VICI Properties: Why Bet In Vegas When You Can Own VICI

REITs have taken a tumble again since the start of February, as inflation continues to be bearer of bad news for the market. This is reflected by the recent inflation report showing that prices rose 0.6% in January, and 4.7% from the prior year.

Nonetheless, I view quality hard assets as being one of the best positioned segments in face of long-term inflationary pressures, as real estate tends to hold up their value better than other asset classes.

This brings me to VICI Properties (NYSE:VICI), whose share price has also dropped since the start of this month, despite demonstrating strong results that beat analyst estimates. Let's explore what makes VICI a great long-term income and growth holding for any portfolio.

Why VICI?

VICI Properties is an S&P 500 (SPY) company and is the largest premier experiential REIT on the market today. It was spun-off from Caesars Entertainment in 2018 holds iconic gaming and hospitality properties along the Las Vegas strip and around the U.S.

Since then, VICI has greatly diversified its portfolio away from Caesars with transformational moves, including the acquisition of MGM Growth Properties and The Venetian Resort. These 3 top premier tenants make up a combined 85% of VICI's annual base rent.

In total, VICI owns 49 gaming facilities and has non-gaming experiential operators including Great Wolf Resorts, Cabot, Canyon Ranch, and 4 championship golf courses, with a 100% occupancy rate at present.

Remarkably, VICI doubled its revenue over the past year due to recent acquisitions, with fourth quarter revenue rising by 101% to $770 million. Importantly, growth is also translating to the bottom line, although at a slower pace due to the acquisitions being funded by debt and equity issuances, resulting in a higher share count. Nonetheless, VICI was still able to grow its AFFO by 15.5% YoY on a per share basis to $0.51 during Q4.

Moreover, VICI also continues a robust pace of growth, including the acquisition of the remaining 49.9% interest in the MGM Grand/Mandalay Bay joint venture in this new year, and acquired 2 regional gaming assets through a sale-leaseback transaction with Foundation Gaming for $293 million.

It's also expanded its existing relationship with Great Wolf Resorts through the origination of a construction loan worth $288 million and is expanding its Canada with the acquisition of four gaming properties in Alberta for C$272 million subsequent to year-end, representing VICI's first international investment.

As shown below, Las Vegas now represents under 47% of VICI's annual base rent and it has exposure to 23 metropolitan statistical areas. While International represents just 1% of VICI's ABR at present, this percentage could grow over time should management be able to source deals at attractive cap rates outside of the U.S.

Importantly, VICI is rewarding shareholders, having raised its dividend every year since being spun-off in 2018. This includes another 8.3% dividend bump in the third quarter of last year, and the $0.39 per quarter dividend rate is well-covered by a 76% AFFO payout ratio (based on Q4 AFFO/share of $0.51).

Looking forward, VICI remains well-positioned to continue to consolidate the fragmented gaming and non-gaming family entertainment space with the support of a BBB- investment grade rated balance sheet and an LQA (last quarter annualized) net debt to EBITDA ratio of 5.7x, sitting below the 6.0x mark that most ratings agencies consider safe for REITs.

This also comes with the stability of the aforementioned 100% occupancy rate, and very long weighted average remaining lease term of 43.4 years, far surpassing the 10 to 15 year average of that of net lease peers. Its existing leases also come with 2% to 3% (capped) annual rent escalators, which is in line with the 2% long-term annual inflation rate targeted by the Federal Reserve.

Turning to valuation, while VICI is not table-pounding cheap like it was at the end of September last year, it's appears to be reasonably attractive at the current price of $33.29 with a forward P/FFO of 13.6, sitting below that of net lease peers such as Realty Income Corp. (O) and National Retail Properties (NNN) which have forward P/FFO of 15.8 and 14.2. respectively.

This is also considering VICI's attractive growth profile, as management continues to build upon its core competency of sourcing and managing entertainment destinations, including 34 acres of undeveloped land along the Las Vegas strip on which it can build.

Lastly, analysts have a consensus Strong Buy rating with an average price target of $37.75, implying a potential 18% total return over the next 12 months.

Investor Takeaway

VICI Properties remains in a strong position as it continues to consolidate the fragmented gaming and non-gaming family entertainment space. It's achieved impressive growth in recent years, thanks to its focus on well-positioned assets and strategic acquisitions, resulting in both top and bottom line growth.

This appears set to continue this year, as recent material acquisitions should contribute to full year operating fundamentals. While some people like to gamble with the money at the casinos, it's a far better bet to own "the House" through shares in VICI.

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