Analyzing VICI Properties (VICI)

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Year to date, the S&P 500 has performed strongly across the board. When we focus on the real estate investment industry, we observe nearly double-digit growth for every company within this sector. This robust performance signals potential opportunities for investors, especially in real estate investment trusts (REITs) like VICI Properties.

Introduction

Investors are always on the lookout for sectors that outperform the general market. The real estate investment industry, particularly REITs, has shown impressive growth recently. One company that stands out is VICI Properties (NYSE: VICI), a REIT specializing in gaming, hospitality, and entertainment destinations.

Impact of Interest Rate Cuts on REITs

Historical Performance Post Rate Cuts

For the first time in four years, the Federal Reserve is anticipated to cut interest rates by 50 basis points. JP Morgan predicts two additional rate cuts in 2024, with more possibly coming in 2025. This is significant because historically, REITs have performed well following the first rate cut. Total returns after the initial rate cut have been strong for REITs compared to other sectors. While the S&P 500 showed a negative 0.5% return, REITs outperformed with a 1.6% return.

Over the next quarter and the subsequent four, REITs tend to outperform the equity market as a whole. This trend suggests that investing in REITs like VICI Properties could be advantageous in the current economic climate.

Overview of VICI Properties

Business Model and Tenants

VICI Properties is a leading REIT that owns one of the largest portfolios of market-leading gaming, hospitality, and entertainment destinations. The company has 13 primary tenants, with a significant concentration in Las Vegas. Specifically:

  • Caesars Entertainment: Holds 18 of VICI’s properties.
  • MGM Resorts: Accounts for 13 properties.

These two tenants represent approximately 74% of VICI’s annualized cash flow. Therefore, investors need to be bullish on Las Vegas’s long-term prospects when considering this investment.

Geographical Diversification

While the majority of properties are in Las Vegas, VICI has expanded across the United States and into Canada. This geographical diversification reduces risk and opens additional revenue streams.

  • U.S. Locations: Spread across various states beyond Nevada.
  • International Presence: Recent expansions into Canadian markets.

Why Invest in VICI Properties?

High Barriers to Entry

The gaming and hospitality industry has high barriers to entry due to:

  • Regulatory Requirements: Obtaining licenses and meeting regulatory standards is challenging.
  • Capital Intensity: Significant capital is required to develop large-scale properties.
  • Established Relationships: VICI’s long-term leases and partnerships with major operators like Caesars and MGM make it difficult for new entrants to compete.

Resilience During Economic Downturns

During the COVID-19 pandemic in 2020, many venues were shut down. Despite this, VICI managed to collect 100% of its rent. This resilience is noteworthy, especially when compared to other REITs that collected between 70% to 99% of rents.

Long-Term Leases

VICI’s tenants have an average remaining lease term of around 41 years. These long-term leases:

  • Secure Revenue Streams: Provide predictable and stable income.
  • Likelihood of Renewal: High chances of lease renewals upon expiration.
  • Attractive to Investors: Long-term commitments reduce uncertainty.

Dividend Growth

  • Consistent Increases: VICI has increased its dividend for the past five consecutive years.
  • Growth Rate: On average, the dividend has grown by around 10% annually.
  • Attractive Yield: The starting yield is approximately 5.23%, paid quarterly.
  • Comparison: Other popular REITs like Realty Income offer yields around 3%, making VICI’s yield particularly attractive.

Diversified Revenue Streams

VICI’s assets are not limited to hotel rooms. The company has diversified into:

  • Gaming Spaces: Casinos and gaming facilities.
  • Meeting and Convention Centers: Hosting events and conferences.
  • Food and Beverage Outlets: Restaurants and bars.
  • Golf Courses: Recreational facilities.
  • Entertainment Venues: Recently added a bowling complex and other entertainment options.

Financial Metrics and Performance

Dividend Safety and Growth

  • Safety Score: Considered borderline safe, indicating a moderate risk of a dividend cut over a full economic cycle.
  • Recent Increase: Dividend increased by 4.2% recently, aligning with inflation rates.
  • Payout Ratio: Adjusted Funds from Operations (AFFO) payout ratio is around 75%, which is within management’s target and acceptable for hotel REITs.
  • Dividend Growth Rate: Over the last five years, VICI has increased its dividend by an average of 10% annually.

Valuation Models

Dividend Yield Theory

  • Current Yield vs. 5-Year Average: The current yield marginally exceeds the five-year average.
  • Implication: Suggests a reasonable valuation or slight undervaluation.

Forward P/FFO Ratio

  • Current Ratio: Approximately 12.7.
  • 5-Year Rolling Average: Around 14.8.
  • Sector Average: The real estate sector averages around 17.7.
  • Conclusion: VICI may be undervalued relative to its peers.

Price to Adjusted Funds from Operations

  • Discount: Shows a 14.66% discount compared to the sector as a whole.
  • Evaluation: Indicates that VICI is attractively priced.

Debt and Dilution Considerations

  • Net Debt to EBITDA Ratio: Stands at 5.86 in 2023, down from 6.46 the previous year.
  • Industry Norms: While higher than the preferred threshold for hotel REITs, it’s common in the industry due to growth strategies.
  • Debt Reduction: The ratio is expected to decrease to 5.44 over the next 12 months.
  • Share Dilution: VICI has been issuing new shares to fund growth, which can dilute existing shareholders’ positions.

Insider and Institutional Ownership

Insider Ownership

  • Percentage: Stands at 0.25%.
  • Recent Activity: Minimal insider buying over the last 12 months, totaling around $87,000.
  • Notable Purchase: Director James Abraham Samson bought approximately 3,000 shares at just under $29 in March.
  • Interpretation: Insider buying can be a bullish signal, but activity has been limited.

Institutional Ownership

  • Percentage: Very high at 98%.
  • Buying vs. Selling: Nearly double the amount of institutional buys compared to sales over the last year.
  • Recent Quarters: Institutions have been net buyers in both the most recent quarter and the last four quarters.
  • Caution: While institutional buying is positive, investors should conduct their own due diligence.

Financial Health Check

Revenue and Net Income Growth

  • Revenue Growth: Increased from $900 million in 2018 to $3.61 billion in 2023.
  • Net Income Growth: From $43 million in 2017 to $2.5 billion in the latest annual report.
  • Consistency: Both top-line and bottom-line figures show strong, consistent growth.

Cash and Debt Position

Total Cash

  • Inconsistency: Cash position has fluctuated, from $0.4 million in 2015 to around $347 million in the latest quarterly report.

Total Debt

  • Increasing Trend: Total debt has risen from $4.8 billion in 2017 to $17.6 billion recently.
  • Net Debt to EBITDA: While high, the ratio is decreasing, which is a positive sign.

Evaluation

  • Debt Management: High debt levels are typical in the industry but require monitoring.
  • Dividend Sustainability: Important to ensure debt doesn’t impact the company’s ability to pay dividends.

Future Expectations and Analyst Ratings

  • Earnings Projections: For the next four quarters, VICI anticipates two quarters of double-digit growth and two quarters of negative growth.
  • Historical Performance: The company has a 50% track record of beating analyst targets, exceeding expectations in two of the last four quarters.
  • Analyst Ratings:
  • Seeking Alpha: Double buy rating.
  • Wall Street: Double buy rating.
  • Quantitative Assessments: Strong buy signal.
  • Price Target: Current price target of $36.50, indicating an 11% upside from the current market price.

Comparative Performance

12-Month Performance

  • Total Return: Up 14%, including reinvested dividends.
  • Peer Comparison: While towards the bottom among peers, the absolute performance is strong.

5-Year Performance

  • Total Return: Up approximately 93%.
  • Investment Example: A $1,000 investment five years ago would be nearly $2,000 today if dividends were reinvested.
  • Sector Performance: The real estate sector has performed very well overall.

Conclusion

VICI Properties presents a compelling investment opportunity within the REIT sector. The company’s strong financial metrics, attractive dividend yield, and consistent growth make it a candidate for investors seeking exposure to real estate assets, particularly in the gaming and hospitality sector.

Key Considerations

  • Concentration Risk: With 74% of revenue coming from Caesars Entertainment and MGM Resorts, and a significant focus on Las Vegas, there is a concentration risk that should be acknowledged.
  • Debt Levels: High debt levels are typical in the industry but require monitoring to ensure they don’t impact dividend sustainability.
  • Share Dilution: The issuance of new shares can dilute existing shareholders, so it’s important to factor this into investment decisions.
  • Market Outlook: Positive developments in Las Vegas, including new entertainment venues and events, enhance the city’s appeal, benefiting VICI’s properties.

Final Thoughts

Given the company’s performance, growth prospects, and analyst ratings, VICI Properties appears to be a strong candidate for investors looking to add a high-quality REIT to their portfolio. As always, conducting thorough due diligence and considering one’s investment objectives and risk tolerance is essential before making any investment decisions.

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