- VICI Properties Inc. has remained resilient in the last year but has been slipping along with the broader markets more recently.
- I've sold some puts, but even the current price would appear attractive to consider adding this name.
- They've continued to grow their dividend, and with AFFO expected to continue growing, it would be anticipated that more growth is in the future.
- This idea was discussed in more depth with members of my private investing community, Cash Builder Opportunities. Learn More »
Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on March 15th, 2023.
We recently sold some puts on VICI Properties Inc. (NYSE:VICI), and I believe that sets us up for a win-win bet on the shares. This is primarily because if shares don't drop to our $30 strike price, then we at least collected the premium. Additionally, if assigned, then we get shares of a high-quality real estate investment trust, or REIT, at a lower price than where it is currently trading. With volatility picking up in the market, it isn't necessarily a bad thing to have some downside cushion.
All that being said, it's also important to illustrate why I find VICI attractive and high quality in the first place. The growing dividend is attractive, but it is only attractive if it's covered and looks like it can continue to grow. I believe this to be the case. Furthermore, the current price coming down with the latest volatility also makes it attractive even if one wants to consider initiating a position at these levels.
Since our last update, shares of VICI have essentially been flat. Well, it wasn't a flat trajectory, but it's made a round trip of making its way to ~$35 a share before sliding back down more recently. Thus, why I thought selling puts was an attractive proposition. In that last article, we discussed the options premium we were collecting at that time due to a trade expiring worthless.
If you are unfamiliar with VICI, it is an:
"experiential real estate investment trust that owns one of the largest portfolios of market-leading gaming, hospitality and entertainment destination, including Caesars Palace Las Vegas, MGM Grand and the Venetian Resort Last Vegas..."
That gives us a basic idea of the properties they look to acquire. They have a concentration in Las Vegas, but they've been diversifying out. I believe that is a positive.
Additionally, they are rated investment-grade by Standard & Poor's and Fitch, which seems to be an important factor worth pointing out during these uncertain times. Moody's has them as non-investment grade, but the outlook for their debt is "stable," too, from the three major rating agencies.
Secured, Growing Dividend, Strong Coverage With Growing Earnings
VICI might not be the oldest REIT, but they hit the ground running in terms of ramping up their dividend to investors. In fact, that went right through during the pandemic as if it never happened.
As REITs are required to pay out most of their taxable income, we generally associate them with yield-type instruments. So seeing a strong 4.83% yield currently that is growing can be quite attractive. That's something a risk-free Treasury doesn't provide for investors, which is the edge that REITs and other dividend growers can provide to compete with Treasury yields. Earlier this year, I discussed why REITs could still be attractive despite increasing interest rates.
One area that limits REIT growth is when share prices become depressed, creating new shares doesn't become as attractive. With VICI remaining resilient and the share price holding up well, it's in a different situation. They had been selling additional shares through their at-the-market offering and had an equity offering in November. That raised $1.3 billion in cash for them. So a resilient share price isn't only good for investors, but it's also great for a REIT to continue to grow.
Given the history and estimated projections from analysts on AFFO for VICI, it gives us a few important takeaways that are worth noting.
I'd say first that the pandemic really didn't have a material impact on the REIT's earnings for the entire year. As we can see, AFFO grew nearly 11% in 2020. When you can grow AFFO when businesses are shut down, it highlights the resiliency of the properties making up VICI's portfolio. That being said, the Q1 2020 FFO was negative, with the diluted AFFO coming in at $0.38.
Another important takeaway here is that given the $2.13 in anticipated AFFO for the fiscal year 2023, it gives us a payout ratio of only 73.24% based on the $1.56 annualized distribution.
That not only tells us that the current payout seems secure, but with a continued expectation of higher earnings, it should open up even more room for growth to meet their 75% AFFO target.
Based on current estimates, earnings growth is expected to slow down in 2024. With their expansion into new markets and acquisitions, there is a lot of time before we have to worry about 2024. Still, plenty of names are not expecting any growth in 2023. So seeing ~10%, AFFO expected for VICI is a positive, in my opinion.
Valuation Looking Tempting
As mentioned above, with volatility in the broader market, we are starting to see a shakeup in names that are otherwise not directly related to the fallout in the banks. Of course, if your banks are failing, prospects generally aren't going to be the most encouraging for the broader economic views. That being said, as we've already seen, VICI tenants remained resilient in a deep recession, albeit a short one.
That being said, based on the fair value range of where VICI has historically traded and given the anticipation for continued earnings, VIC remains trading near the low end of its range. That's why I believe now appears to be a fairly attractive time to consider this name. Selling puts at $30, as I've done, in this case, is simply looking for a "great" deal rather than just a "good" deal.
Despite the AFFO and dividend not looking like it was affected during the pandemic, we can clearly see that the share price was. So that always remains a risk naturally, as it does with most other equities, which we can never avoid completely as investors. This is why I'm always a fan of not going all in at once, instead taking small bets over time to dollar-cost average in.
Portfolio Growing, Expanding, Diversifying
When investing in this space, there is a certain "moat" that this REIT has. Casinos and other large experiential infrastructure are a big consideration, as they come with a large upfront investment.
That comes with the REIT's concentration risks, but also that provides it with its moat, too. VICI listed 50 properties and only 11 different tenants. However, they've grown fairly quickly.
Las Vegas remains 46.6% of the geographic concentration. With a recent expansion in Canada by acquiring PURE Canadian Gaming Corp, it seems they aren't worried about crossing into new countries to expand.
Simultaneous with the acquisition, VICI entered into a triple-net master lease agreement with PURE (the “PURE Master Lease”) covering the PURE Portfolio. The PURE Master Lease has an initial total annual rent of approximately C$21.8 million (US$16.1 million) representing an implied acquisition capitalization rate of 8.0%, and an initial term of 25 years, with four 5-year tenant renewal options. PURE’s obligations under the PURE Master Lease are guaranteed by the parent entity of PURE.
The largest exposure here comes from Caesars and MGM Resorts; they make up a considerable amount of the annual cash rent. Meaning, I think they have more room to add even further diversification to become more resilient, even adding the PURE Casino properties, which only accounted for 1% of the annualized cash rents.
Speaking of branching out, a discussion on acquiring Six Flag's properties came up in the latest earnings call. They didn't provide any specific details, but they also mentioned they were open to the theme park space. By opening up themselves to a broader view of the experiential space rather than purely a gaming focus, it could add further diversification and growth opportunities.
They have proven themselves over decades. What we also find interesting about the theme park landscape in the U.S. is it is really an un-networked landscape. You have hubs, obviously, in the form of Anaheim and Orlando, and you have spokes in terms of the regional theme park operators, but they're not connected and that kind of puzzles us and can't help thinking, well, geez, what would the power be if you could ever connect these things? And we'll see if anything ever comes to that. But yes, it is a category and experiential category that we believe has real investment merits for us, both strategically and economically.
Inflation has been coming down, and a recession could see that come down further. Though inflation still remains elevated and persistent. Fortunately, VICI is fairly protected should it linger longer than hoped, with inflation-protected leases on a significant portion of their portfolio.
50% of leases with CPIlinked escalation in 2023E and 96% of leases with CPIlinked escalation over the long-term (subject to applicable caps)
VICI Properties Inc. remains an attractive REIT to consider, even at the current price. A more patient investor could wait for a lower price with the current economic uncertainty. Alternatively, utilizing a dollar-cost average approach could be appropriate as well. VICI's earnings and dividends were solid through the pandemic, and while that had a swift recovery, it highlighted its tenants' resiliency. As they continue to diversify, I believe that should help provide more stability for the VICI Properties Inc. REIT overall.
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This article was written by
Cash Builder Opportunities (aka Nick Ackerman) is a former fiduciary and a registered financial advisor with 14 years of investing experience.
He is the leader of the investing group Cash Builder Opportunities, where his specific focus is on closed-end funds, dividend growth stocks, and option writing as an attractive way to achieve income. He shares model portfolios and research to help investors make better decisions, via his Investing Group’s active chat room.
Analyst’s Disclosure: I/we have a beneficial short 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.
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