VICI Properties: Time To Double Down

Summary

• VICI Properties is a high-quality REIT with durable long-term revenue streams from premium entertainment and hospitality assets.
• The recent closing of the MGM Growth Properties acquisition further entrenches VICI's moat and positions it well for growth.
• I also highlight the dividend, balance sheet, valuation, and other points worth considering.
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Inflation is not necessarily a bad thing, so long as it also comes along with economic growth. It can be detrimental, however, if it turns into stagflation, which is marked by inflation combined with no or declining economic growth. This inflationary scenario "swindles" everyone, as Buffett noted during Berkshire Hathaway's (BRK.A) (BRK.B) annual investor's meeting.

That's why it's important to have exposure to companies with premium assets that have demonstrated abilities to attract customers and stand above the rest, and it's even better when these assets trade at a discount. This brings me to VICI Properties (NYSE:VICI), and in this article, I highlight what makes this stock an attractive buy, so let's get started.

Why VICI?

VICI Properties is a REIT with a portfolio of premium entertainment and hospitality assets, including Caesars Palace, Bally's Las Vegas, and The LINQ. VICI's properties are known for their high-quality experiences and are located on prime real estate, making them "destination" attractions for their customers. It enjoys a 100% occupancy rate and 80% of its rent roll comes from S&P 500 (SPY) companies, which tend to have more access to debt and equity financing than smaller and private companies.

Moreover, the 100% triple-net structure of its leases provides a shield against operator weakness and makes the business less subject to the swings in operating fundamentals of its clients. VICI also has the longest weighted average remaining lease term in the triple-net REIT sector, with 43.2 years, inclusive of all tenant renewal options.

Additionally, 81% of its annual base rent stems from master leases. This means that tenants under this lease structure cannot simply "hand back the keys" to the landlord lest they want all leased properties to go into default. These factors have contributed to the durability of VICI's operating model and is reflected by its 100% rent collection rate since the start of the pandemic.

Meanwhile, VICI saw a robust 11% AFFO/share growth last year, and continued to grow, entering into agreement with Hard Rock related to the Mirage Hotel & Casino in Las Vegas.

More recently, VICI expanded its moat-worthy footprint in Vegas with the completion of its $4B acquisition of The Venetian Resort, and just last week, closed on its much-anticipated acquisition of MGM Growth Properties, making it the largest owner of hotel and conference real estate in America. This should further bring down VICI's net debt to adjusted EBITDA ratio, which had already decreased from a high of 8.5x to 3.1x at the end of last year.

Risks to VICI include higher than expected inflation over the long term, which could outpace its ~1.8% weighted average contractual rent escalation. In addition, an economic downturn could be a negative for VICI's tenants. However, as shown below, the gaming segment has proved to be rather resilient to both recessions over the past 14 years.

Gaming Sector Performance (Investor Presentation)

I see value in VICI at the current price of $29.81, sitting comfortably below its $52-week high of $33.23. It also comes with a forward P/FFO of 15.3, which sits at the low end of the trading range for other well-run net lease REITs such as Realty Income (O), National Retail Properties (NNN), and W. P. Carey (WPC).

It also pays an attractive 4.8% dividend yield, which is well-covered by a 78% payout ratio. I would expect for the payout ratio to improve with the recent closing of MGM Growth Properties, and for the dividend to continue growing this year.

Investor Takeaway

VICI Properties is a high-quality REIT with durable long-term revenue streams from its premium entertainment and hospitality assets. Its 100% occupancy rate and 80% of its rent roll from S&P 500 companies have kept VICI healthy throughout the pandemic, while it pays an attractive dividend that's well-covered. With the recent closing of MGM Growth Properties, VICI has expanded its already moat-worthy footprint, and is well-positioned to continue delivering shareholder value over the long term.

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.

I am not an investment advisor. This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.