now overpriced relative to NNN and even O.

As with other value stocks, the main risk to the market value of VICI is the future valuation of their cash flows. In contrast, the dividend is very solid and likely to grow at least modestly.

Who should buy or own VICI today? Investors wanting a dividend yield near 5% that will grow by several percent per year, at minimum. My REITs held for income all pay larger yields than 5% and their dividends mostly should grow at about the same rate as those of VICI. But if yields normalize I would cheerfully diversify into VICI.

Who should avoid VICI today? Investors looking for economic returns above 10% or the best chances of appreciation coming out of the bear market. For stronger economic returns one needs to look outside the REIT sector. It will never approach the 20% economic returns one can find in strongly growing firms.

For stronger appreciation potential amongst REITs, my view is that investors should look to Alexandria Real Estate (ARE), Camden Property Trust (CPT), and Crown Castle (CCI), even after the recent price action. I own all three, with some recent coverage in these articles.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of EPR,NNN,ARE,CCI,CPT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The post A Deep Look At VICI Properties appeared first on Up2info.com.

• The VICI management has proven to be highly competent, attributed to profitable growth trend, despite the challenging macroeconomic outlook.
• It is apparent that the REIT has also dipped its toes into multiple non-gaming properties as a way to diversify its risks, with certain sectors expected to underperform the downturn.
• The same trend has also been observed with multiple REITs, such as AMT into Data Center, IIPR into mixed-development/self-storage, and O into resort/gaming properties.
• Despite the ambitious acquisitions thus far, VICI remains highly capitalized with a robust balance sheet, implying the safety of its dividend growth ahead.
• With the Fed unlikely to further hike interest rates and some already speculating a Fed pivot as soon as Q1’24, we believe that the worst may very well be behind us.

We previously covered VICI Properties Inc. (NYSE:VICI) in September 2023, discussing its outperformance over the REIT sector median, with the excellent top and bottom lines triggering the consistently raised quarterly dividends thus far.

Combined with CPI-tied rental escalator and robust gaming portfolio, we had rated the stock as a Buy then, with the REIT sell-off triggering its discounted valuation.

In this article, we shall discuss why VICI’s diversification into non-gaming properties has been highly strategic, with it being an interesting trend observed in multiple REITs over the past few quarters.

We maintain our buy rating on the stock, thanks to its profitable growth trend, healthy balance sheet, and dual-pronged potential capital returns.

The REIT Diversification Is An Interesting Phenomenon To Observe

For now, VICI reported an excellent FQ3’23 earnings call, with overall revenues of $904.32M (+0.6% QoQ/+16.8% YoY), AFFO of $547.6M (+1.3% QoQ/+16.3% YoY), and AFFO per share of $0.54 (inline QoQ/+10.2% YoY).

It is apparent that the management’s diversification away from gaming properties since early 2022 has paid off extremely well, triggering the REIT’s well-rounded gaming and non-gaming portfolios.

Then again, it appears that diversification is a common trait recently observed with multiple REITs, with:

• American Tower (AMT), a REIT specializing in wireless and broadcast communications infrastructure, acquiring Data Center assets just in time for the Generative AI boom.
• Innovative Industrial Properties (IIPR), a REIT specializing in cannabis real estate, opting to convert part of its existing property to a mixed-use/self-storage development.
• Realty Income (O), a REIT specializing in single-tenant commercial properties, acquiring resort/gaming properties.

It is apparent that as the sell-off occurred in 2022 and early 2023, some REITs have been punished for being overly focused in certain sectors that struggle with the uncertain macroeconomic outlook.

Perhaps this is why we are seeing some rather unusual diversification occurring during this difficult period, at a time when the debt-laden business model is put to the test.

However, we are not overly concerned, since the Bowlero (BOWL) deal only comprises a rather small portion of VICI’s annual rental revenue at $31.6M, compared to its FY2022 revenues of $2.66B (+77.3% YoY) and its FQ3’23 annualized revenues of $3.61B (+0.6% QoQ/+16.8% YoY).

Most importantly, Bowlero is immediately accretive to the REIT’s AFFO, with the management already raising the FY2023 AFFO guidance range to $2.17B – $2.18B (+27.9% YoY at the midpoint) and AFFO per share guidance range to $2.14 – $2.15 (+11.1% YoY at the midpoint).

This is compared to the previous midpoint guidance of $2.135B (+25.5% YoY) and $2.115 (+9.5% YoY) offered in the FQ4’22 earnings call.

VICI’s rate of AFFO per share growth is impressive indeed, despite the dilutive nature of the REIT business model, with its share count growing by +48.29M to 1.01B shares over the past three quarters.

If anything, Bowlero has been decently profitable as well, implying its ability to service its obligations, especially after the sale-leaseback deal.

We also believe that VICI’s choice has been relatively prudent, given BOWL’s global leadership position in the revolutionized bowling alley market.

For example, BOWL has consistently delivered growth by acquiring independent bowling houses and chains during the pandemic, while also upscaling its “entertainment center” offerings through multiple marketing strategies.

The list includes arcade offerings, “black-light bowling with glow-in-the-dark balls,” upscale food/bar lists, and the pizza/beer pitcher specials, amongst others, naturally enhancing its experience proposition.

As a result, we believe that BOWL will be accretive to VICI’s increasingly family-friendly portfolio, building upon its previous investments in Great Wolf Resorts’ indoor water parks, Canyon Ranch’s destination health spa resorts, and Cabot’s golf resorts, amongst others.

VICI Valuations

For now, VICI’s valuations appear to be fair, based on its TTM Price/Sales of 8.59x and FWD Price/AFFO of 14.09x, compared to its 1Y mean of 9.22x/14.82x, pre-pandemic mean of 9.39x/14.04x, and sector median of 4.62x/14.51x, respectively.

The Consensus Forward Estimates

This is especially since the consensus forward estimates that VICI may deliver an excellent profitable growth trend at a CAGR of +13.2% and +5.7% through FY2026, compared to its historical CAGR of +30.5% and +7.8% between FY2018.

This is despite the potential impact of the cooling inflation, with all of its lease agreements coming with annual base rental escalations, which are subject to both CPI and/or asset value adjustments.

VICI Sales/Financing Receivables

Perhaps this is attributed to VICI’s long-term lease agreements, with a weighted average term of 43.2 years, almost guaranteeing its top/bottom line prospects barring any extenuating events.

Despite its growing long-term debts to $16.69B (inline QoQ/+21.5% YoY) and annualized interest expenses of $819.72M (inline QoQ/+21% YoY), there is no real impact to its profitability metrics, attributed to the excellent Dividend Coverage Ratio of 4.10x and AFFO Payout Ratio of 74.76%.

This is compared to the REIT sector median of 1.77x and 74.55%, respectively, implying that the management continues to execute a well-balanced growth while maintaining a healthy balance sheet.

As a result, it is unsurprising that VICI’s dividend investment thesis continues to be robust, with the Seeking Alpha Quant rewarding the stock with a B+ Dividend Safety Grade.

So, Is VICI Stock A Buy, Sell, Or Hold?

VICI 5Y Stock Price

We also believe that VICI is currently fairly valued to our estimate of $30.22, based on the management’s FY2023 AFFO per share guidance of $2.145 and its FWD Price/AFFO valuation of 14.09x. Based on the consensus FY2026 AFFO per share estimates of $2.41, the stock may also enjoy a moderate upside to $33.90.

Combined with its excellent forward dividend yield of 5.49% at FQ3’23 annualized dividends of $1.66 (expected to expand at a CAGR of +4.8% through FY2026 to $1.81), it appears that the stock offers a relatively attractive dual-pronged capital returns in the long-term, despite the +13.6% recovery from the October 2023 bottom.

As a result of the attractive risk/reward ratio, we continue to rate the VICI stock as a Buy. This rating does not come with a specific entry point, since it depends on an individual investor’s dollar cost average and risk appetite.

However, with the Fed unlikely to further hike interest rates and some already speculating a Fed pivot as soon as Q1’24, we believe that the worst may very well be behind us.

Investors may continue to moderate at any dips for an improved margin of safety.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The analysis is provided exclusively for informational purposes and should not be considered professional investment advice. Before investing, please conduct personal in-depth research and utmost due diligence, as there are many risks associated with the trade, including capital loss.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: Bowling Its Way Into A Diversified REIT appeared first on Up2info.com.

• Higher interest rates have negatively impacted the real estate industry, but rate cuts expected in 2024 could lead to an increase in valuation.
• VICI Properties owns premier gaming, hospitality, and entertainment real estate locations, with a 100% rent collection and a 7.3% AFFO yield.
• VICI is experiencing growth in its cash flows, with the possibility of rising valuations due to potential rate cuts.

Higher interest rates have had an extremely detrimental impact on the real estate industry, particularly on the commercial side of things, as the cost of capital is pressuring margins and increasing cap rates. Currently, we potentially are at an inflection point where the Fed has finished its rate-hiking cycle, with rate cuts expected in 2024. I’m not an interest rate prognosticator, but instead am a value investor/investment manager and I like buying quality assets at discounts to intrinsic value, where the discount is driven by short-term concerns. My firm has been acquiring the common stock and bonds of various real estate firms including Crown Castle (CCI), W. P. Carey (WPC), Kennedy-Wilson, (KW), and our topic for today’s article is VICI Properties (NYSE:VICI). VICI offers some of the highest quality real estate assets that have experienced 100% rent collection since formation. The stock trades at a compelling AFFO yield of 7.3% and offers a 5.6% dividend yield, which I expect to grow at a solid rate in the future. Long-term investors could see solid double-digit returns per annum over the next 3-5 years as VICI grows its cash flows and dividends, while potential rate cuts could lead to an increase in the valuation.

VICI Properties is a triple-net REIT that owns many of the premier gaming, hospitality, and entertainment real estate locations, including the iconic Caesars Palace Las Vegas, MGM Grand, and the Venetian Resort. The company owns 92 experiential assets, consisting of 54 gaming properties and 38 non-gaming properties across the United States and Canada. The portfolio contains approximately 125 million square feet and features approximately 60,300 hotel rooms, roughly 500 restaurants, bars, nightclubs, and sportsbooks. The properties are occupied by several of the most prominent operators under triple-net lease agreements. The company has expanded into non-gaming experiential partnerships with Bowlero, Great Wolf Resorts, Cabot, Canyon Ranch, and Chelsea Piers. 81% of the rent roll is derived from SEC reporting operators, which provides transparency on tenant performance and health. This is important because VICI is a more concentrated REIT than many of the other popular ones. 50% of the rent has CPI-linked escalation in 2023 and 96% has it over the long term. The challenging regulatory environment in the gaming industry creates huge barriers to entry and limits tenants’ ability to move locations, which contributes to VICI’s 100% occupancy rate. VICI’s average rent per asset is $32,560,000 with a remaining lease term of 42 years, with bother figures being considerably larger than the average triple-net lease. VICI’s scale leads to tremendous efficiency with G&A as a percentage of revenue in Q3 2023 coming in at only 2%.

VICI has raised its annualized cash dividend per share at a 7.6% CAGR, with the current dividend being $1.66 per share. One thing I like about VICI is that the assets have multiple revenue streams, such as restaurants, entertainment venues, golf courses, convention space, etc. The company dominates the Las Vegas strip with 10 premier trophy assets, consisting of 660 acres of underlying land, 41,400 hotel rooms, and 5.9MM square feet of conference, convention, and trade show space. VICI owns 26 acres of undeveloped land strategically adjacent to the LINQ and behind Planet Hollywood. Las Vegas continues to grow and is becoming more and more of a sports hub, with the Raiders, Golden Knights, and now Formula 1 and Athletics. Las Vegas is going to be the destination for the first NBA in-season tournament Final Four, as well as the host of the Super Bowl in 2024, and the NCAA Final Four in 2028. The Sphere has also added just another incredible venue and landmark.

After VICI acquires properties, it will help existing tenants invest in growth opportunities and capital improvements. The company has also started to provide debt capital to new and existing partners that produce attractive rates or returns and open a path toward potential future real estate ownership. VICI has entered into several rights of first refusal and put/call agreements that provide the opportunity for embedded growth, boosting visibility to future cash flows. VICI is also investing in the gaming space through sale-leasebacks, which can be a more affordable source of capital for operators. The company is now venturing further into the experiential sector with the companies that have roll-out business models, where there should be a multitude of properties to invest in. On October 19th, VICI completed the acquisition of the real estate assets of 38 bowling entertainment centers from Bowlero Corp. (BOWL) in a sale-leaseback transaction for an aggregate purchase price of $432.9MM. VICI has a right of first offer for a term of eight years for future sale-leasebacks as Bowlero continues to consolidate and convert the market, which opens the door for future VICI acquisitions. The initial annual rent on the $432.9MM acquisition is $31.6MM, for a solid cap rate of 7.29%, on a 25-year initial lease term with >2% or CPI annual escalators.

VICI’s investment grade BBB- S&P credit rating allows the company to access capital at reasonable rates in this challenging environment for commercial real estate. The reality is that companies like Bowlero wouldn’t sell at a 7% cap rate a year ago, but as capital has become more constrained, opportunities are becoming more plentiful. Other notable investments in the experiential space were loans to Chelsea Piers in New York, and various loans to Great Wolf Lodges and CanyonRanch. VICI’s long-term net leverage target is 5-5.5x, but as of the end of Q3 stood at a net leverage ratio of 5.7x. 99% of VICI’s debt is fixed rate, with 83% of it being unsecured, with 6.1 weighted average years to maturity. $1.05B and $2.05B of debt is maturing in 2024 and 2025, respectively. VICI’s bonds are trading at a little over 5%, so it is good to see the company capturing higher initial cap rates, offering a nice investment spread. VICI also has some put/call agreements that would provide initial cap rates in the high 7-8% range. The company has raised approximately $1.3B of equity capital opportunistically, which has allowed the company to make accretive investments.

The biggest risk to VICI is if inflation perks back up causing rates to stay high for longer, while the economy also suffers a deep recession, pressuring revenues in the gaming and experiential sector. VICI’s biggest tenants are Ceasar’s and MGM, so financial distress with either of those two could be problematic, but it is unlikely the assets would remain empty even in a restructuring. VICI’s expansion beyond gaming opens different risks, so a major miscalculation could of course reduce the quality of the assets, but I’m confident from what I’ve seen from VICI’s management.

VICI offers a dividend yield that is nearly 1% higher than the 10-year Treasury and is well-covered by AFFO. AFFO has solid embedded growth channels within the portfolio and VICI is becoming an attractive option for other high-quality operators outside of the gaming space. In Q3, VICI increased its AFFO per share earnings by 10.7% YoY to $.54 and has announced about $1.1B of new capital commitments in Q3 and so far in Q4. VICI’s guidance for 2023 is now AFFO of $2.17-$2.18B, or between $2.14 and $2.15 per share. At a recent price of $29.62, VICI trades at a roughly 7.3% AFFO yield with a dividend of 5.6%. If AFFO can grow by a realistic 5% a year, VICI would offer double-digit returns, and if the valuation were to increase to around 16.5x AFFO, returns would be in the mid-high teens over the next several years.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post VICI Properties: Buy For Double-Digit Per Annum Return Potential appeared first on Up2info.com.

• VICI Properties is a specialized net lease REIT focused on the gaming and entertainment industry.
• The REIT has a strong tenant base and operates in a sector that historically performs well during recessions.
• VICI has a strong balance sheet and trades at an appealing valuation.

Dear readers,

VICI Properties (NYSE:VICI) is a specialized net lease REIT focused on the gaming and entertainment industry. Half of the REIT’s portfolio consist of well-known trophy assets in Las Vegas, such as MGM Grand, Caesar’s Palace or The Venetian, while the other half is spread across the country in regional gambling hubs such as Atlantic City. The company also has a small 1% exposure to Canada, which where it has expanded lately.

VICI is, in my opinion, one of the best positioned REITs in the current high inflation and high interest rate environment.

In particular, there are four reasons why the stock represents one of my largest REIT holding:

1. The REIT has a very strong tenant base and operates in a sector that has historically done well during recessions
2. It has an unrivalled ability to increase rents in an inflationary environment
3. It has a strong balance sheet
4. And it trades at an appealing valuation

Last time I covered the stock was back in early June when I issued a BUY rating at $31 per share. Since then, VICI has sold off by about 6%, along with the rest of the REIT sector (VNQ).

Over a longer time frame, however, VICI’s performance has been very good, outperforming the S&P 500 (SPX) over the past two years, despite the index’s strong AI-related rally.

VICI is well positioned for a potential recession

The REIT only has 12 tenants and an overwhelming majority of rent comes from just two – Caesars and MGM. Therefore, there is obviously some concentration risk here. But frankly, I’m not too worried about solvency of any of their tenants, much less Caesar’s and MGM, as they’re all very strong investment grade (and mostly publicly traded) companies. Moreover, 81% of rent is covered by a master leases and 91% has parent company guarantees.

The gambling industry tends to be quite counter-cyclical, which means that even if the economy slips into a recession, casino operators are likely to continue seeing high profits. During a recent gaming conference, one analyst even noted that Caesars is on pace for its best October ever. And consequently, VICI’s revenue which is by definition insulated from the operating performance of its tenants should be very resilient, even in a recessionary scenario.

VICI runs a net lease model, which means that tenants are responsible for maintaining the space at their own expense. And recently many of them have invested significant amounts of capital into VICI’s assets which is a testament to their financial health and also their high conviction of a bright future for the sector. Ceasars invested $400 million into just one asset in New Orleans, The Venetian plans to invest a Billion in Las Vegas, and MGM spends hundreds of Millions in CAPEX each year.

In addition, Las Vegas as a whole is seeing high investment creating nice tailwinds at the moment, despite a tough macroeconomic backdrop. This includes the recently opened Sphere, the Formula 1 and the 2024 Super Bowl.

VICI’s leases are second to none

What sets VICI apart from most of its peers are their lease terms. Most leases have minimum lease terms of 25-30 years and if we account for all renewal options, the average remaining lease term stands at 42 years.

Moreover, the portfolio has average minimum rent escalators of 1.9% and 43% of the portfolio has CPI-linked indexation with no caps. That’s the highest level of inflation protection of any REIT I know of and is extremely valuable in the current inflationary environment.

When combined with a strong balance sheet, CPI-linked indexation serves as a great hedge against the higher for longer scenario, because it ensures rent growth can keep up with interest expense increases and as a result the REIT should growth (or at the very least maintain) its cash flows and dividends even if rates remain high for years to come.

VICI has a strong balance sheet

During the third quarter management has played defense and financed virtually all of their new capital commitments in cash (about a $1 Billion) and only $55 Million in debt, demonstrating their commitment to their leverage targets.

That’s a good sign, because leverage is currently somewhat higher than other net lease peers at a net debt/EBITDA of 5.7x. The weighted average interest rate is also a bit higher at around 4.4% with an average remaining term of 6.1 years.

In short, VICI falls somewhat behind its net lease peers in most balance sheet metrics, which is why its rating is also somewhat lower at BBB-.

But what the REIT lacks in cost of capital it makes up for in hedging as 99.1% of all existing interest rate exposure is hedged. Moreover, the REIT also hold a forward interest rate swap agreement for $450 Million, which is meant to hedge 45% of next year’s refinancing risk.

All things considered, net interest expense is likely to be quite stable in 2024 and would only increase materially in 2025, if interest rates stay high until then. I estimate that refinancing all 2025 maturities at a rate of 6.5% would have about a 2% negative impact on AFFO. Since rates will only stay high if inflation stays high, this increase in interest expense will almost certainly get offset by CPI-related rent increases. Consequently, existing cash flow is poised to be resilient no matter the level interest rates.

The valuation is appealing

With stable cash flow from their existing business, we can focus on external growth prospects. The REIT has done a very good job of growing accretively through acquisitions, with cap rates of 7-8%.

They have financed the majority of these acquisitions through equity issuance as they have raised about $1.3 billion of forward equity in 2023.

As a result, the number of shares has increased drastically, but that’s ok, because per share AFFO also increased significantly. In Q3, AFFO per share reached $0.54, up 10.7% YoY and for the full year management forecast AFFO of $2.14-2.15, up 11% YoY.

That’s extraordinary growth, amongst the highest (if not the highest) in the net lease sector and has enabled VICI to increase its dividend at three times the rate vs. other net lease REITs. The dividend now yields 5.8% and remains very well covered with a payout ratio of <70%. And I fully expect the dividend to grow going forward.

Beyond this year, AFFO growth will most certainly slow. The analyst consensus calls for a 4-5% annual growth driven by rent escalators, CPI-related indexation and some new acquisitions. And I think it’s quite likely that VICI will deliver on this forecast.

VICI currently trades at an implied cap rate of 6.7%, which is 220 bps above the 10-year treasury yield. I’d argue that a spread of 2-2.5% is fair.

With 4% annual AFFO growth and assuming that the 10-year declines to 4% by 2025 (from 4.5% today), I expect upside of around 25% (midpoint of 17.99% and 32.72% from the sensitivity table below).

That’s about 12% per year, on top of the nearly 6% dividend, for a total expected annual return of about 18%. While this upside will likely only be realized once interest rates and yields decline, investors will get paid a solid dividend to wait and waiting shouldn’t be too painful as VICI’s cash flow should be highly resilient to high interest rates.

Based on the above, I upgrade VICI to a STRONG BUY here at $28.60 per share.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The post VICI Properties: A Good Bet For Higher For Longer (Rating Upgrade) appeared first on Up2info.com.

• VICI Properties Inc. stock has underperformed the S&P 500 over the past year, notwithstanding its market leadership as an experiential REIT. Macroeconomic factors matter.
• The recent downward volatility in VICI’s stock demonstrates the market concerns over the overall health of REITs.
• Despite these concerns, VICI’s $26 support level and a forward dividend yield of 5.9% make it an attractive opportunity for long-term buyers.
• I argue why VICI’s improved buying sentiments could help it turn the tide, supported by a much-improved valuation, bolstering its risk/reward profile.

VICI Properties Inc. (NYSE:VICI) investors have suffered a torrid year since VICI topped out in August 2022. Notwithstanding its position as a market-leading experiential REIT, macroeconomic factors matter, suggesting investors must consider the broader view even when assessing individual REITs.

I last updated my thesis on VICI in mid-September 2023, urging investors to be wary about adding more exposure. I stressed that “a subsequent re-test of the $30 level cannot be ruled out, with momentum increasingly favoring sellers.”

That thesis has panned out accordingly, with VICI falling toward the $26 level before bottoming out in early November 2023. Therefore, I believe it’s timely for me to reassess the current opportunity in VICI on whether dip buyers waiting patiently can finally pounce on it.

VICI has underperformed the S&P 500 (SPX) (SPY) over the past year, registering a 1Y total return of -9.5%. The downward volatility over the past two months hit VICI holders particularly hard, with the stock down 8% on a total return basis since my update, contributing significantly to its underperformance.

Vici delivered its third-quarter or FQ3 earnings release in late October 2023. It was a solid quarter, as management also upgraded its guidance for the year. Despite that, the downward volatility experienced since then demonstrated that market participants remain concerned over the overall health of REITs.

VICI bulls would likely point out the supposed non-cyclical and sticky experiential assets in Vici’s portfolio. The recent sale-and-leaseback transaction with Bowlero Corp. (BOWL) expanded Vici’s exposure to leading non-gaming assets that are expected to be AFFO-accretive.

However, the acquisition cap rate of 7.3% was well below the 9% to 10% rates that would have lifted investors’ confidence further. Accordingly, management accentuated that such opportunities are unlikely in the current market environment. CEO Ed Pitoniak indicated that “there are few opportunities to acquire high-quality real estate occupied by strong operators at 9 and 10 cap rates.”

Pitoniak also cautioned that the volatility in funding costs could implicate transactions “with longer gestation periods.” As a result, investors must remain patient as the company assesses the opportunities in its pipeline that meet its requirements.

I commend management for arranging a substantial forward sale agreement in January 2023, when its shares traded much higher. The company has “completed the physical settlement of all the remaining 17,702,500 shares of common stock under the January 2023 forward sale agreements.” After completion, it delivered net proceeds of about $560.3M, equivalent to about $31.7 per share.

It has provided the company with significant financial flexibility as it deals with a high adjusted EBITDA leverage ratio of 5.7x, well above its long-term target. Coupled with a debt maturity profile comprising more than 18% of its total debt base through 2025, it could hamper Vici’s ability to continue driving acquisitive growth. Furthermore, the lowered cap rates on its most recent transaction could also impact the growth rates on its AFFO per share, justifying the downward de-rating on its valuation over the past year.

VICI’s valuation has improved, assigned a “B” valuation grade by Seeking Alpha Quant. I assessed that the market has likely priced in the headwinds highlighted earlier, suggesting its growth could slow.

Despite that, VICI has dropped to a zone that I believe should proffer robust support for long-term buyers. VICI’s $26 support level has been defended since early 2022 and underpinned by dip buyers in early November 2023.

Also, its forward dividend yield of 5.9% seems reasonable, considering the spread against the United States 10-Year Bond Yield (US10Y), which last printed at 4.46%. I believe the market has likely priced in a resurgent 10Y, which could affect Vici’s cost of capital for its pipeline opportunities.

Investors must remain cautious, using the $26 support zone as a benchmark to assess robust buying sentiments. For now, I believe an upgrade to my thesis is appropriate, considering the recent developments markedly improving the risk/reward in VICI.

Rating: Upgraded to Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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