Vici Properties: The COVID-19 Wild Card And How To Play It
Summary
- The coronavirus could serve as the first "stress test" for the relatively-new gaming REIT model.
- This black swan “pandemic” has certainly added risk and complexity to the niche net lease REIT platform.
- Yet the asset class also could prove-out the resiliency of the gaming rental streams that are likely to have a temporary impact over the long term.
- Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio. Get started today »
The gaming REIT sector is a fairly new category within the equity REIT universe and is actually a sub-sector of the broader Net Lease REIT sector. As illustrated below, gaming REITs represent around 25% of the Net Lease REIT sector (based on market capitalization):
Source: iREIT
As illustrated below, there are three Gaming REITs: VICI Gaming (NYSE:VICI), Gaming and Leisure Properties (GLPI), and MGM Growth (MGP):
Source: iREIT
Gaming and Leisure Properties was the first gaming-focused REIT that was formed from the 2013 tax-free spinoff of the real estate assets of Penn Gaming (PENN). As a result of the spinoff, GLPI owns substantially all of Penn's former real property assets and leases back these assets to Penn for use by its subsidiaries pursuant to a master lease.
In April 2016, MGM Resorts International (MGM) netted around $1 billion by creating a new REIT and spinning off 11 of its properties into the entity known as MGM Growth Properties.
Then in February, in an IPO, VICI raised about $1.4 billion, making it one of the largest IPOs in 2018 and one of the largest REIT IPOs ever, after its spin-off from Caesars Entertainment Operating Co., a subsidiary of gaming giant Caesars Entertainment Corp. (NASDAQ:CZR) (that emerged from Chapter 11 bankruptcy protection in October 2017).
The coronavirus could serve as the first "stress test" for the relatively new gaming REIT model. This black swan “pandemic” has certainly added risk and complexity to the niche net lease REIT platform, yet the asset class also could prove out the resiliency of the gaming rental streams that are likely to have a temporary impact over the long term
Source: Yahoo Finance
The COVID-19 Wild Card And How To Play It
We have been following VICI Gaming since the company listed shares back in 2018. At the time I explained,
“VICI has the lowest payout ratio, and while the dividend is lower than the peers, we believe that this REIT has the best potential to grow its dividend. Also, as VICI’s CEO pointed out, the company’s “independence and full internalization is a fundamental requirement of any REIT that aspires to be of institutional quality.”
That was back in July 2018, and as viewed below, our initial Strong Buy thesis proved to be a winner, as shares surged by more than 35%, generating total returns in excess of 40% prior to COVID-19:
Source: Yahoo Finance
However, when the Black Swan known as COVID-19 emerged, the gaming REIT sector slowed to a virtual standstill as these tourism-based industries saw dominoes began to fall for municipalities, states, and employers.
As we have examined for most REIT sectors, liquidity is now a critical factor in assessing survivability. Although most casinos remain closed, a few are beginning to open back up as states began various phasing efforts to restart the U.S. economy.
Today I plan to take a closer look at VICI Gaming in an effort to determine how to play the “black swan” and whether or not to initiate a new position. There’s more clarity now as earnings season is over and various states are beginning to reopen.
The Business Model
VICI Properties is an experiential REIT that owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destinations, including the world-renowned Caesars Palace.
VICI Properties’ national, geographically diverse portfolio consists of 28 gaming facilities comprising over 40 million square feet and features approximately 15,200 hotel rooms and more than 150 restaurants, bars and nightclubs.
Its properties are leased to industry-leading gaming and hospitality operators, including Caesars Entertainment Corporation, Penn National Gaming, Inc. and Hard Rock International. VICI Properties also owns four championship golf courses and 34 acres of undeveloped land adjacent to the Las Vegas Strip.
Source: VICI Investor Presentation
All of VICI’s properties are subject to Triple Net leases and the portfolio is 100% occupied (weighted average lease term is 32.9 years). As illustrated below, most of the properties are anchored by iconic assets:
Source: VICI Investor Presentation
VICI has around 29% of portfolio rent being generated from Las Vegas assets and the remaining 71% is from other regions of the country.
The pending Eldorado (ERI) / Caesars (CZR) merger is expected to close, despite the COVID-19 volatility. Shares in both gaming enterprises have begun to ramp back up. The FTC is working through the final review and ERI has secured the financing. Also, VICI has pre-funded its $3.4 billion of financing for the deal, with $2 billion of bond proceeds in escrow and $1.3 billion of forward-equity proceeds that are in the process of being settled.
Source: Yahoo Finance
Part of the recent surge is the fact that “the Nevada Gaming Commission approved various measures to be used to keep customers safe at casinos in the state. The development has pushed the casino sector even higher as the prospect for re-openings increases. Even operators with no properties in Nevada are seeing share price gains.”
When the merger closes, the combined entity will become a much stronger tenant for VICI, with a total of 60 properties and 300 F&B outlets. The combined tenant will pay VICI $1.05 billion in rent annually:
Source: VICI Investor Presentation
In addition, VICI has an unrivaled opportunity to deepen its exposure on the Las Vegas strip:
Source: VICI Investor Presentation
The Balance Sheet
VICI has a strong balance sheet as evidenced by the $1.3 billion in liquidity, comprised of approximately $310 million in cash on hand and $1 billion of availability under the undrawn revolving credit facility. It also has access to approximately $1.3 billion in proceeds from the settlement of the 65 million shares that are subject to the forward sale agreements entered into in June 2019.
Between the proceeds from the equity forward agreements and the ~$2 billion of unsecured notes in escrow, VICI has around $3.2 billion of capital earmarked for the closing of the Eldorado transaction.
Source: VICI Investor Presentation
VICI’s total outstanding debt at the end of Q1-20 was $6.9 billion (inclusive of the $2 billion of unsecured notes) with a weighted average interest rate of 4.19%. The weighted average maturity of debt is approximately 6.9 years and there are no debt maturities until 2024. The net debt to LTM EBITDA was approximately 5x.
Source: VICI Investor Presentation
VICI is rated BB by S&P compared with GLPI’s rating of BB+ and MGP’s rating of BB-.
VICI’s tenants generally possess strong liquidity positions, especially in light of the fact that VICI operators are beginning to reopen their assets, with approximately 50% of VICI assets expected to be reopened by June 5 and with the earliest re-openings showing strong consumer response. At the end of Q1 2020, Caesars, VICI’s largest tenant, had $2.7 billion of liquidity. Penn recently bolstered their liquidity with a $600 million capital raise.
Perhaps most importantly, VICI is among the very few American Triple Net REITS that have collected 100% of rent from 3rd party tenants through March, April and May, with anticipation of full June rent collection as well, as disclosed in a VICI press release dated June 1, 2020.
Finally as it relates to the dividend, during Q1-20 VICI paid a dividend of $0.2975, based on the annualized dividend of $1.19 per share, the AFFO payout ratio for the quarter was 78%, slightly above the long range target of 75% (as a result of the June 2019 equity offering).
The Latest Earnings Results
In Q1-20 VICI’s total GAAP revenues increased 19.2% (over Q1-19) to $255 million, while total cash revenue in Q1-20 was $257.6 million, an increase of 21.8% (over Q1-19).
These increases were the result of adding $44.1 million of rent during the quarter from the Greektown, Hard Rock Cincinnati and the Century acquisitions which closed in 2019, and JACK Cleveland which closed on Jan. 24, 2020.
VICI’s AFFO was $180 million, or $0.38 per diluted share for the quarter. The net model, as flow through of cash revenue to adjusted EBITDA, was nearly a 100%. As you can see below, VICI has maintained an impressive track record of growth:
Source: VICI Investor Presentation
One of the reasons that we have been bullish with VICI and its business model is because of the significant growth opportunities, and the primary catalyst being the proposed closing of the Eldorado/Caesars combination and Eldorado/Caesars portfolio strategy.
A Royal Flush
While COVID-19 represents a Joker in the deck, we believe that VICI is holding all of the cards. The company prefers tenants skewed toward regional markets and expects this mix (60/Regional and 40/LV) to benefit the stability of the rental income because regional markets will recover quicker.
Furthermore, VICI's largest tenant still retains material real estate ownership (~50/50 PF), and we believe that the combined company will become much stronger as a result of the synergies upon closing. It’s quite possible that VICI has some of the best AFFO growth in the REIT sector in 2020, as viewed below:
Source: iREIT
The above estimates are derived from analyst consensus (FAST Graphs), and as you can see, VICI is forecasted to grow FFO per share by a whopping 51% in 2021. This means that the growth thesis is still intact and of course this means that the dividend (growth) is likely to follow:
Source: iREIT
So here’s how I’m playing this hand: I’m upgrading VICI to a Strong Buy, recognizing that the odds are good that growth begins to kick in Q4-20 and into 2021. VICI has an experienced management team and as the country begins to reopen for business, we suspect to see casinos filing back up as social distancing effects wear off.
Granted international travel will be slower to recover, but those in the U.S. will begin to venture out to enjoy one of America’s favorite pastimes.
“Veni, Vidi, Vici” is a Latin phrase that means "I came; I saw; I conquered," and popularly attributed to Julius Caesar who, according to Appian, used the phrase in a letter to the Roman Senate around 47 BC after he had achieved a quick victory in his short war against Pharnaces II of Pontus at the Battle of Zela. The phrase is used to refer to a swift, conclusive victory.
Source: FAST Graphs
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn moreAnalyst’s Disclosure: I am/we are long VICI. 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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Comments (35)
I do Not Buy what I think I should Buy but Buy what I know I should Buy.
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