VICI - I'm Dreaming Of A REIT Christmas
2023-12-25 07:00:00 ET
Summary
- 2023 has been a challenging year for REITs, but their balance sheets remain solid and well-positioned for uncertainty.
- Realty Income, Agree Realty, and VICI Properties are three REITs that offer potential for growth and have attractive valuations.
- As interest rates decrease and investor fears are relieved, REIT stocks are expected to rebound, making them a good investment opportunity.
If you’re reading this on Christmas Day, then a very Merry Christmas to you and yours! And if you’re reading this a day or two later, then here’s wishing everyone a Happy New Year!
I have good reason to hope it will be prosperous.
2023, let’s acknowledge, has been quite the run thanks to a whole lot of unexpected news. There was good. There was bad. There was ugly. There was mixed.
To quote Forbes from December 4 :
“In 2022, the S&P 500 bounced back from its worst year in over a decade. And it is on track to finish 2023 up as well, with a gain of about 21% through November 30. The ride for investors hasn’t always been a smooth one, though. Most of the market’s gains came early in 2023.”
Most of the market’s gains also came through the “Magnificent 7” tech stocks for the first 10 months of the year. But back to the article…
“Despite concerns over inflation and rising interest rates, an unexpected regional banking crisis and rising geopolitical tensions around the world, the U.S. economy remains resilient and corporate profits are on the rise.”
That showed in the “most-anticipated recession” ever… that never happened. Consumers kept the economy up by flocking to flicks like Barbie and Oppenheimer . And Taylor Swift’s concerts and subsequent movie made so many headlines that some people deemed it the “Taylor Swift economy.”
So what can we make of 2023?
How about that the future is never completely predictable.
A Closer Look at REITs
Another example of life’s unpredictability would be the abject malaise real estate investment trusts (REITs) continued to experience this year. I know I didn’t see their stock prices struggling so badly.
Yet it happened nonetheless.
Seeking Alpha recently interviewed me, asking a bunch of great questions I was more than happy to answer. It just published the piece last week, titled: “ 2024 Analyst Outlook: Brad Thomas on REIT Sector Opportunities and Market Expectations .”
The platform didn’t pull any punches, jumping right to reality with this first comment-question combination:
“2023 has been a challenging year for REITs. Interest rate increases, tightening in bank lending, and some defaults have hurt the asset class. What do you see for 2024?”
I won’t cite my entire answer here since it was rather detailed, skipping instead to this segment:
“… it’s true that all REITs have had to adjust to accelerated cost of capital, which has made 2023 challenging.
“Challenging, but not devastating. That’s because ‘most’ REITs were in healthy financial condition before 2023.
“It’s true that leverage increased through the run-up to last decade’s Global Financial Crisis [GFC]. And it briefly spiked in 2009 to 64.7% when market values fell.
“However, it’s stayed below 40% since 2011 and has stabilized in the low- to mid-30% range since 2016. And that’s not the only way REITs have lowered their exposure to high interest rates since the end of the GFC. They’ve also reduced their interest expenses, used fixed-rate debt, and increased the term of that debt.
“As of Q3 [2023], REIT balance sheets were solid and well-positioned for economic and capital market uncertainty.”
That’s why I wasn’t too concerned that their share prices looked so lackluster this year. It wasn’t anything to worry about for a long-term investor like me.
I’m Dreaming of a REIT Christmas
If anything, the first 10 months of 2023 gave me ample room to sift through bargain basement prices.
I say “sift” because certain REITs are struggling more than others.
I acknowledged that in the interview too, stating that “certain sectors do behave differently. So I’m the first person to acknowledge that there are an increasing number of loan defaults within the office and hotel sectors.”
But even there I didn’t write off every single REIT. There are still some office examples in particular that could see their stock prices outperform from here.
And even if 2024 is as lackluster as 2023 was, remember what I said about the larger category’s balance sheets. REITs in general have the money they need to keep paying out the dividends they promise.
That’s an enormous perk I refuse to overlook.
Do your due diligence and research each REIT before you buy it, of course. But if the logical conclusion is that your payouts will keep happening and keep growing…
Then the next logical conclusion is that their share prices will recover too. Again, maybe not right away. But the wait should be worth it just as long as those dividends keep flowing.
Moreover, I don’t expect the wait to be that long. Yes, I know I was taken aback by 2023. But the Fed has strongly indicated it will cut rates next year at least by a bit.
The markets are already obsessed with the thought, sending everything up the last two months. This is no longer a Magnificent 7-only rally we’re seeing.
So imagine how REIT stocks will rebound once an actual cut happens and investors’ (misplaced) fears are relieved?
That’s definitely what I’m imagining… right along with all those dividends that are much, much more guaranteed.
Realty Income ( O )
Realty Income is 10.5% of my portfolio and as seen above, shares are down around 10% year-to-date.
I’ve owned shares in this Dividend Aristocrat for over a decade and during this time shares have returned an average of 8% annually.
Over the last 60 days shares bounced back, up over 23%.
In late October I began adding shares more aggressively (dollar cost averaging) in anticipation of a “REIT Rally” in Q1-24.
As I reflect on 2023, Realty Income had a few noteworthy accomplishments:
February 2023 : Realty Income formed an alliance with vertical farming company Plenty Unlimited to spend up to $1 billion on indoor farms .
March 2023 : Realty Income signed a definitive agreement to acquire up to 415 single-tenant convenience store properties located in the U.S. from EG, a leading independent convenience retailer based in U.K.
August 2023 : Realty Income to invest $950 million in Bellagio Las Vegas in deal with Blackstone ( BX ). This is the second gaming deal for Realty Income.
October 2023: Realty Income agreed to acquire Spirit Realty ( SRC ) in an all-cash stock transaction with an enterprise value if ~$9.3 billion.
November 2023: Realty Income and Digital Realty ( DLR ) formed a JV two build two data centers in northern Virginia. Realty Income invested $200 million for an 8% equity stake in the JV.
That’s quite a transformational year for the “monthly dividend company”.
Indoor farms, gaming, and data centers, in addition to the soon to close deal with Spirit Realty.
As I reflect on Realty Income’s historical growth, you can see below that the company has generated positive AFFO per shares growth every single year (even in 2020) and analysts are forecasting growth of 4% in 2024 and 3% in 2025.
Realty Income said that the Spirit deal is going to be “at least 2.5% accretive” but I suspect Realty will deliver more than its conservative estimate. In addition, as rates fall (tailwind) in 2024 Realty will be able to reduce its cost of capital.
In addition, as cap rates expand, Realty Income is perfectly set up for more sale-leaseback opportunities. This is one of the company’s biggest strengths as the cost of capital and scale advantages allow Realty to continue to spread its capital across various investment platforms.
I suspect to see Realty Income continue its expansion into farming, gaming, and data centers.
But what excites me the most about this company is valuation.
As I mentioned, I’ve been scooping up shares in anticipation of a price reset in 2024.
Shares are now trading at $56.96 with a P/AFFO of 14.2x.
To put that into perspective, consider how this compares with:
- Prologis ( PLD ): 28.4x
- Public Storage ( PSA ): 20.6x
- Agree Realty ( ADC ): 15.8x
- Kimco Realty ( KIM ): 18.0x
Realty Income’s dividend yield is 5.4% and well-covered (76%) by AFFO.
Even with the 20% run-up over the last 60 days, I still consider the company a bargain.
As shown below, I’m targeting shares to return around 15% to 20% (over 12 months).
Agree Realty ((ADC))
Agree Realty is 4.0% of my portfolio and as seen above, shares are down around 11% year-to-date.
I been adding more shares during October (shares + ~14%) and so has CEO, Joey Agree:
As I reflect on 2023, Agree’s news announcement were modest compared with realty Income. The only noteworthy news:
- January 2023: Agree Realty moves into the MidCap 400.
In fact, Agree Realty’s CEO, Joey Agree, made it clear ,
“Even in the absence of external growth, this will enable us to deliver AFFO or true cash growth of over 3% next year on a per share basis.
…we will continue to avoid going up the risk curve, investing capital only in the country's leading operators with high-quality underlying real estate.
While our relationships and acquisition funnel continue to provide a strong pipeline, we will remain disciplined capital allocators to ensure that our risk-adjusted spreads are appropriate, and our cap rates are reflective of broader market conditions.”
In other words, Joey is “sticking to his knitting” and not pursuing new growth opportunities for the sake of growth.
He’s doubling down on his sandbox that includes “leading operators in sectors including farm and rural supply, auto parts, tire and auto service, convenience stores, off-price retail, home improvement and warehouse clubs.”
As I reflect on Agree Realty’s historical growth, you can see below that the company has generated positive AFFO per shares growth every single year (even in 2020) and analysts are forecasting growth of 4% in 2024 and 3% in 2025.
So even without doing any acquisitions Joey Agree explains,
“…we're very confident regardless of the amount of acquisitions that we execute during the fourth quarter that we're going to grow AFFO next year over 3% without doing anything. That's no new capital, that's no new acquisition activity. And so that is, we think, a very strong, I'll call it, again, the base case.”
So, as you see, Agree and Realty Income are two entirely different business models, which is why I own both (as I explain in detail here ).
I’ve also been scooping up shares in anticipation of a price reset in 2024.
Shares are now trading at $62.52 with a P/AFFO of 15.8x (normal is 17.8x).
As I mentioned earlier, that’s a tad more expensive than Realty Income (trades at 14.2x) but still worthy of buying.
The dividend yield is 4.7% and well-covered (75% payout ratio based on AFFO per share).
As shown below, I’m targeting shares to return around 15% (over 12 months).
VICI Properties ( VICI )
VICI Properties is 4% of my portfolio and as seen above, shares are down around 3% year-to-date.
I’ve owned shares since the IPO in 2018 (4 th largest REIT IO) that have returned around 11.5% annually.
Over the last 60 days shares bounced back, up over 29%.
I’ve been adding shares more aggressively (dollar cost averaging) in anticipation of a “REIT Rally” in Q1-24.
As I reflect on VICI since the IPO:
Then in 2023:
- January 2023 : VICI acquired the remaining interest (49.9%) on MGM Grand Las Vegas and Mandalay Bay Resort from Blackstone Real Estate for $1.27 Billion.
- May 2023 : VICI acquired the real estate assets of Century Casino and Century Racetrack in Edmonton, Canada and Alberta for$164.7 million.
- October 2023 : VICI purchases 38 bowling centers from Bowlero (BOWL) for $438.9 million.
VICI’s growth since the IPO has been impressive. The management team has done a terrific job balancing its “sources and uses” while always improving its credit profile.
In Q3-23 VICI had over $3 billion in liquidity, comprised of $430 million in cash, $250 million of forward equity, and $2.3 billion of availability under the revolving credit facility.
As I reflect on VICI’s historical growth, you can see below that the company has generated positive AFFO per share growth since the IPO (3 years of double-digit growth).
Analysts forecast 5% growth in 2024 and 4% in 2025.
I’ve also been scooping up shares in anticipation of a price reset in 2024.
Shares are now trading at $31.34 with a P/AFFO of 14.6x (normal is 16.5x).
The dividend yield is 5.3% and well-covered (75% payout ratio based on AFFO per share).
As shown below, I’m targeting shares to return around 20% (over 12 months).
I’m Dreaming of a REIT Christmas
I like playing roulette and so please don’t get angry at me for using this analogy.
As we soon enter 2024 (and a spin at the wheel) I’ve decided to overweight these three net lease REITs, all unique business models with differentiated value proposition.
As the high interest rate headwinds reverse into lower interest tailwinds, I believe that all three of these will benefit.
For me, it’s not an “I have to own one” story but instead a “why not own them all” story.
More importantly, don’t bet it all on one REIT or stock.
- Get a plan.
- Focus on quality and value.
- Spread your bets.
- And sleep well at night!
Merry Christmas and Happy Holidays.
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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I'm Dreaming Of A REIT Christmas