VICI Properties (NYSE:VICI) was one of the best-performing REITs of 2022. It generated a 13% return even as its close peer Realty Income (NYSE:O) and other REITs suffered large losses:
But is it still a good investment opportunity for 2023?
I believe so and here are three reasons why:
Most net lease REITs like Realty Income invest in traditional net lease properties such as Dollar General (DG) convenience stores, Taco Bell (YUM) quick-service restaurants, and Chevron gas stations (CVX).
These properties can be great investments, but VICI owns much better assets than that. It owns mainly trophy casino net lease properties such as the Caesars Palace (CZR), the Venetian, and the MGM Grand (MGM).
Now compare that to regular Dollar General-type properties owned by Realty Income:
So that's the first reason why I prefer VICI.
People are always comparing VICI to other net lease REITs like Realty Income, but in reality, they really aren't comparable.
Yes, they own use net lease structures, but the assets of VICI are far better.
VICI's leases have much longer terms at 42 years vs. just around 9 for other net lease REITs like Realty Income. So the risk of vacancy is much lower.
They also have greater annual rent hikes, averaging around 2%, compared to closer to 1% for most other net lease REITs.
Their leases are true "triple" net leases, and not "double" net leases. This means that their tenants are responsible for all expenses, including even the maintenance of the properties. Actually, it is even better than that: according to VICI's leases, their tenants must reinvest a percentage of their revenue into capex each year.
In comparison, it is not uncommon for other net lease REITs like Realty Income to be responsible for some things like the condition roof and the parking lot. That's what you call a double net.
VICI also has periodic CPI adjustments in its leases to provide protection against inflation. Most other net lease REITs, with the exception of W.P. Carey (WPC), don't have that.
VICI also has master lease protections, which means that it will put many properties under one lease. This matters because it prevents your tenant from defaulting on one property but continuing to occupy another.
It is thanks to these stronger leases that VICI was able to collect 100% of its rent in 2020, but other net lease REITs only collected 70-90%. VICI actually hiked its dividend by 11% in 2020 and another 9% in 2021.
Finally, despite owning better properties and having safer and more rewarding leases in place, VICI is today still priced at a small discount relative to its net lease peers.
|VICI Properties||Realty Income|
I would argue that VICI deserves to trade at a premium valuation given all that we explained earlier.
I think that it deserves to trade at closer to 18x FFO, which would price it at closer to $40 per share, which is 20% above today's share price.
The company also pays a near 5% dividend yield and I expect it to grow its cash flow annually by 5-7% on average.
So you have a clear path to double-digit total returns and an additional 20% of repricing upside on top of it.
To recap, here's a table that summarizes all the differences between VICI's properties and those of its net lease peers:
|Casino Net Lease||Average Net Lease|
|Rent escalations||1.5-2% (or CPI)||1-1.5%|
|Lease Length||Many decades||~10|
|Normalized Rent Coverage||3-4x||2-3x|
|Capex Need||Very low||Low|
|Lease Renewal Likelihood||Very high||High|
|Technology Risk||Below average||Depends|
|Master Lease Protection||Yes||Occasional|
|Mission Critical Real Estate||Yes||Yes, but to a lesser extent|
|Lease expiration in next 5 years||0% for VICI||3-5% per year on average|
|Competition for Investments||Low||High|
|Investment Spreads||Above average||Average|
When you take all of this into account, it is hard to argue against pricing VICI at a premium valuation. This is why I think that VICI is a better opportunity than Realty Income and most other net lease REITs.
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This article was written by
Jussi Askola is a former private equity real estate investor with experience working for a +$250 million investment firm in Dallas, Texas; and performing property acquisition in Germany. Today, he is the author of "High Yield Landlord” - the #1 ranked real estate service on Seeking Alpha. Join us for a 2-week free trial and get access to all my highest conviction investment ideas. Click here to learn more!
Jussi is also the President of Leonberg Capital - a value-oriented investment boutique specializing in mispriced real estate securities often trading at high discounts to NAV and excessive yields. In addition to having passed all CFA exams, Jussi holds a BSc in Real Estate Finance from University Nürtingen-Geislingen (Germany) and a BSc in Property Management from University of South Wales (UK). He has authored award-winning academic papers on REIT investing, been featured on numerous financial media outlets, has over 50,000 followers on SeekingAlpha, and built relationships with many top REIT executives.
DISCLAIMER: Jussi Askola is not a Registered Investment Advisor or Financial Planner. The information in his articles and his comments on SeekingAlpha.com or elsewhere is provided for information purposes only. Do your own research or seek the advice of a qualified professional. You are responsible for your own investment decisions. High Yield Landlord is managed by Leonberg Capital.
Disclosure: I/we have a beneficial long position in the shares of VICI; O 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.