If you are an income-focused value investor, the REIT we review in this report is worth considering. It’s a triple net lease REIT, with a well-covered 5.0% dividend yield and the potential for ongoing share price appreciation. It’s been largely unfazed by pandemic challenges, and has actually been wisely increasing the growth trajectory of its business in a space with high barriers to entry. In this report we review the business, dividend safety, valuation and risks, and then conclude with our opinion on investing.
Overview
VICI Properties Inc. (VICI) is a triple net lease REIT that owns properties in the gaming and entertainment industry. For example, VICI’s largest tenant is Caesars Palace in Las Vegas, Nevada. More specifically, VICI’s portfolio consists of 29 gaming facilities comprising over 47 million square feet, approximately 17,800 hotel rooms and over 200 restaurants, bars, nightclubs and sportsbooks (both in Las Vegas and in regional markets throughout the US). VICI also owns four championship golf courses and 34 acres of undeveloped land adjacent to the Las Vegas Strip.
VICI was formed in October 2017 as a spin off from Caesars Entertainment (CZR). Caesars accounted for 100% of VICI’s revenues at that point in time. And while Caesars is still VICI’s largest tenant, it has been pro-actively adding more operators to diversify its revenue streams and reduce its tenant concentration. Acquisitions have played a big part in the diversification of its revenue streams. For example, VICI has acquired 29 properties since its formation, including the recent acquisitions of The Venetian Resort (includes the Venetian Resort and the Sands Expo and Convention Center, located in Las Vegas) and MGM Growth Properties (MGP).
Today, VICI has long-term tenancy agreements with industry leading gaming and hospitality operators including Caesars, Century Casinos, the Eastern Band of Cherokee Indians, Hard Rock International, JACK Entertainment, and Penn National Gaming, as well as with Venetian and MGP, pending the completion of both acquisitions.
It is largely encouraging to see the pace at which VICI is diversifying its revenue streams to de-risk from tenant concentration. Also encouraging, the company has a slew of embedded growth pipeline in the form of right to first refusals (ROFR) and put / call agreements with its tenants.
Furthermore, VICI has been exploring investments in properties and areas other than those in the gaming and hospitality sectors such as water parks, lodges, high-end golf courses, theaters and arenas. For example, VICI recently entered into the indoor waterpark resort sector by providing a $79.5 million mezzanine loan to Great Wolf Resorts, the market leader in the sector, to partially fund the development of its 48-acre indoor water park resort in Perryville, Maryland. VICI also has an opportunity to provide up to $300 million of mezzanine financing for a period up to 5 years for the development and construction of Great Wolf's domestic and international indoor water park resort pipeline.
Overall, VICI is expanding its breadth of its business.
Big Benefits from “MGM Growth” Acquisition
Expands Portfolio: VICI’s recently announced acquisition of MGM Growth Properties (MGP) enhances its portfolio and provides significant scale on the Las Vegas strip (which is one of the most dynamic and fastest-growing experiential destinations in the world, attracting over 40 million visitors annually). MGP adds ~32,000 hotel rooms, over 1.7 million square feet of gaming space and 3.6 million square feet of convention space across 7 premier Las Vegas resorts and 8 regional assets to VICI’s portfolio. When the acquisition is complete, VICI’s portfolio will span 43 properties and 15 states.
Importantly, MGP, Caesars, and the Venetian are the three primary casino operators on the Las Vegas Strip (and VICI is now the largest landowner on the Las Vegas Strip). And with high barriers to entry, VICI’s expanded scale will give it more negotiating power than a typical net lease company.
VICI’s Portfolio Post Completion of MGP Acquisition
Source: MGP Acquisition Presentation
Acquired at a significant discount price: VICI is purchasing MGP at a significantly discounted price as compared to replacement cost. Specifically, per the company’s estimates, they're getting it at a 30%-40% discount.
Adds a Long-Term Tenant: As part of the acquisition terms, MGP has entered into a master lease agreement under which it will pay $860 million in annual rent for 25 years to VICI. The agreement has three 10-year renewal options, and the rentals will increase by 2% annually for the first ten years, and thereafter at a rate which is greater of 2% or CPI, subject to a cap of 3%. The acquisition, thus adds a high-quality long-term tenant, while also providing VICI protection against inflation in the form of an assured rental growth rate.
For that matter, VICI’s leases are typically protected under master-lease agreements with letters of credit to minimize the default risk, as well as with annual rent escalations usually tied to CPI (to guard against inflation). Approximately 84% of VICI’s annual contractual rent is subject to a master lease structure, which has a weighted average ~1.8% annual rent escalators built-in, and with ~97% of the contractual rent subject to CPI escalators.
Reduction in Cost of Capital: The added scale, diversity and tenant quality from the MGP acquisition strengthens the overall credit profile of VICI and positions it to migrate to an investment grade credit rating. A rating upgrade will certainly improve VICI’s ability to acquire new debt at favorable terms and lower costs. In fact, all three major credit rating agencies (S&P, Fitch and Moody’s) have viewed the acquisition as a big positive for VICI and indicated that the company is well positioned for an upgrade.
“The acquisition will improve the portfolio’s quality and reduce tenant concentration… the rating action also considers VICI’s good corporate governance…the review could result in an up to two notch upgrade for VICI’s CFR and senior unsecured rating” – Moody’s Investor Service
Furthermore, the acquisition enhances VICI’s chances of an inclusion into the S&P500, as the combined entity becomes one of the top ten “four-walled” REITs with an enterprise value of ~$43 billion. An inclusion in S&P500 would likely drive demand for its equity shares from institutional investors, and thus also lower its cost of equity. An overall reduction in the cost of capital will enable VICI to acquire more high-quality properties in the future to drive growth.
Healthy Growing Dividend
VICI has consistently increased its dividend every year since formation in 2017, even during the pandemic. The dividend is backed by solid AFFO growth, including a healthy 10.8% growth rate in 2020 (at time when many REITs saw flat to declining AFFO).
For 2021, VICI expects AFFO to grow by 11% to 14% to $1.82 to $1.87 per share. And given this expected growth, the company recently hiked its dividend again by ~9% for 3Q21 to $0.36 (which amounts to an attractive annualized dividend yield of ~5%). The current payout ratio on the company’s AFFO is ~70%, which is well below its peers and also its own target payout ratio of 75%, and appears highly sustainable.
VICI’s growing AFFO and dividends are backed by 100% property occupancy and 100% collection of cash rents. This has been possible due to the financial strength of its tenants (~84% of VICI’s rent rolls are from S&P500 tenants). In fact, the company thrived even during the 2020 pandemic year and collected 100% of its rents despite the Las Vegas casinos (which generate more than 40% of VICI’s rents) being closed for nearly a quarter of the year (due to the pandemic).
As a matter of fact, gaming revenues are known to hold up better during recessions than the S&P500; and regional markets are known to hold up even better as compared to Las Vegas, which still experiences less of a drop compared to the S&P500. This demonstrates the strength of VICI’s rent collections—even during challenging times.
Furthermore, the weighted average term of its leases (including extensions) is an amazing 43.5 years—the longest dated lease maturity profile in the triple net lease REIT space. This provides immense visibility of the company’s cash flows in the longer-term, further supporting the dividend payments.
VICI has also maintained a strong balance sheet that acts as a further buffer to its dividends. For example, at the end of Q2, it had ~$3.8 billion in liquidity versus total outstanding debt of $6.9 billion. And VICI had a weighted average maturity of ~5.6 years, with no debt maturing until 2024. Noteworthy, VICI recently repaid ~$2.1 billion of debt, and now has total outstanding of $4.8 billion with no debt maturing before 2025 (excluding the $1 billion revolving credit facility that matures in 2024).
Overall, we think the culmination of the growing AFFOs, lower-than-expected payout ratio, tremendous cash flow visibility from existing tenants, the growth avenues and the strong balance sheet all add tremendous strength to the dividend.
Valuation
Amid the headwinds that challenged the broader equities market, the REIT sector also witnessed a sell-off in September. VICI was not averse to the broader sell-off during the month and saw its share price plunge by almost 9%.
VIVI shares have pulled back a bit in recent monthly, thereby resulting in a dip in the valuation multiple (which currently trade at a Price/LTM AFFO of 15.8x and Price/2021 expected AFFO of 15.6x). This compares favorably with other triple net REITs that trade at relatively higher multiples, while offering lower yield.
* Based on individual company guidance for 2021 AFFO
Source: Yahoo Finance, Company filings
Altogether, we believe at current valuation multiples, VICI’s shares offer investors an opportunity to benefit from strong price appreciation potential and a well-covered 5% dividend yield.
Risks
Tenant Concentration: Historically Caesars has been VICI’s largest tenant accounting for a major chunk of its rental income. While VICI has been diversifying into new tenants, Caesars still remains VICI’s largest tenant, accounting for 68% of its rents, and on the completion of MGP acquisition, Caesars and MGP will together account for 81% (41% and 40%, respectively). Such a large concentration of rents on two tenant has inherent risks which can cause business disruptions, should an unfavorable situation arise.
Recession: While gaming revenues are known to hold up better during recessions relative to the broader market, a recession is still a risk as gaming is in the consumer discretionary sector. Should a recession persist for a long period of time, operators may find it difficult to pay the rents in a timely manner and this can have an adverse effect on the underlying property owner such as VICI.
Interest rate risk: As REITs are often seen as an alternative to bonds, dramatically rising interest rates could mean decreased demand for REITs, thereby causing a decline in their share price.
Conclusion
VICI’s business and shares currently offer a number of attractive qualities, including enhanced scale, marquee S&P500 tenants, industry leading lease duration, an embedded growth pipeline, a strengthened credit profile, a well covered 5% dividend yield, and a compelling valuation. In our view, all of these things combine to make VICI an attractive opportunity for income-focused investors that also like share price appreciation potential. We do not yet own shares of VICI, but it is high on our watchlist, and we may purchase shares in the near future.